When is an ‘arrangement’ a collective investment scheme?

In Asset Land Investment Plc & Anor v The Financial Conduct Authority [2016] UKSC 17 the Supreme Court considered, for the first time, the regulation of collective investment schemes (“CIS”). The appeal in this case related to a ‘land bank’ scheme (detailed in ‘Facts’ below) operated by Asset Land which was not authorised under the Financial Services and Markets Act 2000 (“FSMA”) to operate a CIS.

The Supreme Court, upholding the lower courts’ decisions concluded that the scheme was a CIS. The issue turned on the interpretation and application to the facts of section 235  of FSMA. Section 235 has a wide application applying to “any arrangements with respect to property of any description…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 or sums paid out of such profits or income”. The provision goes on to identify some characteristics which the arrangements must have one or more of (pooling of profits and property managed as a whole), or not have (investor day-to-day control over management of the property) to qualify as a CIS.

On the facts the High Court considered that there were “arrangements”; the investors in the ‘land bank scheme’ did not have ‘day-to-day’ control over the property and the property was managed as a whole by or on behalf of Asset Land. The Court of Appeal in substance adopted the reasoning of the High Court. The Supreme Court agreed. Lord Carnwath and Lord Sumption in their concurring judgments noted that:

  • it was not in dispute that “arrangements” could cover ‘land bank’ schemes and the content of the arrangements was a matter of fact for the lower court, which was amply supported by evidence and disclosed no error of law. In particular “arrangement” was:
    • a “broad and untechnical word” comprising “not only contractual or other legally binding arrangements but any understanding shared between the parties to the transaction about how the scheme would operate”;
    • concerned with substance and not form; and
    • dependent upon what was objectively intended at the time the arrangement was made, and not on what later happened, if different. In this case, after the “arrangement” was entered into, the investor received documentation which included: confirmation from the investor that it was not entering into the contract on the basis of any representations and that Asset Land was not obliged to apply for planning permission or do anything which would constitute regulated activities under FSMA; and a ‘disclaimer’ stating that Asset Land was not regulated under FSMA. So far as these were inconsistent with the representations made by Asset Land before the arrangement was entered into, the court considered that they did not form part of the ‘arrangement’ when looked at subsequently;
  • “property” applied to the whole site not the individual plots within that site (the distinction was key because the investors could arguably be said to have had day-to-day control over their individual plots); and
  • the investor’s right to sell their individual plot did not mean that “management” of the property (which was considered to be the whole site) was not reserved to Asset Land. Whilst on strict legal terms each investor remained the owner and controller of their plot, Lord Sumption was clear that the transaction could not be viewed only in legal terms. The judge at first instance had found that the practical consequences of the arrangements were that the investors’ dominion over their plots was illusory.

Impact – the Supreme Court, in its analysis, was clear that the application by the lower courts of section 235 of FSMA to the facts, as found by the judge, involved no distortion of the natural meaning of that section or its intended purpose. Lord Sumption also helpfully considered the legislative intention and history of section 235. It is clear, following this decision, that legal drafting to attempt to fall outside the ambit of section 235 will not be successful if in substance there is an “arrangement”, a point echoed by the FCA in its press release on this decision.

Facts – Asset Land sold individual plots at six development sites in the UK. It was found, on the facts, to have represented to investors that it would seek re-zoning of the land for residential development and subsequently arrange a sale to a developer. The FCA became aware in 2007 of the scheme and following correspondence with Asset Land’s solicitors, accepted assurances that the company would cease to make such representations. In 2011 the FCA reopened its inquiry. Following judgment at first instance and pending an inquiry into the amounts of restitutionary orders to be made under section 382 of FSMA the judge made an interim order for the payment of £20m.

Background – activities that amount to a CIS (within the meaning of section 235) will be “regulated activities” for the purpose of section 19 FSMA. Section 19 of FSMA provides that no person may carry on a “regulated activity” unless that person is authorised or exempt. The statutory consequences of a breach of the general prohibition in section 19 FSMA are severe. The infringer commits a criminal offence (section 23 FSMA), any contract made in the course of carrying on the relevant activity is unenforceable and there are provisions for compensation and restitution in favour of the other party.


Audit changes to UK corporate governance code and new guidance for audit committees – 17 June 2016

The FRC has published a revised version of the UK Corporate Governance Code (the “Code”) and Guidance on Audit Committees following consultation last autumn (seeBackground’ below). An appendix to its feedback statement summarises the differences between the revised Code and the 2014 (current) version. Described as “minimal” revisions the changes include:

  • a new requirement that the audit committee as a whole has competence relevant to the sector in which the company operates (provision C.3.1);
  • deletion of the requirement that FTSE 350 companies should put the external audit contract out to tender at least every ten years (subject to the Code’s ‘comply or explain’ principle) (principle C.3.7). Instead, retendering will be covered by the EU’s audit regulation which will be directly applicable to ‘PIEs’ from 17 June 2016 and requires retendering every ten years. PIEs are large EU listed entities, credit institutions and insurance undertakings i.e. public interest entities; and
  • a new requirement that the section of the annual report describing the work of the committee should give advance notice of any retendering plans.

Schedule B, the Appendix and Footnotes in the Code have also been amended to take account of consequential changes to be made to the FCA’s DTRs and Listing Rules relating to the Audit Regulation and Directive (detailed below) and the FCA’s requirement for reporting on viability.

The FRC has also published final drafts of its Ethical and Auditing Standards following its proposed changes last year.

Impact - all of the changes are intended to take effect for the audit of financial statements for periods beginning on or after 17 June 2016. The changes to the Code were generally considered by the FRC to have been well-received. Many of the changes were required to implement Directive 2014/56/ EU covering the statutory audit of annual accounts and consolidated accounts (the “Directive”) or to avoid conflict with the EU Regulation covering specific requirements regarding statutory audit of PIEs (the “Regulation”).

Background - the changes follow a previous announcement  by the FRC that its work would include a focus on: recommendations from the then Competition Commission’s review of competition in the FTSE 350 audit market; implementation of the Regulation and the Directive (which apply with effect from 17 June 2016); developing best practice guidance for audit committees; and assessing whether ethical standards for audit remain fit for purpose. The Regulation and Directive taken together also required revisions to both the Auditing Practices Board’s Ethical and Auditing Standards as well as changes to the UK Corporate Governance Code on which the FRC consulted last year. The FRC also took the opportunity to review the “Guidance on Audit Committees” in order to align this with the new requirements for audit committees and changes to the ethical standards for auditors.


  • The FCA has amended its Enforcement Guide (with effect from 22 April 2016) to insert new provisions entitling it to apply to court to suspend the voting rights of a listed company shareholder who has contravened transparency provisions (as defined in section 89NA(11) of FSMA). This follows the introduction of section 89NA(11) as a result of the implementation of the Transparency Directive Amending Directive on 26 November 2015.
  • The FCA is consulting on changes to its technical note ‘Related party transactions – Modified requirements  for smaller related party transactions’ (currently UKLA/ TN/308.2). The change is intended to reflect previous rule changes in relation to sponsor confirmation under LR11.1.10R(2)(b) that the terms of the proposed transaction or arrangement with the related party are fair and reasonable for the shareholders. Under the proposal, the sponsor will only need to have discussions with the FCA where it questions the correct classification under the class tests. The wording currently states that discussions would be required about the substance of the transaction, as well as the class tests.
  • The FCA has published a report on ‘The UK Debt Market Forum – Practical measures to improve the effectiveness of UK primary listed debt markets’.
  • The European Parliament adopted the General Data Protection Regulation (“GDPR”) on 14 April 2016, marking the final stage of the legislative process in relation to the introduction of new rules concerning data protection. The GDPR is anticipated to be given legal effect in June 2016, following which there will be a two-year grace period before it becomes directly applicable in all Member States across the EU. The GDPR represents the most significant change to data protection rules in 20 years and the Information Commissioner’s Office is advising companies to make preparations for the changes now. For more detail click here.
  • The Executive Remuneration Working Group (which the Investment Association helped establish) has published an interim report and consultation on listed companies’ directors’ pay. The working group considers that “the current approach to executive pay in UK listed companies is not fit for purpose”. Specific concerns include: transparency; shareholder engagement; accountability and flexibility.
  • The EU has published a report on its capital markets union action plan.

The High Court’s decision in Cosmetic Warriors Ltd & Anor v Gerrie & Anor [2015] EWHC 3718 (summarised here) which considered the fair value of shares subject to pre- emption provisions on transfer has been listed for appeal.