All VCT, EIS, SEIS, and Business Relief qualifying investments are high risk and are not suitable for most clients. They are illiquid investments and Investors’ capital is at risk.

Due diligence, what it means to you as an Adviser


Last Friday saw the publication of the FCA thematic review on Due Diligence, TR16/1: Assessing Suitability: Research and due diligence of products and services. In the paper, the FCA states that poor quality of an advisory firm’s research and due diligence is one of the three root causes for poor consumer outcomes.

The FCA identifies 3 stages in a due diligence process:

  • Understanding the nature of the investment
  • Understanding the risks and benefits
  • Assessing the provider to establish whether they believe it appropriate to entrust the provider with client assets

The paper talks about what constitutes a reasonable level of research and due diligence highlighting the need to apply contextually – a provider well known to a firm requires less DD than a firm they have never worked with before.

The paper also says that “…Firms can rely on factual information provided by other EEA-regulated firms as part of their research and due diligence…” however “…they should not rely on the provider’s

Opinion, for example, on the investment’s risk level…”

One of the key findings was that “…[some] Firms did not seek to understand or challenge their own inappropriate bias towards products, services or providers and this led to a lack of objective consideration. In some cases this appeared to result from status quo bias…”

The FCA also highlighted the importance of due diligence on platforms, highlighting the importance of “…adequately [reviewing] the options available to the client…”

Understanding the nature of the investment

From an EIS, SEIS and BPR perspective, there are broadly 2 different types of offering:

  1. Those which invest in companies which are operated by the provider. We refer to these investments as “Provider Operated” Investments.
  2. Provider operated companies may be operated directly by the provider itself, but more commonly, they are operated by a 3rd party. The defining factor is that the company is not operated by a full time permanent director or directors who have no connection with the Provider
  3. Those which invest in companies which are operated by at least one independent director who is a full time employee of the business. We refer to these investments as “Independent Companies”.

Understanding the risks and benefits

When understanding the risks and benefits of the product, you need to give special consideration to the conflicts of interest that may exist between the Provider and the investee companies, particularly with Provider Operated Companies

For funds which invest in independent companies, this is about understanding what the investment criteria for the fund are. You can rely on the investment manager to supply this.

Once you have understood the investment criteria, then you should go on to assess just how much risk is involved in making these investments.

Assessing the provider to establish whether they believe it appropriate to entrust the provider with client assets

If the offering is investing in Provider Operated Companies, then you should be cautious about relying on the provider’s due diligence of the product and carry out your own independent assessment. You need to understand what conflicts of interest exist between the provider, the operator and any other relevant stakeholders

Issues such as the Provider’s financial stability and the operator’s experience in the field are important considerations. Diversification across different providers is important.

If the offering is investing in independent companies then your due diligence should focus on the ability of the provider to choose investments. Financial strength of the provider is of less concern, although a relevant consideration.

Platform Due diligence

Another area which has been previously visited is that IFAs should not concentrate on just one platform to the detriment of restricting their client’s choice of products and services. We at Kuber Ventures offer EIS, SEIS and BPR solely through the IFA market and we understand that, as with any process, there needs to be a starting point and we like to think we start you off quite well:-

We understand that this maybe a new market for some advisers and we run CPD training sessions, sponsor an exam covering the EIS and SEIS market as well as being a leading balanced voice on the suitability of these investments.

Why use a platform?

We believe that there are strong and compelling reasons why advisers should use platforms when advising clients on certain investments including EIS, SEIS and BPR investments.

These reasons include:

  • Managing investment risk
  • Managing administration
  • Building a diversified portfolio

Suitability paragraphs

These are investments in unlisted, small to medium sized businesses. The tax benefits dramatically reduce the risks of investment and you can find out more about the nature of these investment by following this link however, they are high risk by their nature and therefore it is important to diversify holdings. A Platform solution simplifies the process of diversification across different providers and funds and reduces the associated administration costs.

Diversifying across multiple funds and providers makes keeping track of investments much harder and the Kuber platform simplifies this. All of the investments placed through the platform are listed in one place along with the various associated documents.

The platform provides a single place to go for updates and information on how your investment are progressing. This simplifies the process of managing the investment and planning further investments once the first round of holdings start to mature.

These investments are part of the wider financial planning planning, and managing the reinvestment process when the individual investments mature is important. Placing the investments through a platform allows your adviser to easily follow the progress of the investments and line up replacement options.

If you are planning to manage your capital gains tax planning having deferred a gain through EIS, you are able target the reinvestment via a platform easily and using annual allowances can significantly mitigate a CGT liability.

The platform solution allows access to a combination of EIS and BPR allowing you to manage the re-investment process of EIS holdings balancing your portfolio between EIS and other investments in order that you maximise the relevant tax relief.