Mr.
Hammond: To take the Minister back a moment, I have not
been following the emergence of this market as closely as my hon.
Friend the Member for Hammersmith and Fulham has, but she just said
that one of motives of the Government was not that of attracting a
different class of investor to UK Government securities. That surprises
me. I had always assumed that one of the motives for looking at this
initiative was the assumption that there was a class of potential
investor, potential buyers of UK Government securities, who felt
excluded from that market at present because of faith-based
restrictions on the products they could be involved with. That could
include domestically based investors as well as potential overseas
buyers of UK Government paper. Why does she not regard that as a
potentially beneficial avenue, a potentially beneficial source that
could be tapped by this
initiative?
Kitty
Ussher: That is a very important point. As I said when I
discussed the indirect effects that could be positive and affect the
sharia-compliant retail market, it may be, for example, that a
sharia-compliant bank, or a bank offering sharia-compliant current
accounts or savings accounts to the British population might find it
useful to have the whole investment chain sharia-compliant. In that
sense, it will attract a different type of investor. I was thinking
more of whether we are trying to tap funds from the middle east and
extremely wealthy people who want to invest in sharia-compliant
securities. I would be delighted if they wanted to invest in UK plc and
they would be welcome to do so, but our research suggests that a
slightly higher return is required to guarantee that we would attract
that type of investor and we do not think it is in the UK
taxpayers’ interests to arrange a product specifically to
provide that kind of return. Of course, there is nothing in a
sharia-compliant sovereign issue that implies that one has to be a
sharia-compliant investor in order to buy it; we did not think it would
work because, if we had to offer a higher return in order to attract
some of the individuals I just referred to, everybody would want it and
so there would be distribution
problems. The
most important point is that we aim to ensure that when these products
are launched on the market, as far as the end user is concerned, they
look the same as any other T-bill. They are obviously structured in a
very different way, but we hope to structure it in the least
complicated way so that the sukuk, to the end user, does not look any
different in risk from a conventional T-bill. That is why we are not
going to go for extremely complicated products. I should clarify what I
mean by “uncharted waters”. We are in uncharted waters
because we have not done a sukuk sovereign issue before, but the actual
products we intend to launch, if we decided to proceed down this route
are not uncharted waters at all—we are proposing a plain-vanilla
ijara structure of
the kind that is widely traded internationally and so would not have the
potential for margin-grabbing from the institutions and banks that, as
the hon. Gentleman mentioned, could take an enormous amount out of it.
Our intention is that the products should be completely understood by
the market and should have the same risk rating as any other sovereign
issue. The British Government are rightly proud of their triple-A
rating in that
regard. Mr.
Hands: I wish I could share the Minister’s
confidence that she will avoid banks trying to take out too large a
margin from these transactions. The language she is using highlights
the dangers here. She was talking about how the bills would look
conventional. That is what has happened in the past: people have bought
into products where the issuer was a triple-A rated Government.
Denominated in their own currency, they looked as safe as houses, but
turned out to be anything but. The Minister talked about easily
tradable securities. The Government expected a rolling market of about
£2 billion in principle of those securities. One of
the answers to their consultation said that in order to guarantee a
liquid issue, they would need a principle probably in excess of
£1 billion. Is she envisaging a large number of pieces of
£25 or £50 million, or does she envisaging one or two big
benchmark issues of £1 billion? That will make an enormous
amount of difference to the likely success of the measure, and
especially—to return to a point that I made—to the
reputation of the UK as a
borrower.
12.15
pm
Kitty
Ussher: We have not decided precisely the
nature—
Mr.
Hands: Will the hon. Lady give us an
indication?
Kitty
Ussher: I cannot give an indication, because we have not
decided. We are holding a consultation about the nature of a programme
of issuance. We think that it would be about £2 billion in
total. We want to make sure it is as successful as possible, and we are
taking advice on these points. We have not decided whether to proceed,
but all those points will become clear if and when we do
so.
Mr.
Bone: The Minister is working hard to explain the
Government’s position, but there are many ifs and buts, and a
great deal of uncharted water. She has said: “We have not made a
decision on that; we are delegating it to regulations and we will bring
it in when we think it is in the national interest.” Would it be
better not to introduce anything at this stage, and come back next year
when Ministers have made a decision? The measure could be debated in
Parliament before we go into action. It is not clear why there is a
rush to do this now, in such a confusing
way.
Kitty
Ussher: I am sorry if the hon. Gentleman thinks that I am
confusing him. I am attempting to create some clarity and light amid
some rather large questions that were raised this morning, and I will
do so for as long as it takes. We thought it was simply sensible
government to take the power in this year’s Finance Bill.
Obviously, if we decide not to proceed with a Government sukuk
issuance, that power will not be used. We have not yet decided whether
to proceed; we
have said that we will decide—or at least give an
update—by the time of the next pre-Budget report. If the
Opposition wish to oppose the taking of that power, I advise them not
to do so, given the huge consensus of support in the City of London for
our proceeding as fast as possible. I will continue to attempt to shed
as much light as possible on the matter, in the hope that that will
reassure the hon.
Gentleman.
Mr.
Bone: I was not trying to imply that the Minister was
confusing; I was just saying that the legislation is confusing. I
understand that, if the measure is put into practice, it will go
through the affirmative statutory instrument process. The problem with
that is that we cannot amend it: we have to accept or reject it. That
is one of the disadvantages of not doing this through primary
legislation.
Kitty
Ussher: If the hon. Gentleman thinks, either at this
stage, or at that later stage, that we are not doing the right thing
for Britain, he is within his rights to reject it. I must say, however,
that given that the Debt Management Office routinely issues Treasury
bills, on a minute-by-minute basis—that is a completely standard
procedure—the idea that we have to debate every single change on
the Floor of the House in great detail, together with the ability to
amend the measure, could be destabilising. We think that we have done
it right: we are having a debate now, and if we decide to proceed, the
regulations will be laid according to the affirmative procedure. We are
consulting in the open as fully as we possibly
can.
Kitty
Ussher: I am conscious of the fact that I have an enormous
number of questions to answer, so I will give way to the hon.
Gentleman, then move on to another
question. Mr.
Hoban: The Minister referred to the importance of the
issuance for the development of the retail market in the UK. What
assessment has she made of the appetite for a £2 billion
issuance? Are there enough savings in the UK market to absorb bills of
that extent, or does she expect that some of these bills will be sold
to overseas investors?
Kitty
Ussher: We do not mind who buys Treasury bills. We do not
think that there will be any lack of appetite for them, compared with
other products. One reason why we decided to proceed with a
consultation on T-bills, rather than larger gilts, is that we believe
that they will be even more liquid, and that demand is extremely well
established. I do not know whether that answers the hon.
Gentleman’s question.
Kitty
Ussher: I feel as if I am going up and down like a yo-yo.
I will give way to the hon. Gentleman one last time, and then I will
make
progress.
Mr.
Hoban: The Minister has not answered my question. What I
seek to understand is what appetite there is among existing UK-based
Islamic retail financial organisations for an issuance of about
£2 billion. Is there £100 million in savings out there to
be invested in the bills, or is it £2 billion,
£3 billion or £4 billion?
The Government talk about a £2 billion issuance programme. It is
important to know what appetite in the institutions the measures aim to
help and develop.
Kitty
Ussher: It is entirely up to those institutions whether
they wish to purchase Government Treasury bills and invest in them. We
have not taken the £2 billion and disaggregated it; it is
entirely up to the market, which is extremely liquid. We have examined
the amount of issuance required to achieve sufficient liquidity to
ensure that the bills can be traded easily, as well as demand among
investors, which is how we came up with the figure £2 billion,
but it would not be right to set a target for the proportion that
should come from Islamic retail institutions as opposed to the broader
investor base which, thankfully, would happily invest in a large number
of Government securities whether they were sharia-compliant or not.
[Interruption.] I am going to make
progress. I
was asked about foreign currency issuance. It is right that we have
taken powers to make payment in foreign currency, but we have no
intention of issuing any sukuk not denominated in sterling. We are
taking the power more broadly, simply to mirror the provision in the
National Loans Act 1968 that gives the Treasury the power to borrow in
foreign currency. To put it in context, the Treasury issued a five-year
US dollar bond in 2003, but it has not issued bonds denominated in a
foreign currency since then, and we have no intention of doing so in
that area. It is simply a matter of legal
consistency. The
original question posed at the beginning of this debate was how we
would ensure sharia compliance. As our consultation document says,
there are a number of ways for institutions to ensure the sharia
compliance of similar securities. They can use a board of
internationally recognised scholars appointed by a bank or other
institution; their own board of internationally recognised scholars; or
an internationally recognised Islamic standard-setting institution such
as the Accounting and Auditing Organisation for Islamic Financial
Institutions or the Islamic Financial Services Board.
We have not
decided which of those that we will use, but it is obviously in our
complete and manifold interest to ensure that the security, if and when
we launch it in the market, is perceived as sharia compliant. We will
take advice from legal firms and investment banks if we pursue that
route on issuance. It is standard practice for advisory firms to
approach sharia scholars on behalf of their client, which in this
instance would be the Government. We will make our procedure entirely
clear.
Mr.
Hands: What happens if the underlying asset in the vehicle
or company referred to in the schedule changes? Surely, that would
prompt another assessment of sharia compliance. What would happen if
the new assessment said that the bills were no longer sharia-compliant?
Presumably, the market would tank and the UK’s reputation as a
borrower would again suffer a severe negative
impact.
Kitty
Ussher: I sometimes get the impression that the hon.
Gentleman is trying to talk the measures down. I am not sure that that
is in the national interest. I would be interested to know whether, if
we solve the problems
that he identifies, he would be in favour of
proceeding— [Interruption.] The type of
asset has not been decided; it will be made publicly known once it is.
It will be sharia-compliant, so if we decide to rotate what is in the
special purpose vehicle, we will not put anything into it that is not
sharia compliant, for precisely the reason that he mentioned. We have
no incentive to get into that
situation. On
the issue of assets, there has been understandable uncertainty about
who will own the asset in the ijara structure if we decide to issue a
Government sukuk. The asset will remain on the Government’s
balance sheet, and we will keep full control over whatever asset it is.
We are simply designing a legal construct that is sharia compliant.
Ownership or control of the asset will not be passed over to anybody
outside Government. It would not be in our interests to do
so. That
point relates to some of our earlier discussions about risk. The
measure involves risk sharing, in the sense that an asset is subdivided
and used to launch Treasury bills in the market that are backed by that
asset. We will not proceed if there is any additional risk. The risk
will be exactly the same as that for any other sovereign security that
is issued. The sharing comes from using a special purpose vehicle to
securitise and subdivide the asset so that there is more than one
holder. That is where the sharia-compliant sharing notion comes from. I
hope that that answers the questions asked by Opposition
Members. The
issue of a double charge for stamp duty land tax was raised. We are
aware of that issue, and we announced in the Budget that we will
address the problem in next year’s Finance Bill after
consultation. The consultation document is due to be published on 26
June.
Mr.
Hoban: If that issue, which is important in structuring
the product, is to be addressed in next year’s Finance Bill, why
can we not debate the measure in next year’s Finance
Bill?
Kitty
Ussher: Because we thought it sensible to take the power
now. We wanted to demonstrate to the constituency with which we are
working that we are serious about doing this. We also wanted to
increase the opportunities for debate, which I would expect the hon.
Gentleman to
favour. A
point was raised about whether the Debt Management Office will swap the
proceeds that it receives from any potential sukuk issuance. I have
said that we will undertake only sterling issuance, so the question of
swapping the proceeds back into sterling does not arise. I am advised
that the issuance of a sukuk will not require the use of swaps or other
derivatives. I hope that that reassures the hon. Member for Hammersmith
and Fulham even further. While we are in uncharted waters with the
possibility of the Government issuing a sukuk, it is not perceived as a
complicated product by the end
user.
| 
