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EIS and VCTs to remain outside the scope of UCIS promotion ban

Guy Myles - 04 June 2013

We were delighted to hear the outcome of the Financial Conduct Authority’s (FCA) review of the promotion of unregulated collective investment schemes (UCIS) today, with confirmation that Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) are among those investments that will remain outside the scope of the ban.

In making this decision, the FCA has accepted that there’s a fundamental difference between what it considers to be risky, unregulated investment products and those it sees as being ‘higher risk’ in nature, but which already have strong corporate governance measures in place.

This is an outcome that Octopus lobbied hard for. Although we knew that our EIS products, as discretionary managed investments, fell outside of the scope of the proposed restrictions, in the case of VCTs we felt there was a strong argument that an exclusion from the restrictions was in the best interests of UK investors. We’re therefore pleased that the FCA has recognised some of the stark differences that distinguish VCTs from the type of investment products that fall within the UCIS categorisation. 

The FCA’s decision means that the tax incentives that come with VCTs will not be restricted solely to the rich, but will remain available to tens of thousands of ordinary investors. This wasn’t always a certainty. Last August, when the FSA first published its consultation paper proposals, there was a great deal of doubt over whether VCTs would ultimately fall within the restricted category. If this were the case, it was feared that the ban would mean that inflows into VCTs could be cut in half from existing levels, having a seriously detrimental impact on those companies that rely on investment from VCTs as one of their primary sources of funding.

At the time the consultation paper was released, we made our view known that although we believed the FSA was absolutely right to restrict the sale of certain high risk, highly illiquid and under-regulated products, we felt very strongly VCTs didn’t deserve to be tarred with the same brush.

From our perspective, we know that VCTs are already some of the most highly-regulated products available to UK investors. Not only are VCTs companies listed on the London Stock Exchange and bound by UK Listing Authority rules, but they are governed by an independent board of directors who hold the VCT manager fully accountable on behalf of investors. We’d argue that in investment terms, you can’t get much tighter regulation than that.

Of course VCTs are not suitable for everyone, and we always recommend that investors who are uncertain of their suitability should talk to their financial adviser before making a decision. We’re therefore pleased that the option of choosing a VCT hasn’t been taken out of the hands of investors, but perhaps more importantly, that financial advisers are still free to offer impartial advice regarding VCTs to anyone who seeks it, and that investors don’t have to be considered ‘high net worth’ in order to invest.

What’s clear about the consultation process undertaken by the regulator is that it listened to everyone concerned and made an informed decision based on the feedback received.

Sometimes keeping things the same – and avoiding change for the sake of it – is the bravest decision to take. Common sense has prevailed, and we see this as a great result for our investors, the VCT industry and also the companies that benefit from a vital and reliable source of funding from the VCTs themselves.

 

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