The Supreme Court has handed down its decision on the appeal by Asset Land Investment plc and associated parties (collectively "Asset Land") against the Financial Conduct Authority (the "FCA"), concerning the meaning of ‘collective investment schemes’.
On 14 June 2012, the FCA brought proceedings against Asset Land. This was on the basis that certain "land banking" schemes (where Asset Land bought areas of farmland with the intention of carving them up into individual plots and selling them on to individual investors) had been established and operated as unauthorised ‘collective investment schemes’ within the meaning of s.235 of the Financial Services and Markets Act 2000 (the "Act"). This would be in contravention of the general prohibition in Section 19 of the Act.
The judge decided that the structure of the schemes was as follows:
The investors would (somewhat unusually) only receive a contract for the purchase of the land after they had paid the full purchase price. The contract included clauses that:
The investors were required to fill out separate forms confirming they had read and understood the disclaimers. Only after these disclaimers were received would title to the plot be transferred to the investors and the disposal be registered at the Land Registry in the investor's name.
The High Court decided that in these circumstances the schemes were being operated as 'collective investment schemes'. The Court of Appeal upheld this decision.
Yesterday, the Supreme Court unanimously dismissed the appeal by Asset Land. It decided that these schemes did amount to 'collective investment schemes', meaning Asset Land needed authorisation from the FCA under the Act, which it did not have.
It was decided that although "each of the investors remained the entire owner and sole controller of his plot and simply counted on Asset Land to enhance its value and find him a buyer" the court looked wider than the legal terms of the transaction and found that these arrangements would not work in practice. In practice, what constitutes 'day-to-day control' will be based on an assessment of to whom control would be given should the need for control of the property arise. Section 253(2) of the Act must therefore refer to control being exercised by investors 'collectively'. In this case, the investors did not have the relevant control of the management of the whole site because Asset Land retained common parts.
The Court reviewed the policy which underlies Section 235. It concluded that it must be interpreted in a way which provided intelligible criteria which can be applied by professional advisers when considering schemes in advance of marketing. At the same time it was decided that the consequences of operating a collective investment scheme without authorisation are sufficiently grave to warrant a cautious approach to the construction of the "extraordinarily vague concepts of s.235".
What does this mean for those trying to decide if a scheme falls within the meaning of ‘collective investment schemes’? Whilst the court agreed with the FCA's argument that technical distinctions should not frustrate the purpose of legislation (particularly where there are criminal sanctions for getting it wrong), it also concluded that the Act cannot be interpreted on the assumption that it was intended to regulate every kind of investment made by the public which could be promoted by unscrupulous intermediaries.
The court will therefore seek to look wider than the contractual terms and take into account practicalities of applying those contractual terms. It will also take into account the practical arrangements (to avoid intermediaries avoiding the regime by using cleverly drafted documentation). Whether a scheme falls within the definition of a ‘collective investment scheme’, meaning it is a regulated activity needing (amongst other things) the firm to be authorised, will depend on what was intended at the time the arrangements are made.
For more information contact Noline Matemera, Partner, on +44 (0)333 006 0734 or noline.matermera@TLTsolicitors.com, Russell Kelsall, Partner, on +44 (0)333 006 0311 or russell.kelsall@TLTsolicitors.com, or Lucy Freeman, Solicitor, on +44 (0)333 006 1530 or lucy.freeman@TLTsolicitors.com.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.