The U.K. Financial Conduct Authority (FCA) has decided to restrict the retail distribution of regulatory capital instruments, amid concerns that the complex securities are too risky for ordinary investors.
The final rules for limiting the retail distribution of contingent convertible securities (CoCos) and mutual society shares are set out in a policy paper published Friday by the FCA.
Large amounts of these sorts of securities are being issued by financial institutions seeking to meet the new capital requirements known as Basel III, the FCA observes.
Yet, it is concerned that most retail investors aren’t fully able to understand these kinds of complex securities.
“We regard 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 said.
The FCA introduced temporary rules restricting the retail distribution of CoCos in October 2014. At the same time, it published a consultation paper seeking comments on permanent rules to replace the temporary rules when they expire on Oct. 1.
The restrictions on the retail distribution of CoCos “represent a reasonable and proportionate regulatory response to the significant risk of harm to consumers that we have identified,” the FCA said Friday, after considering the feedback that it received on the temporary rules.
The final rules aim to ensure investor protection “by limiting the scope for distribution that exploits information asymmetries and other consumer behavioural weaknesses, which are a particular concern where complex, risky instruments are offered to non-sophisticated retail investors of ordinary means,” the regulator said.