14 February 2024

In this article we examine the High Court’s decision in The Financial Conduct Authority v Forster & Ors[1] on what is a collective investment scheme (“CIS”) under the UK’s Financial Services and Markets Act 2000 (“FSMA”).


The defendants operated a model whereby capital was raised from private investors by selling them leasehold interests in care home rooms at a substantial overvalue. The model was marketed as being “buy-to-let” and its general strategy was to use investor investments to refurbish the relevant property to improve its rental yield. All of the care home properties were marketed under the Qualia brand (“Qualia”).

The investment structure involved investors purchasing a leasehold interest in a specific room and then sub-letting the room back to Qualia in return for receiving rental returns of 8-10% of the purchase price per annum. At the end of the sub-lease, investors would be offered a choice between selling the investment back to Qualia at a fixed price or electing to move to a basis where they would receive a return of 50% of the revenue generated from rent received from the occupants (the “Management Provisions”).

A key question considered by the Court was whether this model constituted a CIS under FSMA.

Definition of a CIS

A CIS is defined under section 235 FSMA as:

  1. any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
  2. The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
  3. The arrangements must also have either or both of the following characteristics–

a. the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;

b. the property is managed as a whole by or on behalf of the operator of the scheme.

The underlined words are discussed in more detail below.

Interpreting section 235 FSMA

The Court noted that there has been a certain amount of discussion around how the burden of proof should be applied when considering whether an arrangement falls within s235 FSMA since this could form a constitutive part of determining whether a criminal offence has been committed (such as operating a CIS in contravention of FSMA).

It then considered what a “fair” approach might be to interpreting the FSMA definition. Ultimately the Court decided that the FSMA definition must simply be interpreted in accordance with the ordinary natural meaning of the words used. The Court rejected suggestions that the potential criminal consequences should mean that the Court should require a higher standard of proof or that it should strain against an interpretation which might potentially give rise to criminal consequences. The Court relied in part of a prior decision of Baroness Hale in which she said “Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts”[2]

The arrangements

The Court held that the relevant arrangements in this case consisted of both the contractual and conveyancing documentation as well as the brochures and other promotional material used to advertise the investment.

In reaching its decision, the Court considered and dismissed the following points raised by Mr Forster:

  1. First, Mr Forster argued that the brochure and promotional materials should not form part of the arrangements on the basis that the contractual documentation contained an “entire agreement clause”. Citing, the Supreme Court’s decision in Asset Land Investment Plc v The Financial Conduct Authority[3], the Court held that the definition of arrangements was concerned with the substance and not with the form. It also concerned what the arrangements were at the time and not with what was done thereafter.
  2. Mr Forster also argued that the arrangements could not have been a CIS since different investors were dealt with on different terms. However, the Court held that a CIS could involve a collective set of arrangements even if investors have different understandings as to how the arrangement would work.


The Court noted that the arrangements can be in respect of “property of any description” and that this could therefore include contributions made by participants (Anderson v Sense Network[4]) and property managed in common with that of investors (FCA v Capital Alternatives[5]).

The property, for these purposes, then included (amongst other things) all the care homes in which the rooms had been sold as well as the cash balances received from investors and not used to purchase the rooms.

The purpose or effect

The Court noted that “purpose or effect” created two separate tests. “Purpose” related to what investors thought they were investing in while “effect” related to whether the facts of the arrangement satisfied the definition of a CIS under section 235 FSMA. The best evidence for the purpose was likely to be the promotional material and contractual documentation whereas for effect this was likely to be the evidence of how the arrangement actually operated in practice.

Mr Forster had argued that he had received counsel’s opinion to the effect that the arrangements were not a CIS and, as such, his purpose had never been to offer the right to participate in a CIS. The Court, however, disagreed with Mr Forster’s position and held that the purpose of the CIS is different from the purpose of the promoter. The Court found that the purpose of the model was to permit participants to participate in the revenues from the operation of the care homes regardless of Mr Forster’s state of mind. In any event, the Court decided that whereas a lay client could not be expected to necessarily hold a view as to the legal content of a legal opinion, what a lay client can be expected to do is to consider the assumed facts on which the opinion is based. Here, the opinion had been based on facts which were at odds with how the investments worked in practice and accordingly Mr Forster was not entitled to stand behind it.


Mr Forster’s Counsel had sought to argue that where a participant both owns an asset of the scheme and is entitled to a fixed return on it, there is no pooling since the return due is payable irrespective of the performance of the underlying asset. The Court, however, held that if the economic effect of the arrangement taken as a whole is a pooling, the fact that the contractual terms specify otherwise will not prevent it being regarded as pooled. The Court noted in this regard, that investors believed that the returns due to them would be paid regardless of whether their rooms were occupied.

The Court therefore found that the investments in the Care Homes involved participating in a CIS.

Indirect Offerings

Although the Court had already determined that the arrangements were a CIS, it also considered whether triggering the Management Provisions would hypothetically turn an initial offer to participate in investments that were not a CIS, into an offer to participate in a CIS if they could be varied at a later stage in such a way as to be a CIS.

The Court held that an approach to answering this is to ask who has the option to trigger the conversion to the CIS. If the conversion was automatic or if the offeror could unilaterally convert the investment into a CIS, then the initial offer should be considered an offer to participate in a CIS. However, if the investor has the option as to whether to convert their investment (and the option not to convert is economically realistic), then the initial offer should not amount to an offer to participate in a CIS.

In this case, the Management Provisions would automatically take effect in due course so that investors would end up owning a participation in a CIS unless they sold the investment before the Management Provisions were triggered. Consequently, the Court concluded that offering an investment with these characteristics would constitute an offer to participate in a CIS.

The consequences of it being a CIS

As a consequence of the arrangements being found to be a CIS, the Court held that:

  1. The defendants had established and operated a CIS in the UK without being authorised or exempt in contravention of section 19 FSMA; and
  2. The defendants had, in the course of business, communicated an inducement or invitation (which had not been approved by an FCA authorised person) to either (a) enter into an agreement, the making or performance of which involved the buying or selling of units in a CIS or (b) exercise rights conferred by units in a CIS to acquire, dispose of, underwrite or convert units in a CIS, in each case in contravention of section 21 FSMA.

The FCA has said that it will ask the Court to determine the sums that the Defendants should be required to pay back to investors following the Court’s decision.

Further information

A copy of the Court’s decision can be found here and the FCA’s press release here. For further articles and blogs on funds and financial regulatory updates, please visit the Burges Salmon blog. Further details about Burges Salmon’s specialist funds practice and how we can help you can be found on the Burges Salmon website.


[1] The Financial Conduct Authority v Forster & Ors [2023] EWHC 1973 (Ch)

[2] Re B (Children) (Care Proceedings: Standard of Proof) [2009] 1 A.C. 11

[3] Asset Land Investment Plc v The Financial Conduct Authority [2016] UKSC 17

[4] Fradley at [33], Anderson v Sense Network [2018] EWHC 2834 (Comm)

[5] FCA v Capital Alternatives [2015] EWCA Civ 284

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Tom Dunn

Tom Dunn Partner

  • Head of Regulated Funds and Financial Services
  • Regulated Funds
  • Financial Services

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