Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018

Lord Tunnicliffe Excerpts

Monday 25th June 2018 Lords Chamber

Finally, as we look at this crucial sector, the whole issue that is not being tackled is Islamic student finance. The Government did their consultation back in 2012, knew exactly what they had to do and now intend to rectify the problem—but not until 2020, leaving year after year of students who feel that they cannot take out a student loan on conventional terms but are unable to access that kind of financial support to go to university and to follow the studies that we all want them to be able to follow. Surely, as the Government recognise the urgency of making sure that the sukuk market is liquid, viable and growing in the UK, they could put their skates on to deliver something for our students, who need an equivalent instrument to deal with student finance.

[Lord Tunnicliffe (Lab)]

My Lords, I too thank the Minister for introducing this instrument. The noble Baroness, Lady Kramer, says that we all know that the sukuk is an important feature in the growing and important Islamic finance sector. I have to tell her that before Friday, I did not even know that the sukuk even existed, and this instrument has truly spoiled my weekend.

Clearly, I welcome London’s aspiration to become a major Islamic finance centre, and this caused me over the weekend to try to understand what the differences are and what is special about Islamic finance. I found six characteristics set out in one of my searches, which are quite positive. I will pick three of them. There is a,

“prohibition on uncertainty—to ensure that no party has an unfair advantage over another … prohibition on speculation—profit should be made through hard work and effort, not purely by chance”,

and,

“no unjust enrichment”.

At the level of principle, it seems that this style of finance is intrinsically moral and that we will have nothing to fear from it being a major part of our financial system.

I note that a sukuk, to comply with Islamic law, is like a bond, but it is based on an asset, not debt-based. I also note that they already exist; indeed, a major sukuk was issued here in February for £250 million. That started to confuse me—why do we want these instruments if they already exist? I therefore tried to understand it, and traced it back—for once I read the order, because I could not immediately understand the Explanatory Memorandum. I got as far as FiSMA Article 77A, and after that, I am afraid, I gave up. I could not see how the mechanism of the order was such as to embrace the sukuk as part of the legislation. I would be grateful if the Minister could take me through the steps. However, assuming that the order embraces the sukuk and fully integrates it into legislation, what are the consequences? What changes will there be to the way in which the instruments are supervised, sold, traded and taxed? I would also like to know of any other features of the instrument that are changed.

On the matters raised by the JCSI, which were admirably expressed by the noble Lord, Lord Lexden, and supported by the noble Baroness, Lady Kramer, I too agree with the conclusions of the 26th report. The committee says that the case for an order coming into force the day after it is made should be compelling, and repeats its proposal that the normal period of time should be a minimum of 21 days. Without going on about this point, I register my agreement with that. This is particularly worrying because it seems a bad precedent, going into a period during which we expect to handle many SIs. Setting that precedent at this point is bad news, and I put down a marker that we will continue to resist it as the SI scene develops in the light of Brexit.

I also make a plea about the Explanatory Memorandum. I am afraid that it did not work for me. I accept that I may be a bear of little brain, but that should be the test. A decent Explanatory Memorandum should, to a bear of little brain, be straightforward and readable without excessive prior knowledge of what the order does, and describe why and how it does it. For me, at least, this Explanatory Memorandum failed. It is important that the standards of Explanatory Memoranda are held to a high level. I remember making some major changes to FiSMA that introduced bail-in, and the Treasury wrote some brilliant memoranda explaining how it worked. I would hope that the high standard it achieved in the past could be repeated in the future.

Finally, returning to the sukuk, if the market in these instruments is to grow rapidly and become large, one has to recognise that it is innovatory in the sense that it has not been a big part of the market in London, and it could—I am not saying that it does—create systemic risk. After all, the crisis was caused by the way in which clever instruments reacted with each other. Can the Minister therefore assure me that someone—whether at the FCA, the Bank of England or the Treasury—has done an analysis to assure themselves that encouraging this style of instrument does not develop systemic risk in the marketplace?

[Baroness Morris of Bolton (Con)]

My Lords, I had not intended to speak, but I declare an interest as a chairman of the Centre for Islamic Finance at the University of Bolton. During the financial crisis, the Islamic banks were not affected in the same way, because there is a much better relationship between the customer and the issuer. I place on record my thanks to the Government for ensuring that Islamic financial instruments are not an odd investment on the side but are becoming part of the mainstream. Many people can now participate in them, and certainly in Asia, where the markets are booming, a lot of non-Muslims are also taking part in these instruments because they rather like the idea of them. I was going to sit very quietly, but I thought I would place that on record. I also thank the City, which has put a lot of effort into making the UK such a strong centre for Islamic finance.

--- Later in debate ---

The final question was from the noble Lord, Lord Tunnicliffe, who asked how this might work in practice. The reality is that the instrument expands the definition of AFIBs to allow these to be admissible for trading on additional types of financial trading venues, known as MTFs or OTFs. These are markets for the issuing of trading of debt securities, which are regulated on platforms operated. The London Stock Exchange’s Alternative Investment Market and International Securities Market are examples of markets in which these instruments would operate.

[Lord Tunnicliffe]

Can I check that point? My understanding is that these are not debt securities but asset-backed securities, and it is hoped that these platforms will change their rules so that it can be done.

[Lord Bates]

The securities that are there are allowed to deal with a variety of different securities; they are not limited in the asset class that they can use. It is simply a catch-all phrase to mean that they can be traded on those platforms. That is very much the view of the London Stock Exchange, which has drawn our attention to the fact that people are interested in using those particular markets for that purpose. This instrument will help the City of London to take advantage of these investment opportunities, which will create jobs and wealth for this country. I commend the order to the House.