FSA to probe websites selling venture capital trusts

The Financial Services Authority is investigating the websites of 11 firms selling venture capital trusts because they fail to explain fully the risks to investors.

Analysis from the FSA's financial promotions department concluded that the websites, which allow people to buy VCTs directly, failed to give a true picture of the risks involved in investing in small and unquoted companies.

In March this year the FSA identified VCTs as an area of potential risk to consumers and said it would examine the issue further. It was concerned that firms were not giving investors a balanced view and wrote to intermediaries in August raising these concerns.

The FSA's decision to investigate VCTs was prompted by an upsurge in the money invested in these vehicles from £60m in 2003-04 to £510m last year as investors were lured by significant tax breaks.

"All financial promotions must be clear, fair and not misleading and - particularly with investments such as VCTs - must be balanced," said Vernon Everitt, the FSA's director of retail themes. "Most of the web-based promotions we reviewed did not explain all the main risks prominently."

The FSA found that the websites did not contain an adequate description of how VCTs worked, with some sites providing no explanation at all. All of the promotions reviewed emphasised the benefits of the products, but most did not include a prominent indication of the main risks associated.

The sites also failed to make clear that the investment must be held for the full three-year period to qualify for tax relief or that the investment was in small, unquoted companies.

In some instances, the risks of VCTs were adequately described but hidden in small print. Most promotions failed to mention the long-term nature of the product and did not adequately explain the difficulty and restrictions involved in re-selling VCTs.

The websites failed to indicate likely charges on these investments or hid this information in the small print.

"Previously these investments were niche investments aimed solely at high net worth individuals who used advice and invested as part of a balanced portfolio," said Martin Churchill, director of research company Tax Efficient Review. "But now that investment in new VCT shares attracts 40 per cent tax relief there has been a flood of new trusts on to the market many with minimum investment levels targeted at the mass market."

The FSA said it was raising its concerns with the firms involved and would consider using its enforcement powers in the most serious cases. This could lead to fines. "This needs to be fixed quickly and we are contacting a number of the firms to establish what action senior management will take to put things right," said Mr Everitt.