Financial Conduct Authority v Capital Alternatives Ltd & Ors

Under Financial Services and Markets Act 2000, pooling and management as a whole are separate alternative characteristics of a collective investment scheme. Individual allocation of profits does not prevent a scheme from being managed as a whole.

The relevant property is identified by examining the property which enables participants to receive profits, including property managed by the operator for that purpose. Management is “as a whole” where the elements of individual management, whether arising from attention to individual investors or investor participation, are not substantial. The scheme must be assessed by its substance and practical operation. All four investment schemes considered were collective investment schemes.

The Financial Conduct Authority brought proceedings against promoters, operators and associated persons concerning one agricultural investment scheme and three carbon-credit schemes. The court directed a preliminary issue as to whether the schemes were collective investment schemes within section 235 of Financial Services and Markets Act 2000.

Investors were offered interests in individual agricultural or forest plots and were promised returns attributable to those plots. The central questions were whether the relevant property was confined to the individual plots, whether profits were pooled, and whether the property was managed as a whole despite individual allocation of returns.

1. Construction. Section 235 was to be construed conservatively, rather than narrowly merely because contravention could attract criminal sanctions. The statutory purpose was investor protection where investments involved pooling or collective management.
2. Property. “The property” in section 235(3)(b) is the property described in section 235(1), namely all property subject to arrangements enabling participants to receive profits. It may include property managed by the operator to generate those profits. On the facts, the relevant property included the whole of Yoni Farm and the whole forest areas, not merely the plots allocated to investors.
3. Pooling. Pooling ordinarily means that investment profits provide a fund for the combined or common benefit of participants. Individual returns calculated from the yield or performance of each plot were not pooled. The receipt by an operator of proceeds before distributing individually calculated returns did not alter that conclusion. By contrast, the Sierra Leone and Brazilian carbon schemes contemplated rateable sharing of one overall carbon-credit allocation and therefore involved pooling.
4. Management as a whole. Section 235(3)(b) requires a qualitative and quantitative assessment. The question is whether the elements of individual management, arising from attention to individual investors’ interests or participation by investors themselves, are substantial. The absence of day-to-day control remains relevant to this assessment, even though it is separately addressed by section 235(2).
5. Application. The African Land scheme was operated as one farm by or on behalf of its operator. Individual harvesting and accounting served no substantial commercial purpose and did not benefit investors. The Australian carbon scheme was managed as one forestry project, despite intended plot-based allocation of credits. The Sierra Leone and Brazilian schemes involved both pooling and management as a whole. Each scheme was therefore a collective investment scheme.
6. Disposition. The court declared that all the schemes under consideration were, and had been since inception, collective investment schemes within section 235.

This was a first-instance trial of a preliminary issue. No appellate history was stated in the judgment.