UK watchdog bans sale of bank CoCo bonds to mass retail market

LONDON (Reuters) - Britain’s banks are banned from offering risky and complex hybrid debt known as contingent convertible bonds or CoCos to the mass market from October, the country’s Financial Conduct Authority (FCA) said on Tuesday.

The logo of the new Financial Conduct Authority (FCA) is seen at the agency's headquarters in the Canary Wharf business district of London April 1, 2013. REUTERS/Chris Helgren

Faced with pressure from regulators to bolster their capital cushions, banks are set to issue CoCo bonds in ever larger amounts to shield taxpayers from having to rescue failing lenders like in the 2007-09 financial crisis.

The bonds can be written off or converted into equity if capital at the bank which issued them falls below a pre-determined “trigger” level.

Some $70 billion (52.35 billion pounds) of CoCos were issued between 2009 and 2013 with a fifth from UK banks, the FCA said. Total issuance is set to roughly double over the next five years or so.

So far no CoCo has been wiped out in Britain but the watchdog wants to anticipate any problems.

“In a low interest rate environment many investors might be tempted by CoCos offering high headline returns,” Christopher Woolard, FCA director of policy said in a statement.

“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.”

The FCA was launched last year in a bid to protect consumers better after a string of mis-selling scandals and the watchdog has powers to ban or vary how a product is sold.

Distribution will be limited to professional, institutional and sophisticated or wealthy retail investors ahead of a public consultation on permanent rules later this year.

The restriction on sales and marketing will apply to retail clients anywhere in the European Union.

At present there is little experience of how CoCos operate in practice and the UK market is at an early stage of development, the watchdog said.

“Despite significant market appetite for these instruments, there is growing concern that even professional investors may struggle to evaluate and price CoCos properly,” the FCA said.

It said that up to 75 percent of sales in some countries have been to retail investors, with the loss per customer in some cases over 80 percent of their initial investment.

The FCA’s intervention follows a warning to retail investors last week about CoCos from the European Union’s banking watchdog.

Editing by Matt Scuffham and Mark Potter