LONDON, July 31 (Reuters) - 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)