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Martin Churchill: FSA Ucis rules risk restricting VCTs

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This month I want to cover the current position concerning VCTs and the FSA Consultation Paper 12-19.

CP12-19 proposes to ban the promotion of unregulated collective investment schemes and close substitutes to ordinary retail investors in the UK. This is because the FSA found in research conducted in 2010 that the majority of retail promotions and sales of UCIS that they reviewed fail to meet their requirements, exposing ordinary investors to significant potential for detriment. The proposal in CP12-19 is to restrict marketing of certain products so they only reach customers for whom they are more likely to be suitable.

The current thinking within the FSA on CP12-19 is that Venture Capital Trusts and Enterprise Investment Schemes are within the remit of CP12-19. What this means in practice is that the rules on which the FSA are consulting will cover, if not amended, some EIS and VCTs. Should they remain within the remit then It will only generally be possible to promote those products to sophisticated and high net worth customers. The FSA approach seems to be that those products are not likely to be suited to ordinary retail investors.

Should this position be maintained then investor access to VCTs:

  1. that have a 17 year track record of providing value to retail investors;

  2. that have in-built corporate governance and investor safeguards, through their status as fully-listed companies;

  3. that are fully listed vehicles where any investor has access to VCT shares in the secondary market, though without the tax reliefs that help mitigate downside risk

will be severely restricted.

Representations are currently under way both by the VCT & EIS industries and by their trade bodies, the Association of Investment Companies and the EIS Association, on the importance of the products to the growth of the economy, and how the products do not share the same characteristics as the risky products that the FSA are seeking to include in their review.

The FSA is, through the Retail Distribution Review, improving adviser education and training and removing commission bias. Advisers must base their personal recommendations for each client on a comprehensive and fair analysis of the relevant market, which is both unbiased and unrestricted. So to now say that VCTs cannot be marketed to a retail audience by this newly educated, fee-based, non-commission driven adviser population would not seem a logical outcome of this consultation.

I call on the FSA, the Treasury and HMRC to work together to retain the market presence of VCTs and EISs and not to restrict investment into these products at a time when the government is seeking to encourage growth.

Martin Churchill is the editor of Tax Efficient Review

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