FCA To Continue Ban on Complex Investments to Retail Customers

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Posted in:Banking and Finance, Corporate and Commercial|July 1, 2015 | Join the mailing list

In the first use of its powers to do so, the Financial Conduct Authority temporarily banned the sale of contingent convertible securities to retail customers in August 2014.  The FCA has now confirmed that it will impose a permanent ban on the sale of
these and Common Equity Tier 1 share instruments in mutual societies. This reflects an acknowledgement of the investment risks that these products carry and the need to ensure they are only sold to those customers who have an appreciation and understanding
of their investment consequences. This article highlights the products you should be looking out for.

Contingent convertible securities (CoCos) are defined by the FCA’s policy statement thus:

“1.9 CoCos are highly complex, hybrid capital instruments with unusual loss-absorbency features written into their contractual terms. While CoCos may be designed in a variety of ways and issued under a variety of names, one key characteristic is that CoCos
feature an equity conversion or writing down trigger set with reference to the issuer’s capital position in relation to regulatory requirements.

1.10 CoCos eligible towards issuers’ Additional Tier 1 (AT1) capital also feature other unusual characteristics for non-equity instruments, in that they are permanent notes with entirely discretionary income payments. This means ‘coupons’ may be cancelled at
any time, for any reason, and the notes might never be redeemed.

1.11 While CoCos can be designed in a range of different ways, all are highly complex instruments presenting investment risks that are exceptionally challenging to evaluate, model and price.”

Tier 1 capital instruments is simply a bank selling shares, and as a security these can be held by a mutual society as “capital” to meet its duties under the CDR IV rules regarding toxic loans and liquidity.

In effect, if you have been sold either a Contingent convertible security or a Common Equity Tier 1 share instruments in mutual societies then you should consider whether you ought to have been sold it.  These are highly sophisticated products with which to
invest.  They are so complex and of such a risk-laden nature that a retail customer should not be allowed to invest in them.  If you have invested in this type of product, contact a member of our Dispute Resolution Team, which specialises in banking related
issues, to discuss this further and to consider appropriate action in relation to these investments.

You can find the
FCA’s policy on this her

f there are any issues in this update or more generally that you would like to discuss, please contact one of our Banking and Financial Regulatory team on 0161 833 9211.

(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice
should be obtained before taking, or refraining from taking, any action as a result of this article.)

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