On 24 March 2020, the Islamic Financial Services Board (IFSB) issued an exposure draft of a standard on guiding principles for investor protection in Islamic capital markets (ICM).
In the context of Islamic finance, several elements pertaining to the protection of investors underlie its foundational values, including ensuring fairness, certainty in transactions and avoiding exploitation between transacting parties. These values serve, among others, to ensure that investors are not disadvantaged, misled or defrauded by a product issuer/distributor or by service providers, as well as emphasising the need for meaningful and timely disclosure of information. Other inherent features of Sharīʿah-compliant financing relevant to investor protection include the promotion of ethical conduct in business, such as ensuring justice and fair dealing.
The standard is intended to apply to ICM products (including ṣukūk, ICIS and Sharīʿah-compliant equities) and market intermediaries operating in the ICM, particularly those that are interfacing with clients (brokers, asset managers, portfolio managers, investment advisers, etc.). The provisions in the standard also address emerging financial technologies in the ICM, including crypto-asset platforms (specifically those that deal with assets which represent an interest in a business), peer-to-peer financing platforms, equity crowdfunding platforms and online retail trading and investment platforms.
The guiding principles set out in the draft standard seek to address the protection of investors in relation to:
- appropriate product governance processes;
- robust and proportionate Sharīʻah governance processes and protection of investors against misleading claims of Sharīʿah compliance;
- enhanced transparency and information to investors in relation to Sharīʻah-compliant equities, and protection of minority shareholders;
- protection against misconduct by financial intermediaries, including suitability and appropriateness assessment, fit and proper criteria, best execution, marketing and promotion, and conflicts of interest;
- protection against the misuse of client assets;
- effective means of redress or resolution of disputes in the case of misconduct; and
- effective investor education.
The standard does not have a direct equivalent in a conventional standard that covers a substantially similar scope. The International Organization of Securities Commission’s (IOSCO) Objectives and Principles of Securities Regulations provides a conventional standard that addresses at a high level the safeguards that need to be in place to ensure investor protection. The Islamic Financial Services Board’s IFSB-21: Core Principles for Islamic Finance Regulation build on these for the ICM and address the specificities for Islamic finance, but at a similarly high level. This standard seeks to deal with investor protection in more depth by addressing those areas where guidance is needed on Islamic finance specificities. It draws on, and where relevant complements, more detailed guidance contained in other IOSCO documents on specific areas relevant to investor protection. It also draws on international good practice notably in the EU under the revised Markets in Financial Instruments Directive.
The deadline for comments on the exposure draft is 24 May 2020. The IFSB will be conducting two online webinars for public consultation, to be held on 20 April and 6 May 2020.