Asset Land v FCA
concerns collective investment schemes (CIS). The defendants (Asset Land) were alleged to have conducted an unauthorised CIS.
The statutory definition of a CIS is found in section 235 of the Financial Services and Markets Act 2000 (FSMA).
A CIS is an arrangement respecting property which enables participants to receive profits or income. The arrangement must be such that the participants do not have day to day control over the management of the property, and the participants’ contributions and profits or income are pooled and/or the property is managed as a whole by the operator of the scheme.
As Lord Sumption states in the judgment: “the definition [has] been regarded as highly unsatisfactory…by professional advisers ever since…first enacted, mainly because of [its] generality, lack of definition and dependence on secondary legislation…”.
Asset Land acquired six sites in England. Investors were sold individual plots. Investors were told that Asset Land would obtain planning permission for the site, and arrange a sale to a developer. The investors would receive part of the sum paid, and so secure a profit.
Investors only received contractual documentation after paying the purchase price. The paperwork said that Asset Land would not apply for planning permission and none was obtained.
The decisions at first instance and in the Court of Appeal
The scheme was a CIS.
The courts found that the oral representations made by Asset Land to the investors constituted "arrangements" under FSMA which were not displaced by the later, legally binding contracts.
On the question of "control" and "management", the courts said that the nature of the property defined the meaning. Here, the sites were the "property", not the individual plots, and Asset Land was applying for planning permission over, and selling, the sites. There was no aspect of the scheme over which the investors had individual control, despite being the legal owner of their plots.
The Supreme Court
The Supreme Court agreed that the scheme was a CIS.
Two key points from the judgment are that:
1. The court will look at the substance of an investment, rather than its form.
2. Whether arrangements amount to a CIS will depend upon the intended objectives and not what happened later, if different.
It follows that the oral representations to investors were "arrangements".
The "property" in question was the site, and not the individual plots: that was the intended source of profit.
It was Asset Land and not the investors who controlled the site: Asset Land retained parts of it, and investors could only ever have controlled their own plot.
In respect of management, the court distinguished between two situations. The first was where the owner "retains entire dominion" over their property but engages a professional to exploit that property: that is not a CIS. The second is where the owner relinquishes that entire dominion to a scheme operator in return for more limited rights in larger property: that is a CIS. With Asset Land’s scheme, whilst the investors retained ownership of their plots, that was an "illusion". The scheme would not work if investors exercised individual rights.
Stepping back from the technicalities, the Supreme Court decision is unsurprising. The courts were always unlikely to allow Asset Land to use the gap between the pre-contract representations and the contractual small-print to escape sanction. Importantly, however, the Supreme Court was unwilling to take short-cuts in reaching that conclusion. The difficulties in interpreting section 235 have long been recognised, principally due to its lack of specificity. The Supreme Court, and Lord Sumption in particular, has sought to bring clarity to the statutory definition.
The reasoning in the Supreme Court is in some respects narrower than in the lower courts. That is both welcome and necessary. Operating an unauthorised CIS is a criminal offence, so practitioners need to be clear where they stand.