LONDON, July 31 Banks in the European Union
should think hard before offering consumers hybrid debt issues
to bolster their capital cushion, the bloc's markets watchdog
said on Thursday.
Banks are under regulatory pressure to issue so-called
contingent convertible bonds (CoCos) that can be converted to
equity in a crisis to help provide a capital cushion and avoid
calling on taxpayer help.
But the European Securities and Markets Authority (ESMA)
said Coco structures are highly complex and hard to compare as
the triggers for writedowns vary and it was unclear if investors
fully understand the potential risks and are capable of
correctly factoring these into their decisionmaking.
"As investing in CoCos requires a sophisticated level of
financial literacy and a high risk appetite, these may not be
appropriate for retail investors and ESMA recommends that
investors take into account the relevant risks before
investing," the watchdog said in a statement.
ESMA said banks were placing financial instruments with
their clients in ways that may breach rules and could result in
significant harm to consumers.
"Institutions should not allow the pressure on their
capitalisation needs to affect their compliance with EU
requirements in terms of the provision of services to
consumers," ESMA and the bloc's banking and insurance watchdogs
said in a joint statement.
(Reporting by Huw Jones; Editing by Greg Mahlich)