The FCA has formalised its ban on the sale of contingent convertible (CoCo) bonds to retail investors, in spite of opposition to the restriction.
In a policy statement released today, the regulator said following a consultation with the industry it had decided to make permanent the temporary ban it had put in place in October 2014.
The FCA said CoCos, fixed income assets that have clauses written in that allow the issuer to convert it to equity and can also contain other complex terms and conditions, were “generally not suited to the needs of ordinary retail investors”.
“In relation to CoCos which are convertible into shares, the timing, effect on pricing, currency exchange rate (where applicable) and conversion rate into shares are only some of risk factors that are challenging for investors to model and price,” the regulator said.
In addition to banning the sale of CoCos to any investor not deemed to be “sophisticated”, the FCA confirmed it would also ban the distribution of pooled funds that invest “wholly or predominantly in CoCos” to retail investors.
The regulator noted it had received some feedback from individual investors currently invested in CoCos and said it was “concerned that a number of respondents who hold CoCos already told us that they rely on their CoCos for the majority of their retirement income needs.
“We suggest they should consider the impact on their retirement planning if the securities were converted or written down,” the regulator added.