What Is A Collective Investment Scheme? The High Court Gives Its Decision In FCA v Forster

• Published date: 26 February 2024
• Subject Matter: Finance and Banking, Strategy, Financial Services, Investment Strategy
• Law Firm: Burges Salmon
• Author: Alex Gillespie

In this article we examine the High Court's decision in The Financial Conduct Authority v Forster & Ors¹ on what is a collective investment scheme ("CIS") under the UK's Financial Services and Markets Act 2000 ("FSMA").

Background

The defendants operated a model whereby capital was raised from private investors by selling them leasehold interests in care home rooms at a substantial overvalue. The model was marketed as being "buy-to-let" and its general strategy was to use investor investments to refurbish the relevant property to improve its rental yield. All of the care home properties were marketed under the Qualia brand ("Qualia").

The investment structure involved investors purchasing a leasehold interest in a specific room and then sub-letting the room back to Qualia in return for receiving rental returns of 8-10% of the purchase price per annum. At the end of the sub-lease, investors would be offered a choice between selling the investment back to Qualia at a fixed price or electing to move to a basis where they would receive a return of 50% of the revenue generated from rent received from the occupants (the "Management Provisions").

A key question considered by the Court was whether this model constituted a CIS under FSMA.

Definition of a CIS

A CIS is defined under section 235 FSMA as:

1. any arrangements with respect to property of any description, including money the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding management or disposal of the property or sums paid out of such profits or income.
2. The arrangements must be such that the persons who are to participate ("participants") do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
3. The arrangements must also have either or both of the following characteristics-
   1. the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
   2. the property is managed as a whole by or on behalf of the operator of the scheme.

The underlined words are discussed in more detail below.

Interpreting section 235 FSMA

The Court noted that there has been a certain amount of discussion around how the burden of proof should be applied when considering whether an arrangement falls within...