Alternative Finance Investment Bonds to be permitted to trade on MTFs & OTFs
A draft statutory instrument (“the Order”) entitled Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018 was laid before Parliament on 9 May 2018 and is awaiting formal approval by both Houses (Commons & Lords) before it becomes law. It ensures that Islamic finance instruments are treated equally to the conventional instruments that they mirror.
Alternative Finance Investment Bonds (“AFIBs”) are currently not permitted to trade on Multilateral Trading Facilities (“MTFs”) or Organised Trading Facilities (“OTFs”), based on the AFIB definition provided in Article 77A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
In practice, this means that, while conventional bonds are allowed to be traded on MTFs, Alternative Finance Investment Bonds such as Sukuk (Islamic finance-equivalent bonds) are not, thereby providing for an unintended disparity in treatment between the two types of financial instruments.
The Government has a standing commitment to provide a level playing field for Islamic finance instruments in regulation and taxation in the UK to encourage market-led development of the sector on the basis of a ‘no obstacles, but no special favours’ policy and the Order ensures that Islamic finance instruments are treated equally to the conventional instruments that they mirror.
Conventional bonds are already allowed to be traded on MTFs. The proposed change would ensure that AFIBs benefit from the same regulatory treatment, thereby removing an obstacle to the use of UK venues for the issue and trading of AFIBs. No alternative to changing the definition of AFIBs in regulation has been identified to address this issue.
Existing MTF or OTF operators wishing to trade Alternative Finance Investment Bonds on their trading venues will need to apply for a variation of their permission from the Financial Conduct Authority (“FCA”), which, all else being equal, would incur an application fee of £250. The usual FCA fees and levies would apply to any new applications.
There appears to be only one firm with an existing FCA permission to operate an MTF or OTF trading instruments within the current scope of Article 77A.