A new chapter in COBS came into force on 1 October – COBS 22 “Restrictions on distribution of contingent convertible instruments”. The provisions are effectively a copy of the short-lived COBS 4.14 (and which is now deleted) which was brought in as temporary product intervention rules. Under COBS 22.1.1(4) the rules will still cease to have effect on 1 October 2015.
These instruments (‘CoCos’) – basically convertible bonds whose conversion rights are contingent upon a particular event such as, if issued by a Bank, the Bank’s tier one capital ratio falling below a set threshold – are regarded by the FCA as higher risk and unsuitable for retail investors.
Under COBS 22.1.1 a firm is not permitted to sell a CoCo to a retail client in the EEA or do anything that might result in such a retail client either buying or having a beneficial interest in such an instrument – unless ‘reasonable steps’ are taken to ensure that one or more of the exemptions in COBS 22.1.2 applies. For the purposes of this chapter note the broad definition of ‘retail client’ in COBS 22.1.1(3).
The table in COBS 22.1.2 is similar in concept, but not in content, to that in COBS 4.12 which concerns the promotion of non-mainstream pooled investments. By way of example, a retail client that meets the self-certified sophisticated investor requirements set out in COBS 4.12.8 will meet a permitted exemption under COBS 22.1.1(2).
