Financial Conduct Authority v Capital Alternatives Ltd

The Court of Appeal considered whether four schemes (the African Land scheme and three Carbon Credits schemes) fell within the statutory definition of a "collective investment scheme" under section 235 of the Financial Services and Markets Act 2000. The court applied the statutory test in s.235, focusing on (i) the identity of "the property" to which the arrangements relate, (ii) whether participants lacked day-to-day control, (iii) whether contributions and/or income were pooled, and (iv) whether the relevant property was "managed as a whole" by or on behalf of the operator.

The court accepted the trial judge’s principal factual findings: there was pooling of contributions in the African Land scheme but the returns to investors were paid by reference to individual plots (so the judge found no pooling of income); nevertheless the farm (the whole property) was managed as a whole and that sufficed under s.235(3)(b). For the Carbon Credits schemes the court accepted different factual outcomes for the three schemes: the Australian scheme involved individual accreditation so no pooling of income but was managed as a whole; the Sierra Leone and Brazilian schemes were found to involve pooling of income and management as a whole. The court rejected reliance on informal FCA guidance (the Perimeter Guidance Manual and letters) as determinative of the statutory meaning.

This was an appeal from a High Court (Chancery) preliminary ruling that the African Land scheme and three Carbon Credits schemes were collective investment schemes for the purposes of s.235 FSMA. The Financial Conduct Authority brought proceedings seeking a determination that the arrangements were collective investment schemes so that the relevant activities would be "regulated activities" and could not lawfully be carried on by the (unauthorised) promoters and operators.

Background and parties: The schemes involved sales of subleases or licences over plots within larger areas (a rice farm in Sierra Leone and forest areas for carbon credits in Australia, Sierra Leone and Brazil). Promoters/operators (Capital group companies and others) marketed investments to retail investors. The trial judge (Nicholas Strauss QC, deputy judge) found the schemes were CISs. The operators appealed to the Court of Appeal.

Nature of the application: The FCA sought a preliminary determination whether the schemes were "collective investment schemes" within s.235 FSMA; the legal consequences would include that the activities were regulated and might render contracts unenforceable and expose promoters to enforcement and criminal sanctions.

Issues framed by the court: The court addressed (i) the proper meaning and object of "collective investment scheme" in s.235; (ii) whether contributions and/or income were pooled; (iii) whether participants lacked day-to-day control; (iv) whether the property was "managed as a whole" by or on behalf of the operator; and (v) the weight to be given to FCA guidance (PERG / Perimeter Guidance Manual and informal letters).

Reasoning and findings: The Court of Appeal endorsed an objective approach to s.235, asking what property the arrangements related to and what management directed to obtaining the contemplated profit/income was carried out. The court held that "the property" may extend beyond individual investor plots to the wider farm or project from which the investors expected profit. It rejected an absolute rule that payment of income to an investor solely by reference to his plot necessarily negates management "as a whole". The relevance of any element of individualised activity is a matter of overall assessment; substantial or characteristic collective management of the whole project will satisfy s.235(3)(b) even if some tasks are performed in relation to individual plots. The court also held that FCA guidance was not binding and informal guidance letters were of limited weight where they addressed different facts or were caveated.

Subsidiary and factual findings: The African Land scheme had been oversold, investors lacked day-to-day control, contributions were pooled, and although returns had been calculated by reference to individual plots (segregated harvesting), the operational reality (centralised management by ACSL/GMX, shared infrastructure, allocation procedures and the commercial purpose of the segregation) showed management of the farm as a whole. For the Carbon Credits schemes the Australian project was promising individual accreditation in evidence so no pooling of income, but Citola managed the project as a whole; the Sierra Leone and Brazil projects were found to have an intention or practice of pooling ACCUs and to be managed as whole projects.

Conclusion: On the facts found there was a collective investment scheme in each case and the appeals were dismissed.

Appeal dismissed. The Court of Appeal upheld the trial judge’s conclusion that the schemes fell within s.235 FSMA. The court reasoned that "the property" can include the whole project (not merely individual plots) and that an objective assessment of whether the property is "managed as a whole" must be made; on the facts the farm and certain carbon projects were managed as a whole (and in some cases income was pooled), so they were collective investment schemes. Informal FCA guidance did not displace the statutory test or the factual inquiry.

On appeal from the High Court of Justice, Chancery Division, Nicholas Strauss QC sitting as a deputy High Court judge ([2014] EWHC 144 (Ch)). The Court of Appeal gave judgment dismissing the appeals ([2015] EWCA Civ 284).