• IFR 6. IFR 6. ISLAMIC COLLECTIVE INVESTMENT FUNDS

    • Guidance

      This IFR 6 contains additional requirements that apply to a Collective Investment Fund operated or held out as being operated as an Islamic Fund. A Collective Investment Fund is defined in Part 11 of the Financial Services and Markets Regulations 2015. The definition in Part 11 of the Financial Services and Markets Regulations 2015 is very wide and can capture some Islamic Financial Business. However, under Part 1 of the Financial Services and Markets Regulations 2015 and the Fund Rules, the Regulator can make Rules excluding certain arrangements or types of arrangements from constituting a Fund. Certain types of Islamic Financial Business are not regulated as Collective Investment Funds due to express exclusions provided. Key Islamic Financial Business-related exclusions under the collective investment regime are managing insurance (in the form of Takaful), participation rights evidenced by Sukuk certificates and Managing PSIAs.

    • IFR 6.1 IFR 6.1 Application

      • IFR 6.1.1 IFR 6.1.1

        (a) This IFR 6 applies in the case of a Domestic Fund:
        (i) which is an Islamic Fund, to its Fund Manager and where appointed, its Trustee; or
        (ii) which is an Umbrella Fund with one or more Islamic Sub-Funds, to its Fund Manager and where appointed, its Trustee in respect of those Sub-Funds.
        (b) The requirements that apply to a conventional Fund apply equally to an Islamic Fund, except as otherwise provided in this IFR 6.
        (c) In this IFR 6, except where otherwise provided, any reference to a Fund is to an Islamic Fund or to an Islamic Sub-Fund of an Umbrella Fund as the case may be and any reference to a Fund Manager is a reference to a Fund Manager of an Islamic Fund or a Fund Manager of an Islamic Sub-Fund of an Umbrella Fund.

        • Guidance

          (i) The Fund Rules contains the key requirements relating to the management and operation of conventional Collective Investment Funds. These Islamic Finance Rules set out the additional requirements that apply where such a Fund is managed or held out as being managed as an Islamic Fund. There are other requirements that apply to Authorised Persons managing Islamic Funds which are found in other modules of the ADGM Rulebook, such as the GEN Rulebook, COBS Rulebook and PRU Rulebook.
          (ii) While IFR 3 contains the requirements that apply to Authorised Persons which are Fund Managers of Collective Investment Funds, the requirements in this IFR 6 mainly focus on Shari'a compliance related requirements that apply at the Fund level. For example, while the systems and controls required under IFR 3.3 relate to the systems and controls that a firm must have in order to comply with its Shari'a obligations, IFR 6.1.3 sets out systems and controls that must be established and maintained at the Fund level.
          Amended on (3 February, 2020).

      • Systems and controls

        • IFR 6.1.2 IFR 6.1.2

          (a) The Fund Manager of a Fund must establish and maintain systems and controls which ensure that its management of the Fund and the Fund Property is Shari'a compliant.
          (b) A Fund Manager may, where it is practicable to do so, include the systems and controls required under IFR 6.1.2 (a) within those it is required to establish and maintain pursuant to IFR 3.3.1.

          • Guidance

            (i) Part 5 of the Fund Rules requires the Fund Manager to establish and maintain systems and controls, including, but not limited to, financial and risk controls to ensure sound management of the Fund in accordance with the Fund's Constitution and its most recent Prospectus, taking due account of the nature, scale and complexity of the Fund's investments and operations.
            (ii) IFR 3.3.1 requires a Fund Manager of an Islamic Fund to establish and maintain systems and controls to ensure the Shari'a compliance of that Islamic Fund.

      • Fund's constitutional documents

        • IFR 6.1.3 IFR 6.1.3

          (a) The Fund Manager of a Domestic Fund that is a Public Fund must ensure that its Fund's Constitution and Prospectus are, and remain, approved by the Fund's Shari'a Supervisory Board.
          (b) The Fund Manager of an Exempt Fund must ensure that the Fund's Constitution and Prospectus are, and remain, approved by the Fund Manager's Shari'a Supervisory Board.

          • Guidance

            See Guidance note (iii) under IFR 6.2.1.

      • Islamic Financial Business policy and procedures manual

        • Guidance

          A Fund Manager may, instead of having a separate Islamic Financial Business policy and procedures manual both at the firm level and at the Fund level, maintain a single Islamic Financial Business policy and procedures manual for the Fund Manager and the Funds it manages.

        • IFR 6.1.4

          The Fund Manager of an Islamic Fund must implement and maintain an Islamic Financial Business policy and procedures manual for the Fund which addresses the following matters:

          (a) the manner in which the compliance function will be undertaken, in respect of Shari'a compliance;
          (b) the manner in which the Shari'a Supervisory Board will oversee and advise in regard to the Islamic Financial Business conducted by the Fund Manager;
          (c) the manner in which Shari'a Supervisory Board fatawa, rulings and guidelines will be recorded, disseminated and implemented and the internal Shari'a review undertaken;
          (d) the manner in which disputes between the Shari'a Supervisory Board and the Fund Manager in respect of Shari'a compliance will be addressed;
          (e) the process for approving those internal systems and controls which are in place to ensure not only that the Islamic Financial Business is carried out in compliance with Shari'a, but that information is disseminated to Unitholders in an appropriate manner; and
          (f) the manner in which conflicts of interest will be identified and managed, including as prescribed in IFR 6.2.4.

    • IFR 6.2 IFR 6.2 Shari'a Supervisory Board for an Islamic Fund

      • IFR 6.2.1 IFR 6.2.1

        (a) A Fund Manager of a Domestic Fund that is a Public Fund must, subject to IFR 6.2.1(c), appoint a Shari'a Supervisory Board to its Fund that meets the following requirements:
        (i) the Shari'a Supervisory Board has at least three members;
        (ii) the members appointed to the Shari'a Supervisory Board are competent to perform their functions as Shari'a Supervisory Board members of the Fund;
        (iii) any appointments, dismissals or changes in respect of members of the Shari'a Supervisory Board are approved by the Governing Body of the Fund Manager; and
        (iv) no member of the Shari'a Supervisory Board is a director or Controller of the Fund or its Fund Manager.
        (b) A Fund Manager may comply with the requirement in IFR 6.2.1(a) by appointing to the Fund the same Shari'a Supervisory Board as it has appointed to itself as an Authorised Person (and whether acting as an Islamic Financial Institution or through an Islamic Window) in accordance with IFR 3.5.2, provided the requirements in IFR 6.2.1(a) are also met.
        (c) A Fund Manager is not required to comply with the requirement in IFR 6.2.1(a) where it relies, for the purposes of making investments for the Fund, on a widely accepted Shari'a screening process such as investing in securities included in, or recognised by reference to, an Islamic index, sukuk, or treasury instruments issued by a Shari'a-compliant financial services provider regulated by an international recognised and reputable financial services regulator.

        • Guidance

          (i) In appointing a Shari'a Supervisory Board for the purposes of IFR 6.2.1(a), the Fund Manager should consider the previous experience and qualifications of the proposed Shari'a Supervisory Board members to assess whether the proposed Shari'a Supervisory Board member is competent to advise on the activities undertaken by the Islamic Fund. If the Fund Manager is appointing the same Shari'a Supervisory Board as it has appointed to the firm pursuant to IFR 6.2.1(b), the Fund Manager should still consider whether the requirements in both IFR 3.5.2(a) and IFR 6.2.1(a) are met in respect of that board.
          (ii) If the Fund Manager is relying on Shari'a screening methodologies such as the Dow Jones Shari'a index, such screening is generally regarded as widely accepted and accessible. However, if less widely known methodologies are used, the Fund Manager should be able, upon request by the Regulator, to demonstrate to the satisfaction of the Regulator the grounds on which it considers the particular methodology used to be acceptable and reliable.
          (iii) Although the Fund Managers of Exempt Funds and Qualified Investor Funds are not subject to the requirement for the appointment of a Shari'a Supervisory Board for such a Fund, they would need to ensure that the Exempt Funds or Qualified Investor Funds they manage continue to meet the Shari'a requirements applicable to the relevant Fund. They may use a member of the Shari'a Supervisory Board appointed at the firm level for the purposes of ascertaining compliance with the Shari'a requirements. The manner in which they demonstrate to the Unitholder of the Exempt Fund or Qualified Investor Fund as to how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.
          (iv) A Foreign Fund Manager may not be able to take advantage of IFR 6.2.1(b), unless it has a Shari'a Supervisory Board appointed at the firm level. In contrast the Authorised Fund Manager of a Foreign Fund will be able to use its Shari'a Supervisory Board to meet the Shari'a Supervisory Board requirement relating to the Fund as set out in IFR 6.2.1(b).

      • IFR 6.2.2

        (a) Subject to 6.2.2(b), the Fund Manager of a Fund must document the Fund's policy in relation to:
        (i) how appointments, dismissals or changes will be made to the Shari'a Supervisory Board;
        (ii) the process through which the suitability of Shari'a Supervisory Board members will be considered; and
        (iii) the remuneration of the members of the Shari'a Supervisory Board.
        (b) If the Fund Manager, pursuant to IFR 6.2.1(b), appoints to the Fund the same Shari'a Supervisory Board it has appointed to the firm, the documents required under IFR 6.2.2(a) must be included in or otherwise form part of the records required under IFR 3.5.3.

      • IFR 6.2.3 IFR 6.2.3

        (a) Subject to IFR 6.2.3(b), the Fund Manager of a Fund must establish and retain, for six years, records of:
        (i) its assessment of the competency of the Shari'a Supervisory Board members;
        (ii) the agreed terms of engagement of each member of the Shari'a Supervisory Board; and
        (iii) the matters in IFR 6.2.1(a)(iii) and IFR 6.2.2.
        (b) If the Fund Manager, pursuant to IFR 6.2.1(b), appoints to the Fund the same Shari'a Supervisory Board it has appointed to itself as an Authorised Person (and whether acting as an Islamic Financial Institution or through an Islamic Window), the records required under IFR 6.2.3(a) must be included in or otherwise form part of the records required under IFR 3.5.4.

        • Guidance

          (i) The records of the assessment of competency of Shari'a Supervisory Board members should clearly indicate, at least:
          (A) the factors that have been taken into account when making the assessment of competency;
          (B) the qualifications and experience of the Shari'a Supervisory Board members;
          (C) the basis upon which the Fund Manager has deemed that the proposed Shari'a Supervisory Board member is suitable; and
          (D) details of any other Shari'a Supervisory Boards of which the proposed Shari'a Supervisory Board member is, or has been, a member.
          (ii) If the Fund Manager is relying on IFR 6.2.1(b), then the due diligence process, and the records maintained under IFR 3.5.3 and IFR 3.5.4, should be augmented with the matters specified under IFR 6.2.1(a).

      • IFR 6.2.4

        (a) The Islamic Financial Business policy and procedures manual must provide that:
        (i) a member of the Shari'a Supervisory Board is obliged to notify the Fund Manager of any conflict of interest that such member may have with respect to the Fund or the Fund Manager, and if appointed, or in the case of an Investment Trust, the Trustee; and
        (ii) the Fund Manager will take appropriate steps to manage any such conflict of interest so that the Islamic Financial Business is carried out appropriately and in compliance with Shari'a, the interest of a Unitholder is not adversely affected and all Unitholders are fairly treated and not prejudiced by any such interests.
        (b) If a Fund Manager is unable to manage a conflict of interest as provided above, it must dismiss or replace the member as appropriate.

      • IFR 6.2.5

        The Fund Manager of a Fund must provide the Regulator at its request with information on the qualifications, skills, experience and independence of the individuals who are appointed or proposed to be approved as members of the Shari'a Supervisory Board.

      • IFR 6.2.6

        (a) The Fund Manager of a Fund must take reasonable steps to ensure that the Fund Manager and the Fund's Employees:
        (i) provide such assistance as the Shari'a Supervisory Board reasonably requires to discharge its duties;
        (ii) give the Shari'a Supervisory Board right of access at all reasonable times to relevant records and information;
        (iii) do not interfere with the Shari'a Supervisory Board's ability to discharge its duties; and
        (iv) do not provide false or misleading information to the Shari'a Supervisory Board.
        (b) If appointed, the Trustee must also take reasonable steps to ensure that its Employees comply with IFR 6.2.6(a)(i)–(iv).

    • IFR 6.3 IFR 6.3 External Shari'a reviews and periodic reports

      • IFR 6.3.1

        A Fund Manager of a Domestic Fund that is a Public Fund, other than a Fund relying on the exemption in IFR 6.2.1(c), must ensure that all Shari'a reviews of the Fund are undertaken by the Shari'a Supervisory Board in accordance with AAOIFI GSIFI No 2.

      • IFR 6.3.2 IFR 6.3.2

        (a) In the case of a Domestic Fund that is a Public Fund other than a Fund relying on the exemptions in IFR 6.2.1(c), the Fund Manager must commission an interim and an annual report relating to the Fund operations from the Shari'a Supervisory Board which complies with AAOIFI GSIFI No 1.
        (b) The Fund Manager must deliver a copy of the annual interim report referred to in (a) to the Unitholders in accordance with Chapter 16 of the Fund Rules and must include the report of the Shari'a Supervisory Board in the annual report required under Chapter 16 of the Fund Rules.

        • Guidance

          Although the Fund Managers of Exempt Funds and Qualified Investor Funds are not subject to the Shari'a review process required under IFR 6.3, they would need to ensure that the Exempt Fund or Qualified Investor Fund continues to meet the Shari'a requirements, particularly for the purposes of their annual and interim reports, which are required to be prepared under Chapter 16 of the Fund Rules. However, the manner in which they demonstrate to the Unitholders of the Fund how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.

    • IFR 6.4 IFR 6.4 Internal Shari'a review

      • IFR 6.4.1 IFR 6.4.1

        (a) The Fund Manager of a Domestic Fund that is a Public Fund must perform an internal Shari'a review to assess the extent to which the Fund complies with fatawa, rulings and guidelines issued by the Fund's Shari'a Supervisory Board.
        (b) The Fund Manager must perform the internal Shari'a review in accordance with AAOIFI GSIFI No. 3.
        (c) The Fund Manager of an Umbrella Fund which has an Islamic Sub-Fund must, to the extent possible, perform the internal Shari'a review in accordance with AAOIFI GSIFI No. 3 and must document the manner in which it will conduct that part of the internal Shari'a review that is not conducted in accordance with AAOIFI GSIFI No. 3.

        • Guidance

          (i) Although the Fund Managers of Exempt Funds and Qualified Investor Funds are not subject to the specific internal Shari'a requirements under IFR 6.4, they would need to ensure that the Exempt Fund or Qualified Investor Fund continues to meet the applicable Shari'a requirements. However, the manner in which they demonstrate to the Unitholders of the Fund how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.
          (ii) AAOIFI GSIFI No. (3) (Internal Shari'a Review) establishes standards and provides guidance on the internal Shari'a review in institutions that conduct business in conformity with Shari'a. The standard covers the following:
          (A) objectives;
          (B) internal Shari'a review;
          (C) independence and objectivity;
          (D) professional proficiency;
          (E) scope of work;
          (F) performance of the internal Shari'a review work;
          (G) management of the internal Shari'a review;
          (H) quality assurance; and
          (I) elements of an effective internal Shari'a review control system.

      • IFR 6.4.2 IFR 6.4.2

        The Fund Manager must ensure that the internal Shari'a review referred to in this IFR 6 is performed by the internal audit function of the Fund or the compliance function of the Fund and that the individuals or departments involved in performing the review are competent and sufficiently independent to assess compliance with Shari'a.

        • Guidance

          For the purposes of assessing competency of personnel or departments which perform the internal Shari'a review, Fund Manager should consult AAOIFI GSIFI No. 3 paragraphs 9 to 16 inclusive.

    • IFR 6.5 IFR 6.5 Additional disclosure in a Prospectus of an Islamic Fund which is a Public Fund

      • Guidance

        Chapter 9 of the Fund Rules set out the Prospectus requirements. In addition to complying with those requirements as applicable to the particular Fund, the Fund Manager of an Islamic Fund that is a Public Fund must comply with the additional requirements set out in this IFR 6.

      • IFR 6.5.1 IFR 6.5.1

        A Fund Manager of an Islamic Fund which is a Public Fund must state in the Fund's Prospectus:

        (a) that all the operations in relation to the Fund will be conducted in accordance with Shari'a;
        (b) if the Fund has a Shari'a Supervisory Board appointed to it, the names of the members of the Shari'a Supervisory Board and their qualifications and experience and, whether or not the Fund Manager's Shari'a Supervisory Board is appointed to the Fund pursuant to IFR 6.2.1(b);
        (c) if the Fund does not have a Shari'a Supervisory Board appointed to it pursuant to IFR 6.2.1(c), what widely acceptable screening methodologies are used by the Fund to ensure Shari'a compliance with respect to investments made for the Fund, and the board that has approved them;
        (d) if applicable, the manner and frequency of Shari'a reviews;
        (e) how earnings prohibited by Shari'a will be disposed of; and
        (f) whether Zakat is the responsibility of the Fund or the responsibility of the Unitholders.

        • Guidance

          (i) A Fund Manager should consider providing additional information to support the statement under IFR 6.5.1(a) as indicated in 2 and 3 below.
          (ii) The Fund Manager should provide sufficient details setting out the basis upon which the Fund has been approved and certified as Shari'a compliant by its Shari'a Supervisory Board. Such details should include the basis of the underlying principles, i.e. the Fatawa or rulings, including reference to any relevant Ijtihad, Ijma, Qiyas or other. Where applicable, reference should be made to any Islamic indices to be used. In addition, where applicable, the screening process and any filters used should be identified.
          (iii) The Fund Manager should set out each of the key features of the Fund and explain the rationale for determining why each of these features are considered Shari'a compliant by the Fund's Shari'a Supervisory Board.

    • IFR 6.6 IFR 6.6 Investments in other Funds

      • IFR 6.6.1

        (a) An Islamic Fund which is a Public Fund may invest in Units of another Fund, except where otherwise provided in the Fund Rules, only where the Fund Manager has taken reasonable care to determine, before investing in that other Fund, it:
        (i) is the subject of an independent annual audit conducted in accordance with IFRS or US GAAP;
        (ii) has mechanisms in place to enable Unitholders to redeem their Units within a reasonable time if it is an open-ended Fund;
        (iii) is prohibited from having more than 20% of its gross asset value in the Units of other Funds; and
        (iv) has a proper and disclosed basis for asset valuation and the pricing of Units in that Fund.

    • IFR 6.7 IFR 6.7 Periodic Reports of an Islamic Fund

      • Guidance

        Chapter 16 of the Fund Rules sets out the periodic reports and related requirements. These are additional requirements that apply to Islamic Funds.

      • IFR 6.7.1

        In addition to the matters specified in Chapter 16.5 of the Fund Rules, an annual report of an Islamic Fund, other than a Fund which is an Umbrella Fund, must contain the report specified in IFR 6.3.2(b).

    • IFR 6.8 IFR 6.8 Islamic Real Estate Investment Trusts (Islamic REITs)

      • IFR 6.8.1

        (a) A Fund Manager, or any other Authorised Person making an Offer of a Unit of an Islamic Fund or otherwise marketing an Islamic Fund, must not include the term "Islamic Real Estate Investment Trust" or "Islamic REIT" or refer to an Islamic Fund or otherwise hold out an Islamic Fund as being an Islamic Real Estate Investment Trust or an Islamic REIT, unless it is a Public Property Fund which complies with IFR 6.8.1(b) below.
        (b) An Islamic REIT is a Public Property Fund which:
        (i) is primarily aimed at investments in income-generating Real Property which complies with Shari'a principles;
        (ii) distributes to the Unitholders at least 80% of its audited annual net income; and
        (iii) if at any time during the operation of the Islamic Fund the requirements are not met, the Fund Manager, and, if appointed the Trustee, must immediately notify the Regulator and the exchange of the failure to meet the requirements in these Islamic Finance Rules and what measures have been or will be taken to remedy the breach.

      • IFR 6.8.2

        (a) A Fund Manager of an Islamic REIT must ensure that it distributes to the Unitholders as dividends each year an amount not less than 80% of its audited annual net income.
        (b) The Persons providing oversight functions in respect of the Fund must determine if any;
        (i) revaluation surplus credited to income, or
        (ii) gains on disposal of Real Property,
        shall form part of net income for distribution to Unitholders.

      • IFR 6.8.3

        Where an Islamic REIT holds any Real Property via one or more Special Purpose Vehicles, the Fund Manager must ensure that each Special Purpose Vehicle distributes to the Fund all of its net income as permitted by the laws and regulations of the jurisdiction where the Special Purpose Vehicle is established.

      • IFR 6.8.4

        (a) A Fund Manager of an Islamic REIT must ensure, subject to IFR 6.8.4(b), that any investment made in respect of property under development whether on its own or in a joint venture is undertaken only where the Islamic REIT intends to hold the developed property upon completion.
        (b) The total purchase price and development cost of the property under development in IFR 6.8.4(a) must not exceed 30% of the net asset value of the Fund Property of the Islamic REIT.
        (c) For the purposes of this Rule, the Regulator would not consider property development activities to include refurbishment, retrofitting and renovation.

      • IFR 6.8.5 IFR 6.8.5

        A Fund Manager of an Islamic REIT may obtain financing either directly or through its Special Purpose Vehicle up to 65% of the total gross asset value of the Fund provided that such financing is provided in a Shari'a-compliant manner.

        • Guidance

          1. Remedial action may not require the disposal of Fund assets to pays off part of the borrowings where such disposal would be prejudicial to the interest of Unitholders.
          2. As there are no specific risks that arise by virtue of a Fund being an Islamic Fund, the prudential requirements that apply to a Category 3 firm as set out in the PRU Rulebook apply to such Fund Managers. However, if the underlying assets of the Fund are invested in financial products or instruments that are Islamic and have certain features which would raise any prudential risks, it is the responsibility of the Fund Manager to address such risks. The Regulator would provide any additional clarifications regarding such matters upon request.
          Amended on (3 February, 2020).