The Financial Markets Authority (FMA) is encouraging consumers who are considering investing in bank capital notes to read its new guide on this type of investment product.
The guide is designed to help investors understand the risks and complexities associated with capital notes issued by banks. These notes are a way for banks to raise funds from the public to meet their regulatory capital requirements.
The guide also relates to similar products such as perpetual subordinated notes and hybrid securities.
Recently, there has been an increase in the number of banks offering these products, and there has been a high take-up by retail customers. This trend is expected to continue in 2015. Within the last 12 months, around $1bn has been raised through bank capital notes in New Zealand.
“These types of products are not like a bank term deposit. We want to ensure consumers are not just basing their investment decisions on an advertised high interest rate and the fact that a household name is offering them,” said the FMA’s director of primary markets and investor Resources, Simone Robbers, in a statement.
“If consumers don’t understand how capital notes work they may end up holding shares in a bank that have little or no value, when they thought they were buying a bond with a fixed interest rate. Even more sophisticated investors can find these complex and potentially risky products difficult to assess,” she said.
Bank capital notes are deliberately designed with features that give banks flexibility over payments. Although it can be difficult to predict when a bank might use these features, consumers should be aware that they can be used when it’s in the bank’s interests to do so.
The payments customers receive from capital notes can also be unpredictable, with banks generally allowed to stop paying interest, or reduce the amount of interest they pay, under certain circumstances. Consumers should also be aware that although bank capital notes are usually listed on the NZX, this doesn’t necessarily mean they will be able to sell their notes quickly, or at all.
The FMA encourages people to seek financial advice from an Authorised Financial Adviser if they are not sure about an investment, to see if it is right for their own personal circumstances. The guide can be viewed here.