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A boon for oil and gas start-ups

The UK’s Financial Conduct Authority has decided that if you don’t understand what you are buying, you had better have a lot of money. This week the City watchdog banned the sale of contingent convertible bonds (CoCos) to retail investors for one year, arguing that issuing banks have an “unusually broad discretion” to halt the payment of coupons on the bonds.

After years of paltry returns on their savings as a result of central banks’ ever more fraught attempts to keep asset prices high, retail investors are now barred from one of the few corners of the market where you can still enjoy a double digit coupon. But they can by all means go and spend their life savings on penny shares in that exciting new oil and gas exploration firm with a 10% dividend and little to no revenue.

The move smacks of panic on behalf of regulators having a bit of a Frankenstein moment, wondering what sort of opaque, misunderstood, track record-less monster they may have created when they instructed banks to go and issue billions in additional tier one (AT1) format. 

Cold feet at this stage is a bit of a problem given some reckon banks need to issue nearly €150bn of the stuff over the next three years. They opened the barn door, gave the horse a good hard smack on the backside and then waited a few months before setting off in hot pursuit.

The AT1 paper of many European banks has widened as much as 80bp in the last week. Some of the product’s biggest sceptics have called the end of the illusion, brought about by a combination of BES’s demise and a creeping sense that the stellar returns of the past two years are threatened.

The FCA can’t seriously argue it is much better for just institutional investors, including many pension funds, to be exposed to this potential folly. They are either a bad idea or they aren’t. If CoCos do represent the next bubble, inflated by central bank largesse and investors’ refusal to confront the risks, then retail investors deserve their share of the rally as much as the next idiot.

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