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What is a Collective Investment Scheme?

In our new 360 Series, PrinvestUK will be exploring the UK property market in depth to highlight some of the biggest challenges facing investors today.

What is a Collective Investment Scheme?

In our first instalment, PrinvestUK's business development director, Mark Ivimy, takes a look at what constitutes a Collective Investment Scheme - and why purchasers should be careful to avoid them.

 

What is a Collective Investment Scheme?
Collective Investment Schemes are generally defined by the pooling of money to invest and returns are shared equally.


These type of schemes are regulated in the UK by the Financial Conduct Authority (FCA) and for good reason due to the risk to investor funds if not managed correctly.


This means that if a company wishes to sell a Collective Investment Scheme, they must be authorised by the FCA to do so and the scheme must be operated by fully qualified investment managers.

 

UK Property Investment

 

Classification of a Collective Investment Scheme
What a lot of property agents do not realise is that Collective Investment Schemes are defined by much more than the pooling of funds and income, putting themselves and the investor at risk.


Products can also be classified as CIS if they do not have control of the day-to-day management of their investment.


A prime example of products that could be classified as CIS by a regulatory authority may be described as:

  • Hands off investment
  • Armchair investment
  • Fully managed investment


These terms would suggest that the investor has no control over the day-to-day management of their investment property and in the worst case scenario and income is not being produced, they may not be able to self-manage.


Property investments sold with guaranteed buy backs should also be queried as this could also result in classification as CIS.


Guaranteed buy backs typically come in two forms, which all investors need to clarify with the selling agent as to which form of ‘buy back’ they are being offered:

  • Call Option – this is the seller’s option to buy back the property at a pre-determined price, however they are not obliged to buy the property back
  • Put Option – this is the investor’s option to invoke a buy back from the seller, which is contractually guaranteed, but very much depends on the developer being in funds to execute the buy back


If the ‘guaranteed buy back’ is in the form of a Call Option, this removes control from the investor. If the Call Option can be executed within the duration of an assured rental period, this is likely to classify an investment as a Collective Investment Scheme. For example, if an investor is offered a specific percentage net return for a period of 10-years and the Call Option can be executed within the 10-year period, this could result in a CIS classification.

 

Property Investment UK

 

What could happen if I buy a product that is a Collective Investment?
If an investor has purchased an investment property that may be deemed as a Collective Investment Scheme, this could cause serious issues should they wish to exit their investment.


If the investor chose to re-sell their property on the open market, a typical High Street estate agent would not be regulated by the Financial Conduct Authority; therefore, they would be unable to act for the investor. The investor may also be at risk by selling their collective investment.


Should the investor wish to take remedial action on a property that was classified as a Collective Investment, they would need to go through a lengthy and costly process of consulting with specialist solicitors to vary the contracts that they have entered into.


The management of a property deemed to be collective can also be very costly as the management of the property would have to be undertaken by a management company who are directly authorised by the Financial Conduct Authority. This can increase the cost of managing the property exponentially, eroding the net rental income that the investor receives.


The re-sale value would also decrease substantially, as by purchasing a yield based asset, the onward buyer will be looking for a certain yield, of which the actual net return will determine the value.

 

Property Investment Information - 360 Series

 

How does PrinvestUK ensure that products are not Collective Investments?
PrinvestUK conduct thorough due diligence on all of our products before we launch. A large part of this due diligence process is undertaken by the solicitors acting for the seller of the product.


The vendor’s solicitor produces a contract pack and they consult with Queen’s Counsel Barristers who have expertise in the classification of Collective Investment Schemes.

 

The QC will typically review the contract pack for investor security and recommend any changes to the contracts to ensure that the product does not require authorisation for the FCA.


This is an extremely costly process, but as a result, the investor security and recommend any changes to the contracts to ensure that the product does not require authorisation from the FCA.


For further information, please contact PrinvestUK and we can put you in touch with a solicitor, qualified to answer your questions on Collective Investment Schemes.

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