The FCA has banned the promotion and sale of contingent convertible bonds (CoCos) to retail investors from October this year, although retail funds will be exempt from the ban.
The regulator has moved to “temporarily” restrict the distribution of CoCos to “professional, institutional and sophisticated or high net worth retail investors”.
The restriction will last for a year from October 1 2014, during which time the FCA said it will consult on permanent rules for the asset class.
But the FCA said the ban “does not include indirect exposure via investment funds or occupational pension schemes”, meaning that fund managers investing in these instruments will remain free to do so.
CoCos are bonds that can be converted into equity at the issuer’s discretion and could even be written off entirely if the issuer’s capital position deteriorates significantly.
The FCA said CoCos were “extremely difficult for investors to assess” and that there is currently “little experience of how CoCos operate in practice”.
Christopher Woolard, FCA director of policy, risk and research said: “In a low interest rate environment many investors might be tempted by CoCos offering high headline returns.
“However, they are complex and can be highly risky, and the FCA has used its new powers to ensure that CoCos are not inappropriately made available to the mass retail market while still allowing access for experienced investors.”
