On Wednesday 20 April 2016 the Supreme Court gave judgment on whether the activities of Asset Land Investment Plc operated a Collective Investment Scheme (CIS) under Section 235 of the Financial Services and Markets Act 2000 (FSMA) without authorisation contrary to FSMA. 
To be a CIS, s235 requires that: (a) there are arrangements with respect to property; (b) the purpose of these arrangements is to enable particants to profit from the property; and (c) the arrangements must involve either the pooling of both money going in and money going out of the property or the scheme operator managing the property as a whole. The operation of an unauthorised CIS is a criminal offence and can require the repayment of any sums invested.
There have been a large number of such schemes promoting investments ranging from rice farms to carbon credit forests. Many schemes, sometimes with the benefit of professional advice, were structured to try to avoid the regulatory burdens. A number of cases have examined the application of s.235 to those schemes before but this is the first case to reach the Supreme Court.
Lord Carnwath gave the leading judgment. Lord Sumption, while endorsing that judgment, gave his own reasoned judgment, which included an overview of the history of the regulation of investments and the policy underpinning the legislation. The Supreme Court unanimously decided that Asset Land was offering a CIS and therefore needed to be authorised under FSMA.
Asset Land acquired several agricultural sites across England. It sold parcels of this land to investors. A typical plot size was around 1,000 square feet and would cost around £15,000. Each site was divided into several hundred plots. Asset Land would negotiate with local planners to have the land re-zoned for development and then seek out interested developers. The developers would buy the site at what was anticipated to be a far greater price than the sums paid by the investors for their plots. In the meantime the sites would continue to be farmed by the previous owner.
Investors owned their own plots outright with rights of access over common areas. They could sell their plots at any time if they wished, and they were not legally obliged to agree to sell to the developer introduced by Asset Land or on the terms that might be presented to them. However, investor presentations made it clear that individual investors could achieve a profit only by going along with the scheme.
In the High Court, the trial judge had found that this was a CIS. On the facts:
- The object of the scheme was for Asset Land to procure the sale of the whole site once it had enhanced its value through re-zoning for development, with the profits being shared with the investors. This was the relevant "arrangement" with respect to property. It did not matter that the legal documentation did not reflect the reality of this arrangement.
- The relevant property was the whole site, and the investors did not have control over that. They did not even have effective control over their own plots because the scheme could not work if they exercised their ownership rights.
- Asset Land managed the property as a whole, because individual investors could not realistically exploit the land in the way envisaged by the scheme arrangements.
The Court of Appeal had agreed. So Asset Land appealed to the Supreme Court. It argued that: (a) the relevant property for the purposes of s.235 was neither the site as a whole nor an individual investor's plot, but the aggregate of the plots sold; (b) an investor had the necessary control because they owned their plot and could decide whether or not to sell; and (c) the property was not managed as a whole because each investor could make the final decision about their own plot.
The Supreme Court Decision
The Supreme Court upheld the decisions of the lower courts.
In the leading judgment by Lord Carnwath, their Lordships unaminously agreed that it was right to assess the substance of the arrangements rather than their legal form. The trial judge had been entitled to consider evidence of the representations made to investors and how it was intended the scheme would operate as well as the contractual structure put in place.
Lord Sumption (in a judgement endorsed by all except Lord Carnwath) added that identifying the arrangements for the purposes of s.235 required an objective analysis of what had been intended by the parties at the time the arrangements were made, not by reference to later events (although later events could shed light on what had been originally understood).
The Relevant Property
The trial Judge had found that the "property" for the purposes of s.235 meant the property through which the relevant arrangements would produce the intended return. On the facts found by the trial judge, it had been intended that the plots should all be sold together, there was no commercial sense to an investor acting alone, and the representations made to investors overrode the technical position set out in an investor's contract. Based on these facts, their Lordships agreed that the relevant property was the whole site.
Their Lordships held that the concept of "control" is not a technical term and is not limited to legal control. The right approach was to identify the mechanisms (not necessarily the legal mechanisms) through which participant and operator managed the relevant property. That required an assessment of the reality of the situation, and it need not involve legally enforceable rights. In this case, the investors had no role in negotiating with planners or developers, and their legal ability to choose whether or not to sell their own plot could not be equated with control of the whole property in the meantime.
Lord Sumption rejected the Court of Appeal's endorsement of Brown v Innovator One  EWHC 1321 in which a High Court judge held that control required an assessment of what control was actually exercised by investors and whether that was effective. This was because it required looking at events after the arrangements were set up. He held that control was a simple concept, meaning the ability to decide what happens to something.
The critical point for the purposes of s.235 was that the absence of control had to be a feature of the relevant arrangements, and the property over which the investors had to lack control had to be same property in respect of which the arrangements were made. As the property relevant to the arrangements meant the site as a whole, it was clear the investors did not have day-to-day control. At best they only had control of their own plot. Asset Land retained the common areas and there were no mechanisms in place for investors to make collective decisions over the whole site.
Management as a whole
Finally the Supreme Court decided that the property was indeed managed as a whole by Asset Land and the trial judge had been entitled to reach that view on the facts. The relevant management of the whole site consisted of two functions - negotiating with the planning authority over zoning and finding a buyer. Those were functions devolved to Asset Land.
Lord Sumption appears to have been more cautious on this point in his judgment. He held that the relevant question was whether Asset Land's function after the sale of the plots to investors objectively constituted management of the property, not the scheme. The key, fundamental distinction underlying s.235 was whether: (a) the investor had direct control of the property underlying the investment and was using professional help to realise its value or (b) the professional was actually in charge. For this reason, the manager of a block of flats on behalf of the flat owners or an estate agent selling a property for multiple owners or a wine merchant cellaring investment wines could not be said to be running a CIS.
In his view, simply finding a buyer was not an act of management if the investors could then approve or reject the sale as they saw fit (which, as a matter of strict legal contract, they could). That was because the investor always retained dominion over his property and there was nothing in the "arrangements" which called for the surrender of that dominion. However, the trial Judge had decided on the facts that this power was an illusory one and the Court of Appeal had upheld this. On that basis, he could not interfere with this factual assessment by the Judge, and he was bound by it.
The Supreme Court's judgment is extremely helpful in setting the statutory provisions in context and illustrating step by step how they should be assessed and applied in practice. What is also clear is that schemes still need to be assessed individually on their own facts and the Supreme Court's analysis carefully applied.
The challenge remains that s.235 deploys what Lord Sumption described as "extraordinarily vague concepts", and certainty may continue to be an elusive goal for scheme operators wishing to avoid the serious consequences of s.235.
That uncertainty has a knock-on impact on professional advisers. If there is any risk that an investment might be a CIS (and by implication, an unregulated one), it would seem sensible to ensure that it is treated as if it is an UCIS, and promoted only to the right kind of investor with the right risk appetite. Additional care should also be taken over the risk warnings.