UK Financial Services Regulatory Issues For Property Professionals – What You Need To Know

The purpose of this article is to keep you, your clients and business partners out of trouble – by enabling you to spot issues which could place you at risk of prosecution by the FCA.

Here are some of the main areas of financial services regulation you need to be aware of:

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, as are loan notes, 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. Real estate as such is not regarded as an investment for these purposes. However, shares in an SPV, loan notes 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 certain smaller funds.

If you need help restructuring your business activities so that you’re not at risk of FCA prosecution, please call us +44 020 3432 3269. We have tried and tested structures, as well as toolkits of template documents which you can use.