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OPINION

Will the regulator see sense on VCTs and EISs?

Will the regulator see sense on VCTs and EISs?
February 15, 2013
Will the regulator see sense on VCTs and EISs?

Last August the regulator published a consultation paper that proposed to ban the promotion of unregulated collective investment schemes (UCIS) and close substitutes to ordinary retail investors.

Through research, the FSA found that some investors were being exposed to unreasonable levels of risk, so it proposed to restrict the marketing of certain products which it deems to be non-mainstream pooled investments (NMPI) to 'high net worth' or 'sophisticated' investors.

Originally, the FSA implied that Enterprise Investment Schemes (EISs), venture capital trusts (VCTs), real estate investment trusts (Reits) and some exchange traded funds (ETFs) would fit within the definition of NMPI.

The Investors Chronicle has highlighted the dangers of such product bans on several occasions (read 'Leave investors free to choose 'bad' products' and 'Does nanny know best?'). Following this and lobbying from industry bodies, the FSA this week announced that it is considering amending its proposals to exclude VCTs, Reits and exchange traded products from the scope of the new marketing restriction.

The regulator says it is also aware of concerns in relation to enterprise investment scheme funds and seed enterprise investment scheme funds, which it is "considering further".

The regulator will confirm its verdict after the board of the new regulator, the Financial Conduct Authority, has considered them in April.

We urge the regulator not to ban the marketing of these products that are very useful tools in many investors' portfolios. In particular, Reits, VCTs and EISs are government-sanctioned tax breaks. But once a ban was in place most regulated advisers would refuse to recommend them to clients at all, because of the heavy cost of professional indemnity insurance and problems fulfilling their regulatory obligations.

There is a danger that existing investors in these schemes would suffer if the flow of monies is stemmed by the regulator. Alternatively, we would see an explosion in unregulated distribution channels, with unregulated salesmen pushing high-risk products to investors.

Dermot Campbell, managing partner at Kuber Ventures, says: "The raison d'être behind EIS is to stimulate the flow of private funds into the SME [small and medium-sized enterprises] sector. If they are categorised as NMPIs the market will shrink and this source of private capital will simply dry up, further paralysing economic growth.

"We are living in a time when small businesses find it difficult to borrow from the banks, when government lending schemes appear to be having little impact and at a time when the economy needs a much-needed injection of capital.

"Limiting the effectiveness and accessibility of EIS products to investors is not only detrimental to small businesses but could have far-reaching consequences for the underlying strength of our economy for years to come."

Watch out for our top VCT and EIS picks in the 22 February issue of Investors Chronicle.