Warning notice

Land banking schemes

 

Issued on 14 September 2012

This warning notice is for anyone who is involved or who is considering acting for clients involved in the promotion or facilitation of investment schemes which involve selling plots of land to investors on the basis of prospective planning permission.

Whilst this notice does not form part of the Solicitors Regulation Authority's (SRA) Handbook, the SRA may have regard to it when exercising its regulatory functions.

The issue

The SRA is aware that there are a number of fraudulent investment schemes. These are typically where agricultural, brownfield or other blighted land is acquired at low cost and divided into plots for sale to investors. Investors are informed that the land will soar in value once planning permission is obtained. However, as the land will usually be on a green belt or protected site, the land is unlikely to obtain planning permission or achieve the value intimated by the operator, resulting in the investor paying an inflated price for the land. This practice is sometimes known as "land banking".

In a recent case prosecuted by The Financial Services Authority (FSA), it was estimated that investors paid up to £32 million for land, when the actual value of the land was in the region of £3 million. The Financial Services Authority (FSA) estimate that the loss to investors through land banking schemes, is in the region of £200 million since 2006. Some schemes are run as ‘collective investment schemes' and should be, but are rarely, authorised by the FSA.

The Principles

You should be aware that as a regulated individual or firm, you or your firm may be used by operators of land banking schemes to provide credibility to the scheme. You may also be asked to facilitate their operation by registering transfers of the individual plots and dealing with the proceeds of their sale. If you are involved or are considering becoming involved in a land banking scheme you should consider if you can comply with the Principles in the SRA Handbook and in particular:

  • Principle 2 - act with integrity;
  • Principle 3 - not allow your independence to be compromised;
  • Principle 4 – act in the best interests of each client;
  • Principle 6 - behave in a way that maintains the trust the public places in you and the provision of legal services;
  • Principle 8 - run your business or carry out you role in the business effectively and in accordance with proper governance and sound financial an risk management principles.

As land banking schemes may require you to deal with unrepresented investors, the outcomes in chapter 11 of the SRA Code of Conduct 2011 ("the Code") - relations with third parties- will also be relevant.

Complying with the Principles

To comply with the Principles it is important that you and your firm are able to identify land banking schemes and manage the risks associated with such schemes. Ensuring that you and everyone in your firm is aware of the following should assist with this:

FSA warnings: The FSA has released multiple warnings which detail how land banking schemes work and how you can protect yourself. You should consider these warnings and in particular the warning entitled Land banking 3 January 2007.

Misleading statements: Land banking schemes are often promoted on the basis that planning permission is imminent or that a well known company is about to buy the land. The SRA is aware that forged Land Registry letters and Land Registry estate plan approval letters have been used as evidence that planning permission is available when this is not the case. Also the obtaining of planning permission may be in the control of a management company which may have no intention of applying for planning permission.

If you are acting for the operator of a scheme you must ensure any information passed to third parties is not misleading. In such circumstances you must achieve O(11.1) - a requirement not to take unfair advantage of a third party.

Operators: Operators of land banking schemes are often based overseas, making it difficult for an investor to recover funds invested in a scheme or for enforcement action to be taken against the operator. Operators may also attempt to conceal the original value of the land by inter-company transactions which inflate the original purchase price.

Investors: Investors in land banking schemes may be unrepresented or based overseas and may be unaware of the risks involved in land banking schemes. Some investors may be investing their life savings in schemes or may have been induced into investing in a scheme on the basis they will be protected because you or your firm is regulated. In such circumstances, again, you must achieve O(11.1) (a requirement that you do not take unfair advantage of third parties on your client's behalf).

If you are acting for an investor in a landbanking scheme you must comply with Principle 4 (i.e. act in your client's best interests) and achieve the outcomes in Chapter 1 of the Code (you and your client). In particular, O(1.2) requires you to provide services to your in a manner which protects their interests in their matter, and O(1.5) makes it clear that the service you provide to clients must be competent, delivered in a timely manner and take account of your clients' needs and circumstances. This requires you to discuss with and advise clients of the risks and to ensure they understand all the relevant issues.

Please take extra care if it is envisaged that your retainer is to be limited in nature, for example it excludes providing advice to clients or is solely restricted to the registration of the properties. Before agreeing to act in these circumstances you should consider whether it is necessary to carry out due diligence in relation to the scheme in order to avoid unwittingly becoming involved in a fraudulent scheme. In particular Outcome 9.1 contains a requirement that your independence and your professional judgement are not prejudiced by virtue of any arrangement with another person. Outcome 9.2 makes it clear that you must ensure that your clients' interests are protected regardless of the interests of an introducer or fee sharer or your interest in receiving referrals. Outcome 9.3 makes it clear that you should ensure that; clients are in a position to make informed decisions about how to pursue their matter.

Collective investment schemes: Some land banking schemes are deliberately structured as ‘collective investment schemes' (CIS) to prevent investors making their own enquiries and applications for planning permission. A CIS is an arrangement that enables a number of investors to pool their assets and have these professionally managed by an independent manager. Problems may be encountered because of the need for consent from all plot holders or the managing agent before an application for planning permission, which may never be given. A CIS must be authorised by the FSA. The definition of a CIS can be found in section 235 of the Financial Services and Markets Act 2000 and you should consider whether a scheme which has not been authorised by the FSA might fall within that definition.

Handling investor funds: The promoters of Land banking schemes will often require you or your firm to hold investor funds in your client account. There are specific outcomes in chapter 11 of the SRA Code of Conduct 2011 in relation to undertakings. They may also ask you to pay the proceeds of sale to unconnected third parties, who may be based off shore, or purchase high value assets on behalf of the company, its members or directors in which case consideration should also be given to compliance with Rule 14.5 of the SRA Accounts Rules 2011 (the prohibition on providing banking facilities through your client account) - and compliance with your obligations under the Money Laundering Regulations and related legislation.

Enforcement action

Whilst the SRA is committed to working constructively with firms, the SRA will take enforcement action against individuals or firms that fail to address the issues and risks associated with land banking schemes. The FSA are also investigating and prosecuting operators and those associated with land banking schemes.

The Solicitors Disciplinary Tribunal have recently prosecuted two cases involving solicitors in land banking schemes which were found to be collective investment schemes. These cases are Stephen Peter David Murrell who was struck off the roll and ordered to pay costs in the region of £42,000 and Ian David Campbell Smith who was fined £10,000 and ordered to pay costs in the sum of £25,000.

Further assistance

If you require further assistance with understanding your obligations in relation to land banking schemes please contact the Ethics Helpline.

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