This article is for property professionals – including property developers, property agents, investors, lawyers and anyone else involved in the sector, who are not already authorised and regulated by the UK Financial Conduct Authority (FCA).
Its purpose is to keep you, your clients and business partners out of trouble – by enabling you to spot issues which could lead you to foul of UK financial services regulation if you don’t tread carefully.
You might think that you won’t be caught, but if your plans include continuing to build a business in the UK, it’s probably worth playing by the rules.
So here are some of the main areas you need to look out for:
1. Financial promotions
Section 21 of the UK Financial Services and Markets Act 2000 says that “in the course of business, an unauthorised person must not communicate an invitation or inducement to engage in investment activity unless either the content of the communication is approved … by an authorised person or it is exempt.”
This covers both written communications and “real-time” communications such as telephone conversations. Real estate as such is not caught by this prohibition. But shares in a property SPV are caught, and there are special rules about promoting “collective investment schemes” – see further below. A breach of Section 21 is a criminal offence.
2. Advising on investments and arranging deals in investments
Again, these are regulated activities. They are widely defined and could cover, for example, preparing a summary of an investment opportunity and introducing an investor and investee to each other. Again, real estate as such is not regarded as an investment for these purposes. However, shares in an SPV or units in a collective investment scheme would be.
3. Operating a collective investment scheme
In general terms, a collective investment scheme (CIS) is any set of arrangements where:
- Two or more investors participate in profits or income arising from the acquisition, holding, management or disposal of property of any kind
- The investors do not have day to day control of the management of the property
- The investors’ contributions and the profits or income due to them is pooled, or the property subject to the arrangements is managed as a whole.
Establishing, operating or winding up a CIS are controlled functions and therefore require an FCA authorised person. The definition of CIS means that a company (such as a property SPV or joint venture company) cannot be a CIS. But LLPs, partnerships, trusts or other syndicates or arrangements can be, and these are very common in the real estate world.
As mentioned above, the issues relating to CIS concern not only the management of the arrangements, but also how funds are raised, since the promotion of collective investment schemes is caught by the restrictions of the Financial Services and Markets Act 2000.
4. Alternative Investment Funds
The concept of an Alternative Investment Fund (AIF) was introduced by the Alternative Investment Fund Managers Directive, and has now been implemented in the UK. It is similar to the concept of collective investment schemes, but unlike a CIS, it includes corporate vehicles.
The manager of an AIF must be registered with the Financial Conduct Authority. There is a lighter touch regime for managers of funds with a cumulative value of less than €100 million, and managers of funds with a cumulative value of less than €500m in total where the fund portfolio consists of funds that are not leveraged and has a lock-in period for investors of at least five years.
You can read more information about AIFs in this article: What is an alternative investment fund?
5. Non-mainstream pooled investments
The FCA has introduced restrictions on the promotion of “non-mainstream pooled investments” (NMPIs) to retail investors. This followed the FCA’s “Retail Distribution Review” to address perceived mis-selling. Strictly speaking, these restrictions apply only to FCA authorised persons, and we are including NMPIs in this list only for the sake of completeness.
The definition of NMPIs includes collective investment schemes and special purpose vehicles. You can find more information in this article: Reference guide: What is an NMPI?
The way forward
Assuming you have identified a potential issue and taken advice, what are the possible outcomes and ways forward?
One is to modify the arrangements, so as to come within the relevant exemptions. For example, it may be possible to avoid a syndicate being treated as a collective investment scheme or an AIF by making sure that all the investors are entitled to participate in decision-making, and that they actually do so.
Another is to involve an FCA authorised person, for example to approve a financial promotion (e.g. in the form of an information memorandum) or to act as operator. It rare than a particular arrangement cannot be made to be compliance in some form, and the question is often whether the investment proposition is still viable, notwithstanding the additional costs involved.