In the case Asset Land Investment Plc and another (Appellants) v The Financial Conduct Authority (Respondent) the Supreme Court unanimously dismissed Asset Land's appeal and found that Asset Land’s activities amounted to operating a collective investment scheme under s. 235 Financial Services and Markets Act. The activities related to sales of individual plots at six possible development sites in various parts of the United Kingdom. Asset Land divided the sites into plots which they sold to investors, representing that it would be responsible for seeking rezoning for residential development and for arranging a sale to a developer. The High Court held that in the circumstances this amounted to operating a collective investment scheme. This decision was upheld by the Court of Appeal. The judge found that the property was managed as a whole by Asset Land and that the dominion of the investors over their plots of land had no basis in the evidence.
When considering if Asset Land was operating a collective investment scheme the court considered the definition of a collective investment scheme as an arrangement respecting property which enable participants to receive profits or income arising from the acquisition, holding, management or disposal of the property where the participants in the scheme must not have day to day control over the management of the property, and the property must be managed as a whole by or on behalf of the operator of the scheme.
The court found that the relevant "property” is the whole site, but that management control of the property may be achieved in different ways, and may not be by legal mechanisms or legal control. "Have control” refers to "the reality” of how the arrangements are to be operated. The relevant "management of the property as a whole" comprised the steps necessary to obtain planning permission and secure a sale to a developer. It was no part of the arrangement that the investors should have any part in or control over those management activities.
When considering the "day-to-day" control of the property, the court considered that the question must be "in whom would control be vested were control to be required”. When assessing the control exercisable by the investors collectively, it was clear that they did not have the relevant control of the management of the whole sites because common parts were retained by Asset Land.
In addition to this, the court held that whether a scheme is a collective investment scheme depends on what was objectively intended at the time the arrangements are made, and not on what later happens. In this case, there was a mutual understanding based on the core representations made by Asset Land that the whole site would be rezoned and sold to a developer, and the profit which each investor would derive would be derived from an allotted share of the entire sale price for the site.
This decision highlights the need to ensure that investors have genuine control over their investments in order to avoid the risk of being found to have operated a Collective Investment Scheme. The implications of the case go not just to the issue of "operating" a collective investment scheme, but to the wider issues of managing, promoting and distributing such schemes and to other issues of regulatory and AIFMD compliance.
FCA director of enforcement and market oversight, Mark Steward, said: "While this is an important victory from a legal point of view, we are acutely aware from experience that the risk to investors who deal with unauthorised firms is that most, if not all, investors are likely only to get a fraction of their money back. Consumers should therefore recognise that there are huge risks involved when investing with unauthorised businesses."
For further details, please see press summary and judgment