The Financial Services Authority has warned Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) managers to avoid marketing investments at customers solely on attractive tax incentives.

The Financial Services Authority has warned Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) managers to avoid marketing investments at customers solely on attractive tax incentives.
 
As part of its ongoing investigations into promotions, the FSA has issued a directive to firms telling them that while investments in the schemes have ‘generous’ tax relief, they remain ‘high risk’ and products should be presented in a ‘balanced way’.
 
The Financial Promotions Industry Updates for July states that the increase in tax relief for both schemes, which was announced by the Chancellor, George Osborne, in the 2011 Budget in March, is ‘likely to result in increased demand for these products’.
 
In his Budget speech, Osborne announced, among a raft of reforms, that from April this year income tax relief will increase from 20 per cent to 30 per cent for investors who commit to businesses through the EIS. The rate will match the current tax relief for Venture Capital Trust (VCT) investment.
 
The statement continues, ‘Whilst these schemes offer generous tax relief, they remain high risk investments as they involve investing in smaller companies and can be complex. Our concern is that they may be marketed to consumers based primarily on the tax incentives offered, with investors not fully understanding the risks involved.
 
‘In addition, we have noted that there are a growing number of EIS opportunities in the market, particularly EIS funds.’
 
The FSA says it expects in all media advertisements, including digital, that, ‘The overarching principle for financial promotions is that they should be clear, fair and not misleading. We often see EIS or VCT investments being promoted on their tax benefits. However, it is important that firms present these tax benefits in a balanced way.’
 
It continues, ‘We expect all firms which promote EIS or VCT investments to include clear warnings about capital being at risk and tax risks. These warnings should be highlighted prominently to the consumer … [and] a firm must ensure that information does not disguise, diminish or obscure important items, statements or warnings.’
 
HM Treasury last week began a 12-week consultation process on the future of seed and early-stage investment in the UK. The consultation aims to seek public comment on: additional support for seed investment via the creation of the new scheme; simplification of the current schemes; and, refocusing of the current schemes to ensure they remain appropriately targeted.