On the face of it, the regulator has legitimate concerns that VCTs could be sold to investors who are unaware of the risks but advisers argue that if the FSA does perceive a problem, why has it promised to issue sales guidance less than two weeks before the end of the tax year and after several hundred million pounds have been pumped into VCTs? Last year, Chancellor Gordon Brown increased the VCT tax break from 20 per cent to 40 per cent and there is also the lure of tax-free capital growth and income if the plan is held for three years. This has understandably generated a lot of press coverage and investor interest which has led to providers offering a record number of VCTs this year. Over 40 VCTs are currently open to subscription and in the clamour to attract assets, minimum investment levels have tumbled from a typical 5,000-10,000 to as low as 1,000, which the FSA believes may tempt people less suited to higher-risk investments. VCTs invest in less liquid and often higher-risk assets, predominantly fledgling companies, private equity and start-ups. The trust manager has three years to invest 70 per cent of the VCT’s assets in qualifying stocks to ensure that it grabs the tax breaks for investors and there is also FSA concern about where the other 30 per cent is being invested. Spokesman Rob McIvor says: “We are heading off any misselling issues at the pass by giving advisers guidance on how to handle the sale of VCTs. Risk is fine as long as it is accompanied by informed judgement.” The FSA believes the tax breaks are being pushed too strongly at the expense of risk warnings. McIvor says the FSA rev-iewed the situation last August and found no problems but, having seen recent provider brochures which push the tax message more forcefully, it is writing to firms to gather direct-marketing material to review it. Matrix Money Management managing director Bridget Guerin says she is a little baffled at the regulator’s attack on the use of the tax breaks in marketing material. She says: “Surely, the Government expects the tax breaks it offers to be used to sell a product or they would not bother offering them at all and the whole thing whiffs a little of the FSA trying to cover its own back, with the memories of split caps and precipice bonds still pretty raw.” Chelsea Financial Services bond manager Mat-thew Woodbridge says the tax breaks are mentioned in brochures but in a responsible manner. He says: “All our marketing material has been accompanied by explicit risk warnings highlighting the risk associated with the investment and that it should be held for at least seven to 10 years.” Hargreaves Lansdown investment manager Ben Yearsley says he shares the FSA’s concern about reduced minimum investment levels and calls for investors to see an independent adviser before buying shares in a VCT as, while they are attractive on a tax-efficiency basis, there will also be a lot of duds. He says: “I think VCTs are good investments and very tax-efficient and it is not a surprise that many people are looking at them. To be honest, though, I would only invest in six or seven, 10 at a push, of those in the market and would favour a provider with an established VCT team. I do think that a 1,000 minimum is too low and think it should be 5,000 at the very least.” McIvor says a major concern is that VCT prov-iders have moved away from the traditional strategy of investing this extra money in cash and fixed interest to buy derivatives and other higher-risk financial instruments. Guerin says that as the VCT manager has three years to reach his 70 per cent exposure to qualifying stocks, most will have much higher levels than 30 per cent in non-qualifying investments initially. She says none of the three Matrix VCTs has any derivatives’ holdings and she would be surprised if any VCTs would risk capital in this way. Several advisers say First State is the only provider they know holding derivatives and this is only a very small percentage of the fund. Yearsley says: “This is rubbish. VCT managers have always invested in a mix of assets outside the qualifying stocks and some will invest 100 per cent in qualifying stocks.” Guerin says that, overall, the FSA’s guide makes sense as long it is presented in a sensible and balanced fashion. Yearsley says that even if it is a bit late for this year, at least it will be in place for the next tax year. Guerin adds that while the VCT market has been at its most buoyant in years, the spread of advisers selling VCTs does not seem to have significantly expanded. She says: “We will have a big review of how much we have broadened our market at the end of the tax year but my gut feeling is that the majority of money coming through IFAs to us is through the same ones as every year.” Perhaps the FSA is prea-ching to the converted but, to be fair, while late in the day, at least the regulator is being proactive, for which it has been criticised. After recent events, few can blame it for wanting to nip any problems in the bud.