With interest rates remaining at a historical all time low, it is not surprising that ordinary retail investors are increasingly moving away from traditional savings and being drawn to alternative investments, such as collective investment schemes (CIS).
CIS are defined under section 235 of the Financial Services and Markets Act 2000 (FSMA) as an arrangement with respect to property (whereby the purpose of the arrangement is to enable participants to profit from the property), over which the investors do not have dayto-day control. Accordingly, either the assets are pooled or the property is managed by or on behalf of the operator of the scheme. It is a criminal offence to operate a CIS without FCA authorisation.
Unregulated collective investment schemes (UCIS) are different from CIS as they are not FCA authorised investments (although the promotion of them is regulated). This means operators have freedom of investment choices and no borrowing limits, therefore typical investments include high-risk illiquid assets, such as property. For example, they can invest in seemingly attractive schemes, ranging from wine to overseas property, with the promise of high returns. UCIS remain popular despite the adverse publicity they have attracted over recent years and the obvious risks attached to them. Unfortunately, as a result of the lack of regulation, it is not uncommon for UCIS to fail. When they do, investors often look to hold others, such as their advisers, accountable for their losses. Insurers are only too familiar with the types of claims that can arise from a failed UCIS. It does not just result in claims against financial advisers; numerous other financial institutions are often involved in the litigation that ensues when these schemes ultimately collapse, such as the authorised corporate directors, trustees, custodians and feeder funds. The exposure to the FI insurance market can be vast. Accordingly, whilst some insurers have sought to exclude claims relating to UCIS, identifying such a scheme has proved tricky. The recent Supreme Court ruling in Asset Land Investments Plc & Anor v Financial Conduct Authority  provides useful commentary as to what constitutes a CIS which may, in turn, help to alleviate this difficulty.
Asset Land acquired a site of agricultural land and divided it into small plots, which they subsequently sold to individual investors. Asset Land represented that they would be responsible for reclassifying the land for residential use and then seek out interested developers.
It was anticipated that the developers would buy the land at a far greater price than the sums paid by investors, who would then share the profit. The investors owned their plots outright.
In June 2012 the FSA (as it was then) brought a claim seeking a declaration that Asset Land’s scheme was a CIS, contrary to s.235 FSMA.
The High Court held that the scheme satisfied the requirements of a CIS, namely:
- it was an arrangement with respect to property, despite the legal documentation not reflecting the reality of the agreement;
- the relevant property was the site as a whole which investors did not have day-to-day control over; and
- the property was ultimately managed as a whole by/on behalf of Asset Land.
Asset Land appealed on the following grounds:
- The High Court was wrong in its identification of what constituted the arrangement. The focus should have been the arrangement as made by Asset Land and the documents prepared for that purpose, not as the investors had perceived it.
- The ‘property’ was not the site as a whole; it was the aggregate of the individual plots owned by the investors, each of which they owned outright. On this basis, Asset Land argued that the investors had management control of the property, including control over their inclusion in the arrangement and the ultimate sale. They argued it was akin to a tenant’s control of a flat within a block of flats.
The Court of Appeal did not agree and upheld the High Court’s decision, with an order that Asset Land should repay the investors £21m. Consequently, Asset Land appealed to the Supreme Court.
In April 2016, the Supreme Court unanimously dismissed the appeal and upheld the decisions of the lower Courts. It found that the arrangements amounted to a CIS on the following grounds:
- Arrangements - The constitution of the arrangement was a matter of fact for the Supreme Court. It was right to assess the substance of the arrangement rather than its legal form. It was necessary to look objectively at the arrangement based on what must have been intended by the parties at the relevant time.
- Property - The ‘property’ was in fact the site as a whole. This was because the arrangement was to sell the whole site as the source of profit, not the individual plots.
- Control - The Supreme Court held that the requirement for management control was not limited to legal control and the reality of how the arrangement operates must be considered. In this case, the investors bought into a scheme whereby Asset Land managed the property, which was necessary to obtain planning permission and ultimately sell the investment. The investors had no involvement in this process.
- Management as a whole - Lastly the Supreme Court held that the property was managed as a whole by Asset Land.
The case provides useful guidance in determining a CIS. It helps to put the statutory provisions into context.
For a scheme not to be classified as a CIS, operators must ensure investors have real and genuine control over the investments, as dayto-day control extends beyond legal control. The arrangements will be interpreted by substance rather than form, so any understanding shared between the operator and the investor as to how the scheme will operate should be made clear to ensure both parties are on the same page.
Ultimately the guidance given by the Supreme Court should help operators and promoters to determine whether their product might be a CIS and fall under the regulation of FSMA and its requirements.
Offering guidance as to what constitutes a CIS will also assist in identifying unregulated schemes where additional care will need to be taken. Promoting UCIS to ordinary retail investors could result in personal liability for substantial reimbursement sums. For the investor, they also risk not getting their money back where the scheme goes wrong.
This decision will therefore assist the insurance market when considering whether a scheme is a UCIS for the purposes of triggering any relevant insuring clauses or policy exclusions.