Martin Heffernan, Partner at Thompson Taraz
Thompson Taraz Applauds the FCA’s Position on UCIS, EIS and SEIS
Having taken part in the FSA/FCA’s consultation process surrounding the decision to potentially restrict the distribution of unregulated collective investment schemes (UCIS) and close substitutes to the retail market, Thompson Taraz is delighted that the FCA, at the end of June, decided not to capture all Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) within their new rules which are to be introduced in January 2014.
Much to the market’s relief, the situation on EIS/SEIS under the new rules is:
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- a single company offering of shares under EIS and SEIS will not be caught
- EIS and SEIS funds will also not be caught as long as long as they are not structured as UCIS, but
- EIS and SEIS that are structured as UCIS (of which there are very few) will be caught.
“The way forward for EIS and SEIS,” reiterates law firm Maclay Murray & Spens, “is for them not to be structured as UCIS.”
Good UCIS, EIS and SEIS funds remain excellent investments for the right kinds of investors; the problem in recent years has been that they have ended up too often in the hands of unsophisticated investors or those who couldn’t afford the potential for total losses. It was this that the FSA identified through their review of the market which led to the changes being proposed and it is exactly this that the FCA has sought to address, and in our opinion has succeeded in addressing, with their new rules.
While UCIS are more restricted by the new rules, the FCA has focused their ban only on “ordinary” retail investors meaning those who are neither sufficiently financially sophisticated nor wealthy enough to understand the risks or bear the losses which may result. This seems eminently sensible to us and we’re pleased that in addition the FCA have not only made mis-selling less likely but have also made sales to the right investors a little easier.
EIS and SEIS funds are generally not affected by the new rules. This is a relief to many as they serve an important part of the market. Simon Webber, TT’s Strategic Regulatory Consultant suggested: “If ordinary EIS funds were to be included in the definition of non-mainstream pooled investments (NMPI), it might well cause advisors to direct people to invest in a single company EIS which would not provide any spread of risk and where the investment would not necessarily be managed or monitored by a regulated firm.”
The latest bump in the road for EIS and SEIS is the FCA’s recent statement published in their policy on the Alternative Investment Fund Managers Directive. This says that although EIS and SEIS funds aren’t (generally) UCIS and aren’t caught by the new policy on retail restrictions, they may well be an Alternative Investment Fund which is captured by the new Directive. This would mean that, depending on the size of their manager, EIS and SEIS funds would need to have separate managers and custodians and the managers would need to employ risk and investment management techniques designed to regulate hedge funds. The additional costs of complying with the Directive would crush many EIS and SEIS funds.
There is however some relief in that EIS and SEIS portfolios where they are not run as single funds (even though they may often co-invest the funds of a number of clients) will not be caught by the Directive. We therefore expect the EIS and SEIS market to move further in this direction.
Looking to the future
To date, the negative sentiment surrounding UCIS and by implication, all higher risk, alternative investments, together with fear in the industry about mass claims and the FSA and FCA’s deliberations on the new policy have contributed to the lack of take-up of EIS and SEIS in the first half of this year.
Whereas the new rules looked like the green light for EIS and SEIS funds, the potential impact of the Directive may well continue to act as a brake on these funds, at least during the year of ‘transition’ into the Directive from July 2013 to July 2014. The market is now watching and waiting to see whether there will be a renewed interest in these investment opportunities.
Wherever UCIS, EIS and SEIS sit in the marketplace – whatever product label we apply to them – these products are intended for those comfortable and familiar with sophisticated investment strategies and higher levels of associated risk. We’re delighted that as a result of these rules, this is exactly where they will be targeted in the future.