The SFO announced this month that it has opened a criminal investigation into an alleged fraudulent investment scheme marketed by Ethical Forestry Limited and its associated companies. The FCA also carried out an investigation into these companies in 2016, and in particular into whether they were operating an Unregulated Collective Investment Scheme ("UCIS"). So, what is a UCIS, what steps can investors take to protect themselves?
The Ethical Forestry group of companies promoted investments in tree plantations in Costa Rica, and it is thought that at least 3,000 investors put a minimum of £18,000 each into the scheme between 2007 and 2015. The total investment is estimated at around £50 million.
The Ethical Forestry group was put into liquidation in January 2016. Since then, there have been allegations of multi million pound payments having been made to directors in 2013 and 2014, suggestions that the group owes HMRC over £14 million and, most recently, FCA and SFO investigations. The SFO's press release confirmed that it has worked with Dorset police to execute search warrants at three addresses as its investigation picks up speed.
What is a UCIS?
A Collective Investment Scheme ("CIS"), which is also sometimes referred to as a "pooled investment", is defined by s235 of the Financial Services and Markets Act 2000. It is essentially a fund contributed to by several investors, in which fund managers invest the money into various asset types. Authorised CISes in England and recognised schemes from other countries are regulated by the FCA.
As the name suggests, a UCIS is a CIS which has not been recognised or authorised, and which is therefore not regulated by the FCA. Often, UCISes are based outside of the UK and money can be invested in a wide range of businesses, including less traditional investment areas such as wine, film production, ethical crop projects and, as in this case, forestry. UCISes tend to represent higher risk investments than CISes, and the funds are often pooled into one type of investment rather than being spread across a range. They have, nevertheless, been attractive to some investors in recent years given the very low rates of interest available from more traditional investments.
Determining whether a particular scheme is a CIS (or UCIS) can be difficult. Historically, guidance provided by regulators has not been definitive. The current FCA guidance suggests that, broadly speaking, a typical CIS will have the following characteristics: (i) investors do not have day to day control over managing their plot of land (or other investment type); (ii) the scheme involves pooling investors' funds; and (iii) the operator has responsibility for managing the scheme as a whole.
The FCA has sought to protect investors from becoming involved in UCISes by prohibiting their promotion to the general public. UCISes can only be proposed to limited investors, who fall into the following categories:
certified high net worth investors;
self-certified sophisticated investors; and
existing investors in a UCIS.
The FCA has, however, raised concerns that members of the public who do not fall into the above categories have been approached in relation to investment in UCISes, and that some (as in the case of Ethical Forestry) are being advised to invest their Self-Invested Personal Pension funds.
The FCA's guidance explains that a key issue for investors considering these types of investment is that, because of the unregulated nature of a UCIS, they will generally not have access to compensation schemes or complaints procedures if things go wrong. However, in certain circumstances, there may be ways for investors to recover at least some of what they have lost. In the case of Ethical Forestry, for example, the Financial Services Compensation scheme ("FSCS") has indicated that it does expect to pay out in relation to certain claims regarding investment into the UCIS on the basis that some investors appear to have invested their pension funds in reliance on negligent or unsuitable advice. Where that advice was given by a regulated financial adviser, claims to the FSCS are possible.
Whilst it can be difficult to assess with any certainty whether a particular scheme constitutes a UCIS, what is clear is that the FCA's approach is to clamp down on UCISes, and the rules regarding what constitutes a CIS are being interpreted broadly. Any doubt tends to be interpreted by the FCA and the Courts in favour of an investment being a CIS (or UCIS). That approach no doubt protects investors, but it also means that those setting up any sort of joint investment or co-ownership arrangement must consider carefully whether a CIS could inadvertently arise. Moving forward it will be important for regulators to ensure that any regulation is both protective of potential investors and provides those marketing for these investments with clarity as to what the regulatory position is.
It is also clear that the SFO's investigation takes things a step further in terms of cracking down on UCISes. It will include an investigation into fraud and conspiracy offences, with potentially severe consequences for wrongdoers, including unlimited fines and prison sentences.