Concerns have been raised over an enterprise investment scheme that offers advisers “commission-style” payments as a reward for investing.
An email sent to advisers by Oxford-based investment company Oxford Technology says the firm will now pay them 50 per cent of its first-year management fee upfront on its combined seed enterprise investment and EIS fund, and 20 per cent of performance fees thereafter.
For the first three years of an investment, Oxford charges 2 per cent, so 1 per cent of the sum invested will immediately go back to the adviser when the investment is made.
The Oxford Technology fund invests in start-ups and early-stage technology companies in the local area. It previously ran a series of venture capital trusts, which are now fully invested.
As of April, the combined SEIS and EIS fund had made 68 investments in 28 companies, totalling nearly £4m. The investments range from bladder cancer treatments to high-quality metal powder production.
The company’s website reads: “So far there have been two failures (there will surely be more) but, because of the very generous tax reliefs, the losses on these are only £33,000. Three companies have gone well (there will surely be more) and the gains of these (so far only on paper) are more than £3m.”
Former FCA technical specialist Rory Percival believes the payments are a “straightforward breach of the commission ban rule”.
He says: “If you read the rule you will see it is very wide-ranging. But this doesn’t even need the wide-ranging nature; it’s a simple breach.”
Another source with knowledge of the firm said the fee structure was “not exactly in the spirit of, or actually the letter of, RDR”.
Compliance and Training Solutions director Mel Holman says: “This looks very like commission.
“My first thought is: is this a regulated product? Second: if they are aiming for the advisory market, aren’t they off the mark?
“All firms need to charge adviser charges so it doesn’t matter what the firm is offering, the firm would be restricted by the disclosure documents as to how much they could earn.”
Signpost Financial Planning adviser Nigel McTear says he uses a number of EISs but the Oxford Technology structure is “unusual”.
He says: “The inducement to sell is unusual. Personally, I would pass any initial fee ‘handout’ back for the client’s benefit, and have done so in the past.”
An FCA spokesman says the regulator cannot comment on specific firms.
Although some EISs and SEISs do not fall under the definition of “retail investment product” as specified by the RDR, and so are excused from the commission ban, nevertheless inducement rules would apply.
These state that “a firm must not pay or accept any fee or commission, or provide or receive any non-monetary benefit” for client business if it impairs “compliance with the firm’s duty to act in the best interests of the client”.
Oxford Technology managing director Lucius Cary told Money Marketing: “We run an honest ship, and we’ve done the same thing for the past 30 years. If we want to share some rewards with advisers, why shouldn’t we?
“A couple of advisers have said that’s great, terrific.”
Cary says that he has confirmed with the regulator since this article was first published that the payments are allowed because in order to access the fund investors are categorised as “elective professionals” – where they acknowledge the risk and illiquidity in the investments – and IFA payments are allowed for this type of investor.