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FSA to restrict VCT and EIS sales

by Annabelle Williams on Oct 18, 2012 at 09:30

FSA to restrict VCT and EIS sales

A vast swathe of venture capital trusts (VCTs) and enterprise investment schemes (EIS) will be included in the Financial Services Authority's upcoming finalised guidance on unregulated collective investment schemes (Ucis) in a move branded ‘absolute nonsense’ by tax experts.

Bringing VCTs and EIS under the Ucis banner will see many deemed only suitable for sophisticated investors at a time when the government is encouraging investment into these vehicles as a means to support small businesses.

In correspondence seen by Wealth Manager, the regulator has stated that both EIS and VCTs will be caught by the rules governing Ucis depending on their structure and underlying investments.

A spokesperson for the FSA confirmed this, saying: ‘Under the current proposals they would be caught by the rules.’

VCTs structured as listed companies will fall under the non-mainstream pooled investments (NMPI) rules and thereby the Ucis guidance unless they are investment trusts, which are exempt. VCTs that invest in listed shares will fall outside the rules, but those investing in unlisted shares will be caught.

Similarly, the underlying investments of EIS will determine whether they are deemed Ucis or not. Stockbrokers can run portfolios of EIS which will be outside the remit, but if these portfolios are structured as a collective investment scheme they will fall under the rules.

The FSA is currently consulting on the best way to regulated Ucis products, after publishing guidance paper CP12/19 in August. The paper made little reference to either EIS or VCTs, and investors were left uncertain as to what, if any, impact the rules would have on the structures. A finalised paper outlining the rules is expected in the first quarter of next year.

Martin Churchill, editor of Tax Efficient Review described the news as ‘absolute nonsense’ and questioned whether the FSA had evidence VCTs had been mis-sold.

‘You can buy them secondhand and they are not in the risk category that the FSA believe they are,’ he said. ‘The FSA has used some research that they did in 2010, into Ucis products which are bamboo bonds or eucalyptus trees in Brazil.

‘VCTs are well established, they have been going for 17 years, run by reputable managers and they are listed on the stock exchange. VCTs are a very different animal and have not been abused.’

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9 comments so far. Why not have your say?


Oct 18, 2012 at 10:52

That the CEO of Bovill considers an EIS to be a "pooling" is worrying.

The HMRC website on EIS says that "The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies."

I read that as implying a single fund-raising for a single company.

It does beg the question of why one would employ a regulation consultancy that misunderstands something so fundamental.

Any comments, Mr Blackett-Ord?

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Ben Blackett-Ord

Oct 18, 2012 at 12:24


Investors gain exposure to EIS qualifying investments in multiple ways. Some arrangements are indeed simply a direct investment in a single company where as more frequently the market is seeing EIS investments structured as EIS Funds. EIS Funds come in a variety of guises ranging from those aligned most closely to a traditional fund to those based on a discretionary management service. This variety means that there can be no blanket answer on pooling although it is probably true to say that the closer the scheme mirrors a traditional fund the more likely it will be seen to have a collective element.

Kind regards

Ben Blackett-Ord

Bovill Ltd

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Oct 18, 2012 at 12:44

Probably a better approach would be to retrict permissions to advise and require advisers to display a level of competence before authorising them to recommend EISs and VCTs.

For example advisers must study for and sit exams and their employers must have the requisite permissions before they are able to advise on occupational pension transfers.

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Oct 18, 2012 at 14:16

Some clarification would be helpful. Is the FSA considering a further ban on the sale of collective investments where these have been structured as VCT's or EIS funds? Or are they trying to prevent retail investors from getting EIS relief when they susbscribe to what are usually small share issues by small companies, whether listed or not. BBO - would you care to comment further on this point?

David - have you not heard of RDR? Isn't that what it sets out to do? Or have I missed something?

There is a lot of confusion over the EIS tax reliefs and the differences between the FSA and HMRC rules over RSEs and RIEs. I'll spare you the fine details, but be aware that the Enterprise Investment Scheme is a valid mechanism for encouraging investment in small- and micro-cap companies, and is specifically aimed at those based in the UK, with most of their turnover in the UK. Financial service, property or investment companies are ineligible.

Any investment in such a company should stand up under its own merits and bundling them up into a scheme allows unscrupulous firms to use smoke and mirrors to enrich themselves while fobbing clients off with a poor product or service.

Of itself, that's not enough to justify the FSA removing another type of investment from the universe of the man on the Clapham Omnibus. There is a very sensible principle in English Law - it's been around for a while. It's called CAVEAT EMPTOR.

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Oct 18, 2012 at 14:22

"Bringing VCTs and EIS under the Ucis banner will see many deemed only suitable for sophisticated investors..."

When were they considered mainstream products suitable for the general market?!

I think Davidm4164 as a good idea there.

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Oct 18, 2012 at 15:30

PCIAM: Believe me, I have very much heard of RDR.

You may consider this controversial, but to my mind RDR sets a relatively low bar and passing a few multiple choice exams doesn't necessarilly mean an adviser has the necessary skill set to advise on VCTs or EISs, especially if they only ever look at them every few years.

For more specialist services (e.g. discretionary investment management, occupational pension transfers) the firm needs to apply to the FSA for additional permissions and the recommendations have to be given by an adviser who has passed the relevant additional exams (e.g. IMC, G60, AF3 etc).

I am not a great advocate of aditional regulation, but if the FSA is to restrict their promotion/distribution it makes more sense to make sure the advisers recommending them understand them properly, rather than take away protection from those that wish to invest.

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Oct 18, 2012 at 16:10

David: thanks for your comments.

I'm interested that you think the hurdle is higher for discretionary managers. In fact, DIM's only need a Level 4 qualification.

The CISI's Investment Advice Diploma provides three multiple guess/choice exams, and candidates sit the Securities paper rather than the Advice one.

That's about it - obviously, you need CPD, and an SPS and necessary gap-fill is useful. And of course your investment decisions have to be suitable.....

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Arthur Schopenhauer

Oct 20, 2012 at 09:07

‘absolute nonsense’ quite right Martin

In the July FSA Promotions update 8 the term UCIS is not used

Could we please have some joined up government Not all are as toxic as the spin implies

Rather like blaming one religion for all terrorism Here it is the regulation spin that has been embellished and is far removed from what the regulation clearly says and has said for some time

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David Hedge

Oct 20, 2012 at 11:10

This just shows how little the cretins at Cannary House understand what they are regulating.

I would support the commentators who suggest further education on the subject. G20 provided a basic knowledge of VCTs and EISs and any adviser of quality would look at them carefully before recommending them to qualifying clients. However, for the cretins to outlaw the arranging of these products when circumstances are such that they are the best product is totally ludicrous.

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