Financial services – Regulation – Financial Services and Markets Act 2000 – Collective investment scheme – Appellants selling plots of land on various sites to investors with representations regarding pursuit of planning permission for residential development and onward sale at profit – Whether relevant “arrangements” amounting to unauthorised investment scheme within section 235 of 2000 Act – Whether management control of the property exercised by appellants or investors – Appeal dismissed
The second appellant was the principal owner and director of the first appellant, a company involved in the business of acquiring sites and dividing them into plots to be sold off to investors. The first appellant marketed the plots largely through telephone sales, with an unsolicited telephone call to a potential investor followed up by further telephone discussions. Investors who agreed to purchase would pay a 10% deposit, with payment of the balance required within a few weeks thereafter. The investors would not receive a copy of the sale contract until the purchase price had been paid in full.
The respondent, as the body responsible for the regulation of financial services, brought a claim against the appellants in which it alleged that the arrangements at the sites amounted to unauthorised “collective investment schemes” within section 235 of the Financial Services and Markets Act 2000, contrary to the statutory provisions against land-banking.
Investors gave evidence that the appellants had represented that they would pursue planning permissions for residential development on each site and procure its onward sale as a whole to developers at a significant profit, with the investors each receiving a share of the total consideration paid by the purchaser. However, the contract documentation stated that the appellants were not obliged to, and would not, pursue re-zoning or planning permission for the plot or the site as a whole and also contained an express statement that the investors were not entering into the agreement in reliance on any representations other than those set out in the contract or in written replies to pre-contract enquiries.
Upholding the respondent’s claim at first instance, the judge found that the appellants had established and operated “arrangements with respect to property” of a kind that fell within the definition of a collective investment scheme in section 235, in breach of the general prohibition contained in section 19 of the 2000 Act: see [2013] EWHC 178 (Ch). He found that the relevant “arrangements” were made when the plots were marketed and the deposits paid and that their content, based on the investors’ consistent understanding of the nature of the scheme, was that: (i) the appellants would achieve a sale of the sites after they had sought to enhance their value through the re-zoning of the land or through the grant of planning permission; (ii) the proceeds of sale would be shared between the investors; (iii) the investors would not have day-to-day control over the management of the “property”, namely the site as a whole, which was instead managed by the appellants; and (iv) in that regard, steps with a view to enhancing the development value of the land and selling to a developer constituted “management”. The judge’s decision was upheld by the Court of Appeal: see [2014] EWCA Civ 435; [2014] PLSCS 119. The appellants appealed to the Supreme Court.
Held: The appeal was dismissed.
(1) The collective investment schemes with which section 235 of the 2000 Act was concerned involved arrangements in respect of property that enabled the participants to receive profits or income arising from the acquisition, holding, management or disposal of the property. A significant feature of section 235 was the reference to “management of property”; for a scheme to fall within section 235, it had to be shown that the participants in the scheme did not have day-to-day control over the management of the property and that the property was instead managed as a whole by or on behalf of the operator of the scheme. Steps with a view to enhancing the development value of the land and selling to a developer could constitute such management: Re Sky Land Consultants plc [2010] EWHC 399 (Ch) and Financial Conduct Authority v Capital Alternatives Ltd [2015] EWCA Civ 284; [2015] Bus LR 767 applied.
(2) Section 235 could in principle cover a scheme involving the sale of a property in small units to investors with a view to participation in the development profits of the whole site. The word “arrangements” had its ordinary meaning and was not limited to agreements binding in law. The judge had been entitled to determine the content of the arrangements entered into by the appellants by reference to the consistent understanding of the investors as to what was involved. It would be artificial and unrealistic to focus only on the arrangements as made by the appellants, including the documents prepared for that purpose, rather than looking at how they were perceived by others; the judge had been entitled to take the view that the understandings of the investors conformed to the appellants’ intentions, and had not been required to give special weight to contractual or other documents without regard to their context. It therefore made no difference that, under the contractual arrangements, each owned his plot outright. The judge was entitled to conclude that “arrangements” within section 235 were made when plots were marketed and investors paid their deposits, with the object of the arrangements being that the appellants should achieve a sale of the site after seeking to enhance its value by improving the prospects for housing development, the price to be shared between the investors.
(3) The judge had not erred in treating the relevant “property” as each of the sites acquired by the appellants, rather than the aggregate of all the plots sold to individual investors. The “property” for the purposes of section 235(1) was the whole site. That definition remained the same in principle throughout section 235, although management control of the property, for the purposes of section 235(2) and (3), could be achieved in different ways. The management control mechanisms might not be the same in each case and did not have to be legal mechanisms. Similarly, the “control” envisaged by those arrangements was not confined to legal control. The “control” was not a technical term and referred to the reality of how the arrangements were to be operated, which might or might not include rights or powers enforceable in law.
Under the appellants’ scheme, the relevant management of the property as a whole comprised the steps necessary to obtain planning permission and secure a sale to a developer. It was no part of the arrangements that the investors should have any part in, or control over, those management activities. The investors’ ownership of the individual units was not linked to any exercise of management control, individually or collectively. It was not even envisaged that the plots should be separately identifiable on the ground. The investors’ ability as individual owners ultimately to determine whether or not to participate in a sale could not be equated with control of the property’s management in the meantime. Control of the management activities for the property as a whole lay with the appellants, acting as the operators of the scheme and not as mere managing agents for the investors. The fact that their control was not underpinned by any legal rights over the units making up the property did not affect the substance of the arrangements. The judge’s application of section 235 to the facts as found by him involved no distortion of its natural meaning or its intended purpose.
(4) Per Lord Sumption: The 2000 Act did not regulate the establishment or promotion of schemes unless they were collective investment schemes or involved regulated activities in relation to specified assets. Any conclusion that a scheme was a collective investment scheme therefore had to be founded firmly on the language and purpose of section 235. The fundamental distinction underlying section 235 was between cases where: (i) cases where the investor retained entire control of the property and simply employed the services of investment professional, who might or might not be the person from whom he acquired it, in order to enhance its value; and (ii) cases where he and other investors surrendered control over their property to the operator of a scheme so that it could be either pooled or managed in common, in return for a share of the profits generated by the collective fund. Whether arrangements amounted to a collective investment scheme depended on what was objectively intended at the time the arrangements were made, and not on what happened later. The transaction could not be viewed only in legal terms. The judge had been entitled to find that the dominion of the investors over their plots, although apparently complete, was in reality an illusion and that the management of the property as a whole was carried out by the appellants.
Michael Blair QC and Robert Purves (instructed by Morrisons Solicitors LLP, of Wimbledon) appeared for the appellants; Nicholas Peacock QC, Tim Penny QC and Philip Hinks (instructed by the legal department of the Financial Conduct Authority) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Financial Conduct Authority v Asset Land Investment plc and another
