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FSA to set out guidelines as fears grow on VCT risk

The FSA is to issue guidance to advisers on VCTs amid concerns that the products could be sold to investors who are unaware of the risks.

It has seen a recent fall in VCT entry-level contributions from 15,000 to as low as 3,000, which it says could tempt mass-market clients who are not fully aware of the potential risks.

FSA spokesman Rob McIvor says recent marketing literature he has seen emphasising the tax efficiency of the product could tempt customers without the appropriate risk knowledge.

The FSA says some new VCT investment strategies have shown a move away from cash, with high-risk derivatives being used by some VCTs for the 30 per cent of the trust that does not have to be invested in qualifying stocks. The FSA looked at the issue last August and decided not to act but says recent changes have led them to reassess the situation.

It will be writing to firms to gather direct-marketing material in a process due to last two months. It will then decide what action to take, ranging from withdrawal of marketing material to enforcement action.

McIvor stresses the FSA does not have a problem with the product itself but says the risks and structure of the product need to be explained fully to clients. He 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.”

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