Banks Warned on CoCo Sales to Retail Clients by Danish FSA

Denmark’s financial watchdog warned lenders and insurers against selling their riskiest bonds to retail clients amid signs Scandinavian issuers are lining up to tap the market for contingent capital.

Financial institutions face a conflict of interest in selling CoCos to customers unable to grasp their complexity, the Copenhagen-based Financial Supervisory Authority said today. The warning also applies to other financial products used by banks to build regulatory buffers, it said.

“There’s a potential risk that institutions’ own interests in raising new capital in this situation can come in conflict with laws to protect customers’ interests,” Annette Bjaaland Andersen at the FSA’s consumer protection division said in a statement.

Denmark’s FSA today banned “aggressive” marketing and said banks and insurers shouldn’t pitch risky products to customers unable to assess their complexity. Investment advisers who sell CoCos need certification, the agency said. The warning follows announcements by some of the Nordic region’s biggest banks that they plan to issue contingent capital.

“This is an early warning to banks,” Andersen said by phone. The FSA cannot ban a product; that requires legislation, she said.

Red CoCos

“We have another system under which we risk-weight products and CoCos are red,” Andersen said. “That means if they are to be sold to a private person, they have to be sold by people who are trained in CoCos and know the risks that are tied to them.”

Danske Bank A/S, Denmark’s largest lender, received offers for 17 times the amount of additional Tier 1 debt it sold back in March. Nordea Bank AB, Scandinavia’s biggest lender, sold AT1 debt at record-low dollar yields last month.

European lenders issued a record amount in CoCos last month to bolster reserves before European regulators publish results of asset reviews at the end of October. European regulators told banks and insurers in July they will be punished if caught targeting the wrong customer groups for risky and complex financial products.

Before it's here, it's on the Bloomberg Terminal.