Operating an unregulated collective investment scheme: are your investors really taking part in day to day management?

On 20 April 2016 the Supreme Court handed down judgment in the case of Asset Land Investment Plc and another v The Financial Conduct Authority. This is an important decision as it is the first case in which the Supreme Court has considered the parameters of what constitutes a collective investment scheme; if arrangements do constitute a collective investment scheme, the operator of the scheme will be engaged in a criminal activity unless it has permission to undertake this activity from the FCA.

The case involved a scheme operated by Asset Land under which investors bought individual plots of land on the understanding that the land would increase in value if planning permission was granted or the land was re-zoned. The court found that, although the investors were the legal owners of their individual plots of land, in reality they had bought them on the understanding that there would be an increase in their value based on the planning permission or re-zoning of the plots as a whole, which would be achieved through the expertise of Asset Land, and that the investors did not in practice have control over their investment. The fact it was legally possible for investors to sell their individual plots was not persuasive, as that was not what was intended or likely to happen.

The case is formal recognition that in order to fall outside of the legal definition of a collective investment scheme, it is key that the participants in the arrangements are genuinely involved in the day-to-day management of the property of the scheme – it is not sufficient that the promotional and legal documents state this – it must be the case in reality as well.

This follows a number of cases started by the FCA involving land banking schemes, and additional guidance given on the same in the FCA’s Perimeter Guidance manual. However, the principles underlying the cases will apply equally to any other sort of collective arrangement.

The FCA said in a press statement issued shortly after the judgment that the “judgment provides further protection to consumers by confirming that it is necessary to consider the substance of the arrangements put in place by the operator when assessing if they are operating a CIS. Operators of such schemes will not be able to benefit by providing purely illusory rights to investors. Operators need to ensure that investors have genuine control over their investments to avoid being found to have operated a CIS.“