The FCA regards contingent convertible securities (CoCos) and common equity tier 1 share instruments issued by mutual societies as posing particular risks of inappropriate distribution to ordinary retail customers. The FCA has been working with issuers for some time while developing its policy approach and a significant amount of its supervisory resource has been directed at this issue.
In August 2014 the FCA announced the introduction of temporary product intervention rules restricting the retail distribution of CoCos. The rules entered into force on 1 October 2014 and will expire on 1 October 2015.
The FCA has now published Consultation Paper 14/23: Restrictions on the retail distribution of regulatory capital instruments (CP14/23). In CP14/23 the FCA is proposing to make permanent the temporary rules. These rules prevent firms from distributing CoCos in the retail market without first checking that the perspective client meets certain criteria. In effect, firms should not distribute these instruments to ordinary investors. The FCA also proposes rules that will restrict the retail distribution of certain pooled investments that invest wholly or predominantly in CoCos.
The FCA states in CP14/23 that it considers its approach to be consistent with relevant EU legislation, including MiFID, the Prospectus Directive and the CRD IV/CRR.
The deadline for comments on CP14/23 is 29 January 2015. The FCA will consider feedback and intends to publish a Policy Statement in the summer of 2015. The FCA aims to have the permanent rules in place by 1 October 2015 when the temporary product intervention rules for CoCos expire.
View CP14/23 Restrictions on the retail distribution of regulatory capital instruments, 29 October 2014