The government will use this Wednesday’s Budget to tighten up eligibility rules of enterprise investment scheme investee companies and force equity investments rather than loan funding, as it seeks to head off a retail investment ban by the regulator, according to sector fund managers.
Kieran O’Gorman, partner at Deepbridge Capital, told FTAdviser that new rules around equity funding would be seen as a timely re-emphasis of the HM Revenue & Customs rule that no arrangements must be in place to protect investors from the normal risks with shares investing.
Such amendments would prevent the funds being seen as an esoteric investment option akin to unregulated collective investment schemes, Mr O’Gorman added.
The Financial Services Authority has announced a ban that would prevent retail investors from being advised to invest in Ucis.
The regulator recently announced that venture capital trusts or Reits will not fall under the Ucis remit, though it said it continued to harbour concerns over EISs and is still mulling whether they should fall under the Ucis umbrella.
The failure of the government’s attempts to counter conservative lending behaviour of banks to small businesses has placed greater emphasis on the need to attract development capital from other sources, meaning it is keen to prevent EISs falling under the Ucis ban, Mr O’Gorman said.
He highlighted that in the last quarter of 2012, net lending by the Funding for Lending scheme fell by £2.4bn compared to the previous three months.
Mr O’Gorman said: “In a recessionary environment, when the provision of development and commercialisation capital in UK small businesses is experiencing profound impediment... [EISs have] a significant role to play in the recovery of the UK economy.
“That said, such investment should, in accordance with the ethos of EIS, involve investors bearing the risks associated with equity investment in bona fide trading companies.”
Neil Lewis, partner at Old Burlington Investments, told FTAdviser the Treasury wants to see the EIS develop as a sophisticated addition to economic policy and agreed that this imperative will drive it to head off the threat posed by an FSA ban on retail investment.
Mr Lewis said: “The balance between Treasury policy, mixed messages from government around acceptable use of tax reliefs, the FSA’s instinct to protect, and the public’s appetite for alternative wealth strategies should eventually converge around a well regulated, orderly alternatives market, with EIS as its cornerstone.”
St James’s Place director Tony Müdd recently told FTAdviser that the Treasury and the FSA are at odds over the future of EIS investments, stating that the government is keen to ensure that EISs are not included under the Ucis umbrella.
He said: “Our understanding is that the Treasury is quite keen that it doesn’t fall under Ucis in any case because these are vehicles that should help stimulate the economy at a time when actually that is exactly what the economy needs.”
