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Out-Law News 2 min. read

Supreme Court: 'land bank' was unauthorised collective investment scheme

A 'land bank' arrangement which sold small plots of land to investors at "hugely inflated prices" was an unauthorised collective investment scheme (CIS) which ought to have been regulated by the Financial Conduct Authority (FCA), the UK's highest court has confirmed.

The Supreme Court said that a scheme which did not give "genuine control" to investors was a CIS and should be regulated as such, even although the investors were the legal owners of their individual plots of land. The nature of the scheme in this case was such that individual investors could never have day to day control over their particular plots, meaning that the rights that the investors had were "in reality an illusion", the court said.

This final judgment means that a £21 million repayment order in favour of the investors, made by the High Court in March 2013 but put on hold while the scheme appealed the decision, can now be enforced. However, the FCA said it was "acutely aware from experience" that the investors were unlikely to get much of their money back. The scheme was unlikely to have the money to repay investors, and it would not be covered by the Financial Ombudsman Service or Financial Services Compensation Scheme as it was unauthorised, it said.

"There are huge risks involved when investing with unauthorised businesses," said the FCA's director of investment and market oversight, Mark Steward.

"This decision should sound a clear warning to those selling dubious investments. We will do what it takes to shut down firms trying to exploit loopholes and take advantage of consumers," he said.

Asset Land, the company at the centre of the legal challenge, had purchased six plots of land in various parts of the country, which it sold on in smaller parcels to individual investors for between £7,500 and £24,000. The company had set out to those investors that it was responsible for seeking planning permission for the bigger plot and then selling it on to a developer at a higher value, resulting in a profit for the individual.

Section 235 of the 2000 Financial Services and Markets Act (FSMA) defines a CIS as an arrangement in which profits or income from the management of the underlying assets are shared through collective investment, but the individual participants have no day to day control over the management of those assets. Those operating a CIS require FCA authorisation.

Asset Land and its directors had attempted to argue before the Supreme Court the reference to "management of the property" in section 235 should be interpreted narrowly, "given the serious consequences of a finding that the arrangements fall within" the provision. The Supreme Court disagreed, finding that the original trial judge's application of the provisions to the facts of this case "involved no distortion of its natural meaning of its intended purpose".

"Under the present arrangements … the investors' ownership of the individual units was not linked to any exercise of management control, individually or collectively," said Lord Carnwath, giving the leading judgment of the court. "It was not even envisaged that the plots should be separately identifiable on the ground."

"Conversely ... under the arrangements as found by the judge control of the management activities for the property as a whole lay with the company. It was acting as the operator of the scheme, not as mere managing agent for the individual owners. It is true that its control was not underpinned by any legal rights over the units making up the property. That did not affect the substance of the arrangements, even if it might have been an obstacle to their effective implementation," he said.

In a statement, the FCA said that the judgment provided "further protection to consumers" by "confirming that it is necessary to consider the substance of the arrangements put in place by the operator when assessing if they are operating a CIS".

"Operators of such schemes will not be able to benefit by providing purely illusory rights to investors," it said. "Operators need to ensure that investors have genuine control over their investments to avoid being found to have operated a CIS."

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