The Supreme Court dismissed an appeal by Asset Land Investment plc and its principal director, Mr Banner-Eve, and held that their plot sales were a collective investment scheme under section 235 of the Financial Services and Markets Act 2000. Buyers took title to individual plots, but the arrangements were that the company would seek to improve each site’s development prospects, arrange a sale of the site as a whole and share the price among the owners. Written statements denying any planning role did not stop those arrangements from being a regulated activity carried on without authorisation.
The sales and the proceedings
The Financial Conduct Authority alleged that Asset Land Investment plc and associated parties had carried on a regulated activity without authorisation, contrary to section 19 of the Financial Services and Markets Act 2000, by selling individual plots at six possible development sites. The only issue in the Supreme Court was whether those activities were a collective investment scheme under section 235. The company and Mr Banner-Eve, its principal owner and director, appealed.
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Asset Land acquired sites, divided them into plots and sold the plots to individual investors. The commercial attraction was the prospect of rezoning and a later sale to a developer.
Investors bought their plots on the understanding that the company would pursue that objective for the site as a whole.
The regulator brought civil proceedings. The High Court found that the arrangements amounted to collective investment schemes, and the Court of Appeal upheld the finding.
What section 235 requires
Section 235 covers arrangements relating to property whose purpose or effect is to enable participants to share profits or income from acquiring, holding, managing or disposing of that property. The participants must not have day-to-day control over management of the property, even if they may be consulted or give directions. The arrangements must also either pool the contributions and the profits from which payments are made, or provide that the property is managed as a whole by or on behalf of the operator.
The Authority did not rely on pooling. The proceeds of sale were to be shared, but the plots themselves were not pooled. The dispute was whether each site was managed as a whole by the company and whether the investors lacked day-to-day control. Lord Sumption explained that the Act regulates specified financial investments directly, but regulates physical assets such as land only where they are dealt with indirectly through a collective investment scheme. A sale of land alone is not a regulated activity, and he accepted that a planning consultant or estate agent engaged afterwards would not, merely by advising and finding a buyer, be operating such a scheme. Both he and Lord Carnwath endorsed the warning in Financial Services Authority v Fradley that section 235 must not be read so as to include matters not fairly within it. Breach of the prohibition is a criminal offence, and a contract made in the course of the unauthorised activity is unenforceable.
The arrangements and the property
The appellants accepted that arrangements had been made and accepted the finding about the investors’ understanding. They argued that the court should have judged the operator’s arrangements objectively, including the contracts and disclaimers, rather than the investors’ understanding. Lord Carnwath rejected that distinction as artificial. Arrangements have their ordinary meaning and need not be legally binding. The judge was entitled to find that the investors’ understanding matched what the operator intended, and was not required to give the documents decisive weight regardless of context.
Andrew Smith J had held that the representations clause did not cover what the brokers told investors, was not binding under the Unfair Terms in Consumer Contracts Regulations 1999 and had no effect under the Misrepresentation Act 1967. The services clause did not assist either, because it was not binding under the 1999 Regulations. The footer was verbose and not prominent, and investors reasonably continued to rely on what they had been told. Lord Carnwath held that arrangements within section 235 were made when the plots were marketed and the deposits paid, with the object that the company would seek to improve the prospects of housing development and achieve a sale of the site, the price being shared among the owners.
The relevant property was each site as a whole, because that was what was to be rezoned and sold and was the source of the profit. Treating the property instead as the aggregate of the investors’ plots and their rights over roads and common parts made no difference of substance. The company retained the roadways, access points and other common spaces.
Control and management
The appellants said that outright ownership gave the investors day-to-day control, because only an owner could decide whether to sell. They compared flat owners, who control their own flats and collectively the common parts, and argued that misrepresentation, contract and consumer-protection remedies made it unnecessary to treat these sales as a collective investment scheme.
Lord Carnwath, with whom the other members of the court agreed, held that control here is not a technical expression and is not confined to legal rights. It refers to the reality of how the arrangements were to operate. The management that mattered was action directed to increasing the development value of the land and selling it to a developer. The investors were to have no part in that. A right to refuse a later sale was not control of the management in the meantime, and the judge had found that opting out would have made no practical sense. Unlike flat owners, these investors were not given management of their units or of the rest of the site. It was not even envisaged that the plots would be separately identifiable on the ground. The later offer of larger enhanced plots, supposedly allowing an owner to seek permission individually, did not give control over the remainder of the property.
Management of each site as a whole therefore lay with the company as operator of the scheme, not as a mere agent for the owners. Lack of a legal power to compel a sale did not alter the substance of the arrangements. Lord Carnwath accepted that section 235 should not be stretched to cover matters already dealt with by other remedies, but held that the judge’s application involved no distortion of its meaning.
Lord Sumption, with whom Lord Mance, Lord Clarke and Lord Hodge agreed, would also dismiss the appeal, but he did not accept the view of the judge and the Court of Appeal that section 235(2) depends on whether investors actually exercise control after the arrangements are made. Control, in his opinion, is the ability to decide what happens to the property. It must be a feature of the arrangements when they are made, not a conclusion drawn from later events. Even on that test, the investors collectively lacked day-to-day control of the whole site: the company retained the common parts, over which the investors had only easements, and there were no arrangements for the investors to manage the site together.
On management as a whole, Lord Sumption distinguished an owner who keeps dominion and merely buys professional services from investors who surrender control to an operator. Finding a buyer would be management if the operator could sell for the investors or they had to sell on approved terms. It would not be if the operator only put a proposal to owners who remained free to accept or reject it. In strictly legal terms, the core representations did not require a surrender of control. The judge had found, however, that the arrangements could not work if the investors exercised the rights they theoretically had. Lord Sumption treated that assessment as decisive: their apparent dominion was in reality an illusion, and it was not for the Supreme Court to substitute another view of the facts. On that narrower ground, these schemes were collective investment schemes.
Verdict: The Court unanimously dismissed the appeal. Asset Land had operated collective investment schemes without authorisation. The Supreme Court did not decide the amount of restitution.
Source: Asset Land Investment Plc and another v The Financial Conduct Authority [2016] UKSC 17
