The FCA has moved to make its temporary restrictions on a specialised form of banking corporate debt permanent and widen the parameters to include some funds.
The regulator today released a proposal to make its temporary ban on Cocos, or contingent convertibles, permanent and expand the scope of the restrictions to include funds which “invest wholly or predominantly in Cocos and which are not retail-oriented regulated funds”.
Cocs are similar to convertible bonds in that they can both be converted into equities. However, Cocos are different in that the company that issues them does not need to count the shares as part of its diluted earnings. By not being considered, the company’s earnings per share looks stronger.
The FCA announced in August it would ban the promotion and sale of Cocos to retail investors for a year from this month, at which time it said retail funds would be exempt.
But the regulator has moved to make the restrictions permanent and also include funds.
“We also propose to apply the same requirements as set out above to investment funds that invest wholly or predominantly in Cocos and which are not retail-oriented regulated funds,” the regulator said.
“Coco funds within scope of the proposed rules could be structured as unregulated collective investment schemes, qualified investor schemes or as special purpose vehicles.”
The regulator said the market for such capital instruments was “still fairly new” but it wanted to act to control their sale to investors early.
“Nevertheless, these securities may be issued in large amounts over the coming months and years as banks and building societies transition their capital position to meet the new prudential requirements under the Capital Requirements Directive IV (CRD) and Capital Requirements Regulation (CRR) package of measures,” the FCA said.
“We regard Cocos and common equity tier 1 share instruments issued by mutual societies as posing particular risks of inappropriate distribution to ordinary retail customers.”
