The UK’s Supreme Court has handed down its judgment in Asset Land Investment Plc -v- the FCA. The judgment, which upholds the decisions of the lower Courts, is consistent with the FCA’s long-held position on the meaning and effect of the term “collective investment scheme“, especially in the context of “land-banking”.
In February 2013, the High Court made an order requiring AL and several others to make an aggregate interim payment of £21m to the investors in AL’s schemes; but the obligation to pay was suspended pending the outcome of this appeal. Today’s decision makes it possible for that order to be enforced. However, the FCA thinks it’s unlikely that the relevant parties have the £21m required to make these payments. It has therefore restricted itself to welcoming the Supreme Court’s decision, and emphasizing that consumers should recognize that “there are huge risks when investing with unauthorized businesses“.
Asset Land Investment Plc (AL) acquired property, and sold it to investors in small plots.
Every investor was required to sign and return a form, which explained that AL “did not give investment advice or offer regulated investment products … and … having sold the land [AL] does not pursue re-zoning or planning permission…“. In addition, every contract “confirmed that no representations were relied on outside the contract”; and “provided that [AL] would not apply for planning permission for the property or provide any other services”.
Despite that, there was a clear understanding between AL and the investors that (a) AL would seek to have the whole property rezoned for housing development; (b) when that had been done, AL would arrange for a developer to buy the whole property; and (c) every investor would receive a share of the profit from the sale of the property that was worth more than the price he’d paid for his plot.
Section 235 of the Financial Services and Markets Act 2000:
“(1) … ‘collective investment scheme’ means arrangements with respect to property … the purpose or effect of which is to enable persons taking part in the arrangements … to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property …
(2) The arrangements must be such that the persons who are to participate … do not have … control over the management of the property …
(3) The arrangements must also have either or both of the following characteristics: (a) … (b) the property is managed as a whole by or on behalf of the operator of the scheme…”
The decisions of the Supreme Court:
Lord Sumption, with whom Lords Mance, Clarke and Hodge agreed, found that:
- Arrangements “is a broad and untechnical word. It comprises not only contractual or other legally binding arrangements, but any understanding shared between the parties to the transaction about how the scheme would operate, whether legally binding or not. It also includes consequences which necessarily follow from that understanding, or from the commercial context in which it was made”;
- “In these respects, the definition is concerned with substance and not with form. It is, however, important to emphasize that it is concerned with what the arrangements were and not with what was done thereafter … it must be possible to determine whether arrangements amount to a collective investment scheme as soon as those arrangements have been made. Whether the scheme is a collective investment scheme depends on what was objectively intended at that time, and not on what later happened, if different“;
- “… the property referred to in subsection (1) is the property from whose acquisition, holding, management or disposal the profits or income were to be derived … that was the whole site. It was the whole site that was to be rezoned, and it was the whole site which was to be sold to a developer. The profit which each investor would derive from these transactions would be derived from an aliquot share of the entire sale price for the site “;
- “Day-to-day control“:
- “‘Control’ of property means the ability to decide what is to happen to it … that does not only mean the legal ability to decide. It extends to a case where the arrangements are such that the investor will in practice be able to do so. But the critical point is that the absence of day to day control … has to be a feature of the arrangements. This is necessarily prospective, viewed from the time when the arrangements are made. Either those arrangements confer or allow control on the part of the investors or they do not. The test cannot depend on what happens after the arrangements have been made. Nor would a test based on the actual exercise of control be realistic … The question must necessarily be in whom would control be vested were control to be required“;
- “Management of the property as a whole“:
- “ … what has to be ‘managed as a whole’ is the property the subject of the scheme, not the scheme itself … [There is a] fundamental distinction … between (i) cases where the investor retains entire control of the property and simply employs the services of an investment professional … to enhance value; and (ii) cases where he and other investors surrender control over their property to the operator of a scheme so that it can be … pooled or managed in common, in return for a share of the profits generated by the collective fund …”;
- In this case, “each investor remained the entire owner and sole controller of his plot and simply counted on [AL] to enhance its value and find him a buyer. But the transaction cannot be viewed only in legal terms … the arrangements … could not work if the investors exercised the rights they theoretically possessed … The dominion of the investors over their plots, although apparently complete, was … an illusion … On that ground … the schemes with which we are concerned are collective investment schemes“.
Lord Carnwath, with whom Lords Mance, Clarke, Sumption and Hodge agreed, found that:
- In section 235, “The word ‘arrangements’ has its ordinary meaning … the content of the arrangements was a matter of fact for the judge”. He was “entitled to take the view that the understandings of the investors conformed to what was intended by the operator … [and he] was not required to give special weight to contractual or other documents … The judge concluded that arrangements … were made when plots were marketed and investors paid their deposits, the object of the arrangements being that the company should achieve a sale of the site after seeking to enhance its value by improving the prospects for housing development, the price to be shared between the owners. That conclusion was amply supported by the evidence, and discloses no error of law“;
- In this case, “… the relevant ‘property’ … was [AL’s] site … taken as a whole, not the individual plots. That was the property whose sale was to lead to the profits which were the object of the exercise, and which brought the scheme within the scope of the section … That definition remains the same throughout the section”;
- “Management control” :
- “…management control of the property under subsections (2) and (3) may be achieved in different ways. It is necessary to consider the mechanisms by which the participants on the one hand or the operator on the other manage or have management control of the property. The mechanisms may not be the same in each case, and they need not be legal mechanisms. That follows from the acceptance that the term ‘arrangements’ is not limited to agreements binding in law. By the same token, the ‘control’ envisaged by those arrangements is not confined to legal control“;
- “Have … control“:
- This “… is not a technical term … it … refer[s] to ‘the reality’ of how the arrangements are to be operated, which may or may not involve rights or powers enforceable in law … [The investors’] ability as individual owners to determine … whether or not to participate in a sale cannot be equated with control of its management in the meantime …”;
- “Managed as a whole by or on behalf of the operator“:
- “…control of the management activities for the property as a whole lay with [AL]. It was acting as the operator of the scheme, not as mere managing agent for the individual owners … control was not underpinned by any legal rights over the units making up the property. That did not affect the substance of the arrangements, even if it might have been an obstacle to their effective implementation“
AL was therefore operating a collective investment scheme.
The Supreme Court’s judgments in this case, and its endorsement of a number of lower court decisions in other cases (including the Court of Appeal’s decision in FCA -v- Capital Alternatives Limited), should make it easier for practitioners to identify, and avoid inadvertently creating, “collective investment schemes” in the future. That might even be enough to facilitate the resolution of some or all of the outstanding “land banking” cases. But it’s unlikely to bring “collective investment scheme” litigation to an end just yet. There are several reasons:
- There’s a lot a stake: it’s a criminal offence to establish and operate a “collective investment scheme“, without being FCA-authorised, or exempt from the obligation to be FCA-authorised. If the offence is committed, the consequences can be severe. If there’s a successful prosecution, fines and imprisonment might follow. Whether or not there’s a prosecution, investors may be entitled to recover their investments, together with interest, damages and costs. So, a lot can turn on whether there’s a “collective investment scheme“, or not;
- Sections 235 isn’t the whole story: sections 235 and 417 of the Financial Services and Markets Act 2000 tell us what a “collective investment scheme” is, whilst the Collective Investment Schemes Order tells us that some arrangements, that would otherwise be “collective investment schemes“, are not … if certain tests are met. But, the Collective Investment Schemes Order can also be difficult to interpret and apply (see our blog, for a recent example). So it’s still relatively easy to end up with a “collective investment scheme“, when you thought you’d done enough to avoid that result;
- The Supreme Court has handed down two judgments that go well beyond what was required to settle the issues in this case. It is therefore easy to imagine circumstances where the judgments will be persuasive, but not necessarily binding; and other circumstances where, because there are two judgments covering some of the same ground, a coach and horses can sit between them.
There are ways of mitigating or negating the legal and regulatory risks associated with arrangements that may (or may not be) “collective investment schemes“. There is still therefore value in seeking specialist legal advice on these issues … despite the Supreme Court’s heroic efforts.