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DISTRIBUTION OF EIS
Distribution of EIS investments has
traditionally been a rather low key affair.
The biggest EIS investment providers would
distribute their products via a network of
advisers who they had established a good
working relationship with. This worked
well for both parties – the providers
knew the advisers gave them access to
the right category of investors (indeed,
many investors were rolled over into
similar EIS funds whenever one closed)
and the advisers had products from
providers that they knew and trusted.
This worked because there was a lot of
knowledge and trust throughout the
distribution chain, and the majority of EIS
investments are still distributed in the same
way today. However, it does mean that there
are challenges for new investment providers
to overcome – they have to earn the support
and respect of advisers and this makes
it very hard for new market entrants to
challenge the status quo. Well established
managers know they can distribute
through this route, but EIS funds run by
new managers or new single company EIS
investments looking for distribution through
IFAs have to undertake a very large business
development task to attract advisers.
To our knowledge there are no firms
focused solely on the task of independently
distributing EIS investments to advisers
(i.e. they are not a provider, an industry
body or investment broker). Ram Capital
is a pure distributor who focuses on EIS
as well as VCTs and other products aimed
at tax planning; there are a number of
online discount brokers who distribute EIS
alongside VCTs and mainstream funds.
These organisations would be the closest
to pure EIS distribution businesses.
The Allenbridge Tax Shelter Report, Tax
Efficient Review and EISA websites all
have reasonably comprehensive lists of
current open opportunities. When MICAP
launches, they plan to offer a facility for
advisers to search, compare and build
sample portfolios of all the current
EIS offers in their online database.
One barrier to the distribution of EIS
investments is that they are not held
on the large investment platforms such
as Transact or Cofunds. These are very
popular with both advisers and clients, with
over £274bn in assets held on platforms
(Platforum), and it is estimated that
between 70-80% of all new transactions
now take place on a platform. Clearly
being able to be held on platforms would
be a massive boost to distribution.
To date there have only been tentative
moves in that direction, primarily from the
EIS platform providers who are seeking to
build strategic links. The main consideration
with EIS investment through a platform
centres on the illiquidity of unlisted
companies. The majority of investment
platforms focus on mainstream investment
opportunities, which are traded and
therefore considered lower risk and liquid
from a regulatory stand point. Platforms
are set up to support listed investments,
which can be easily bought and sold and are
often considered more suitable to ordinary
retail investors. There has been much less
demand from advisers and investors to hold
more alternative and tax efficient products
through investment platforms, and there
are also additional costs and regulatory
restrictions to be considered. Advisers
would have to weigh up the additional
platform costs against the flexibility
that investment platforms provide.
PS13/03: Restrictions on UCIS and other
Non-Mainstream Pooled Investments
EIS (and VCT) investments escaped the
restrictions placed on other ‘esoteric’ or
Non-Mainstream Pooled Investments
(NMPIs) contained in PS 13/03, which
came into force on 1 January 2014.
Initially, the draft policy statement
wording had appeared to capture EIS
and VCTs. However, after some effective
lobbying during the consultation process
the regulator was persuaded that EIS
and VCTs already have strong corporate
governance measures in place and
were not as risky as the products it
was primarily concerned about, such
as Unregulated Collective Investment
Schemes and Qualified Investor Schemes.
This means that regulated advisers
can still recommend EIS investment
to any client who they felt met the
appropriateness and suitability tests.
PS14/04: Restrictions on Crowdfunding
However, the new crowdfunding regulations
will have an impact on the promotion
of EIS investments. These rules impact
‘direct offer’ financial promotions, where
investors receive promotional material and
can then respond directly to the product
provider – such as a response form. Note
that this applies both on and off-line.
Before making a direct offer financial
promotion, firms will now need to check that
a retail investor is appropriately certified.
In addition to the familiar high net
worth and sophisticated investor
certificates, a third route of certification
has been introduced for retail investors.
Individuals who restrict themselves to
investing only 10% of their net investable
financial assets in ‘non-readily realisable
securities’ can also be promoted to.
Firms will also have to apply an
appropriateness test before allowing
an investment to be made.
These rules apply to ‘non-readily realisable
securities’ – a bit of a mouthful, referring
to illiquid securities where there is only
a very limited secondary market.
KEY POINTS
The EISA, Allenbridge Tax Shelter
Report, Tax Efficient Review and MICAP
can all provide information on the market
that can support advisers, including
investment reviews
Investment performance data is
difficult to obtain and it will require an
industry-wide consensus to address this
issue. The lack of data remains an obstacle
to investment
Advisers need to be careful, but not
overly cautious when recommending EIS
investments. Generally they are going to
be more suitable for wealthier clients who
are close to maximising more mainstream
tax allowances or have tax liabilities that
they wish to offset
