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FSA/PN/125/2005
22 November 2005

The Financial Services Authority (FSA) has found many shortcomings in the web-based financial promotions of 11 intermediaries that market Venture Capital Trusts (VCTs). The regulator is raising these concerns with the firms involved and will consider using its enforcement powers in the most serious cases.

The FSA identified VCTs as an area of potential risk to consumers in March 2005 and committed to further work to examine the risks involved. The FSA was concerned that firms were not giving investors a balanced view of the advantages and risks of investing in VCTs and wrote to intermediaries in August 2005 raising these concerns. The regulator has now examined whether firms were over emphasising the potential benefits and under playing the possible disadvantages of VCTs through their websites.

Vernon Everitt, the FSA's Director of Retail Themes, said:

"All financial promotions must be clear, fair and not misleading and – particularly with investments such as Venture Capital Trusts – must be balanced. Most of the web-based promotions we reviewed did not explain all the main risks prominently. 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."

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

Specific concerns included:

• Some sites did not prominently mention that the investment must be held for the full three year period to qualify for tax relief;
• Some sites failed to mention the investment was in small, unquoted companies and most failed to clearly explain the risks associated with investing in such companies;
• In some instances, the risks of VCTs were adequately described but hidden in small print. Furthermore, one promotion played down the risks associated with investing in VCTs;
• Most promotions failed to mention the long-term nature of the product and most did not adequately explain the difficulty and restrictions involved in reselling VCTs; and
• Few websites provided an indication of likely charges and, even where this was provided, prominence of the information was an issue.

Following the identification of the potential risk to consumers earlier this year, the FSA also looked at VCT distribution channels and investor profiles. That review provided reassurance on advised sales and the FSA is planning no further work in this area. However, it identified a marked shift of sales of these products to a direct, non-advised, basis and this emphasised the importance for promotions of VCTs to be clear, fair and not misleading. The FSA has also provided information to consumers on its website regarding the risks associated with VCTs.

Notes to editors

1. The full text of the FSA's review of VCTs may be found on the FSA website.
2. The FSA has provided information to consumers on its website regarding the risks associated with VCTs.
3. Venture Capital Trusts (VCTs) were introduced by the Government in 1995 to provide individual investors with the opportunity to invest in smaller UK companies.
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness