The Court of Appeal has provided further guidance on collective investment schemes ("CISs") in FCA v Capital Alternatives Limited and others [2015] EWCA Civ 284. - DAC Beachcroft

The Court of Appeal has provided further guidance on collective investment schemes ("CISs") in FCA v Capital Alternatives Limited and others [2015] EWCA Civ 284.'s Tags

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The Court of Appeal has provided further guidance on collective investment schemes ("CISs") in FCA v Capital Alternatives Limited and others [2015] EWCA Civ 284.

Published 15 April 2015

The Court of Appeal provided clarification on the appropriate test for establishing whether schemes are “managed as a whole” for the purposes of s.235 (3)(b) of Financial Services and Markets Act 2000 ("FSMA") and thus whether they constitute CISs. Whilst approving the decision of the High Court, the Court of Appeal applied a different test.


In 2013, the FCA issued proceedings against two investment schemes. The first is the African Land Scheme, a farming scheme in Sierra Leone concerning a rice farm in which investors bought sub-leases of plots of land at the farm in return for profits from the sale of the rice cultivated on them. The second is the Carbon Credits Schemes, which involved the sale to investors of sub-leases or licences relating to forest areas in various jurisdictions - the operators would seek accreditation by the relevant body, resulting in tradable carbon credits which could be re-sold at a profit.

As a preliminary issue, the High Court had to determine whether the schemes constituted CSIs within the meaning of s235 of FSMA. An investment scheme will be classed as a CIS if participants in the scheme do not exercise day-to-day control over the management of the investment property and there is pooling by the scheme operator of either (or both) of (i) the contributions to and profits or income from the investment scheme, or (ii) the investment property "as a whole" is managed. If a scheme is a CIS, then the establishment, operation and winding up of it is a regulated activity and can only be carried out by authorised persons. CISs attract regulation because the operator may not be dealing with the characteristics and needs of each individual investor, their appetite for risk, or their desire for income or capital, but with the operation of the scheme, and the assets forming part of it, as a whole. 

In the High Court, the Judge found that there had not been any pooling of profit/income and proceeded to undertake an extensive analysis of both the schemes' operation and the statutory framework. It was held that when determining whether property was "managed as a whole" within the meaning of s235(3)(b), the correct test was whether the elements of individual management, arising either from attention given by the management to the interests of individual investors or from participation by the investors themselves in the management of the property, was substantial. 

The Court of Appeal agreed that the income/profits of the schemes were not pooled and then focussed on the test for what constitutes "managed as a whole". The Court of Appeal found that the phrase "the property is managed as a whole" uses words of ordinary language. It is not appropriate to attach to the words some form of exclusionary test based on whether the elements of individual management were "substantial".

It was held that the critical question is whether a characteristic feature of the arrangements under the scheme was that the property to which those arrangements related was managed as a whole. That required an overall assessment and evaluation of the relevant facts. For that purpose it is necessary to identify "the property" and the management of that property, which was directed towards achieving the contemplated income or profit. It is not necessary that there should be no individual management activity, only that the nature of the scheme is that, in essence, the property is managed as a whole - the amount of individual management of the property would be relevant to that determination. The arrangements that need to have the characteristic of being “managed as a whole” are those relating to one or more of the acquisition, holding, management or disposal of the property.


Section 235 has historically been considered to be a difficult provision to interpret and to apply to practical situations. Prior to the High Court judgment the only publicly available guidance on the meaning of "management as a whole" in section 235(3)(b) was contained in chapter 11 of the FCA’s Perimeter Guidance Manual. The judgment therefore contains a helpful summary of the analysis of the meaning of "management as a whole" whilst providing a warning to operators who may have deliberately tried, or intend to do so in the future, to structure their scheme to avoid regulation.

The judgment is likely to be of a significant impact on a wide range of schemes, including those that facilitate investment in hotel rooms, buy-to-let apartments, or commodities.


Jonathan Brogden

Jonathan Brogden

London - Walbrook

+44 (0)20 7894 6290

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