The UK government may be stalling on the issuance of a sovereign sukuk in the wholesale sterling market, but the country took a step nearer to facilitating the issuance of the first UK corporate sukuk. Come end of February 2010, the necessary final legislation should be adopted by the House of Commons following the introduction of The Financial Services and Markets Act 2000 Order 2010 by Treasury to support Islamic finance and the issuance of corporate sukuk within the UK.
According to the Treasury, Order 2010 will help to provide a level playing field for corporate sukuk within the UK and provides clarity on the regulatory treatment of corporate sukuk, reducing the legal costs for these types of investments and removing unnecessary obstacles to their issuance.
“The Financial Services and Markets Act 2000 Order 2010 explicitly exempts alternative finance investment bonds (AFIBs), a class of debt-like security which includes sukuk, from collective investment scheme (CIS) regulations. It introduces a unique regulatory definition of an AFIB, removing uncertainty about the regulatory treatment of corporate sukuk,” explained a Treasury statement.
In a note to the order, the Treasury states: “This order inserts a new article 77A into the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) to make alternative finance investment bonds a specified investment for the purposes of the Financial Services and Markets Act 2000. New article 77A(2) provides that arrangements fall within article 77A if they meet a number of conditions, as set out in sub-paragraphs (a) to (f).”
The measures come only a week or so after the Luxembourg tax authorities published a new tax circular on the treatment of a whole range of Islamic finance products including Murabaha, Musharaka, Mudarabah, Istisna, Ijarah, Ijraha wa Ikitina and sukuk.
Perhaps a coincidence is the development in Korea where The Strategy and Finance Committee of the country’s National Assembly (Parliament) is set to approve a bill aimed at facilitating tax neutrality for the issuance of sukuk in Korea during its next sitting at the end of February 2010. The vote for the adoption of the bill was postponed in December 2009 because of a lack of parliamentary time due to an unscheduled debate dominated by the two main parties — the Grand National Party and the Democratic Party — on further fiscal measures introduced by the Government aimed at mitigating the ongoing effects of the global financial crisis on the Korean economy.
The move has been welcomed by Islamic finance market players and potential issuers in the UK. Sukuk, according to the Treasury, are a broad class of financial instruments designed to replicate the economic function of bonds, but with a structure which complies with Islamic financial principles. Although there is an obvious appeal to the Muslim business community, sukuk, added the Treasury, can be issued and bought by everyone irrespective of creed and ethnicity.
“The government’s objectives on Islamic finance,” reiterated Exchequer Secretary to the Treasury Sarah McCarthy-Fry, MP, “are to enhance the UK’s competitiveness in financial services by maintaining the UK’s position as a Western leader for international Islamic finance; and to ensure that everybody, irrespective of their religious beliefs, has access to competitively priced financial products. This measure is another important step in the development of the Islamic finance sector in the UK and will help to provide a level playing field for Islamic financial products in this country. It is good news for the UK economy and for our Islamic finance industry.”
The introduction of the latest measures to support corporate sukuk issuance follows a series of legislative changes introduced by the last three Labour governments toward creating a “level playing field” for Islamic financial products.
However, classifying Islamic financial instruments, including sukuk, under existing regulatory frameworks did pose challenges for the UK authorities like for those in other jurisdictions, especially non-Muslim ones.
In December 2008, Treasury jointly with the Financial Services Authority (FSA), launched a “Consultation on the Legislative Framework for the Regulation of Alternative Finance Investment Bonds (sukuk)” which set out the proposed legislative framework for the regulatory treatment of “Alternative Finance Investment Bonds”. The order in fact takes into account responses received by Treasury to its consultation which focused on definition of an AFIB as similar in characteristics to a conventional bond, its regulation as such, mandatory listing of AFIB’s, and tax provisions for AFIBs. Respondents to the consultation include top City law firms, Islamic banks in the UK, other major financial institutions, community organizations and professional bodies.
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.
“In line with our efforts toward a level playing field on tax overall,” added McCarthy-Fry, “Treasury and the FSA have been working to remove barriers and uncertainty in the regulation of alternative finance investment bonds. Following constructive consultation with industry, the statutory instrument has now been laid before Parliament, and we are confident that the new regulations will come into effect by the end of February. These measures will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate sukuk in the UK”.
