Fund Management
FCA Says CoCos Are A No-No For UK Retail Investors

The Financial Conduct Authority has banned the selling of high yield bonds named contingent convertible securities - or CoCos - by banks to ordinary retail investors from October.
The Financial Conduct
Authority has banned the selling of high yield bonds named
contingent convertible securities - or CoCos - by banks to
ordinary retail investors from October.
The regulator has decided to flex its muscles, stating that the
bonds are too complex for ordinary investors to
understand. CoCos instead will only be distributed to
professional, institutional and sophisticated or high net worth
retail investors.
“In a low interest rate environment many investors might be
tempted by CoCos offering high headline returns,” said
Christopher Woolard, FCA director of policy, risk and
research.
"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."
CoCos are popular as they convert to equity as a result of some
triggering event. For most of the banks issuing the bonds, the
trigger is capital falling below a certain threshold. Regulators
like them because they offer an instant increase to capital
cushions in times of crisis, in theory preventing taxpayers from
having to bail out banks. Investors snap them up as they have a
high return.
“CoCos can be written off (in part or entirely) or converted into
equity when the issuer’s capital position falls, while issuers
can have unusually broad discretion in relation to coupon
payments, making it extremely difficult for investors to assess,
understand and price CoCos. At present there is little experience
of how CoCos operate in practice,” the FCA added.
The CoCo market is still small, with banks having issued only £40
billion ($67.4 billion).