Treasury and FSA have published a joint consultation on how they plan to regulate "Alternative Finance Investment Bonds". By this term they mean sukuk or Islamic bonds, but intend it to apply to other instruments with similar characteristics. The paper looks at the background to AFIBs and the current UK approach. The Government wants to bring more certainty to the regulatory classification and treatment of these products and intends to align them with conventional debt securities. The consultation looks at four options:
- exempt AFIB from the definition of CIS and introduce a new investment type under RAO for AFIB. The paper discusses the importance of getting the definition right and highlights the key elements of any new definition, including a mandatory listing requirement;
- exempt AFIB from the definition of CIS but define them simply by reference to existing tax definitions. The risk of this approach is that, although the definitions should be very similar, any change to the tax definition may have unintended regulatory consequences;
- exempt AFIB from the definition of CIS but include them under the existing RAO investment type of instruments creating or acknowledging indebtedness. This could ultimately achieve the same result as Option 1, but would lead to a long and possibly confusing definition and would distinguish between products issued by the private and public sectors, which is not the intention; or
- do nothing.
Clearly the Government wants to do something and favours Option 1. This option, though, is likely to bring the most additional cost to FSA as it will have to modify its permissions and other technology. The consultation attaches draft legislation based on Option 1, including a new Article 77A to RAO. Comments are due within 12 weeks.