Rule 6

The Law Society is reviewing the application of Rule 6 of the Solicitors Practice Rules 1990 to home purchase plans. Their current view is that the nature of Diminishing Musharaka and ijara products are radically different from a conventional mortgage and, accordingly, a solicitor would be in conflict due to being instructed by both the customer and the financier in such a transaction. The government is therefore considering making an exemption for home purchase plans from the application of Rule 6 as per conventional mortgages if the parties consent to a joint instruction.

Regulation

Home purchase plans are not currently a regulated activity within the meaning of the Financial Services and Markets Act 2000. However, home purchase plans become a regulated activity from 6 April 2007 pursuant to the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order SI 2006 No 2383. This will have a marked effect on the way such business is conducted and marketed to residential customers.

Stamp duty

Customers of Diminishing Musharaka products who were individuals have benefited from the ‘level-playing field’ legislation since 2005. Sections 71A of The Finance Act 2003 (as amended) exempted steps 2 and 4 (mentioned earlier) of a Diminishing Musharaka from incurring a stamp duty land tax (SDLT) liability although the financier will invariably require the customer to pay SDLT in respect of Step 1. Pursuant to s. 168 of the Finance Act 2006, such exemptions were extended customers who are “persons” and thus applicable to incorporated companies and partnership since 20 July 2006.

Conclusion

It is very clear that a Diminishing Musharaka mortgage is very different from a conventional mortgage and not just a ‘window-dressing’ exercise as claimed by its detractors. Whether a conventional bank is willing to accept these risks, which financial institutions such as Bristol & West and HSBC have, will be a commercial decision. There are ways to mitigate these risks such as the procurement of insurance that would have an upward effect on the pricing of the products. Furthermore, with greater emphasis on due diligence, the procurement of more detailed covenants and a larger deposit from the customer, it is possible that some of the ‘risk’ would only be theoretical.

There is further scope for developing products that are closer to the ‘spirit’ of Sharia, but the above will have illustrated that perhaps Diminishing Musharaka is a ‘fairer’ product for the customer (not taking into account pricing considerations) in contrast with conventional mortgages and as a consequence there may be a market for such products among the ethical non-Muslim market. MFG

Tariq Hameed is an associate at the Norton Rose Islamic Finance Group