The
Committee consisted of the following
Members:
Ainger,
Nick
(Carmarthen, West and South Pembrokeshire)
(Lab)
Ancram,
Mr. Michael
(Devizes)
(Con)
Bailey,
Mr. Adrian
(West Bromwich, West)
(Lab/Co-op)
Breed,
Mr. Colin
(South-East Cornwall)
(LD)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Clarke,
Mr. Charles
(Norwich, South)
(Lab)
Duddridge,
James
(Rochford and Southend, East)
(Con)
Field,
Mr. Mark
(Cities of London and Westminster)
(Con)
Hoban,
Mr. Mark
(Fareham)
(Con)
Hoyle,
Mr. Lindsay
(Chorley)
(Lab)
McCarthy-Fry,
Sarah
(Exchequer Secretary to the
Treasury)Mitchell,
Mr. Austin
(Great Grimsby)
(Lab)
Mudie,
Mr. George
(Leeds, East)
(Lab)
Smith,
Geraldine
(Morecambe and Lunesdale)
(Lab)
Timpson,
Mr. Edward
(Crewe and Nantwich)
(Con)
Williams,
Mrs. Betty
(Conwy)
(Lab)
Eliot Barrass, Committee
Clerk
attended the
Committee
Fifth
Delegated Legislation
Committee
Tuesday
9 February
2010
[Jim
Sheridan in the
Chair]
Financial
Services and Markets Act 2000 (Regulated Activities)
(Amendment) Order
2010
4.30
pm
The
Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):
I beg to move,
That the
Committee has considered the Financial Services and Markets
Act 2000 (Regulated Activities) (Amendment) Order 2010 (S.I., 2010,
No.86).
I welcome
you to the Chair, Mr. Sheridan. This is the first time that
I have served under your chairmanship, and I am sure that it will be
the first of
many.
The
order was laid on 19 January 2010 with the intention, subject to
parliamentary approval, of its coming into force on 24 February 2010.
It seeks to change the definitions regime for regulated activities, as
laid out in the Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001. The order before us seeks to exempt alternative
finance investment bonds from the current collective investment scheme
regulations, and create a new specified investment under the 2001
order. The order further seeks to introduce a unique regulatory
definition of alternative finance investment bonds for this
purpose.
The
change will benefit institutions looking to issue corporate sukuk by
creating regulatory clarity and reducing potential legal and compliance
costs. Under the Finance Act 2009, we introduced relief from stamp duty
land tax and tax on capital gains for any transactions undertaken as
part of the issue of alternative finance investment bonds. The purpose
of the legislation is to remove further obstacles to the issuance of
corporate sukuk in the UK.
The FSA has
estimated that the regulatory change would reduce the overall costs of
corporate sukuk issuance by around £35,000 for a sukuk of the
duration of five years.
Mr.
Mark Hoban (Fareham) (Con): The Minister described the
regulatory category as unique. However, my understanding of the
Governments philosophy, which we share, is that there should be
equal treatment for comparable sukuk and conventional products. From
looking at the Treasurys consultation, essentially, corporate
sukuk are treated on the same basis as conventional debt instruments.
Is that the correct basis? Is she not going slightly wider than the
point by suggesting that it is
unique?
Sarah
McCarthy-Fry: This is a unique regulatory definition of an
alternative finance investment bond, not unique to sukuk. That is
probably the differentiation that the hon. Gentleman was
seeking.
Mr.
Hoban: I am sorry. The principle that I am trying to
ensure that the Government stick to is ensuring that there is
comparable treatment. The Governments consultation was the
basis of putting financial investment bonds on a level playing field
with conventional debt instruments. Will the Minister confirm that that
is what the Government are
doing?
Sarah
McCarthy-Fry: I thought I had. That is
exactly what we are trying to do. Where alternative investment bonds
display characteristics similar to ordinary investment bonds, the
legislation puts them on the same footing. I am merely explaining the
definition. We hope that some of the problems
that people have had with corporate sukuk will be addressed by the
order, but that is not the only reason why it is on the
statute bookit covers the whole gamut of alternative
investments, provided that they are within the regulatory
framework. It is not specific to
sukuk.
Alternative
finance investment bonds refer to a type of financial instruments
commonly known as sukuk, or Islamic bonds, but can also refer to any
financial instrument with similar characteristics which replicate the
economic effects of conventional bonds. Sukuk aim to do that in way
that conforms to the principles of sharia, but sharia compliance is not
a requirement for the instrument to be treated as an alternative
finance investment bond under the order. The sharia-compliant features
of sukuk, which include the principle of mutual co-operation and risk
and profit sharing arrangements would mean that in some cases, they
would fall between the broad regulatory definitions of a collective
investment scheme under section 235 of the Financial Services and
Markets Act 2000. That arguably puts alternative finance
investment bond issuers at a disadvantage to issuers of conventional
debt securities, as authorisation of a collective investment scheme
involves application fees, ongoing supervisory fees and, more
importantly, internal and third-party costs associated with compliance
procedures.
Although the
structure of sukuk might be such that it does not fall within the
collective investment scheme regulations, its uncertainty was cited by
the Islamic finance industry as a barrier to the issuance of corporate
sukuk. In December 2008, HM Treasury and the Financial Services
Authority launched a joint consultation on the regulatory treatment of
alternative finance investment bonds. We had four policy options, the
first of which would introduce legislative amendments to exempt
explicitly such instruments from collective investment scheme
regulations and create a new specified investment under the regulated
activities order, and introduce a unique regulatory definition of
alternative finance investment bonds for that
purpose.
Option
2 was the same as option 1, but alternative finance investment bonds
would be defined by the existing tax definition. Option 3 was the same
as option 1, but would include alternative finance investment bonds
under the existing specified investment of creating or acknowledging
indebtedness, and option 4 was to do nothing. HM Treasury proposed the
first option, which would introduce legislative amendments to exempt
explicitly the instruments from collective investment scheme
regulations and create a new specified investment under the regulated
activities order, and introduce a unique regulatory definition of
alternative investment bonds for that purpose to be taken forward. The
20 responses to the consultation paper showed broad industry support
for that course of action.
The views of
the industry were summarised and the authoritys feedback given
in the second document published in October 2009. We receive three
responses to that during the second consultation phase and took those
views into account in our further refinement of the statutory
instrument. We intend the legislation to come into force on 21 February
so that the legislative changes and the changes to the FSAs
handbook can take effect at the same time. The effect of the order will
be to make alternative finance investment bonds a specified investment
for the purposes of the Financial Services and Markets Act 2000, and
afford them equivalent treatment to conventional bonds. I hope that it
will command the support of both sides of the
Committee.
4.37
pm
Mr.
Hoban: It is a pleasure to serve under your chairmanship
for the first time, Mr. Sheridan. I share the
Ministers optimism in hoping that it is the first of many such
occasions.
The
principle that both the Government and the Opposition subscribe to in
the treatment of sharia-compliant financial products is to ensure a
level playing field in both the tax and regulatory arenas. We recognise
some differences between the structure of the two groups of products,
but we also know that it is important to ensure a level playing field.
Its creation has meant that London is becoming a global centre for
Islamic finance. It is certainly one of the two leading centres outside
the middle east. There has been a range of measures, of which the order
is the latest, to ensure that the level playing field is in
place.
I
want to test the Minister on a couple of matters. A conventional debt
product does not require to be listed on a market to get the
appropriate regulatory or tax treatment, whereas the alternative
finance investment bonds are required to be listed in, I suppose, the
context of the statutory instrument as well as section 48A of the
Finance Act 2005, which gives a tax definition of alternative finance
investment bonds. Several respondents to the Governments
consultation process suggested that it was discriminatory for there to
be a requirement for the bonds to be listed. Given that principle of
equality of treatment, will the hon. Lady explain why there is
discrimination in the statutory instrument? There is a requirement in
article 77A(f)(i) and (ii) for a security such as that to be admitted,
so I should be interested to know why the Government are diverging from
the principle of common
treatment.
My
second point is linked to the first that I raised. The definition used
by the Government in the statutory instrument almost mirrors that of
section 48A, which defines an alternative finance investment bond.
There are differences between the two, which could lead to confusion.
For example, under section 48A(d)(i), there is a requirement for the
bond issuer to dispose at the end of the bond term of any bond assets
that are still in the bond issuers possession. In the
comparable provision in article 77A(2)(d), there is no such
requirement. That potentially creates confusion because someone could
comply with the regulatory definition in the statutory instrument but
still fall foul of section 48A. Will the Minister explain why the
Government have chosen to almost mirror the provisions in section 48A?
Is there not a risk of confusion between issuers, the regulator and the
tax authorities where a bond might satisfy one
set of criteria but may not satisfy another set? To make a slightly
broader point, why have the Government not sought to mirror precisely
the terms in the Finance Act 2005 in defining what an
alternative finance investment bond should
be?
Can
the Minister clarify the meaning in article 77A(2)(e) of the
requirement for the bond to make a reasonable commercial
return on the loan? In the consultation, a number of people
suggested that it was not necessarily the case that a conventional
product would provide what would seem to be a reasonable commercial
return, and it would be helpful if she could clarify that
discrepancy.
The
other point that I want to raise isI think the Government are
trying to correct this, but I am not clear that they have achieved
their goalthe issue raised in the consultation that the
alternative finance investment bond would have a fixed life, whereas
the reality is that corporate sukuk, along with other debt instruments,
may have an open-ended life. The Government chose not to change
definition 77A(2)(c), but then introduced in a new subsection
(3):
The
reference to a period in paragraph (2)(c) includes any period specified
to end upon the redemption of the bond by the
bond-issuer.
Can
the Minister confirm that that means that an alternative finance
investment bond can be issued with an unspecified end date, so that it
could be perpetual or it could be redeemed at the discretion of the
bond
issuer?
The
statutory instrument is relatively straightforward. I have no further
points to
raise.
4.43
pm
Mr.
Colin Breed (South-East Cornwall) (LD): The measures are
uncontroversial and we welcome the intention of getting clarity and
creating a level playing field. My only thoughts are that this is a
difficult area on which to get completely level playing fields, because
they are different systems of finance. The overall objective to try to
broaden the opportunity for Islamic financial products and to make the
UK at least a bit of a leader in thisat least in the West,
anywayis a good objective, which we support. Overall, the
objectives set out by choosing option 1 appear to be the easiest way
forward. I suspect that, as we develop more products along those lines,
we will bump up against some existing regulatory aspects of FSMA and
such. We are happy to support these relatively uncontroversial measures
and hope that they will produce an opportunity for a wider market and a
greater availability of products under Islamic
finance.
4.44
pm
Sarah
McCarthy-Fry: I thank both hon. Members for their
contributions to the debate. As I said at the start, we believe that
alternative finance investment bonds should be afforded as far as
possible a level playing field with their conventional equivalents.
There has been discussion about the aim of the order, which is to
create clarity in the regulatory treatment of corporate sukuk and
reduce potential legal and compliance costs, which have so far been a
barrier to issuance. The hon. Member for Fareham and I recently
attended an Islamic finance conference in the City, and the matter was
raised by several people.
A question
was asked about the difference between the definitions of alternative
finance bonds used for tax and regulatory purposes. There are different
requirements for tax and regulatory authorities and the distinction
will ensure that the regulatory regime is not unintentionally affected
by changes to or interpretations of tax legislation. The term
alternative finance investment bond will be used for
both for the sake of consistency, even though the definitions
differ.
I know there
were some objections to the mandatory listing provision. We believe
that it is necessary in order to limit the risk of regulatory
arbitrage. The risk may be low, but we do not think that consumers
should be exposed to inappropriate and avoidable risks. However, that
position will be reviewed in two years as we see how it is used in
practice.
I was asked
a question about an open-ended life versus a fixed term, and article
77A(3)(d) means that open-ended sukuk can be issued. Another
question
concerned the reasonable commercial rate of return and whether that
would restrict the types. We think the clause is necessary as it seeks
to ensure that only instruments that display the characteristics of a
debt security can be alternative finance investment bonds. As
with any financial instrument, the reasonable rate of return
is not inflexible and can vary, depending on issuer, value, duration
and a number of other economic circumstances, and there is further
guidance available in the FSAs perimeter
guidance.
The
purpose of the regulations is to remove uncertainty over the regulatory
treatment of alternative finance investment bonds, which includes some
types of sukuk. The legislation is predicted to reduce the overall cost
of issuing sukuk and, as I said, we are committed to reviewing the
regime after a period of two years to ensure the rules are functioning
as intended. With that, I hope we can approve the
order.
Question
put and agreed to.
4.47
pm
Committee
rose.