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Part G Islamic Finance, 51 Corporate and Regulatory Issues

From: The Law and Practice of International Banking (2nd Edition)

Charles Proctor

Content type:
Book content
Product:
Financial Law [FBL]
Published in print:
01 March 2015
ISBN:
9780199685585

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Subject(s):
Regulation of banks — Deposit taking

(p. 871) 51  Corporate and Regulatory Issues

Introduction

51.01  The next chapter will consider the problems confronting the growth of a truly international market in the sphere of Islamic banking. In contrast, the present chapter will focus exclusively on the corporate and regulatory issues which have arisen within the United Kingdom with respect to the authorization and business of Islamic financial institutions.

51.02  The growth of the market for Islamic products in the United Kingdom has posed a variety of challenges, largely because the existing regulatory structures are directed towards conventional products involving, amongst other things, the payment of interest and the taking of security. The present section is designed to provide an overview of selected corporate and regulatory issues and the manner in which they have been addressed.

Constitutional Structure of Islamic Banks

Introduction

51.03  The Islamic financial institutions currently operating in the United Kingdom have been established as companies incorporated in this country (ie as opposed to branches of foreign institutions).1

51.04  There is no special UK regime which is specifically applicable to Islamic banks. The policy of the FCA was to create, so far as possible, a level playing field as between conventional and Islamic institutions. As the FCA put it in describing its approach to the (p. 872) authorization of Islamic banks, there would be ‘no obstacles, no special favours’.2 The FSMA and associated regulations accordingly apply to conventional and Islamic banks on an equal footing.

51.05  Similar considerations apply in the field of corporate law, in the sense that an Islamic bank will be incorporated and adopt constitutional documents in exactly the same way. In addition, the directors of such a bank will be subject to the same fiduciary and other duties applicable to directors of any other company.

Constitutional Issues

51.06  In spite of the factors just outlined, the fact that a company is being formed as an Islamic bank may have consequences for the content of the constitution which is adopted by the shareholders and, as a result, for the rights and obligations of those involved with the bank, whether as ‘insiders’ or as contracting parties. For example:

  1. (a)  The shareholders may include in the memorandum of association a clause to the effect that the bank shall carry on all of its business in a Shariah-compliant fashion.

  2. (b)  This requirement is not in itself entirely straightforward since, as has been shown, the precise content and effect of Shariah law in the financial sector is the subject of some controversy. As a result, the constitution will usually provide for the establishment of a Shariah Supervisory Board (SSB), which will advise the main board of directors on matters of Shariah compliance. So far as English law is concerned, it is important that the role is advisory only.3

51.07  Do these voluntarily adopted structural and constitutional differences have any particular legal implications? It is suggested that the following points may arise:

  1. (a)  The memorandum and articles of association of a company constitute a contract between the company itself and its members.4 Consequently, it would seem that a shareholder could take proceedings against the company if it wrote business which is not Shariah-compliant. In general terms, it is hard to find any form of loss which could legitimately form the subject matter of an award of damages by reason only of the writing of such business. However, the shareholder could perhaps obtain an injunction to prevent the deal, if he found out about the proposed business in advance. In addition, he could perhaps establish a right to damages if his shares depreciated in value following a default on the non-compliant business. In practice, however, such remedies are likely to be very difficult to obtain, not least because the English courts would be very reluctant to rule on whether particular business is, or is not, Shariah-compliant.5 In addition, the argument may in any event be foreclosed if the memorandum of association provides for the rulings of the bank’s SSB to be conclusive as to matters of Shariah compliance.6

  2. (p. 873) (b)  An alternative avenue for the shareholder may be to take proceedings against the individual directors of the bank (or at least, against those who authorized the transaction concerned).7 The directors of a company are obliged to exercise their powers and discretions for the purposes for which they were conferred.8 In the instant case, they were plainly conferred for the purpose of writing Shariah-compliant business. Nevertheless, the court would probably hold that the SSB was the final arbiter on matters of Shariah compliance for the bank concerned. If the directors had acted on the advice of the SSB, then the court would probably hold that there had been no breach of duty in the first place. Even if it could be shown that the SSB’s views were erroneous, the court would again hold that there has been no breach of duty since the directors would have relied on the opinion of the appointed scholars in good faith. Alternatively, if a breach of duty could be established, the court would probably find that the director should be excused from any liability which would otherwise result.9

  3. (c)  What of the position of a third party dealing with the Islamic bank? Suppose that the bank has contracted with a borrower to provide him with a facility which, to the borrower’s knowledge, contains significant elements of riba. In spite of this knowledge, can the borrower enforce the facility agreement or obtain damages for the bank’s refusal to allow utilization in relation to a non-compliant arrangement? Or is he precluded from that course as a result of his knowledge on this issue? On the whole, it seems quite clear that the agreement would remain legally valid and binding so far as English law is concerned. The bank cannot plead by way of defence its lack of capacity to enter into transactions which are non-Shariah compliant.10 Furthermore, a borrower dealing in good faith with the directors of the bank is entitled to hold the bank to the transaction even though the directors lacked the necessary power to bind the bank to transactions which were non-compliant.11 The requirement of good faith will be met, since the riba elements of the transaction merely have the result that the directors have exceeded their powers under the articles, and knowledge of that fact does not by itself constitute evidence of bad faith for these purposes.12

  4. (d)  In a similar vein, it may be added that there is no obligation on the third party to verify that his proposed transaction has been approved by the SSB. This involves a matter of internal procedure (or ‘indoor management’) for the bank, and thus does not affect the position of third parties or outsiders.13

  5. (p. 874) (e)  The position may differ slightly where the bank is incorporated outside the United Kingdom, since questions touching its powers and capacity will be governed by the laws of its jurisdiction of incorporation. However, at least in relation to the amount originally invested, the point may well be moot in many cases, at least where the contract is subject to English law. The agreement will either be valid and enforceable or, alternatively, it will be void for want of capacity on the part of the bank. In the first case, judgment for the debt will be given in the usual way. In the latter case, the amount of the investment will be recoverable by means of an action for restitution. In terms of the original investment, the net result is thus effectively the same in either case, although the ability to recover the agreed profit element will depend upon the essential validity of the contractual arrangement.14

The Shariah Supervisory Board

51.08  Reference has already been made above to the SSB but, given its unique role within an Islamic financial institution, it is perhaps appropriate to discuss its functions in a little more depth.

51.09  It was noted above that the role of the SSB must be of an advisory nature. Why should this be so? If the SSB could give directions or otherwise become involved in the main business of the bank, then two consequences would follow. First of all, the individuals concerned could become ‘shadow directors’, with the result that they would owe fiduciary and other duties to the company in the same way as the members of the main board. Secondly, they would require ‘approved person’ status from the FCA in order to carry out their management duties.15 This will only be allowed to those who have appropriate experience in the management of banking business, and the members of the SSB will not always meet this criterion.16 It will usually thus be important to ensure that the SSB has an advisory role only. Even then, it may be asked whether the role of the SSB involves ‘advising on investments’ in a manner which could require authorization.17 It is submitted that it does not, because the SSB is not advising on the financial merits of such investments18—it is merely advising on the extent to which their formal structures may be regarded as Shariah-compliant.

51.10  Of course, different considerations may apply in other jurisdictions. For example, a Malaysian commentator has observed that ‘…[e]ven the decisions of the board of directors and top management of Islamic financial institutions are subject to SSB’s review to ensure they comply with the Shariah. …’19 For the reasons given above, the SSB could comment as (p. 875) to whether particular structures are Shariah-compliant but could not otherwise have a role in purely business decisions.

51.11  Since the members of the SSB are not directors of the bank, they do not owe fiduciary duties in the generally accepted sense of that expression. This, in a sense, leaves a ‘governance gap’ for the SSB. It has been suggested that this is in some respects mitigated by the fact that the SSB members will be Shariah scholars, who may therefore be expected to act with integrity, but that a more formalized governance framework would nevertheless be highly desirable.20 In this respect, it may be noted that AAOIFI has published a series of ‘Governance Standards for Islamic Financial Institutions’, which seek to lay down appropriate guidelines in this area. In particular, in an attempt to secure a degree of independence for the SSB, it is recommended that its members should be elected by the shareholders (and not by the directors) of the bank. The Standards also set out guidelines on ethics, standards, the conduct of the Shariah-compliance review, and other matters.

51.12  Whilst the FCA has naturally indicated that it will not become involved in the debate between different interpretations of the Shariah, it will—for the reasons given above—wish to know the role and functions of the SSB and the influence it enjoys in the operations of the bank.21

General Regulatory Issues

51.13  As noted above, from a regulatory perspective the FCA has sought to treat Islamic banks on the same basis as conventional banks, with a view to allowing them to compete on the basis of a level playing field. As a result, the UK has not adopted a separate regulatory regime for Islamic banking; it has merely contented itself with a few technical amendments relating to stamp duty22 and consumer protection23 designed to ensure that the proverbial playing field is indeed level.

51.14  Whilst the United Kingdom has thus adopted a fairly neutral stance to the regulation of the Islamic financial markets, it should be appreciated that governments in the Middle East and the Far East have adopted a more proactive and strategic approach in establishing and promoting their Islamic financial markets. The steps taken by Malaysia have already been discussed in some depth to provide the backdrop to the comparative case law discussion attempted earlier in this section.24 In relation to the Middle East:25

  1. (a)  In the Dubai International Financial Centre (DIFC), the locally established Financial Services Authority regulates the provision of Islamic financial services under the Law Regulating Islamic Financial Business (DIFC Law No 13 of 2004).

  2. (p. 876) (b)  In Bahrain, the Central Bank of Bahrain regulates the Islamic financial markets under the terms of the Central bank of Bahrain and Financial Institutions Law 2006 and its Rulebook for Islamic Banks.

  3. (c)  The Qatar Financial Services Regulatory Authority is likewise the regulator of Islamic banks in that country, operating pursuant to the Qatar Financial Services Law and its Islamic Finance Rulebook.

51.15  Reverting to the position in the United Kingdom, the PRA has to date authorized a small number of Islamic banks. This refers to institutions which conduct their business on a wholly Islamic basis. Some conventional banks have established ‘Islamic windows’ to cater specifically for Muslim customers. Arrangements of this kind are considered at a later stage.26

Regulatory Standards and Guidelines

51.16  As noted above, British adherence to the level playing field has meant that no special rules have been promulgated for the regulation of the Islamic financial markets in this country. As a result, Islamic banks are subject to a regulatory regime equivalent to that applicable to conventional banks. Nevertheless, when questions of compliance with those standards arise, it may be pertinent to have regard to the standards and guidelines issued by AAOIFI and the IFSB.27 These are, in any event, standards with which the bank’s own Shariah Supervisory Board is likely to expect compliance. In this context, it may be noted that Shariah Standard No 6 (which sets out the rules applicable to the conversion of a conventional institution into an Islamic bank) contains the following provisions:

  1. (a)  In providing banking services, the Standard makes the fundamental point that ‘…it is not permissible for the bank to receive interest as compensation for services rendered…It is a requirement that an Islamic alternative be worked out…It is not permissible to take a commission for providing a mere facility. However, the commission may be linked to expenses incurred for the execution of the credit facility accordingly. …’ In other words, interest and commissions are forbidden but the bank may charge for work actually undertaken in providing facilities.28

  2. (b)  On the other side of the bank’s balance sheet, the bank’s own funding activities must likewise be confined to permissible structures, including (i) the issue of equity share capital, (ii) the issue of sukuk,29 (iii) the use of salam contracts, where the bank acts as a supplier of goods on deferred terms,30 (iv) the use of istisna’a contracts under which the bank takes on the role of manufacturer or builder with the price paid to it in advance,31 (v) entering into ijara leases, under which assets of the bank are sold and leased back to it, thereby raising a capital sum and creating an obligation to pay rent,32 or (vi) entering into tawarruq (or reverse murabaha) transactions as commodity sales for deferred payments.33

(p. 877) Deposit-taking

51.17  As has been seen, the regulatory regime for banking business in the United Kingdom is built around the prohibition against the acceptance of deposits.34 A deposit is a sum of money which is ‘repayable’ on demand at a future date, whether with or without interest.35 A payment thus only constitutes a deposit if the principal sum is repayable in full. But, on the other hand, an arrangement designed to avoid the payment of interest—such as a mudaraba, qard, or wadi’a—will still constitute ‘deposits’ for these purposes, with the result that their acceptance is subject to the authorization regime created by the FSMA.

51.18  Insofar as this provision relates to the provision of non-interest bearing current accounts, this can apply equally to banks in the Islamic market. However, there is an obvious difficulty in the context of accounts which are intended to yield a return because (i) as noted above,36 an account of this kind offered by an Islamic institution must generally involve the sharing of profits and losses as between the bank and the customer, and (ii) as a result, the original deposit would not necessarily be repaid in full.

51.19  On this basis, it might be argued that an Islamic institution should not be authorized as a deposit-taking institution at all. Rather, it should be authorized on the basis that it offers investment products carrying a possibility of gain and a risk of loss.37 Yet this would not reflect the realities of the situation and a regulatory approach of this nature might be perceived to be discriminatory. Consequently, in the case of the Islamic Bank of Britain, it is understood that the bank undertook to repay all of its deposits in full, giving depositors the option to return (or not to claim) any amounts which represented the loss which would have been incurred on a fully Islamic-compliant deposit. In consequence of this undertaking, it was possible to authorize the Bank as a deposit-taker.38 It is, of course, necessary for an Islamic bank to comply with the terms of the FCA Handbook on soliciting and accepting deposits of this kind.39

Collective Investment Schemes

51.20  It has been noted earlier that the prohibition against receipt of interest has tended to drive Islamic financial institutions in the direction of structures which involve profit-sharing, where the bank and the customer become parties to a joint venture or are ‘partners’.

51.21  This, in turn, takes Islamic finance into another area of regulation, namely that of collective investment schemes. Such schemes are subject to a separate regulatory regime based on sections 235–284 of the FSMA. The key characteristics of such a scheme as set out in section 235 itself are as follows:

  1. (a)  the arrangements must relate to property of any description, including money;

  2. (p. 878) (b)  the purpose or effect of the arrangements must be to enable the persons taking part in them to participate in profits or income derived from the use of that property;

  3. (c)  the arrangements must be such that the participants do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions; and

  4. (d)  the arrangements must involve (i) the pooling of the contributions made by the participants and/or (ii) the property must be managed by the manager of the scheme.

51.22  There are several regulatory considerations which will apply if a proposed arrangement amounts to a collective investment scheme. First of all, it is unlawful even for an authorized person to promote such a scheme to prospective participants, unless specific exemptions apply.40 Secondly, the person responsible for the establishment and operation of the scheme requires FCA authorization for that purpose.41

51.23  On the face of it, it may be said that the structures adopted by Islamic banks in connection with customer deposits do appear to fall within this definition. This is especially the case given the emphasis placed on profit-sharing as a means of developing Shariah-compliant products. It may thus be argued that the funds provided by customers are pooled under the management of the bank with the profits being available to participants in the scheme. Yet, for a variety of reasons, this would not be an acceptable conclusion. For the reasons given above, it would be very difficult for Islamic banks to market their deposit services if these were regarded as units in a collective investment schemes, and would place them at a disadvantage to their conventional competitors. Such case law as is currently available in England does however suggest that the ‘pooling’ and ‘investment’ features of Shariah-compliant deposit products do not give rise to a trust but constitute direct payment obligations of the bank concerned.42 As a result, such arrangements should not be taken to constitute a collective investment scheme for the purposes of the statutory provisions noted above.43

51.24  Nevertheless, given the acknowledged breadth of the definition of ‘collective investment schemes’, it is clearly desirable that the issue should be placed beyond doubt. Accordingly, a number of exemptions have been created by statutory instrument,44 and those exemptions include so-called ‘pure deposit based schemes’. Under the terms of this exception,45 arrangements ‘…do not amount to a collective investment scheme if the whole amount of each participant’s contribution is a deposit which is accepted by an authorized person with permission to carry on an activity of the kind specified by article 5 of the Regulated Activities Order (accepting deposits)…’.46 This exemption applies to institutions which (p. 879) adopt the deposit structure used by the Islamic Bank of Britain because, as discussed earlier in this chapter, they have been granted permission to accept deposits.

51.25  This discussion nevertheless provides a further illustration of the difficulties involved in applying a legislative framework designed for conventional banking to the new challenges posed by the Islamic financial market.

Islamic Home Finance

51.26  It was noted earlier that home mortgage finance is now within the scope of FCA regulation.47 However, the scope of regulation applies to credit arrangements which are secured on land.48 This expression does not really capture the ijara and diminishing musharaka products which are most commonly used for Shariah-compliant home finance in the United Kingdom,49 because ownership of the property rests with the financing institution for the duration of the transaction. As a result, so-called ‘home purchase plans’ were brought within the scope of regulation by an amendment to the Regulated Activities Order.50 The definition of ‘home purchase plan’ extends to an arrangement under which the financier (referred to as the ‘home purchase provider’) acquires property with a customer as beneficial tenants in common and the customer is to buy out the provider’s interest over the period of the transaction.51

51.27  Once again, the object of this exercise was to ensure a level playing field in the regulatory treatment of conventional and Shariah-compliant products.52

Other Regulatory Issues

51.28  It has been noted that a number of Shariah-compliant products depend on the purchase and deferred sale of commodities—see in particular the earlier discussion of the murabaha and tawarruq products.53 Under these arrangements, several transactions may take place in commodities on the date of the transaction, and the party requiring finance is left with an obligation to pay the deferred purchase price (including profit or mark-up) on the maturity date of the deal.

51.29  Other structures, such as the istisna’a or bai salam,54 involve upfront payments for a delivery of assets at a later date. The question which arises is: do any of these arrangements amount to ‘futures’ for the purposes of the Regulated Activities Order, with the result that the parties might require permission from the FCA in order to enter into transactions of this kind? The Regulated Activities Order defines a ‘future’ as ‘…rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed on when the contract is made…’.55 A few points may be noted:

(p. 880)

  1. (a)  The murabaha and tawarruq contracts do not constitute ‘futures’ within this definition because, although the deferred payment is due at a future date, the underlying commodities are all purchased and sold for immediate delivery on the due date.

  2. (b)  However, the istisna’a and bai salam contracts do involve delivery of property at a later date and hence pose more difficulty. Nevertheless, where the contract involves physical delivery, such a contract may be regarded as made for commercial (rather than investment) purposes, and it will be taken outside the definition of ‘future’ on that basis.56

Islamic ‘Windows’

51.30  It has previously been noted that some conventional banks offer Shariah-compliant services to Muslim customers through a so-called ‘Islamic Window’.57

51.31  The accounting standards published by AAOIFI58 make specific provision for institutions which are offering these types of services. The main provisions are contained in Financial Accounting Standard No 18 and may be summarized as follows:

  1. (a)  Institutions of this type should produce separate accounts for their Shariah-compliant business and these should be annexed to their standard financial statements.59

  2. (b)  The assets/liabilities and income/profits contained within the ‘window’ should be segregated from the conventional side of the business60—or at least, if it is not, full disclosure of that fact should be made.61

  3. (c)  Since a conventional institution offering Islamic financial services must certify that their products are Shariah-compliant, it must (i) appoint a Shariah supervisory board to prepare a report on compliance matters and (ii) implement AAOIFI’s governance standards for that board.62

  4. (d)  The institution must disclose its source and application of funds, demonstrating Shariah compliance.63

  5. (e)  The institution must disclose any non-Shariah compliant revenues and expenditures and, in the case of revenues, explain how they have been dealt with.64

  6. (f)  The institution must provide a breakdown of its business in percentage terms as between its Shariah-compliant and its conventional banking business.65

  7. (g)  Various other detailed disclosure requirements apply.66

(p. 881) 51.32  An institution which provides services via an Islamic window in the United Kingdom will, of course, require the PRA/FCA permissions which are necessary to that end. In practice, however, its activities will most likely be covered by the authorizations which it already holds in respect of its conventional business. Of course, if institution elects to provide the ‘window’ through a separately established subsidiary, then that subsidiary would itself require separate authorization.(p. 882)

Footnotes:

1  This refers to banks which undertake Shariah-compliant business only. As to conventional banks which operate an Islamic ‘window’, see paras 51.30–51.32 below.

2  See ‘Islamic Banking in the UK’, FSA Briefing Note BN016/06, 9 March 2006.

3  The role of the SSB is discussed in more detail at para 51.06 below.

4  Section 33 of the Companies Act 2006.

5  Compare the discussion of the decision in the Beximco case, at para 49.08 above.

6  The memorandum of one of the UK’s Islamic banks provides that the main object of the company is ‘to carry on the business of a Shariah compliant bank…The term “Shariah” shall be as determined by the Supervisory Board of eminent scholars from time to time appointed by the company.’ This implies that the rulings of the SSB on matters of Shariah compliance are to be binding on the bank, its directors, and its members. Contractual provisions to similar effect will often be contained in the bank’s facility documentation, and it seems that an English court will be reluctant to re-examine the views of the Shariah Committee: see The Investment DAR Company KSCC v Blom Development Bank SAL [2009] EWHC 3545 (Ch), para 10.

7  The right to bring an action against a director for breach of fiduciary or other duties is a right of the company itself. Consequently, if the company were unwilling to bring such proceedings itself, the relevant shareholder would need to bring a derivative action with the leave of the court. On this subject, see ss 260–269 of the Companies Act 2006.

8  Section 171 of the Companies Act 2006.

9  A director may be excused from liability if he acted honestly and reasonably and, in all the circumstances, ought to be excused: see s 1157 of the Companies Act 2006.

10  Section 39 of the Companies Act 2006. On this provision, see paras 26.58–26.61 above.

11  Section 40 of the Companies Act 2006. On this provision, see paras 26.47–26.51 above. An ultra vires argument of this kind was rejected in Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems NV [2002] WL 346969: see the discussion at para 50.04 above.

12  Section 40(2)(b)(iii) of the Companies Act 2006.

13  See the rule in Royal British Bank v Turquand (1856) 6 E&B 327 and First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194. See also the decision in the Blom Development Bank case, para 50.15 above.

14  See the decision in Blom Development Bank, para 50.15 above.

15  On ‘approved person’ status, see para 1.31 above.

16  The articles of association of one such bank show an appreciation of this problem, and provide that: ‘The bank shall establish a Shariah Supervisory Board, whose responsibility shall be to provide advice to the Board…to ensure that the Company’s activities are in compliance with the Shariah…and to report on Shariah-related matters to the Board…’ (emphasis supplied).

17  See Blair, Walker, and Purves, para 19.73.

18  Under Art 53 of the Regulated Activities Order, the ‘advising on investments’ activity connotes ‘advice on the merits of…buying, selling, subscribing for or underwriting a particular investment’. Although not explicitly stated, it is submitted that this must refer to the financial merits of an investment. The functions of the SSB do not extend to advice of this kind.

19  Jabbar, ‘The Shariah Supervisory Board of Islamic Financial Institutions: a Case for Governance’ (2009) Company Lawyer 243.

20  See Jabbar, n 19.

21  See the FSA publication ‘Islamic Finance in the UK’, referred to at n 2 above. For discussion of this subject see Henderson in Nethercott and Eisenberg, paras 3.23–3.28.

22  See paras 52.36–52.38 below.

23  See paras 52.26–52.29 below.

24  See Chapter 49 above.

25  In relation to the points about to be made, see Blair, Walker, and Purves, para 19.16.

26  See paras 51.30–51.32 below.

27  On these instruments, see para 49.23 above. The point in the text is made by Blair, Walker and Purves, para 19.56.

28  This point has already been noted at para 49.13 above.

29  On these instruments, see para 49.49 above.

30  On salam and bai’ salam contracts, see para 49.36 above.

31  On istisna’a contracts, see para 49.42 above.

32  On ijara lease structures, see para 49.39 above.

33  On the tawarruq structure, see para 498.33 above.

34  See the discussion at para 51.13 above.

35  See art 5 of the Regulated Activities Order.

36  See the discussion of the mudaraba, wakala, wadi’a and qard products at paras 49.57—49.61 above.

37  Authorization under this heading might be granted on the basis that the institution is operating a collective investment scheme, involving the pooling of cash from a number of investors:

38  On the whole subject, see the FSA’s Briefing Note (BN016/06) entitled ‘Islamic Banking in the UK’, n 2 above. The subject is also discussed by Blair, Walker, and Purves, paras 19.81–19.85, and by Henderson in Nethercott and Eisenberg, paras 3.37–3.39.

39  See in particular the BCOBS Sourcebook which deals with the information to be provided to depositors and prospective depositors.

40  Section 238 of FSMA. Section 238(3) of FSMA includes exemptions for FSA authorized and recognized schemes, whilst further exemptions for high net worth individuals and sophisticated investors are created pursuant to the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060), as amended.

41  Article 51 of the Regulated Activities Order.

42  The Investment DAR Company KSCC v Blom Development Bank SAL [2009] EWHC 3545 (Ch).

43  For a wider discussion of Islamic financial products in the context of the UK regulatory regime, see Henderson in Nethercott and Eisenberg, paras 3.22–3.57.

44  Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062), as amended.

45  See para 3 of Sch 1 to the Order mentioned in the previous footnote.

46  On the acceptance of deposits as a regulated activity, see paras 1.09–1.24 above.

47  See the discussion in relation to conventional mortgage products at paras 4.48–4.59 above.

48  Article 61 of the Regulated Activities Order.

49  On these products, see paras 49.39 and 49.44 above.

50  See now art 63F of the Regulated Activities Order.

51  For the detailed definition, see art 63F(3) of the Regulated Activities Order.

52  For further discussion, see Blair, Walker, and Purves, paras 19.86–19.88.

53  See paras 49.27 and 49.33 above.

54  See paras 49.42 and 49.36 above.

55  Article 84(1) of the Regulated Activities Order.

56  It will be recalled that the parties must intend to take physical delivery of the commodity in order to ensure Shariah compliance. On intent to take delivery, see CR Sugar Trading (in administration) v China National Sugar and Alcohol Co [2003] EWHC 79 (Comm).

57  For a discussion of Islamic windows, see Blair, Walker, and Purves, para 19.64.

58  Accounting, Auditing and Governance Standards for Islamic Financial Institutions (AAOIFI, 2007).

59  See para 3 of Accounting Standard No 18.

60  See paras 6 and 7 of Accounting Standard No 18.

61  See para 11 of Accounting Standard No 18, requiring disclosure of any commingling of funds between the two sides of the business.

62  See para 9 of Accounting Standard No 18. On the governance standards for an SSB, see para 51.11 above.

63  See para 12 of Accounting Standard No 18.

64  See para 13 of Accounting Standard No 18. This will usually be by means of an appropriate charitable donation.

65  See para 15 of Accounting Standard No 18.

66  See para 16 of Accounting Standard No 18.