On 1 February 2007, HM Treasury (HMT) began its consultation on whether the Schedule to the Collective Investment Schemes Exemption Order (CIS Order) should be amended to clarify its application to certain types of property transaction. HMT is seeking to minimise or avoid:
- Legal uncertainty for participants and potential participants
- Increased legal expenditure in structuring transactions to ensure they benefit from exemptions in the CIS Order
- Risks of legal challenge by a participant or enforcement action by the Financial Services Authority (FSA) if structures were used inadvertently so that they did not benefit from the exemptions Responses must be made to HMT by 29 March 2007. The eight week consultation period - shorter than usual - has been chosen
- “…due to the demand among some stakeholders for a quick solution…”.
Does this affect me?
There is a general prohibition on establishing, operating or winding up a collective investment scheme without prior authorisation from the FSA. The Schedule to the CIS Order lists certain arrangements that are exempt and can therefore be established without FSA authorisation.
Projects involving the sharing between a number of participants of either the ownership or the economic benefits of owning property may have to rely on these exemptions to avoid regulation by the FSA. This feature is common in certain transaction structures where property is pooled or sites are assembled using jigsaw options. The structuring of these sorts of projects and others that have similar features often needs to take account of the specific exemptions in the CIS Order.
Issues with the current CIS Order
Those in the industry familiar with these sorts of projects will be aware that, as HMT says, “…there is significant uncertainty over whether certain types of property transaction fall within the definition of a CIS…”. In its consultation, HMT draws attention in particular to Paragraph 9 of the current Schedule to the CIS Order. That paragraph exempts certain arrangements entered into for commercial purposes related to an existing business. The paragraph might usually be expected to exempt commercial transactions between businesses. However, there is uncertainty as to its application:
• Use of special purpose vehicles (SPVs) - some property transactions make use of one or more SPVs. Paragraph 9 only applies where all the participants enter into the relevant arrangements for commercial purposes relating to an existing business. An SPV is specially created for the transaction and will not have an existing business. If the SPV was classed as one of the participants, it may prevent the exemption from applying. In HMT’s view there is uncertainty over how the current Paragraph 9 would apply to property transactions involving an SPV and a risk that arrangements which would otherwise benefit from the exemption would be prevented from doing so.
Multiple transactions - for paragraph 9 to apply each of the participants must carry on a business other than one of the businesses directly regulated by the FSA that are referred to in the CIS Order. Companies entering into property transactions might seem likely to pass this test as their businesses would be related to property. However, if an organisation participated in similar arrangements several times, those arrangements could be viewed as an existing business for the purposes of Paragraph 9. That company might then not pass the test and the arrangements might not benefit from the exemption.
HMT has suggested either amending the CIS Order (and has published a proposed amendment as part of its consultation) or granting specific exemptions to particular organisations (those that regularly enter into affected property transactions) as alternatives to doing nothing. HMT seeks response to the following principal questions:
- Is reform of the CIS Order necessary?
- Is amending the CIS Order preferable to granting specific exemptions?
- Does the scope of the proposed Paragraph 9 (as amended) need reviewing, and is it too narrow?
- Should the definition of what is a collective investment scheme and what is exempted be more fundamentally reformed? Wragge & Co LLP’s view on each of these questions is “yes” and we will be responding to HMT’s consultation - will you? HMT’s consultation document is available on it website: www.hm-treasury.gov.uk/consultations_and_legislation You could respond directly to HMT by 29 March 2007 or feed in your views to us so that we can reflect them along with the views of others