A UK-based alternatives boutique has come out to criticise the Financial Services Authority’s proposal to define enterprise investment schemes and venture capital trusts as “non-mainstream” investments as a move which could harm the UK economy as well as the EIS and VCT markets.

Old Burlington Investments believes that the draft regulations contained in the FSA’s Consultation Paper 12/19 are a cause for concern as they appear to define both VCT and EIS investments as non-mainstream pooled investments, and describe them as funds. On the contrary, they are investments in underlying companies which are generally uncomplicated, says Brett Williams, managing partner at Old Burlington. Therefore, EIS and VCT investments should not be within the scope of non-mainstream pooled investments, in his view.

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What’s more, the draft proposals run the risk of directly contradicting measures announced by the Treasury in April which were intended to make EIS investments more attractive, (among the changes was a rise in the annual allowable investment per investor in EIS-qualifying companies to £1 million from £500,000).

The FSA’s proposed definition of non-mainstream pooled investments is “likely to cause, and is already causing, an undesirable uncertainty in the investment market,” says Williams. "The definition should be revisited to prevent the market devising schemes which fall within exemptions to the ‘collective investment scheme’ definition. VCTs and EIS make an important contribution to the UK economy and should not be penalised."

VCTs and EIS are increasingly popular among high net worth clients as they offer attractive tax advantages, and the government has encouraged their proliferation as a means to bolster small and medium sized enterprises at a time when lending conditions are particularly tough. Indeed, this year the government introduced Seed Enterprise Investment Schemes, a variant of EIS investments, in a bid to further boost venture capital and finance for small and growing businesses.

It would seem that the government and the FSA are sending somewhat of a mixed message over VCT and EIS investments, with the one encouraging investors and the other seeming to want to restrict marketing them to retail investors. Williams fears that the FSA’s draft rules will not only have a “negative impact on the ability of certain investors to access the whole market” but that they “will also deprive certain areas of the UK economy of much-needed investment”.

A spokesperson for the FSA said: "VCTs and EIS would be caught by our proposed rules where they meet the terms of the definition of 'non-mainstream pooled investments', as set out in the UCIS and close substitutes consultation paper. The proposals do not ban retail sales but only limit the extent to which firms may promote these products: in the retail market they could only be promoted to sophisticated and high net worth customers meeting specified criteria (depending on the characteristics of the EIS or VCT). 

"However, this is a consultation and we are interested in responses from consumers and the industry as to whether this is the right approach. We have not yet confirmed that we will make the rules in this form and it is not a foregone conclusion. What we would want to see from those respondents who think that VCTs and EIS should not be caught by our proposals in their current form is evidence or arguments explaining which types of consumer they believe these products should be marketed to, with reasons."