Woe woe for retail investors as watchdog says no-no to cocos
BANKS will be banned from marketing contingent convertible (coco) bonds to retail investors, the City watchdog said yesterday.
It deemed the bonds too complex for normal investors, limiting their sale to institutions and sophisticated buyers only.
The bonds act as debt when banks are performing strongly, paying interest as a return to investors.
But if a bank gets into trouble and its capital ratio dips dangerously low, the bond either converts into equity, or is wiped out altogether.
The idea is to ensure investors prop up the bank when times are tough, supporting its capital position and stepping in early to help.
But the Financial Conduct Authority is worried retail investors will see the relatively high rate of interest on the product, but not understand that is matched by higher risks.
“Cocos are complex and can be highly risky, and the FCA has used its new powers to ensure that they are not inappropriately made available to the mass retail market while still allowing access for experienced investors,” said Christopher Woolard, the FCA’s policy, risk and research boss.
The initial ban will last for one year from 1 October, as the watchdog consults on the rules.