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.’
Ben Blackett-Ord, chief executive of regulation consultancy Bovill, said he could see an argument for EIS fitting under the FSA’s rules but not VCTs.
‘I think EIS are much more likely to fit the description because the thing is a pooling, they are clearly high risk and I think the FSA is likely to be concerned about the kind of individual that ends up investing in them,’ he said.
‘A VCT is a listed company, it is effectively an investment trust. It wouldn’t seem to us to be appropriate but we suspect that they might unlist in some circumstances.’