Guest post by Neil Bromage, writer and journalist
Unlawful property investment schemes have now failed in huge numbers across the UK. Hotel rooms, student accommodation, rooms in care homes, storage pods and car parking spaces have all been sold unlawfully to unwitting investors. At one point, even burial plots were being sold in this way.
Billions of pounds have been taken from small, unsophisticated investors, in many cases from their pension or retirement nest eggs. Promised high-level returns, many of those investors now face retirement in penury.
It is now widely acknowledged that virtually all these property developments are unregulated collective investment schemes (UCIS) and therefore unlawful.
The Financial Conduct Authority (FCA) is currently investigating and prosecuting the first culprits. Others will follow in their wake as the Serious Fraud Office has also now stepped in with concerns about fraud and money laundering as schemes almost inevitably turn into Ponzis.
Schemes like this should have been authorised by the FCA. In not doing so, a whole range of offences have been committed and are now coming to light. At the same time, many schemes still exist and continue to be marketed by unscrupulous sales teams in the full knowledge that they are UCIS. It naturally follows that some lawyers are still prepared to act for those buying into the schemes.
The SRA has carried advice and warnings about solicitor’s involvement in collective investment schemes since at least 2013.
It says: “We have warned for a number of years about the risks posed by dubious or questionable investment schemes… Schemes are being promoted as involved in the routine buying of a property when in reality the buyer’s money is being used to finance a high-risk development or refurbishment.
“This is of particular concern in unusual developments such as the buying of individual hotel rooms, rooms in care homes, or self-storage units… We are seeing cases of solicitors simply processing transactions for buyers while adopting the language of conveyancing. The effect is to mask what is really happening…
“The Serious Fraud Office have previously investigated losses of up to £120m arising from the promotion of self-storage schemes…
“Many of these schemes are likely to be ‘collective investment schemes’ under section 235 of the Financial Services and Markets Act 2000. If those involved in the schemes are not authorised by FCA, they will be committing a criminal offence and are likely to be imprisoned.”
It may now seem like a distant memory, but The Great British Property Scam has many of its roots in the financial crisis of 2008.
When Lehman Brothers filed for bankruptcy on 15 September 2008, hundreds of employees, mostly dressed in business suits, left the bank’s offices one by one, carrying their careers in cardboard boxes.
Television screens around the world flashed up images of angry staff walking out of expensive office buildings with little to show for their commitment and no idea of what the future held for them.
It was a sombre reminder that nothing lasts forever even in the wealthy financial and investment world, but it was merely the earthquake that caused the tsunami, and few, if any, saw it was coming.
In the days and weeks that followed, other banks went down the same slippery slope into administration, bankruptcy or, if they were fortunate, takeover. The result saw the beginning of the worst credit crunch since the Great Depression of the 1930s.
This time it was all about property and how great swathes of it had been overvalued by so-called experts.
Banks and lenders quickly drew in their horns. Lending products disappeared from brokers’ screens and borrowing criteria were stringently reviewed. Those individual reviews by every recognised lender tightened the criteria to such a degree that it became almost impossible to be approved for a loan.
The banks had simply pulled down the shutters while continuing to tell the world at large that they were still open for business.
This resulted in virtually no lending and therefore no dealing in property. No building or developing. Renovations and new-build projects remained unfinished or half built. Plots of development land rarely saw the sharp end of a spade. The property industry was brought to its knees.
However, it is an industry that does not only employ bricklayers and builders. It is supported by architects, surveyors, solicitors, lenders, estate agents and brokers. The staff exit from each of those sectors was as busy as that at Lehman Brothers.
One small commercial finance broker said that, at the time of the crisis, they had around £100m of deals they were working on and that were previously capable of being financed. Not a single deal was completed due to the withdrawal of bank funding.
The legal sector was hit particularly hard and large numbers of lawyers were desperately trying to find alternative work.
Necessity and creativity, however, will often produce a result, particularly when opportunity comes knocking. It did for a relatively small number of law firms.
These pliable lawyers went on to make a name for themselves within a murky pool of developers who were selling hotel rooms, student pods and care homes. The vast majority were UCISs.
I and other journalists have written about many of these schemes in the mainstream press. Even on the day that I am writing this – 21 August 2022 – a buy-to-let headline appeared in the Mail on Sunday. It’s about a reader’s investment into what appears to be an ordinary residential apartment block and it highlights the lack of understanding about what constitutes a UCIS.
Section 235 of the Financial Services and Markets Act 2000 says that collective investment schemes can be any arrangements relating to any type of property, including money. When the Bank of England’s financial markets law committee reported in 2008, it said this can be just about anything, even a group of ostriches.
Clearly, the use of one very small word, ‘any’, opens up collective investment schemes way beyond the unusual and takes us into everyday territory. It’s a hugely significant factor that almost no one has recognised yet and that may well be because of the impact it will almost certainly have in the development sector as the financing of apartment blocks also comes under scrutiny.
Where a developer is building off-plan, pooling the monies received from buyers there is likely to be a problem.
Put simply, where the purpose or effect of a scheme is to enable those taking part to receive profits or income arising from the acquisition of the property, it will be deemed a UCIS if:
- The participants do not have day-to-day control over the management of the property;
- The contributions of the buyers and the profits or income out of which payments are to be made to them are pooled; and
- The property is managed as a whole by or on behalf of the operator of the scheme.
There is no way around the legislation and the FCA will look through any arrangements to see what the underlying intentions were. Developers and lawyers ignoring this do so at their peril.
My research over the last eight years has culminated in the publication of The Great British Property Scam. The book explores the origins of these schemes and how they have slipped under the radar for so long.
It examines failed schemes and looks at how they have fallen foul of the legislation. The role of the agents marketing these schemes to the public is also scrutinised, along with that of the all-important lawyers.
Real investor stories and interviews bring life to the subject as we look at the often devastating effects on their lives.
- You can buy The Great British Property Scam: The buy-to-let scandal of the century on Amazon.
Neil Bromage is a writer and journalist. For more than twenty-five years he has written for The Times, Sunday Times, Telegraph, Daily Mail, Mail on Sunday, and Reuters.