Regulations and Challenges in the UK 181obstacles that could not be overcome. This owes much to the collaboration
between the FSA and the applicants to develop pragmatic solutions.
The FSA has identified three main areas of potential difficulty which are
common to Islamic applications. These are:
- The regulatory definition of products;
- The role of Shari’a scholars; and
- Financial promotions.
Regulatory definition of products
The definition of products offered by Islamic firms is a key factor that firms
and the FSA need to consider as part of the authorization process. As
explained earlier, the structure of Islamic products is based on a set of
contracts acceptable under Shari’a. So while their economic effect is similar
to or the same as conventional products, their underlying structure may be
significantly different. This means the definition of these products under the
RAO may not be the same asthe conventional equivalent.
This has two important implications for applicants. First, firms need to be
sure they apply for the correct scope of permission for the regulated activities
they wish to undertake. This, in turn, highlights the need for firms to assess
whether the structure of Islamic products can be accommodated within the
RAO.
Secondly, the regulatory definition is relevant in determining the
framework in which products can be sold, for example in the application or
otherwise of conduct of business rules. If a product falls outside the FSA’s
regulatory framework, there may be restrictions on who the product can be
sold to. For these reasons, new applicants are encouraged to engage at an
early stage with the FSA and their legal advisers about the regulatory
definition of the products they intend to offer.
The role of Shari’a scholars
The FSA also has to consider the role of the Shari’a Supervisory Board
(SSB). The industry defines the key objective of SSB scholars as ensuring
Shari’a compliance in all an entity’s products and transactions. In practice,
Shari’a scholars examine a new product or transaction and, if satisfied it is
Shari’a-compliant, issue an approval. The FSA is, however, a secular and
not a religious regulator. It would not be appropriate, even if it were possible,
for the FSA to judge between different interpretations of Shari’a law.
However, the FSA does need to know, from a financial and operational
perspective, exactly what the role of the SSB is in each authorized firm. It
needs, in particular, to know whether, and if relevant how, the SSB affects
the running of the firm. The FSA has to be clear as to whether the Shari’a
scholars have an executive role or onethat is simply advisory.