InvestmentsJun 29 2018

FCA urged to act on VCT fee disclosure

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FCA urged to act on VCT fee disclosure

Richard Hoskins, co-founder of Kin Capital, which provides fund raising and other services to companies in the VCT and enterprise investment sectors, made the claims to FTAdviser amid ongoing concerns about Kids, some of which regulators at the Financial Conduct Authority have now pledged to look into.

Mr Hoskins has previously branded Kids for venture capital trusts "dangerous" due the requirement to include a measure of risk, because in his view the documents do not properly reflect the risks of putting money into what can be a complex investment.

But he is also asking the regulator to intervene to ensure VCT providers are more transparent on fees.

Mr Hoskins said: “To put the cost issue in context, in 2017/18 at least a quarter of VCT investors were signing up to paying more in fees and charges over the minimum commitment of five years, than they are getting in income tax relief.  

"Whilst eye watering, high charges are easy for some managers to justify in a bull market. But, bulls quickly turn to bears.

"And let's not forget the £1bn or more of un-invested cash in VCTs. High levels of cash and high running costs - not exactly the best recipe for success.

"Fees matter, particularly at this stage in the cycle when clients are effectively locking in for five years given the VCT minimum holding period.

"There needs to be more provider competition on fees in this part of the market - the VCT industry desperately needs new entrants - something the government identified in last autumn's Patient Capital Review."

According to Mr Hoskin, the vast majority of EIS and VCT funds charge portfolio companies arrangement, monitoring, and director fees.

While these are costs essentially paid by the shareholders of the investee companies, given the fund is a shareholder, the investors in that fund are paying at least a portion of these fees, in addition to the other fees above.

"Venture capital investing is hard work and it is not cheap to deploy capital," Mr Hoskin said, "so higher fees in this market are completely justified. But there is no justifiable reason why managers can’t be transparent about all the charges."

"Any manager that tries to hide behind the ‘We don't know what the costs are in advance, so we can't tell investors what they are’...should not be responsible for managing other people's money.”

Investors in VCTs receive a 30 per cent tax break, but the shares must be held for five years. Mr Hoskins said that when considered over the five year period, the extra fees are more than this tax break.

This means the returns achieved by investors will be only those delivered by the underlying investments.

Francis Klonowski, an adviser at the firm of Klonowski and Co in Leeds, said he has not typically invested in VCTs, as he feels the returns are poor, once the tax reliefs are excluded.

Mr Hoskins described key investor documents as a “crisis” for the FCA to handle, and said the regulator should insist that deal fees, arrangement fees, monitoring fees and any other remuneration received by the manager or it’s close affiliates should be disclosed and form part of the 'reduction in yield' calculations.

"Even insisting on a simple clear statement in the Kid as to whether or not the product fees, and importantly the reduction in yield figures, include or exclude all remuneration the manager or it's close affiliates receives would be a start," he said.

Ideally there would also be reference to a cap on the level of hidden ‘extras’ charged and this included in the cost figure, he said.

"Managers should be required to state words to the affect of “the costs specified in this Kid provide a fair representation of all the different revenues that are received by the manager or it’s close affiliates”. This would make the product providers that don’t like transparency to hopefully think twice,” Mr Hoskins added.

When approached for comment, the FCA pointed to recent remarks from its chief executive, Andrew Bailey, who said "change is coming" to the way the Kid rules are applied in the UK.

Ben Yearsley, a director at Shore Capital said there bis little competition on fees among VCT managers, and that the influx of cash which has entered the asset class in recent years has coincided with a dip in performance. 

David.Thorpe@ft.com