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Consultations & legislation
10 December 2008
This document sets out the proposed legislative framework for the regulatory treatment of ‘Alternative Finance Investment Bonds’. AFIBs refer to a type of financial instrument commonly known as sukuk or Islamic bond, but can also refer to any financial instrument with similar characteristics. This consultation paper considers the regulatory policy options for these instruments. This is a joint consultation between HM Treasury and the Financial Services Authority (FSA) (referred to hereafter as 'the Authorities’).
Sukuk are one of the most prominent instruments used in Islamic finance. Since 2003, there have been several initiatives by the Authorities to create a ‘level playing field’ for Islamic finance. For example, the Government has introduced, and has proposals to further introduce, various tax changes with respect to AFIBs.
Classifying Islamic financial instruments, including sukuk, under existing regulatory frameworks has posed challenges in the UK and other jurisdictions. Although many instruments are designed to replicate the economic functions of certain conventional financial products, their legal structure and risk characteristics may be different. It may therefore be difficult to map these products into the existing legal framework. Some of these instruments currently appear to fall within the definition of a Collective Investment Scheme (CIS) as set out in the Financial Services and Markets Act (FSMA 2000). However, alternative interpretations exist, and assessment is currently conducted on a case-by-case basis.
HM Treasury are seeking to introduce legislative changes to align the regulatory treatment of AFIBs with conventional debt securities. Four policy options have been identified:
The preferred option is option 1. As with options 2 and 3, its main benefit is that it treats AFIBs as conventional bonds. This provides clarity about the regulatory treatment and compliance costs for AFIBs and thus facilitates UK issuance of these instruments. It also creates a level playing field between AFIBs and the conventional bonds that they mirror in economic substance. Option 1 produces this benefit in a flexible and simple manner that creates legal certainty. It does not distinguish between private and public issuance of AFIBs.
Option 1 may incur costs associated with upgrading the FSA’s technology platforms which record regulatory permissions and other associated systems. The scale of these costs is presently unclear and the FSA are currently conducting a detailed assessment to estimate the costs associated with these changes. If the costs are unavoidable and material, the Authorities will examine the feasibility of other legislative solutions that would avoid such costs (such as those set out in option 3 of this document).
The consultation is available in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website. For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.
On 14 October 2009 HM Treasury published a feedback statement to the consultation. This document summarises the responses received to the above consultation, and provides feedback on these.
