FSA says investors not being warned of VCT risks

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The Financial Services Authority sent out its second warning in eight months to brokers and advisers who sell Venture Capital Trusts (VCTs) yesterday, complaining that too many of them were still failing to make the risks of VCTs clear to investors.

Publishing the conclusions of its latest review of the sector, the regulator criticised the web-based marketing of intermediaries, saying too much prominence was being given to the benefits of investing in VCTs, and not enough to the potential pitfalls.

The regulator said it was particularly infuriated by the 11 worst offenders, as it had written to many of these firms just three months ago, pointing out the importance of highlighting the high-risk nature, the costs and the restrictions involved with investing in VCTs. It said it would consider taking enforcement action against the firms if they did not raise their advertising standards to the required level immediately.

Vernon Everitt, the FSA's director of retail themes, said: "All financial promotions must be clear, fair and not misleading and - particularly with investments such as VCTs - must be balanced. Most of the web-based promotions we reviewed did not explain all the main risks prominently. This needs to be fixed quickly."

VCTs are funds that invest in small and start-up companies - either unquoted, or listed on the Alternative Investment Market. They were launched 10 years ago to encourage investment in fledgling businesses. However, after a sharp fall in sales during 2003 and 2004, the Government improved the tax breaks last year, offering investors in the funds a 40 per cent income tax kickback.

That triggered a rush of providers launching new funds, with some 40 trusts collectively seeking £1bn during the 2004/5 tax year. In the end, just over £500m worth were sold in total.

Among the specific criticisms in its latest report was that few advisers are making investors aware that they will not qualify for the tax breaks unless they hold their investment for three years. The FSA was also concerned that investors were not being told that there is only a limited secondary market for VCTs, meaning it can be difficult to sell at a fair price.

Ben Yearsley, an investment manager for Hargreaves Lansdown, the financial adviser, said: "We don't want people buying VCTs for the wrong reasons and then saying they're not what they expected. There's been so many mis-selling scandals - it's not good for the industry."

The latest warning comes eight months after the regulator expressed concerns that many less wealthy investors were being persuaded to invest in the funds.