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The City regulator has announced a review into preference shares, to give investors greater clarity about whether or not the shares can be cancelled.
The Financial Conduct Authority (FCA) said it wanted to investigate whether investors were given enough information when buying shares described as "irredeemable" or "perpetual".
The move follows Aviva’s controversial plans to cancel irredeemable preference shares at par value, rather than the market price. The insurer later backtracked on the decision following an outcry from investors – prompting the regulator to take a closer look at the market.
Andrew Bailey, head of the FCA, said: “The FCA is currently reviewing the prevailing market for certain fixed income shares, particularly those shares that are described as being perpetual, irredeemable or in some other way that suggests permanence.
“The FCA wants to ensure investors [can] properly assess the risks and rewards attached to such shares.”
The Aviva announcement caused the value of preference shares at other major firms to fall. Although the insurer later said it would not cancel the shares, the regulator was concerned that investors were unaware that firms could cancel shares at anything other than the prevailing market price. It said firms could provide clearer information to investors.
Mark Taber, of financial research website Fixed Income Investments, said he hoped other firms would follow the lead of asset manager Ecclesiastical, which publically stated it had no plans to cancel its own preference shares.
“I would like to see others ruling this out," he said, adding that investors had been under the impression that firms couldn’t cancel the shares for par value.
“Firms have a moral, ethical and possibly legal obligation not to change that position now. The market has priced that in," he said.
“While there are clearly legal mechanisms for this to happen, you cannot get that from reading prospectuses – they are impenetrable. Shareholder rights should be more transparent.”
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