Interest rates have been low since 2009, making it difficult for savers to make a decent return. Some savers have been tempted by less conventional investments as a result. Among these are unregulated collective investment schemes (UCIS), for example, investments in farmland, bamboo, hotels or storage units, which are neither authorised nor regulated in the UK, but which can be sold here.
Unfortunately, as in the infamous Harlequin Property and Sustainable Agro-Energy, returns that are too good to be true usually are. Investors have found themselves out of pocket and have (rightly or wrongly) looked for someone to blame, which in many cases has been the financial adviser or, where the investment was made via a Self-Invested Personal Pension, the SIPP provider/trustee. With the Financial Conduct Authority (FCA) condemning such schemes and the Financial Ombudsman Scheme (FOS) awarding compensation to aggrieved investors, the insurers of these entities can then find themselves facing a stream of claims.
Insurers are alive to the risks of UCIS and some policies exclude claims relating to UCIS. The problem for both insurers and insureds can be identifying which schemes are UCIS.
When faced with a claim relating to alternate and often exotic products, insurers will first want to look closely at the information that the insured provided before the policy incepted to find out whether their involvement with these products was disclosed.
Proposal forms generally ask about an insured’s business, and sometimes specifically about its involvement with UCIS. A failure by the insured to answer such questions accurately may provide grounds for insurers to avoid the policy or, where there is a “basis of the contract” clause, to discharge the contract for breach of warranty.
However, with the introduction of the Insurance Act 2015, that will change. For contracts entered into after 12 August 2016, avoidance will only be an option if the non-disclosure was fraudulent or reckless, or if insurers can establish that the policy would not have been written had the risk been fairly presented. Basis clauses will also no longer be permitted.
Were the claims validly notified?
Where an insured has advised multiple clients regarding an investment then the failure of that investment may trigger a blanket notification by the insured. Insurers will need to consider the relevant policy wording to check whether the notification is valid. The mere fact that a shopping list of potential claims is notified does not mean that it can be rejected.
Is there a relevant exclusion?
Where the policy excludes insurers’ liability for claims relating to UCIS, the wording of the exclusion will need to be carefully considered to see whether it applies in the circumstances of the particular case. A UCIS exclusion will often apply if insurers can establish that the relevant investment was in fact a UCIS. Determining whether an investment is a UCIS can be tricky.
Section 235 of the Financial Services and Markets Act 2000 (section 235) defines what constitutes a collection investment scheme (CIS). In summary, a CIS is an arrangement respecting property, which is intended to generate participants’ profit or income. The arrangement must be such that the participants do not have day to day control over the property’s management, and participants’ contributions and profits or income are pooled and/or the property managed as a whole by the operator of the scheme, as opposed to by individual investors.
A CIS will be a UCIS if it is not on the register of regulated CIS’s maintained by the FCA.
Ambiguity arises due to the generality of section 235’s wording. The statutory wording has now been considered by the Supreme Court in Asset Land v FCA, which was handed down on 20 April 2016 (see our briefing for discussion of the decision). It should help bring some clarity to what is and is not a CIS. It is, for example, clear that the court will look at substance rather than the form, such that artificial arrangements or agreements intended to avoid a scheme being a CIS are unlikely to be of any effect.
If you would like to find out more about this topic or you if need legal advice, please contact Claire Roake or any of our legal experts on insurance and breach of warranty.