The Financial Conduct Authority v Capital Alternatives Ltd & Ors

A collective investment scheme may exist even though each participant receives only the income attributable to an individually allocated asset. Pooling and management as a whole are separate statutory characteristics.

Whether property is managed as a whole requires an objective, overall assessment of the arrangements in practice. The court must identify the relevant property and the management directed towards producing the contemplated income or profit. Individual management activity does not prevent the property from being managed as a whole where the scheme’s essential character is collective management.

The arrangements must fall fairly within section 235 of the Financial Services and Markets Act 2000, construed according to its ordinary language and protective purpose.

The Financial Conduct Authority brought proceedings against the promoters and operators of an agricultural investment scheme and three carbon-credit schemes. Investors acquired or were allocated interests in plots, while the schemes’ operators or project managers undertook the activities intended to generate returns.

On a preliminary issue, a deputy High Court judge held that all four arrangements were collective investment schemes under section 235 of the Financial Services and Markets Act 2000: [2014] EWHC 144 (Ch). The defendants appealed. The FCA cross-appealed findings that income or profits were not pooled in the African Land and Australian carbon-credit schemes.

The central issues were the identity of “the property”, the meaning of property being “managed as a whole”, and whether the schemes pooled participants’ income or profits.

1. The appeals and cross-appeal were dismissed. All four arrangements were collective investment schemes under section 235 of the Financial Services and Markets Act 2000. Christopher Clarke LJ gave the leading judgment. Vos LJ agreed and added reasons; the Chancellor agreed.

2. The statutory phrase “the property is managed as a whole” uses ordinary language and should not be qualified by an exclusionary test asking whether individual management was “substantial”. The correct inquiry is whether a characteristic feature of the arrangements is that the relevant property is, in essence, managed as a whole. This requires an objective overall assessment of the facts, including the identity of the property, the management directed towards the contemplated return, and the extent of any individual management.

3. The relevant property was not confined to each investor’s plot. It comprised the property to which the arrangements related and from whose management the contemplated profit arose. For the agricultural scheme this included the farm, buildings, roads, irrigation areas, machinery and other facilities needed to operate the project.

4. The African Land scheme was managed as a whole. A single manager controlled the farm, made all material cultivation decisions, used common infrastructure and funds, and acted without input from individual investors. Separate plot allocation and harvesting did not alter the scheme’s essential character, particularly where that separation had no real commercial purpose and was intended to avoid regulation.

5. Absence of day-to-day control and participation in management are distinct matters. Investor participation falling short of day-to-day control may nevertheless be relevant, though not conclusive, when deciding whether the operator manages the property as a whole.

6. The FCA’s cross-appeal on pooling failed in relation to African Land and the Australian scheme. Standard prices or charges, later mixing or sale of produce, and minor cross-subsidisation did not necessarily pool income where each return remained attributable to an individual plot. The intended practical method of allocating Australian carbon credits could form part of the arrangements despite not being specified in the contracts.

7. The Sierra Leone and Brazilian schemes involved both pooled returns and management as a whole. Accreditation and project activities were collective, were not linked to individual plots, and were undertaken for each project without separate investor management.

1. Court of Appeal (Civil Division): The appeals and the FCA’s cross-appeal were dismissed: [2015] EWCA Civ 284.
2. High Court, Chancery Division: Nicholas Strauss QC, sitting as a deputy High Court judge, determined a preliminary issue by holding that all four arrangements were collective investment schemes: [2014] EWHC 144 (Ch).