British regulators are considering a permanent ban on selling banks’ regulatory capital securities to retail investors, suggesting they are too complex.
Back in August, the UK’s Financial Conduct Authority (FCA) introduced temporary rules restricting the retail distribution of so-called contingent convertible securities (CoCos) that banks are issuing to meet rising capital requirements. The rules took effect on Oct. 1 and are set to expire on Oct. 1, 2015.
On Wednesday, the FCA said it is consulting on proposals to make the ban permanent.
“CoCos are risky, highly complex financial instruments. The FCA believes they are unlikely to be appropriate for ordinary retail investors, so has stepped in to restrict their retail distribution to investors who are sophisticated or high net worth,” it says. The distribution of these securities to professional and institutional investors remains unrestricted.
At the same time, the FCA is proposing to adopt new requirements that would apply when a mutual society sells shares to ordinary retail investors in order to raise capital. It’s also concerned about risks inherent in these issues, such as a lack of liquidity, and the risk of capital loss.
The proposed rules would require firms selling these investments to ensure the investor has read specified risk warnings and does not to invest more than 5% of their net assets.
“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,” said Christopher Woolard, director of policy, risk and research at the FCA.
The consultation on the proposed new rules will be open until Jan. 29, 2015.