The Financial Conduct Authority has released proposals for new requirements applying to when mutual society shares are sold to ordinary retail investors, consulting on previously announced restrictions on the distribution of contingent convertible securities (CoCos).
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.
In August the FCA laid out a temporary ban on the promotion and sale of CoCos to “professional, institutional and sophisticated or high net worth retail investors”, although retail funds were exempt from the rules.
These rules came into force on 1 October and will expire in a year’s time. The FCA is now consulting on proposed permanent rules, which are broadly the same as the temporary rules, but would also impose restrictions on funds of CoCos.
The FCA has labelled these as “complex instruments”.
Mutual societies are able to issue new types of share instruments to strengthen their capital base, as they often have limited sources to raise capital. However, while features between issues vary, these instruments can carry risks which many consumers may be unfamiliar with, the FCA said.
According to the regulator, the key risk factors include a lack of liquidity, meaning investors may not be able to sell when they want to or can only sell them at reduced values. Dividends are also not guaranteed by the mutual society and there is the risk of partial or complete loss of capital if the issuer gets into financial difficulty.
The FCA is proposing that firms selling these investments will need to ensure the investor has read specified risk warnings and committed not to invest more than 5 per cent of their net assets.
These requirements apply only to sales to retail investors who have not been certified as sophisticated or high net worth.
Christopher Woolard, director of policy, risk and research at the FCA, said: “One of our objectives is to ensure that consumers have the right degree of protection.
“That is why the new rules we are proposing will make sure that there are appropriate safeguards in place so these complex instruments are offered only to investors who are able to make informed decisions about them.”
The consultation will be open until 29 January 2015.
peter.walker@ft.com
