VCTs are tax-deductible funds which support fledgling business start-ups and investments in existing small firms. They can be held by retail investors.

If the Financial Service Authority's ban is imposed as suggested, retail investors would be excluded from VCTs, the Association of Investment Companies said yesterday.

“The AIC is aware of this issue and is working closely with the FSA. VCTs are listed investment companies overseen by an independent board and regulated by the listing rules and company law, in the same way that investment companies are. We will be calling on the FSA to exclude VCTs from the proposals, in the same way that investment trusts have been excluded,” Ian Sayers, director general of the AIC, said in a statement.

The regulator is trying to prevent retail investors from being exposed to products that it deems unsuitable, a stance that arguably could create a situation where such people are only allowed to hold relatively cautious, plain-vanilla products. Ironically, conventional fixed income funds can be marketed to investors even though such vehicles might be unsuitable at a time of negative real interest rates.

The possibility of a threat to VCTs would be ironic as policymakers typically have called for a more friendly climate for venture capital as a way to boost flagging economic growth. In recent years, tough market conditions and the subdued market for initial public offerings have crimped investor appetite for venture capital as an asset class, as discussed by this publication here.