IFR 2.4 IFR 2.4 Islamic Financial Instruments and Products
IFR 2.4 Guidance1. The DFSA regulatory regime applies to a
Personcarrying 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 a Financial Service. Note there are a number of such exclusions in GEN chapter 2.2. The DFSAwill, when considering the treatment of Islamic Financial Businessarrangements, take a "substance over form" approach.3. The issue of financial products which are Securitiessuch as Shares, Debenturesor Unitsas 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 as Prospectusor Exempt Disclosure Statements. Where such products are included on an Official List of Securitiesor made available to the public in the DIFC, there are initial and ongoing disclosure and other obligations that apply to the Reporting Entity(generally the issuer) under the MKT module. These MKT obligations are quite distinct from the obligations that apply to Personscarrying on Financial Servicesin respect of such financial products.
Profit Sharing Investment Accounts (PSIAs)4.
PSIAsdo not fall within the GEN definitions of Investments. They are contractual arrangements under which Authorised Firmsinvest 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 under Mudaraba, so that the investor in principle bears the full investment risk. Although PSIAshave the characteristics of a Collective Investment Fund, under an express exclusion provided under CIR Rule 2.1.13, they are not treated as such. Instead, Managing a PSIAis a distinct Financial Serviceas defined in Rules GEN 2.2.2(r) and GEN 2.21.5. As Managing a PSIAis a Financial Service, the DFSA regulatory regime that applies to Personscarrying on Financial Servicesin or from the DIFC applies to Authorised Firmsthat manage PSIAs. As PSIAsare not Investments, the offer of PSIAs, does not attract prospectus-like disclosure. Instead, it attracts a tailored regulatory regime that applies to the entity, i.e. an Authorised Firm, that manages the PSIAs(see IFR chapter 5 for these Rules). The Financial Service of Advisingon Financial Productswill apply to a Persongiving advice on the merits of investing in a PSIA(as a PSIAis 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 a PSIA(as it is not an Investmentas defined in GEN).
Investmentscomprise two types of products; Securitiesand Derivatives. 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 any Shari'a Supervisory Boardrulings as applicable. While not an exhaustive list, conventional Investments that are commonly used as Islamic financial products include Shares, Sukuks, Units of Islamic Fundsand also Structured Products. Increasingly, Derivativesare 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 to Personswho carry on in or from the DIFC any Financial Servicesactivity in relation to any Islamic financial products that fall within the definition of Investments. However, particular products or instruments such as Profit Sharing Investment Accounts(PSIAs), Takafuland Islamic Fundsattract product/instrument specific additional conduct and other requirements, which are included in this module.
Takaful insurance8. 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. The
Takafulinsurer's role is generally confined to managing the insurance activities and investing the fund assets in accordance with Shari'a.9. Persons conducting Takafulinsurance are conducting Insurance Business. There are two types of Financial Servicesthat comprise Insurance Business, ie, Effecting Contracts of Insuranceor Carrying out Contracts of Insurance. Accordingly, any Personcarrying on these Financial Servicesactivities is subject to the DFSA regime for regulating Financial Services. Where such activities are carried out as Takafulinsurance, there are additional Takafulspecific 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 as Insurance Intermediation(see GEN section 2.19). Personsconducting those activities in relation to Takafulinsurance are regulated in the same way as Personsconducting such activities in relation to conventional insurance.