The Financial Conduct Authority (FCA) has stepped in to ban contingent convertible securities (CoCos) in the first use of consumer protection powers.
CoCos are high-return specialist investments that the FCA believes are too risky for ordinary investors.
From October 1, 2014, only professional, institutional or wealthy investors can buy in to the market for 12 months.
During that year, the FCA will look at CoCos to see if they are suitable investments for all investors or whether the restrictions should be continued.
Returns from CoCos are notoriously difficult for investors to assess as the issuer can write off them off or convert into equity if the capital of the issuing bank slips below a certain threshold.
CoCos too risky for investors
FCA director of policy, risk and research Christopher Woolard said: “These investments are very complicated even for seasoned investors.
“Financial advisers cannot sell CoCos without first checking the investor is a professional or high-net worth individual under the measures we have now put in place.
“With so many investments offering low returns, investors could be tempted to go for the higher returns offered by CoCos. However it would be easy for an inexperienced investor to lose all their money very quickly. That’s why we have limited the market to experienced and professional investors while we take a look at CoCos suitability for the mass market.”
Similar measures to limit the sale of CoCos have been taken in the European Union.
The FCA has the power to step into a market and safeguard consumer interests without any prior consultation if the regulator considers their money is at risk.
Until now, the FCA has not used this power.
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