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Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2010

My Lords, it is good to see your Lordships again. It is also good to see such refreshing, young faces—not the sort who had to be brought in to be seated behind Mr Cameron when he spoke to so-called university students at a lecture earlier this week, who subsequently proved not to be students of the institution in question. These certainly are students of the institution in question: the Opposition. This order seeks to make a change to the definitions regime for regulated activities, as laid out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Specifically, the order seeks explicitly to exempt alternative finance investment bonds from the current collective investment scheme regulations and to create a new specified investment under the regulated activities order. The order further seeks to introduce a unique regulatory definition of alternative finance investment bond for this purpose. This change will benefit institutions looking to issue corporate sukuk by creating regulatory clarity and reducing potential legal and compliance costs. In the Finance Bill 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 this legislation is to remove further obstacles to the issuance of corporate sukuk in the UK. The FSA has estimated that these regulatory changes would reduce the overall costs of corporate sukuk issuance by around £35,000 for sukuk of five years’ duration. It may help the House if I briefly outline what alternative finance investment bonds are, how they are currently treated within the regulatory framework and the background to this order. Alternative finance investment bonds 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. These instruments replicate the economic effects of conventional bonds. Sukuk aim to do that in a way that conforms with the principles of Sharia. Sharia compliance is not a requirement for an instrument to be treated as an alternative 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, mean that in some cases these would fall within the broad regulatory definition of a collective investment scheme in Section 235 of the FSM Act 2000. Arguably, that puts alternative finance investment bond issuers at a disadvantage to issuers of conventional debt securities, as authorisation as 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 may be such that they do not fall within the collective investment scheme regulations, this uncertainty was cited by the Islamic finance industry as a barrier to the issuance in the UK of corporate sukuk. In December 2008, Her Majesty’s Treasury and the FSA launched a joint consultation into the regulatory treatment of alternative finance investment bonds. Four policy options were identified. Option 1 was to introduce legislative amendments to exempt explicitly these instruments from collective investment scheme regulations and create a new specified investment under the regulated activities order and to introduce a unique regulatory definition of alternative finance investment bonds for this purpose. Option 2 was the same as option 1, but with alternative finance investment bonds being defined by the existing tax definition. Option 3 would be the same as option 1 but would include alternative finance investment bonds under the existing specified investment of creating or acknowledging indebtedness. Option 4 was to do nothing. HM Treasury proposed that the first of those—to introduce legislative amendments to exempt explicitly these instruments from collective investment scheme regulations and create a new specified investment under the regulated activities order and to introduce a unique regulatory definition of alternative finance investment bonds for this purpose—be taken forward. The 20 responses to the consultation paper showed that there was broad industry support for that course of action. The views of the industry were summarised and the authorities’ feedback given in a second document, published in October 2009. We received three responses to this during a second consultation phase and took these views into account in our further refinement of the statutory instrument. We intend that the legislation will come into force on 24 February so that the legislative changes and the changes to the FSA’s handbook can take effect at the same time. The effect of the order before the House today will be to make alternative finance investment bonds a specified investment for the purposes of the Financial Services and Markets Act 2000 and to afford them equivalent treatment to conventional bonds. I beg to move.