Entire Section
IFR 2.4 IFR 2.4 Islamic Financial Instruments and Products
IFR 2.4 Guidance
1. The DFSA regulatory regime applies to aPerson carrying on any Islamic financial activities in or from the DIFC if the activity:a. relates to a financial instrument or product of the kind described in Guidance Notes 3 (Profit Sharing Investment Accounts ), 5 (Investments), and 7 (Takaful insurance) below; andb. is conducted by way of business and not expressly excluded from regulation as aFinancial Service . Note there are a number of such exclusions in GEN chapter 2.2. TheDFSA will, when considering the treatment ofIslamic Financial Business arrangements, take a "substance over form" approach.3. The issue of financial products which areSecurities such asShares ,Debentures orUnits as defined in GEN A2.1.2 (which are a subset of the definition of Investments — see Guidance Note 5), attracts product specific disclosure requirements such asProspectus orExempt Disclosure Statements . Where such products are included on anOfficial List of Securities or made available to the public in the DIFC, there are initial and ongoing disclosure and other obligations that apply to theReporting Entity (generally the issuer) under the MKT module. These MKT obligations are quite distinct from the obligations that apply toPersons carrying onFinancial Services in respect of such financial products.Profit Sharing Investment Accounts (PSIAs)
4.PSIAs do not fall within the GEN definitions ofInvestments . They are contractual arrangements under whichAuthorised Firms invest clients' funds, often (though not always) on a pooled basis, and are generally treated by the firm as off balance sheet. They are sometimes structured underMudaraba , so that the investor in principle bears the full investment risk. AlthoughPSIAs have the characteristics of aCollective Investment Fund , under an express exclusion provided under CIR Rule 2.1.13, they are not treated as such. Instead,Managing a PSIA is a distinctFinancial Service as defined in Rules GEN 2.2.2(r) and GEN 2.21.5. AsManaging a PSIA is aFinancial Service , the DFSA regulatory regime that applies toPersons carrying onFinancial Services in or from the DIFC applies toAuthorised Firms that managePSIAs . AsPSIAs are notInvestments , the offer ofPSIAs , does not attract prospectus-like disclosure. Instead, it attracts a tailored regulatory regime that applies to the entity, i.e. anAuthorised Firm , that manages thePSIAs (see IFR chapter 5 for these Rules). The Financial Service ofAdvising onFinancial Products will apply to aPerson giving advice on the merits of investing in aPSIA (as aPSIA is defined as a 'financial product' for the purposes of that activity). However, other activities such as dealing and arranging and COB requirements relating to those activities do not apply to aPSIA (as it is not anInvestment as defined in GEN).Investments
6.Investments comprise two types of products;Securities andDerivatives . These products are defined in GEN App2. Most of the conventional Investments defined in GEN App2 can be offered as Islamic financial products, provided the relevant requirements including Shari'a principles are adhered to and in accordance with anyShari'a Supervisory Board rulings as applicable. While not an exhaustive list, conventional Investments that are commonly used as Islamic financial products includeShares ,Sukuks ,Units of Islamic Funds and alsoStructured Products . Increasingly,Derivatives are also being developed in accordance with Shari'a, such as a contract where the rights and liabilities of the parties are determined by reference to an underlying factor such as property of any description, currency rate or index, provided that the underlying factor in itself is Shari'a compliant and the contract does not involve any fundamental uncertainty (Gharar).7. The DFSA regulatory regime applies toPersons who carry on in or from the DIFC anyFinancial Services activity in relation to any Islamic financial products that fall within the definition ofInvestments . However, particular products or instruments such asProfit Sharing Investment Accounts (PSIAs),Takaful andIslamic Funds attract product/instrument specific additional conduct and other requirements, which are included in this module.Takaful insurance
8. Takaful insurance generally refers to an arrangement where an insurer establishes a Shari'a compliant fund, predicated for mutual protection, where participants donate a part of their contributions to the common fund which will be used to meet claims payments and any participation rights. TheTakaful insurer's role is generally confined to managing the insurance activities and investing the fund assets in accordance with Shari'a.9. Persons conductingTakaful insurance are conductingInsurance Business . There are two types ofFinancial Services that compriseInsurance Business , ie,Effecting Contracts of Insurance orCarrying out Contracts of Insurance . Accordingly, anyPerson carrying on theseFinancial Services activities is subject to the DFSA regime for regulatingFinancial Services . Where such activities are carried out asTakaful insurance, there are additionalTakaful specific requirements that apply to such an insurer, which are set out in this module (see IFR chapter 8). In addition, there are certain activities relating to insurance, such as advising and arranging, which are regulated asInsurance Intermediation (see GEN section 2.19).Persons conducting those activities in relation toTakaful insurance are regulated in the same way asPersons conducting such activities in relation to conventional insurance.Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
Amended in accordance with Notice of Amendments to Legislation April 2011 [VER3/02-11]
[Amended] DFSA RM94/2012 (Made 14th June 2012). [VER4/06-12]
[Amended] RM192/2016 (Made 7th December 2016). [VER11/02-17]