The Great British Property Scam (pt 9)

Chapter 2

Rules of Engagement

Perhaps one of the most striking features about the regulations which control collective investments is that they came into force nearly twenty years ago on the 1st December 2001. However, despite the passing of two decades they are still being ignored by lawyers, developers, and their sales agents and the law continues to be broken. We are of course, all now familiar with the well-established legal principle of ignorance of the law being no excuse. Aristotle translated it as “nemo censetur ignorare legem”, meaning “nobody is thought to be ignorant of the law”. The addition of “nobody” will be important for many of those lawyers, developers, and agents. The Financial Services and Markets Act 2000 (FSMA) introduced various regulations to protect consumers and control market abuse. It also created the Financial Services Authority (since renamed as the Financial Conduct Authority (FCA)) as a regulator for insurance, investment business and banking. In other words, just about everything financial. Unfortunately, we can`t ignore the legislation if we are to have clarity on what constitutes a Collective Investment Scheme (CIS). It`s also a fact that legislation is rarely an easy read. It is written by lawyers for lawyers and often comes with the warning that it can seriously damage your state of mind. A quick scan of the contents of the act reveals a very lengthy piece of legislation that is, in essence, no different. The challenge is to take that heavily legalistic language and turn it into understandable English. So let`s try to simplify it.

Section 235 of the act says that collective investment schemes can be any arrangements relating to any type of property, including money. When the Bank of England`s Financial Markets Law Committee reported in 2008 they said this can be just about anything, even a group of “Ostriches”. Clearly, the use of one very small word, “any”, opens up collective investment schemes way beyond the unusual and takes us into everyday territory.

However, it is necessary to understand what the purpose or effect of any such scheme is. According to the act it must enable those taking part to receive profits or income from the acquisition, holding, management or disposal of the property. In other words, the arrangement must cause you to profit from it. Why else would you be in it if not for profit.

Additionally, in order to be considered a collective investment scheme the owners of the individual rooms or units must not have day-to-day control over the management of the property, even if they have the right to be consulted.

So, up to now we have “any” type of property, which must provide a profit and the buyer should not have day-to-day control. So far so good. There are just two more things to consider in order to know whether the arrangement amounts to a collective investment scheme.

Firstly, will the money paid by the buyers to acquire their units, or any of the income or profit generated by the property go into a single pool. Secondly, is the property managed as whole by the operator of the scheme (or someone appointed by them). In order to qualify as a collective one or both of these two characteristics must be present.

Many schemes are caught on the pooling of income but even where that isn`t happening the management of the property is problematic for a great many of these schemes. It is, after all, impossible to see how a hotel, care home or student accommodation block with say, a hundred rooms, could be looked after by multiple managers.

To recap, an arrangement relating to any type of property where the investor is getting a profit, doesn`t have day-to-day control, and monies or management are being pooled is almost certainly a collective investment scheme. If it`s not registered with the Financial Conduct Authority it automatically becomes an unregulated scheme or UCIS.