EIS funds have been obscure in their position on the extent of their investor coverage through the Financial Services Compensation Scheme (FSCS). Historically, investors would typically be covered by the FSCS in the event of the fund's custodian default (subject to a maximum claim of £85,000). However, recent guidance now indicates that in certain circumstances investors may be covered by the scheme in the event of investment manager default.

As EIS funds are classified as Alternative Investment Funds (AIFs) they had not been covered by the FSCS.  However, the FCA and the FSCS recently indicated that this is no longer going to be the case. Going forward, any claims to be covered by the FSCS must relate to a predefined activity; this is defined as a ‘protected investment business’ as set out in COMP 5.5.1R.

Another argument used to prevent EIS fund investment from being covered under the FSCS  was that as the fund is considered to be the investment manager's client, the investor would not be entitled to compensation. It should be noted that compensation is not available in the event of funds underperforming relative to their target return. COMP 5.5.1R(1) states that you do not need to be a client of a regulated firm to claim under the FSCS;  in the case of AIF management, it must be performed “with, or for the benefit of the claimant”.

In summary, the above-mentioned FCA guidance has provided much-needed clarity on the scenarios in which an investor may be able to claim under the FSCS. This new guidance is not to be taken as legal advice, and it is recommended that if you are unsure about potential qualification to the scheme, you should contact the FSCS at: https://www.fscs.org.uk/  or alternatively, write to them at 15 St. Botolph Street, EC3A 7QU, London or your appropriately regulated legal/regulatory adviser.

Please click the link to read the EISA's original statement.