FSA warns of VCT mis-selling to less wealthy

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The Independent Online

The Financial Services Authority (FSA) voiced concerns yesterday that venture capital trusts, high-risk funds which invest in young and start-up companies, are being mis-sold to less wealthy investors, rather than being targeted at their traditional audience of high net-worth individuals.

The Financial Services Authority (FSA) voiced concerns yesterday that venture capital trusts, high-risk funds which invest in young and start-up companies, are being mis-sold to less wealthy investors, rather than being targeted at their traditional audience of high net-worth individuals.

The venture capital trusts industry has seen a record number of trust launches this year in response to a change in their tax treatment, which enables investors to receive a 40 per cent income tax kickback on their investment if they hold it for three years or more.

However, the surge in supply has far outstripped demand, leaving many trusts struggling to fill even their minimum allocation before the tax year comes to an end in 11 days.

More than 40 trusts have been looking to raise about £1bn in total this year. However, just £360m has been raised so far, with more than £600m of capacity likely to go unfilled.

The FSA, headed by John Tiner, said advisers needed to ensure they are more careful to make their clients aware of the risks involved with venture capital trusts.

It pointed out that of the 75 launched over the past nine years, 22 stand below their starting price, even after taking the tax breaks into account.

The regulator also raised concerns over a recent trend by fund managers to invest part of their portfolios in alternative risky investments.

Fund managers must invest 70 per cent in "qualifying" investments but are unrestrained with the remainder. Historically, this 30 per cent was kept in cash, but many are now using derivatives or equities.

Ben Yearsley, a specialist in venture capital trusts at Hargreaves Lansdown, said the minimum investment limits on venture capital trusts are also too low. Many now accept investments as low as £1,000.

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