New rules clamping down on the sale of risky investments to individuals are coming into force in the wake of the "death bond" mis-selling scandal that hit thousands of people in the UK.
The Financial Conduct Authority unveiled rules on Friday that prohibit companies that sell investments to retail customers from promoting complex bonds called contingent convertible securities, or "cocos".
The announcement comes only two weeks after the watchdog said it plans to fine Stewart Ford, the former chief executive of defunct "death bond" company Keydata, with a record GBP75 million penalty.
The hybrid bonds, issued by banks, offer attractive yields of about 6 per cent, but their value can be reduced or switched into equity if the lender's capital falls below a certain level.
Regulators had hoped that these convertible bonds would help shore up banks' capital buffers in times of stress.
However, the FCA warned last year that banks have "unusually broad discretion" over the interest paid by the bonds and could stop payments in certain circumstances, making it difficult for private investors to assess the products.
The watchdog imposed a one-year ban last August on the sale of these bonds to retail investors as a result.
The new permanent rules should "significantly limit the scope for consumer harm from inappropriate retail investment in these loss-absorbing instruments," the FCA said. They restrict the sale of cocos to sophisticated investors, or those receiving financial advice.
Michael Ruck of law firm Pinsent Masons said: "This follows on from the lessons it learnt in relation to 'death bonds', UCIS and other high-risk investments which have caused both detriment to retail consumers and to the wider reputation of the financial services industry."
However, he said that it is still unclear whether companies who have advised on cocos for retail customers need to review any advice previously given in light of the FCA's stance.
The clampdown follows the high-profile collapse of Keydata, which mis-sold GBP470 million worth of financial products to 37,000 customers, in one of the UK's biggest investment scandals.
The complex investment products, issued by offshore vehicles, were based on second-hand life insurance policies brought from elderly citizens in the US.
Under the new rules, building societies have been given the green light to offer special bonds, called core capital deferred shares, to retail investors. The bonds allow building societies to raise funds and not rely solely on retained earnings to boost capital buffers.
The FCA's rules specify that individuals can hold a maximum of 10 per cent of their portfolio in these bonds.
Robin Fieth, chief executive of the BSA, said: "I do not expect to see a queue forming to issue these instruments immediately, however this is a crucial addition to the capital toolkit for customer-owned organisations like building societies.
"These final rules strike a good balance between investor protection and opening up a legitimate market."
