It may be thought that if an investment is entered into using a UK-based firm, that investment is covered by one of the statutory schemes established to protect investors. However, this is not always the case, and it is important to understand the limitations of protection available before committing funds to an investment.
A recent case involving a 'property plot investment' company illustrates the potential pitfalls.
The company acquired a number of sites, initially in Surrey but later nationwide, which it subdivided into plots. These were then sold to investors. Between 300 and 400 investors bought them.
The ostensible plan was that the investment managers would attempt to get the plots rezoned as suitable for residential development and then sell them to property developers. The intention was that the uplift in value from the sale would provide substantial gains for the investors who had purchased the plots.
The question before the Supreme Court was whether the scheme constituted a 'collective investment scheme' (CIS) for the purposes of the Financial Services and Markets Act 2000. Such schemes require the permission of the Financial Conduct Authority (FCA) to operate and the operation of such a scheme without permission is a criminal act.
The issue turned on the following questions:
- Was the scheme set up to provide a financial return for the participants?
- Did they pool their funds to accomplish this?
- Was the day-to-day control in the hands of the scheme operator rather than the investors?
In a lengthy judgment that dealt with each aspect of control in detail, the Court took the view that for the scheme to be a CIS, the owner of each plot would have had to enter into an arrangement under which someone else managed the property on their behalf. This was what happened. Accordingly, the scheme amounted to a CIS, carried on without authorisation.
The advice of the FCA regarding such schemes is clear. It begins with the recommendation that you should 'find out why to be wary of unregulated collective investment schemes' and goes on to say that they are 'risky products and because we do not regulate them you may not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme if things go wrong'.