EIS Industry Report 2018/19

20 21 Inconsistencies? Misinformation? Confusion? The KIDs aren’t alright Since the arrival of the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation in January, the whole industry has been up in arms about the Key Information Documents (KIDs) it requires. While in some ways, there has been more flexibility for EIS managers to take a more common- sense approach to the document than, say, listed funds, it still has not resulted in those outcomes that managers or advisers believe add value to the sales process. Confusion? Misinformation? Inconsistency? The very things that regulation normally protects against seem to be at the heart of the criticism levelled at PRIIPs. It is not unusual to have criticism of a new regulation as everyone adjusts to it, but such widespread and enduring criticism is rare. With the press widely reporting these concerns, and some even predicting a ‘future mis-selling scandal’, it is no surprise that the FCA is taking note. Such an early request post-implementation suggests that the regulator is painfully aware of how this European regulation may be missing its mark. NO. OF OPEN EIS OFFERS In November 2018, the amount of open offers dipped by 17% compared with November 2017. This reflects a number of offers closing, due to being focused on strategies that did not comply with the new rules from the 2017 Autumn Budget. EIS managers are now purely focused on growth strategies, and although some EIS investment managers had to close or pivot their offerings to be compliant with the new rules, the shift in legislation is widely seen to give new legitimacy to the scheme. What managers are investing in Technology has become the largest sector in the EIS market, taking over from Media & Entertainment last year. It’s worth noting that a significant proportion of general enterprise managers have a significant tech focus. Taking this into account, around 50% of EIS offers have a significant tech focus. Media & Entertainment has dipped from a 33% share of the market in 2017 to 24% in 2018. Although media investments were not excluded from EIS relief in the 2017 Budget, some of the strategies in this sector used risk mitigators, which would have made them not permissible under the new risk-to-capital condition. The effort of manufacturing a KID may not be that visible at first glance in this three-page document. However, the modelling and testing work that sits behind the text shouldn’t be underestimated. With all of that time spent by fund managers, why does the outlook for one fund look so different to another? It is understandable that multiple interpretations of the regulation can arise, and it certainly was not drafted with illiquid investments or investments that attract tax relief in mind. Take for example the scenario where the manager confirms how much money an investor will receive if they withdraw a year into the investment. If you were comparing non-AIM growth capital EIS funds, you would probably expect to see similar outcomes for year one. However, it is more likely that you will see a spectrum of scenarios, which suggests far more of a difference between the funds than actually exists in practice. Some KIDs will suggest your client would get zero, some will flag that the question is not applicable in an EIS context, either by using a dash or ‘n/a’, while others will suggest that your client will receive 50% to 95% of their funds back. What seems like a simple question – how much can I get back in year one – is loaded because the client has not lost their money at the end of year one, but equally they will not be able to withdraw their investment either. The regulation is simply not drafted in such a way to create consistent results that do not mislead the consumer. The industry has responded to the FCA, both through the EIS Associations’ regulatory committee, and in many cases on an individual level. We wait with bated breath to see if there lies a better path ahead. Until the issue is withdrawn, you will need to see through the inconsistencies where they clearly don’t make sense. Gillian Roche-Saunders Partner at Bates Wells Braithwaite. She is also a director of the EISA and chairs its regulatory committee. SECTOR ANALYSIS A DEEP DIVE INTO OPEN OFFERS All of the below will be based on the latest 2018/19 market data available via MICAP. This represents quite a significant shift to prior statistics, which were based on older periods from HMRC. Is it worth explaining this as some of the conclusions are more ‘dramatic’ than the conclusions drawn from previous statistics. The amount of open EIS offers has dipped by 17% OPEN EIS OFFERS BY SECTOR 65 54 2017 2018 Market Update / Thought Leadership TECHNOLOGY FOOD & DRINK GENERAL ENTERPRISE SPORT & LEISURE PHARMA & BIOTECH MEDIA & ENTERTAINMENT INDUSTRY & INFRASTRUCTURE 31.5% 31.5% 3.7% 3.7% 24.1% 3.7%