UK watchdog bans sale of bank CoCo bonds to mass retail market

Britain’s financial services watchdog has announced a one-year ban on the sale of complex bank bonds to individual investors, in the first use of its new consumer protection powers.

Yesterday, the Financial Conduct Authority said it would limit the sale of contingent convertible securities, known as "cocos", to professional and sophisticated investors from October 1st, as the risky, high-yield investments were "unlikely to be appropriate" for the mass retail market.

Cocos are hybrid bonds that currently offer attractive yields of about 6-7 per cent, but their value can be written down or converted into equity if the issuing bank’s capital drops below a certain minimum level.

Regulators had hoped that this convertibility could help bolster a bank’s finances in times of stress.

However, the FCA has said that the “unusually broad discretion” banks have over the interest they pay, and their ability to stop paying coupons in some circumstances, makes it difficult for private investors to assess and price coco bonds.

Individual investors will still be able to buy cocos via execution-only dealing platforms. – (Copyright the Financial Times Ltd 2014)