201605.09

What Is a Collective Investment Scheme? Supreme Court Rules

In an important decision, the Supreme Court has ruled that a so-called ‘land banking’ arrangement – by which individuals bought small plots of land which were said to have development potential – was a collective investment scheme and was thus subject to tight regulation by the Financial Conduct Authority (FCA).

The company which operated the scheme had acquired six sites, which were divided up into smaller pieces and sold individually. It represented to investors that it would seek re-zoning of the sites for residential development and to arrange for their resale at a handsome profit.

In those circumstances, the FCA launched proceedings against the company on the basis that it was carrying on a regulated collective investment scheme without the authority required by the Financial Services and Markets Act 2000. The FCA’s arguments succeeded before the High Court and the Court of Appeal.

The company pointed out that individual investors owned their plots outright. In rejecting its appeal, however, the Supreme Court found that the scheme had been rightly characterised as a collective investment scheme. The theoretical control that investors had over land held in their name was in reality illusory.

The essence of the scheme was that investors in practice lacked practical or legal dominion over their individual plots and played no active part in the company’s management of the land. Arguments that the Court’s decision would potentially interfere with a wide range of legitimate business activities were also rejected.

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