FCA On Restriction Of Retail Distribution Of CoCos And Mutual Funds

Author:Mr Harvey Knight, Kirsten Lapham and Colin Smith
Profession:Withers LLP

The FCA is proposing to put in place new requirements which would apply when mutual society shares are sold to ordinary retail investors and to tighten the rules around the sale of contingent convertible securities ('CoCos'). The FCA's decision is driven by the fact it says; that most investors are unaware of the risks associated with share instruments issued by mutual societies. These risks include the lack of liquidity, the fact dividend payments are not guaranteed and that there is a risk of partial or complete loss of capital if the issuer gets into financial difficulty.

The FCA is proposing that firms selling these investments will need to ensure the investor has read specified risk warnings and committed not to invest more than 5% of their net assets. These requirements apply only to sales to retail investors who have not been certified as sophisticated or high net worth.

In August, the FCA also announced temporary rules imposing a restriction on the retail distribution of CoCos, which will run for a year from 1 October 2014. The FCA is now consulting on proposed permanent rules, which are broadly the same as the temporary rules, but would also impose restrictions on funds of the securities. The FCA will continue to work with issuers in the interim, to ensure that the sale of these instruments are targeted appropriately.

CoCos differ to regular convertible bonds in that the likelihood of the bonds converting to equity is contingent on a specific event, such...

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