In April 2016, the UK’s Supreme Court issued its judgement in the case of Asset Land Investment Plc and another v the Financial Conduct Authority, considering the definition of what constitutes a collective investment scheme (CIS).
The judgement was in relation to an appeal against the Court of Appeal’s decision that Asset Land Investment Plc’s land investment scheme amounted to a CIS within the meaning of section 235 of the Financial Services and Markets Act 2000 (FSMA).
Asset Land acquired potential development sites that it sub-divided into plots for sale to investors. Its offering was to procure the re-zoning of the sites and thereafter arrange their sale to a developer, with the investors sharing in the sale proceeds.
The FSA (now the FCA) initially attempted to restrict Asset Land’s activities and, when this was unsuccessful, began proceedings against the firm on the basis it did not have FCA permission to operate an unregulated CIS. So what is a CIS?
A CIS is defined under section 235 of FSMA. Broadly, it is any arrangements with respect to property of any description, the purpose or effect of which is to enable the participants in the arrangements to receive a financial return from that property. The participants must not have day-to-day control over the management of the property, and either or both of the following characteristics must be present:
a) Pooling of the contributions of the participants or the income from which payments are to be made to participants; and/or
b) Management of the property as a whole by, or on behalf of, the operator of the scheme.
The Supreme Court issued two judgements: the leading judgement by Lord Carnwath and a further judgement by Lord Sumption clarifying the CIS definition. Lord Sumption stated that ‘arrangements’ [in the definition] comprises any understanding shared between the parties about how the scheme would operate, whether legally binding or not, and any consequences from that understanding or from the commercial context in which it was made. The parties’ intention at the outset of the arrangements is the crucial factor, not what happened later.
On the issue of ‘day-to-day control’, Lord Sumption stated that control of property means the ability to decide what happens to it, which not only encompasses the legal ability to decide but also that the investor will, in practice, be able to do so.
The question is who would exercise control. This illustrates the importance of investors having day-to-day control of the management of scheme property to avoid a scheme being a CIS.
In considering what constitutes ‘management activity’, Lord Sumption drew a distinction between:
• Investors controlling the property and employing a service provider to operate it; and
• Investors surrendering control to the operator of a scheme so that it can be pooled or managed in common, in return for a share of the profits.
