Article 3 of the Collective Investment Schemes Order (SI 2001/1062) (the Order) makes it clear that “A personal pension scheme [is] not … a collective investment scheme“, but it doesn’t tell us whether “personal pension scheme” includes the mechanism linked to the pension scheme, which is used to invest that scheme’s assets.

In Ian Gray & Associates Limited -v- Investments Limited (in liquidation), the High Court found that the reference to “personal pension scheme” in article 3 of the Order does include the mechanism that’s used to invest the scheme’s assets – even when that mechanism relies on 3rd-parties. However, the Order is “not easy to construe …different minds could reasonably take different views … and hence … an appeal would have a real prospect of success”. So “permission to appeal” was granted. It’s not yet known whether the appeal will be pursued.

Ian Gray & Associates Limited (IGA) was an independent financial advisor, and an Appointed Representative of Investments Limited (IL). Relevant IGA clients transferred their pension funds into a bespoke self-invested personal pension (SIPP). IGA’s clients’ funds were pooled in the hands of the SIPP trustee, before being transferred to a 3rd-party for investment. The 3rd-party was a broker, and it was expected to invest “the pooled fund on the instructions of investment managers under consultancy with IGA, IGA having entered into discretionary fund management agreements with each of its clients“.

Under section 235 of the Financial Services and Markets Act 2000, “collective investment scheme” means:

“(1) … any arrangement with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements … 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 … do not have day-to-day control over the management of the property …

(3) The arrangements must also have either or both of [these] characteristics: (a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; [and/or] (b) the property is managed as a whole by or on behalf of the operator of the scheme“.

It was common ground between IGA and IL that, if article 3 of the Order had not been made, when IGA’s clients’ funds were pooled in the hands of the SIPP trustee, a CIS would have been created. But there was a dispute between them about whether the 3rd-party / investment managers / IGA investment mechanism was part of the “personal pension scheme“, or not. If the investment mechanism was part of the “personal pension scheme“, it wouldn’t be a CIS; but if it wasn’t part of the personal pension scheme, the opposite would be true.

The Court found that “If the pensions exemption did not include the mechanism for investment, a personal pension scheme could never amount to a CIS“, so article 3 would not be required. “[T]he pensions exemption would have no function unless it covered such pooling and investment as happened here. Pension schemes have to invest to provide pensions. If there is more than one participant in the pension scheme, there is necessarily a pooling of funds as a preliminary to investment. The fact that the actual investment was directed by IGA rather than [the] operator or … trustee [of the SIPP] seems to me irrelevant. The [first instance] decision in [the FSA -v-] Fradley [2004 EWHC 3008] shows that there can be a CIS without any actual investment … but it does not show how the pensions exemption would have a function if the pooling and subsequent investment carried out for the … SIPP fell outside it. Hence, in my judgment, the investment arrangements are to be treated as forming part of the … SIPP for the purpose of the pensions exemption. That is, the investment arrangements do not amount to or form part of a CIS“.

Unfortunately, like article 3 of the Order, this part of the judgment is “not easy to construe” either. However, the Court’s reasoning seems to be flawed in at least two different ways.

(1) Article 2 of the Order defines a “personal pension scheme” as “a scheme or arrangement … having or capable of having effect so as to provide benefits to or in respect of people (a) on retirement; (b) on having reached a particular age; or (c) on termination of service in an employment” (emphasis supplied).  It is not therefore true to say that “If the pensions exemption did not include the mechanism for investment, a personal pension scheme could never amount to a CIS“. If two or more people are participating the relevant “personal pension scheme”, there will be pooling, and there would therefore be a CIS, if article 3 had not been made. It’s not therefore necessary to include the investment mechanism to secure the pooling required to create the CIS, which article 3 was made to “cancel”.

(2) The Court quotes from chapter 12 of the FCA’s Perimeter Guidance Manual, which includes a question: “I intend to operate a personal pension scheme under which members will acquire benefits derived from the management of a pool of assets. Will the scheme become a [CIS]?” And an answer: “No. Personal pension schemes … are specifically exempted from being [CISs] However, where a personal pension scheme invests in a pooled investment vehicle of some kind, that vehicle may itself be a [CIS] unless another exemption applies to it”.  In other words, a personal pension scheme, and the investment vehicle in which the scheme’s assets are invested, are different things; the investment vehicle may or may not be a CIS; and it’s CIS / non-CIS status will not be affected by the CIS status of the personal pension scheme, one way or the other. This doesn’t necessarily mean that the investment mechanism in this case was a CIS; but it seems to suggest that the mechanism has, or at least could have, its own CIS / non-CIS status, and that a separate analysis is required. If that’s right, that analysis hasn’t been done yet; and it will now fall to the Court of Appeal to do it (if the appeal in the current case is pursued).

That doesn’t necessarily mean that the Court’s decision in Ian Gray & Associates Limited -v- Investments Limited (in liquidation), is wrong. But it might. And only the Court of Appeal can really tell us either way.


FT Adviser has published two articles about this case, and they’re available here and here. They include commentary about the possible ramifications of the Court’s decision.

Here are some additional thoughts for Principals, Appointed Representatives (ARs) and 3rd-party investment mechanism operators, who use arrangements like those described in the Ian Gray case.

The FCA (if asked) is likely to say that:

  • Principals, ARs, and investment mechanism operators should regard the Ian Gray decision as a warning that, in some circumstances, CIS issues can arise when SIPP assets are invested using 3rd-party investment mechanisms;
  • FCA-authorised IFA’s should therefore carry out enough due diligence on the SIPP and investment mechanisms they use or recommend, for them to be able to satisfy themselves on reasonable and rational grounds that their arrangements are lawful, and their clients’ assets will not be put at risk by using them. If an IFA cannot satisfy itself about each of these things, it should not use or recommend the relevant arrangements. If an IFA fails to carry out adequate due diligence, or it advises a consumer to invest regardless, regulatory action may follow;
  • Principals should carry out enough due diligence on the mechanisms being used and recommended by their ARs, for them to satisfied that their ARs are not using or recommending arrangements that are unlawful or might put consumer assets at risk. Principals that cannot satisfy themselves that their ARs are only using and recommending lawful and appropriate SIPP and investment mechanism arrangements, should intervene to stop the relevant arrangements being used. If a Principal fails to intervene, regulatory action may follow;
  • All other things being equal, Principals, ARs and investment mechanism operators should regard regulatory action as more likely now, than it was before the Ian Gray decision was published;
  • If the Ian Gray decision is appealed, and the Court of Appeal finds that the investment mechanism was a collective investment scheme,  the risks for other Principals, ARs and investment mechanism operators will increase still further.


Posted by Cooley