Fears raised about due diligence on EIS products

Fears raised about due diligence on EIS products

Several industry experts have called for in-house due diligence on Enterprise Investment Schemes, although ideas for how this can be achieved vary.

Speaking to FTAdviser, Kuber Ventures managing director Dermot Campbell explained that many advisers are relying on subjective reports from industry commentators and research houses.

“This isn’t enough. Advisers need to scan the whole market and obtain primary due diligence in the form of due diligence questionnaires.

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“It is not very hard, but they sometimes don’t know what to do. Advisers need to be trained in due diligence.”

For Martin Fox, chairman of the Financial Planning Committee, there are some firms which are well equipped internally for research, but for the majority of EIS firms it is “largely an occasional fail”.

“There is only a limited number of clients that it will be right for and because of this they can’t justify having research internally. The danger is that it becomes a compliance tick box to review, rather than working out what is best for the client.”

Mr Fox added that over 80 per cent of the firms that he has interviewed see EIS growing in their business, so the need for better due diligence is growing.

“A lot of advisers are coming to it late to the party. You have got the juxtaposition of are they learning it from the clients perspective, or are they just ticking the compliance box.”

Sarah Wadham, director general of the Enterprise Investment Scheme Association, pointed out that IFAs must cover the whole of the market in all areas in which they provide advice, which may span mortgages and life insurance through to investments and tax planning.

“Advising their clients on investments into EIS/SEIS, whether through professionally run funds or via direct investment into qualifying companies, is only ever going to be a small part of their business.

“Having said that, IFAs have a responsibility to their clients to understand the market and the products on offer. Research from expert third parties is an important staring point to assess the range of possible investments available.”

She added that the third party researchers have whole market expertise and a methodology to compare the merits of one investment with another.

“Even the best equipped and resourced IFAs would struggle to do primary due diligence entirely themselves.”

The Enterprise Investment Scheme Association has launched an online diploma covering all aspects of EIS, including the tax benefits and regulatory background, as well as details of the ways to invest in EIS companies and funds and which investors these investments are appropriate for.

Ms Wadham added: “Fortunately, between the range of research and due diligence information that is available to advisers, their own experience, expertise and client knowledge, most well qualified financial planners I know are able to make informed and sound decisions.”