Land Banking Scams – Hope for investors and advice for the virtuous

Matheu Smith explains how investors caught with land banking scams may be able to recover their funds via the FSA or direct action.

Land banking is the practice of acquiring land and holding it for future profitable use, usually legitimately. However, land banking schemes have become a common basis for investment scams and the Financial Services Authority (FSA) estimates that such scams are a £200M a year problem.

Like all good investment scams the schemes are simple and plausible. First the scammers purchase a plot of land, typically agricultural land close to the periphery of an area of existing housing. The land is then subdivided into small plots often following the plan of what appears will one day become a housing estate. These small plots are then offered to investors with the potential for profit arising from the possibility of obtaining planning permission for the land to be developed.

During the boom years of the property market these land banking schemes seemed to offer investors a way to join in for a relatively modest outlay. Counter-intuitively the economic crisis of recent years seems to have triggered further growth of these schemes as investors searched for better returns on their investments, with interest rates on savings at record lows. Sadly, it is usually only the scammers that profit and those profits can be huge. Generally the scammers paid well under £10,000 per acre for the land but then sold on the subdivided plots at massive mark-ups, perhaps as much as 3,000 per cent.

The hints, suggestions or promises that planning permission will be obtained and lead to spectacular profits for the investors come to nought and investors are left as the not-so-proud owners of a small plot of greenbelt land with virtually no prospect of ever obtaining planning permission.

The land banking scams developed largely unchecked for many years. Most schemes offered genuine plots of land for sale in a manner that seemed to fall between the cracks of the various UK regulatory regimes intended to protect investors or to prevent false or misleading advertising. This was no accident, just as with earlier investment scams such as selling shares in casks of whisky, the scammers were deliberately trying to operate beyond the reach of the regulators. However as the problem has grown various agencies have begun to try to tackle it and the FSA has so far had the most success.

The FSA does not regulate the sale of land, but a feature of many land banking schemes was that the promoter would handle the planning application process. This feature and other factors meant that the schemes were collective investment schemes, which do come within the FSA’s powers under the Financial Services and Markets Act 2000. A collective investment scheme can only be established or operated by an FSA-authorised person. This has enabled the FSA to go to court to shut down a number of the land banking schemes that were being promoted by some of the worst scammers before more unwitting investors were drawn in. In the last 18 months the FSA has shut down eight firms that were operating land banking scams through which investors had lost £50 million.

Investors that have participated in land banking schemes against which the FSA has not yet taken action may need to take matters into their own hands. The FSA is actively seeking information on all land banking schemes so that it can check if they are legitimate (see www.fsa.com for more information and contact details). If it gets enough complaints or cogent enough evidence that a scheme was an unauthorised collective investment scheme then it may act.

Alternatively, investors can go directly after those that operated the schemes. In certain circumstances, the Financial Services and Markets Act 2000 gives individual investors the right to cancel the contracts that they entered into and claim their money back and compensation. Investors may also be able to do this on grounds such as ‘misrepresentation’ or ‘deceit’. In certain circumstances it may also be possible to bring claims against the individuals that made the false claims and even third parties such as lawyers, surveyors or planning consultants that were involved.

Complaining to the FSA will be far cheaper and easier than taking action directly against those involved, but the FSA may not act and, even if it does, any sums recovered may be shared amongst many investors and there probably will not be enough money to repay every investor in full.

Investors also need to realise that statutory ‘limitation periods’ may well prevent them from pursuing their claims after a certain period of time has elapsed. The start and length of the limitation period varies depending on the type of claim, but many expire six years after the start date. Accordingly, investors who bought land in 2006, 2005 or earlier should seek urgent advice.

Keystone solicitors, Matheu Smith and Tony Watts, have already been involved in helping investors to pursue the repayment of sums invested in land banking schemes. We can help investors to pursue claims against the scammers directly or help to gather and present the sort of evidence that will encourage the FSA to act.

For those operating or planning to operate legitimate schemes involving property managed as an investment the activities of the scammers has created a very real risk that you will come under very close regulatory scrutiny. If you would like advice about whether you should register with the FSA, which regulatory rules may apply to you and how to comply with them please get in touch with us.

Matheu Smith is a litigation lawyer with expertise in fraud and regulatory cases and Tony Watts is a specialist in the law governing the regulation of financial services.