Retail distribution ban on CoCo bonds

The Financial Conduct Authority has added CoCo bonds to the list of investments banned for distribution to retail investors.

In a new Policy Statement, the financial services regulator has made permanent a temporary ban on their distribution first introduced in October last year.

CoCos are fixed income investments with clauses written in allowing issuers to convert them to equity. They can also contain other complex terms and conditions.

Making the ban on distribution to retail investors permanent, the FCA said CoCos were “generally not suited to the needs of ordinary retail investors”.

The FCA has also banned the distribution of collective investment funds which invest “wholly or predominantly in CoCos” to retail investors.

Commenting on the temporary ban last autumn, the FCA said at the time:

“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.”

It’s positive to see the regulator clamping down on the sale of risky investments like these to retail investors, who often cannot fully understand or tolerate the risks involved.

The sale of CoCos is now restricted to sophisticated investors, who can better evaluate and understand the risks involved, and high net worth investors, who can afford to absorb any losses from these instruments.

We believe that the vast majority of retail investors are perfectly well served by traditional mainstream investments.

The need to invest using esoteric, high risk and complex schemes (such as CoCos) is often driven by a desire for the adviser to look clever or for the investor to break the unbreakable link between risk and reward.

If your adviser has previously recommended CoCos, or indeed a fund which invests in CoCos, you should ask them to review the suitability of their advice in light of their new retail distribution ban from the FCA.