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The Treasury Committee has finally published its thoughts on last month’s Autumn Statement. Of interest to fans of coherence is the committee’s creeping anxiety about the Funding for Lending Scheme, which was launched in July with one aim being to encourage banks to lend more to small businesses.

At the time, Chancellor George Osborne trumpeted the policy as ‘providing welcome support to businesses that want to expand’ and claimed it would ‘support the flow of credit to where it is needed in the real economy’.

The Treasury Committee demurred in its report, albeit with the caveat that it was probably too soon to assess the scheme’s impact. ‘The supply of corporate lending by the banks remains of significant concern, especially for smaller firms,’ it said. ‘We have heard evidence that the weakness of corporate lending may be hindering some firms from expanding.’

‘We are concerned,’ it continued, ‘by reports that there may be a bias in the effect of the Scheme that favours lending for mortgages rather than lending to small and medium-sized enterprises.’

The problem is that despite the government’s avowed intentions to keep small businesses afloat with a cheap-credit rubber ring, another state tentacle is simultaneously planning to scupper a potential life raft: venture capital trusts (VCTs).

The Financial Services Authority (FSA) is consulting on proposals to ban the promotion of VCTs to most investors, which a recent survey by Bestinvest suggested would create a £200 million shortfall for small businesses.

Some VCTs are undoubtedly as high risk and generally unsuitable as their ‘venture capital’ moniker would imply. But ultimately a VCT is just a legal structure, not necessarily any worse than any other publicly traded product (there aren’t currently any plans for the FSA to preclude investments in BP, RBS or G4S).

Indeed, there are plenty of VCTs that follow resolutely low-risk strategies. These are typically known as ‘limited life’ or ‘planned exit’ VCTs, which are designed to return shareholders’ investments after a set number of years having paid hefty dividends in the interim.

One provider of such specialist funds in Puma Investments; the group’s chief executive, David Kaye, stresses the importance of ‘downside protection’ to him.

Puma relays investors’ money on to small businesses in the form of asset-backed loans. Last year, for example, it handed a company called Community Solutions £5.4 million to develop accommodation for the healthcare sector. This sum, Kaye says, was ‘triple secured’: by Morgan Sindall, a construction giant that is the parent of Community Solutions; by pre-let agreements on the facilities with Leonard Cheshire, a not for profit with £600 million in annual revenues; and finally by the option of converting the accommodation into flats for sale.

As well as the estimated 9 per cent annual return to investors, Kaye notes that the project also created plenty of jobs that would never have existed without the VCT support.

There is no convincing reason for the government to cut off a large swathe of investors from such opportunities. ‘You’re effectively saying these are just for rich people,’ argues Kaye. ‘You disenfranchise the masses.’

VCTs are after all subject to stringent stock-market oversight, while houses like Puma are regulated by the FSA and have verifiable track records.

Suppressing them stands not only in contradiction of the government’s fervour for small businesses, but of another proposal from the Autumn Statement.

Osborne is considering letting investors hold AIM-listed firms in their stocks and shares ISAs. There are plenty of fine AIM businesses, but there many more profitless non-UK entities on the junior market that will wipe out the credulous just as quickly as a VCT committed to backing the next Instagram.

At the moment, the government is telling banks to give more money to small businesses. It’s also telling individuals to give less money to small businesses. And all the while it’s pondering allowing them to give more money to whatever cash-free minnow is tipped the week before the ISA deadline.

See the article online here on the What Investment website