There is a chance that the Financial Services Authority, if it isn’t careful, might hit a sector that certainly should not be put beyond the boundaries of retail investors. That sector is venture capital.

I have been concerned for some time that the UK financial
regulator’s zeal to crack down on what it deems “unsuitable” products that are
sold to retail investors can backfire. (To view one of my pieces on this issue,
click here.) Well, there is a chance that the Financial Services Authority, if
it isn’t careful, might hit a sector that certainly should not be put beyond retail investors. That sector is venture capital.

Late last week, the Association of Investment Companies, a
trade organisation representing the investment trusts sector, urged the FSA to
exempt Venture Capital Trusts from any proposed ban on marketing supposedly
risky funds to retail investors.

VCTs are listed and have been around since 1995 under the
old Conservative government of John Major; they are tax-deductible vehicles
that are designed to put relatively small sums into fledging business start-ups
and small firms. (A VCT must get approval to operate by HM Revenue &
Customs, the UK’s
tax authority, although that approval does not imply that there are any guarantees for
investment performance.) The tax benefits to holding VCTs have fluctuated in
recent years, but some advantages remain. For example, there is income tax
relief at rate of 30 per cent, and no capital gains tax is paid when shares in
a VCT are disposed of.

This sector has had its ups and downs; performance of VCTs
can vary widely and investors should always be mindful that investing in
relatively modest firms is a long-term business; investments are typically
relatively illiquid – this is not like punting on the S&P 500 – and it pays
to get a financial advisor to scrutinise the management firm
of a VCT. But this is the sort of commonsense advice that any investor,
sophisticated, institutional or retail, should be able to understand.

Venture capital is not a mysterious asset class. After all, the UK television programme “Dragon’s Den”, while it
might be a bit gimmicky and have annoying judges has for example helped to
put the idea of venture capital a bit more into the public’s mind. Investing in
a spread of small firms that might develop into something much bigger is hardly
any more difficult to understand than, say, holding a portfolio of bonds. And
in a world of negative real interest rates, is the FSA really going to suggest
that the only options open to retail investors are plain vanilla stocks, cash
and bond funds?

The UK
government has recently said that there needs to be a lot more focus on wealth
creation. All governments say that. A test of how serious this administration
is will be how it allows the broader investor public to tap into the process of
seeding and encouraging small, fast-growing companies. The FSA’s determination
to weed out crooks from the financial world is admirable; its determination to
only allow retail investors to hold the most basic of assets is
less so.