On 25 March 2015 the Court of Appeal handed down its judgment in the matter of The Financial Conduct Authority v Capital Alternatives Limited and Others [2015] EWCA Civ 284, the latest case to come before the Courts concerning the operation of Collective Investment Schemes. Last year, the trial judge, Nicholas Strauss QC held that an investment scheme centred on a rice farm in Sierra Leone and several forest investment schemes in Australia, Sierra Leone and the Amazon were Collective Investment Schemes. The appeal centred on the issues of whether the profits from the schemes were pooled and whether the property concerned was managed as a whole. 


The issues in question are important. If investments are Collective Investment Schemes (CIS) then most matters connected with them are regulated activities within the meaning of the Financial Services and Markets Act 2000 (FSMA) and can only be carried out by authorised persons.  Carrying out activities in connection with such schemes in the United Kingdom by an unauthorised person is also a criminal offence.  From a financial adviser's perspective the types of investor to whom such products can be recommended or promoted are also subject to close regulation.  

The investment schemes under consideration were of two types. One was a rice farm in Sierra Leone in which investors acquired a plot of land in return for a percentage of the income generated by the sale of the rice from that plot. The cultivation, harvesting and sale of the rice were undertaken by a management company. The second series of schemes involved investments in newly planted and existing forests in order to take advantage of tradable carbon credits. In some schemes investors were allocated a specific piece of forest but in others they were not.  However investors were to be paid according to the area of land to which they had notionally or actually purchased rights. These schemes together attracted around 2,000 investors and over £16m of investment.

Under Section 235 of FSMA CISs are quite widely defined as any arrangement in respect of property of any description such that the participants do not have day to day control over the management of the property (even if they have a right to have a say). Further, and critically for these proceedings, the arrangements must either involve a situation where (i) the contributions of the participants or the income from which payments out to participants is pooled or (ii) the property is managed as a whole by or on behalf of the operator of the scheme.

The decision

The Court of Appeal decided that there was not a pooling of income from most of the schemes.  In the case of the rice farm the fact that the rice was sold collectively at a standard price and that expenses were simply pro-rated across the plots did not mean that the income was pooled. The amount of net income for each investor was calculated on the basis of the actual weight of rice produced by their plot and it was not necessary for the rice from each plot to be physically sold separately. In respect of the carbon credit schemes the limited evidence suggested that it was intended that in respect of one scheme the growth of trees on each plot would determine the investment return and accordingly there was no pooling. However, in some schemes the carbon credits of the whole forest would be allocated rateably between investors in accordance with the size of their plots.  In these cases the income was pooled.  

The Court of Appeal was also asked to consider whether the properties involved in the schemes were managed as a whole. The scheme operator's arguments centred on the fact that if the income received by an investor was not pooled it could not be said that their property was managed as a whole.  

The Court of Appeal disagreed with this interpretation and affirmed the trial judge's view that 'managed as a whole' was not a reference to the investor's property but the entire scheme. The Court of Appeal made clear that the treatment of contributions and income did not determine this issue. The Court of Appeal stressed that the words used in Section 235 of the FSMA were to be given ordinary meaning and it was necessary to identify objectively (i) what was the property being managed and (ii) what was the management of the property directed towards achieving, before deciding if it was being managed as a whole.

Key principles

The Court of Appeal approved the following key principles:

  1. The application of section 235 depends on the specific facts of each case;
  2. Management arrangements had a wide meaning and could include non-contractual arrangements; 
  3. What mattered was the way in which the scheme was run in practice and not the contractual terms if they did not reflect reality;  
  4. Whether investors were involved in property management depended on whether control was actually exercised, not simply their contractual rights.

Applying these principles to the schemes in question the property was the entire farm or forest rather than the individual plots. The purpose of the investment was to generate income by the cultivation and selling of what the farm or forest produced. The Court therefore regarded the organisation of labour, provision of machinery, roads, fertiliser and water as all organised on a scheme wide basis. The individual investors had no place in the management process and accordingly the Court of Appeal concluded that the investments were managed as a whole. 
The Court of Appeal disagreed with the trial judge on two points however. The trial judge had considered that the question of management had to be viewed through the eyes of the manager of the property. The Court of Appeal disagreed and preferred that the enquiry should be an objective one.  Secondly the trial judge considered the test to be whether the participation by investors in the management of the property was "substantial".  The Court of Appeal did not think such test was helpful and stated that all relevant facts should be considered against the ordinary meaning of the words used in the statute. 

The Court of Appeal also did not accept that the statute should be given a generous interpretation in favour of the scheme operators because of the potential criminal sanctions.  Finally the Court of Appeal noted that there may have been a commonly held view in the alternative investment market that if returns were not pooled then the investment would not be a CIS.  However, the Court of Appeal said such a view was "unwarranted" and was based on a "failure to analyse with care" how the schemes worked and what the statute said.

Going forwards

While it remains to be seen whether this issue will be placed before the Supreme Court, this decision provides useful guidance on the issues of pooling and management of property which have not been the subject of detailed analysis by a higher Court before.