- DFSA Signs International Agreement on Audit Oversight
- DIFC Companies Allowed Dual Licenses to Operate Across Dubai
- DFSA Launches License Initiative for FinTech Firms
- DFSA Amendments to Legislation
- DIFC Announces Enactment of DIFC Laws Amendment Law 2017
- DFSA Hosts 3rd Annual Supervision Outreach
- DFSA Censures Individual for Misleading Conduct
- DFSA Takes Action Against Senior Executive Officer
DFSA Signs International Agreement on Audit Oversight
The DFSA has joined 21 of the world’s leading regulators of auditors in an agreement to increase co-operation with the oversight of audit professionals.
DFSA Chief Executive, Mr Ian Johnston, signed the International Forum of Independent Audit Regulators’ (IFIAR) Multilateral Memorandum of Understanding (MMoU), during the IFIAR Plenary Meeting in Tokyo.
The MMoU aims to encourage and strengthen information sharing and co-operation to offer mutual assistance among IFIAR Members. It was first approved by the IFIAR Membership in June 2015, and follows a rigorous verification process to satisfy the highest standards of co-operation and confidentiality.
DIFC Companies Allowed Dual Licenses to Operate Across Dubai
The Dubai International Financial Centre (DIFC) and Dubai Economy have signed a Memorandum of Understanding (MoU) to allow companies operating within DIFC to obtain licenses to operate in mainland Dubai. This agreement will give non-regulated companies in the Centre the opportunity to also operate as mainland businesses and this will help expand the services that DIFC provides. The MoU ensures better compliance, fraud prevention and increased protection of customers due to a central data repository being established which will allow data exchange between the parties, improving visibility and transparency of commercial activity within the DIFC. The MoU also mirrors the DIFC’s efforts to triple in size by 2024 and encourage robust best practice.
DFSA Launches License Initiative for FinTech Firms
The DFSA have launched a new license for financial services referred to as an Innovation Testing License. This new license will allow FinTech firmsto develop and test innovative concepts from within the DIFC, without being subject to all of the regulatory requirements that normally apply to regulated firms. On a case by case basis, applicants will work with the DFSA so that parties understand the business proposal and establish appropriate controls for the safety of any customers involved. The move comes in order to provide the landscape for the sustainable development of the FinTech industry while protecting customers and financial stability. Firms will be able to use the restricted license to test an innovative product or service for six to 12 months. If after this period the firm has met the outcomes detailed in the regulatory test plan and it can meet the full DFSA Authorisation requirements, it will migrate to full authorisation. The idea behind the development of FinTech initiatives is to catalyse growth and efficiency within areas such as trade finance, alternative finance and Sharia-based services.
DFSA Amendments to Legislation
Following the end of the consultation period on proposed handbook changes that were set out in Consultation Paper 112 “Testing FinTech Innovations in the DIFC”, amendments have been made to the GEN handbook which came into force on the 24th May 2017. GEN now sets outs chapter 12 which are rules relating to business transfer schemes under Part 9 of the Regulatory Law. The DFSA has also introduced chapter 13 which contains guidance on the DFSA’s approach to facilitating the testing and development of innovative financial technology (FinTech) in the DIFC. This chapter sets out the DFSA’s approach to businesses that facilitate FinTech innovation and includes details of the authorisation process, test plans, creating a simplified regulatory framework, restrictions and conditions, completion of testing, withdrawal of license and fees. These amendments go accordingly with the introduction of the Innovation Testing License introduced by the DFSA as explained in 1.3.
DIFC Announces Enactment of DIFC Laws Amendment Law 2017
In order for the DIFC to completely comply with the OECD Global Forum on Transparency and the Exchange of Information for Tax Purposes the DIFC has enacted the DIFC Laws Amendment Law, DIFC Law No.1 of 2017 (Law), this enactment includes amendments to:
- Companies Law of 2009
- General Partnership Law of 2004
- Limited Partnership Law of 2006
- Limited Liability Partnership Law of 2004
The Law introduces a new definition of “Accounting Records” into the Companies Law and Partnership Laws which also clarifies the type of underlying documentation to be retained by companies and partnerships in the DIFC.
The Registrar also proposes to make amendments to the Schedule of Fines in the Companies Law and the various Partnership Laws in order to clarify contraventions and correct mistaken references to articles of the law creating contraventions.
The enactment of the Law will facilitate amendments to the Companies Law of 2009, General Partnership Law of 2004, Limited Partnership Law of 2006 and Limited Liability Partnership Law of 2004, to ensure that DIFC fully complies with the requirements set out by the OECD Global Forum on Transparency and the Exchange of Information for Tax Purposes.
DFSA Hosts 3rd Annual Supervision Outreach
DFSA Annual Outreach
On 3rd May 2017, the DFSA held their Annual Outreach to discuss key regulatory priorities and issues. The event brought together various speakers from the DFSA, the Compliance Officers Network Group (CONG) and the Dubai International Financial Centre (DIFC) Authority. The session was broken down into a morning session for all participants and break-out groups in the afternoon, each with a specific focus.
DFSA Outreach – Morning session
The DFSA’s Chief Executive, Ian Johnston, opened the Outreach Session by identifying a number of global and regional trends, including increased market volatility and uncertainty, Regulatory focus on organisational culture, Digitalisation and cyber security, Combating financial crime, Common Reporting Standards (CRS) and FinTech.
Mr. Johnston stated that the DIFC continues to grow both broader and deeper and had the largest increase in number of authorised firms in 2016 since the financial crisis. The DFSA agenda is set out in the 2017/18 business plan and its efforts focus on key matters of import to the Board, being combating financial crime, client protection and enforcement.
Jacques Visser, Chief Legal Officer of the DIFC Authority, highlighted the importance of technology to the growth of the DIFC and the establishment of the FinTech Hive as a significant step in meeting Dubai’s objectives to become a leader in this sphere. He emphasised that there needs to be a balance between innovation and the management and supervision of risk, identifying a key area of focus for the compliance community lies in automating our supervision of this new technology in an efficient and transparent manner.
Adrianna Beer, on behalf of the CONG, acknowledged 2017 as the 10th anniversary of the establishment of the CONG. She gave thanks to all its members and to the DFSA for providing compliance officers with an open forum to engage with the regulator, an opportunity which is increasingly important in the complex regulatory environment we are operating in.
Bryan Stirewalt, Managing Director of Supervision, delivered key messages from the DFSA. He reviewed the global macro trends, such as Brexit and the US election, the impact of proposed deregulation and how populism appears to be defeating globalisation, highlighted recent increases in interest rates as positive and welcomed fresh conversations around fiscal policies.
He identified compliance trends such as regulatory focus on organisational culture, digitalisation and cyber security risk, continuing efforts to combat financial crime and the effect of de-risking, the implementation of CRS and the development of the FinTech and RegTech space.
In 2017/18 the DFSA’s supervision continues to focus on steering corporate behaviour, product and service suitability for clients and protection of investors and combating of financial crime, but also introduces 2 new areas of focus, being increasing efforts towards mitigating operational risk such as cyber security risk, and creating a proper environment for innovation.
The DFSA continues to engage with the regulators in the wider UAE including the Central Bank and AMLSCU, preparing for the planned FATF Mutual Evaluation scheduled for 2019, the Insurance Authority and ESCA. It is working closely with the relevant authorities and looking towards a blueprint on the delivery of financial services in the UAE. The DFSA is also keeping involved with its regional peers and is pleased to have representation within each of the global standards setters such as the Basel Committee, IAIS, IFIAR, IFSB and IOSCO.
Another key area is sustainability and the DFSA is focused on recruiting the right people, noting that 30% of supervision staff are Emirati, providing training on the critical matters facing the regulator and maintaining a positive work environment. Its emphasis remains on risk based supervision, efficiency, consistency and innovation. The DFSA will change its departmental structure towards the end of 2017. The Thematic Supervision Team will move into Conduct Risk and a new Supervision, Policy, Operational Risk and FinTech team will be established. The newly introduced team will supervise firms on a thematic basis and leverage the use of the DFSA’s online portal. This means that most firms outside of Prudential Category 1 will fall under Thematic Supervision. The change will build on the successes of the Thematic Supervision techniques introduced in the recent past. The change has been brought about to emphasise the supervision policy and ensure consistency for instance, through digitisation and moving a number of processes online. In addition, with the development of FinTech, a non-traditional approach to supervision is required. The change will also centralise MIS and data management to improve the DFSA supervision capability, allowing it to focus attention on key areas of concern. It also provides a career path for less experienced staff through exposure to different regulated activities and firms.
Peter Smith, Managing Director of the DFSA’s Policy and Strategy division, highlighted the recent implementation of regulatory amendments arising from Consultation Paper 106 (in relation to the financial services of Arranging & Representative Office activities), Consultation Paper 107 (in relation to the AML, CTF and Sanctions module) and Consultation Paper 109 (in relation to crowdfunding and the Innovation Testing Licence (ITL)). The DFSA received a wide range of comments on Consultation Paper 110 - DFSA Fees, and while it is considering these, confirmed that there will be no fee changes implemented in 2017. Upcoming Consultation Papers will cover Basel liquidity and capital rules as well as changes to the rules on funds to facilitate business in fund management & asset management sectors.
Moving into 2018, the DFSA will look at resolution of failing institutions and client assets, the suitability of investment advice, OTCs and the rules on internal audit. Of interest to Compliance Officers, will be a review of the responsibilities and role of Compliance Officers, taking into account the strict responsibility of the Compliance Officer in the DIFC versus other peer jurisdictions, to assess whether this is the best way to hold a firm to account.
Serdar Gunar, Director, DFSA Supervision, discussed the DFSA Risk Based Approach and Supervisory Process. Mr. Gunar explained that the DFSA are able to monitor and supervise firms through techniques including reviewing return submissions, risk assessments and management meetings. Through its management information system, the DFSA identifies trends across key risk areas such as conduct risk, financial crime, corporate governance and financial and operational risk, over time. The DFSA has available, a number of possible remedial actions, ranging from no action at all, to making observations for boards to consider, to risk mitigation plans, or taking action under the provisions of the Regulatory Law. The regulator’s tolerance for various risk groups is based on the risk appetite of the DFSA’s Board, and going forward, will tend towards corporate governance, conduct risk and especially suitability, AML/CTF and cyber risk.
Nilesh Ashar, Tax Partner at KPMG, updated the DIFC community on the recent implementation of the Common Reporting Standard (CRS), comparing it to and distinguishing it from FATCA. While both regimes have adopted similar terminology and definitions, the application differs in that FATCA applies to US persons and CRS is based on the concept of tax residency. CRS also has no withholding obligation but also no thresholds for reporting. A person’s tax residency is not fixed, and there could be multiple residencies in a year, and different residencies over time. The difficulty for regulated firms lies in collecting this information from clients who will each have their circumstances and levels of complexity. He highlighted the timelines firms need to observe to be compliant with CRS.
The morning session closed with a panel discussion moderated by Peter Brady of the CONG. The Panel discussed the DFSAs enforcement activity and noted that the Enforcement Division is changing its approach and will be more proactive, working with the supervision team to deal with issues much earlier than it has in the past, and as a result, finding resolution sooner. The panel noted the role of the compliance officer in communication with the firm’s senior management managing the information flow during an investigation, and the time required of management and compliance to bring an investigation to closure.
Chris Cameron, Associate Director, DFSA Supervision, spoke on the growth of the DFSA’s Fund regime, highlighting the positive effects of the Qualified Investment Fund (QIF) regime and streamlined authorisation process for QIF managers and QIF funds. The DFSA have noted key trends including the use of QIFs to accumulate real estate assets, a desire to use locally domiciled funds and to keep assets in the region and using the QIF framework for alternative investments. Following on from a number of regulatory developments in the funds space in 2016, the DFSA will now focus on the listing rules for funds, the development of funds platforms and the types of vehicles which may be employed to establish a domestic fund.
The panel closed with a discussion on the DFSA’s approach to FinTech and innovation and the challenge is determining where these new types of business appear on the regulator’s risk spectrum. Traditional supervision doesn’t have experience in the field and is not used to dealing with firms and products which are deployed to market in a short period of time. The DFSA is looking to issue cyber guidance for firms, establishing a cyber advisory panel and cyber response team.
DFSA Outreach - Authorisation session
Martin Wilding, Director, Authorisations, presented the Authorisations Team’s reporting chart and introduced Nicola Wildman who comes to the DFSA from the UK’s FCA. The number of applications that the team receives continues to grow year on year with 2016 presenting a new increase of 40 firms, or close to 10% on 2015. In terms of trends, the team is seeing firms change licence from Representative Offices to Prudential Category 4 Firm’s and a number of conversions from branch to subsidiaries. In terms of meeting its published turnaround times, the team had an overall success rate of 92%, with 100% success in relation to Rep Office and QIF applications. The DFSA has recently introduced additional timing improvements, including self-certification of operational readiness prior to the issuance of a full licence, use of specialists at the front end of an application to manage issues related to pre-acceptance of an application. Going forward, approvals in principle will be issued for six months to take into account the various operational challenges firms face in setting up to go live, as well as to use internal resources in a more efficient manner.
The DFSA stressed the value of a well prepared application, and invited applicants and consultants to discuss and highlight issues with the DFSA early on and, by way of example, cited (i) issues with the fitness and propriety of senior personnel and controllers (ii) complaints and litigation at parent/group level which are not adequately disclosed (iii) qualified audit reports on and the financial statements of the parent/ group (iv) no financial history or (v) group issues such as complex structures and financial groups and non-financial groups.
Jeremy Cox, Senior Manager, Supervision, provided an update on the DFSA’s online forms initiative which will not only cover application/authorisation documents, but a number of ongoing reporting requirements for authorised firms. The forms will be dynamic with content requirements adapting based on the information populated into the forms. Firms can expect to see a lot less text and more drop down menus making the forms easy to use. The DFSA will roll out testing forms for advisors and arrangers, Rep Offices, QIF managers and QIF funds, Authorised Individuals and the new version of the AML Return. In another development, the DFSA’s Electronic Prudential Reporting System (EPRS) and the DFSA’s e-portal will be aligned and once authorised, a firm will have access to forms specifically tailored for the firm, rather than a generic list of possibilities. These forms will be easy to navigate, print or save and the EPRS guidelines will be updated.
The DFSA’s Serdar Gunar, Adrian McCarthy and Elisabeth Wallace discussed the regulator’s FinTech initiatives. Good feedback has been received on the recent Consultation Paper in relation to loan based crowdfunding, equity based crowdfunding and innovation testing. The Rules are expected to be issued in June and will look similar to the proposals in the CPs, with the application forms to follow in Q3. Applicants are nevertheless invited to contact the DFSA to discuss their initiatives as early as possible.
The Innovation Testing Licence holders will have the opportunity to develop their product while under a high level of supervision by the regulator. The DFSA feels this is beneficial for both parties: the licences may not be used to operating within a regulatory framework and the DFSA will need time to understand and get used the product or services under testing. While the DFSA can waive the application of certain rules, there is no flexibility in respect of AML Rules or Federal Law requirements. The licence will be valid for 6-12 months, with a view that the licence holder will either graduate to a full licence or wind down if the testing proves unsuccessful.
The DFSA has identified the key risks in crowdfunding regime to include (i) consumer understanding of the product (ii) access to information (iii) conflicts of interest (iv) fraud and AML risk (v) platform failure and (vi) lack of an exit strategy. The loan based licence will be issued in Category 4 and will be a disclosure based regime. Client limits if US$5000 per loan and US$50,000 per platform will be imposed. The DFSA has considered the requirements of the Investment based crowdfunding regime, and will allow Prudential Category 4 Firm’s to hold client money, albeit with a higher capital requirement of US$140K. There will be no client investment limits but a US$5 million limit per capital raise. Clients will be required to sign a risk disclosure and crowdfunding licences will be supervised on a one-to-one basis.
DFSA Outreach - Conduct of Business session
Lawrence Paramasivam, Director, Conduct of Business, opened up the session and highlighted that the key conduct risks for 2017/2018 would include Client Classification and Suitability, Product Governance, Safeguarding Client Assets and Retail OTC Leveraged Products.
Hamda AlSarkal and Hend Al Budoor, Managers, Supervision provided an update on the recently concluded Client Classification and Suitability Review.
The findings and subsequent recommendations can be summarised as follows:
• Completing the client classification assessment
The DFSA found good evidence of an independent review of classification assessments. However, the manner in which assessments are conducted could be improved. Examples of best practice in this respect are as follows:
- Obtaining documentation to support the classification
- Providing adequate guidance to relationship managers if they are responsible for carrying out the assessment.
- Verification of the Client Classification by an independent person.
• Documenting client classification
Some firms are not adequately documenting the classification of Professional Clients. Firms must ensure the sub-classification is also recorded, i.e. assessed, service-based or deemed – if the firm provides additional products or services the sub-classification may be different. For example, classifying a client as service-based professional for the provision of corporate financing is fine, but not fine if the firm goes on to provide advice on investments.
• Option to be treated as Retail
- Some Firms are not giving adequate notice to clients.
- Notice should also inform clients about the consequences of opting to be treated as Retail, i.e. the Firm can no longer provide services etc.
• Reclassifying Grandfathered Clients
Firms who have grandfathered clients must reclassify if the following trigger events occur:
- The client opts to be classified as Retail/otherwise
- New financial services are provided
- The client no longer meets the professional client requirements
• Net Assets
- The DFSA noted during client file reviews that the relationship managers may have obtained a number of different statements across different periods of time, from different institutions, or in different currencies, however there was no analysis of the statements to evidence how the client met the net asset requirement.
- Firms must analyse the documents they have obtained, and document the net assets clearly.
• Knowledge and experience
- The DFSA observed good practice in the assessment of knowledge and experience where Firms considered this against different product types, and where Firms supported their assessments with statements.
- The DFSA noted that some Firms were adopting a tick-box approach with sole reliance on the client completing a checklist, without any further analysis by the Firm or any supporting information. It was advised that firms do not adopt a tick-box approach.
- Some Firms are not documenting suitability consistently or in sufficient detail.
- Under the COB Module, Firms are able to limit the extent to which they will consider suitability, but this does not mean they can exclude their obligations entirely. In the event a Firm limits suitability, it should provide clear warning to the client and seek express consent to do so. The warning should be drawn to the client’s attention, i.e. embedding it into a client agreement is not deemed to be a clear warning, and this also makes it difficult for the client to express that they do not consent if they are required to sign the agreement to become a client.
- The DFSA did identify some good suitability assessment tools, whereby risk scores allocated to clients were then associated with products and services with similar risks. Where this did not work in practice was where a “one size fits all” approach was taken – whilst risk profiling as a tool can help RMs to provide a suitable recommendation, it should not be wholly relied on, as it is not specific enough to the client’s particular needs and circumstances or to the merits of each transaction or product.
- Suitability is not just something that is considered at on-boarding or on a periodic basis, it is transaction specific. This means for every transaction or recommendation there should be a supporting rationale as to why it was suitable for the client. Different types of transactions should also be distinguished so that appropriate records of transactions where suitability is required can be identified. Furthermore, firms should periodically refresh their records so that they reflect the client’s current situation, for example relying on information obtained 12 months ago may no longer be appropriate.
Dean Miller, Senior Manager, Supervision then echoed the importance of considering suitability and reminded Firms of DFSA Principle 8 in relation to suitability.
Mr. Miller also discussed forthcoming supervisory themes coming out of the DFSA which include the following subjects:
- Roles of the Governing Body and Senior Management
- Reliance on Group for CDD and Client Classification
- Arranging vs. Providing Custody
- Client Money and Client Investments
- Product Governance
Finally, Mr. Miller provided an update on the DFSA’s approach towards Retail OTC Leveraged Products. A formal update on the DFSA requirements that will supersede the March 2015 SEO Letter is expected shortly. The new requirements will expand beyond FX to cover a wider range of OTC derivatives including CFDs and binary options. The new requirements will also address leverage limits, product governance expectations, appropriateness considerations and new disclosure requirements.
DFSA Outreach – Prudential Risk, Banking and Insurance Firms session
Arvind Baghel, Director, Supervision, opened up the session and highlighted the DFSA’s role and approach to assessing firms’ prudential reporting requirements. During the year 2016 there has been a significant growth in the balance sheet of the DIFC mostly due to the relocation of HSBC to the centre.
Scott Lim, Associate Director, Insurance Supervision focused on the recent changes in the Insurance rules and some common risk assessment findings.
Mr. Baghel also mentioned that the DFSA is intending to issue a thematic review on the Internal Audit function this year.
Risk Assessment Highlights
Various risk assessments conducted during the past year focused on the following:
- Governance Arrangements;
- Appropriateness of Policies and Procedures;
- Quality of Human Resources;
- Risk Management Function;
- Loan Classification and Provisioning;
- Funds from the UAE.
- Service Level Agreements with group entities;
- Detail in the BCP/DRP and adequate testing.
Upcoming update to EPRS and PRU
Updates will include:
- Enhancements to the PIB returns to consider feedback from firms and auditors as well as further alignment with international regulatory standards and the development of activities within the DIFC’
- Fixing errors in the current system;
- Including new instructional guidelines.
DFSA Outreach – Financial Crime Risk session
Lawrence Paramasivam, Director, Conduct of Business, opened up the session and highlighted the DFSAs financial crime priorities for 2017/2018 which include:
- Risk based supervision of Firms and DNFBPs specifically in relation to their AML annual returns and the results of the recent thematic review on trade finance and financial crime;
- Implementation of AML Rule Changes;
- FATF assessment of UAE due in June 2019.
Common Reporting Standards
Jacques Visser, Chief Legal Officer, DIFC Authority presented on the Common Reporting Standards (CRS) that are required to be implemented in 2017 with first reporting due in June 2018. Much of what was covered by Mr. Visser was included in the morning session and has been included on pages 4 and 5.
Financial Crime Thematic Review
Ali Baalawi, Senior Manager, Supervision presented on the objectives and key findings from the Financial Crime Thematic Review.
- Analyse the quality and implementation of the firm’s Business Risk Assessment;
- Assess the adequacy of the firm’s systems and controls including ongoing monitoring;
- Assess the adequacy of transaction monitoring and reporting.
Main Areas for Improvement
- Need to tailor risk assessment to the business activities and get buy-in from all management and staff;
- Need to conduct ongoing due diligence;
- Need to consider increasing the number of external SARs being submitted.
Catherine Durben, Manager, Supervision presented an update on SARs and the process for reporting both internally and externally and also outlined improvement opportunities as follows:
- Clearly document all decisions and actions taken;
- Complete all sections of the form;
- Advise if any dual filing has been made;
- Attach supporting documents;
- Clearly state the suspicion;
Explain the time lag.
Ms Durben also advised that understanding the nature of the relationship between your client and their customers is also important for identifying any suspicious activity.
AML Questions and Answers
Michael Wong, Associate Director, Supervision presented on some of the questions that had been collected by the CONG prior to the Outreach Session.
- Firms with a financial year end after 31 December 2016 are required to submit only one AML Annual Return during 2017 which will cover the period from 1 August 2016 to 30 July 2017;
- Business partners, where CDD has been conducted, can be included in the number of customers reported in the AML Return;
- The DFSA has no interpretation of the Federal requirement to identify the 5% direct owners of an entity but firms are reminded that the DFSA continues to have a beneficial ownership requirement and firms must decide on a risk based approach the extent to which they identify and/or verify beneficial owners;
- There is no guidance on the prescribed form of reporting to the AMLSCU but firms must attempt to make a report. Firms should assess their AML controls and report how they comply with the Federal AML laws;
- The DFSA is seeking guidance on what coordination is required with the AMLSCU on AML Training;
- There is no direction from the DFSA or the UAE Central Bank that firms are required to have access to the AMLSCU’s online SAR platform;
- Certified copies should be received for non-face-to-face business and reasonable explanation should be included on the client files if this is not possible.
DFSA Censures Individual for Misleading Conduct
The DFSA have censured a former employee of a DFSA Authorised Firm, for providing the DFSA with false and misleading information.
Mrs Jai Surve was not open to the DFSA in relation to having knowledge of a password for a client’s online account and stated that she had not executed any trades on the client’s account. However after an investigation by the DFSA Mrs Surve admitted knowledge of the password and that she had actually executed unauthorised trades on the account. While similar conduct in the past has resulted in a financial penalty, the DFSA treats each situation on a case by case basis and concluded that a public censure for Mrs Surve was the most appropriate action given the circumstances of the matter and Mrs Surve’s personal situation.
Mr Ian Johnston, Chief Executive of the DFSA said “For a regulator to be effective, it is imperative that it receives information which is true, precise and complete. The DFSA will therefore take action against any person who provides information to the DFSA which is false and misleading.”
DFSA Takes Action Against Senior Executive Officer
The DFSA has taken action against Mr S Ravishankar Naidu, the Senior Executive Officer (SEO) of Royal Shield Limited (RSL), an Insurance Intermediary licensed by the DFSA.
Mr Naidu failed to:
- arrange re-insurance cover in accordance with a Client’s instructions and allowed incorrect information to be provided to the Client about their cover;
- comply with the DFSA’s requirement that, as the SEO, he must be resident in the UAE;
- ensure that RSL’s financial statements for the financial year 2014 accurately reflected the financial position of RSL; and
- ensure that RSL had adequate systems and controls to undertake its Insurance Intermediation business.
Mr Naidu was ultimately responsible for the day-to-day management, supervision and control of RSL’s Financial Services activities however, he failed to show adequate skill, care and diligence and take reasonable care to ensure that RSL’s business was organised so that it could be managed and controlled effectively.
Mr Naidu has cooperated fully with the DFSA and voluntarily undertaken to step down and ensure that RSL appoints a new SEO.
If you would like further information about the DFSA’s Representative Office regime, please contact:
Clare Curtis (CCurtis@cclcompliance.com)
- Proposed Miscellaneous Amendments to ADGM Regulations
- Application of Fund Rules to Asset Managers
- Publication of the Names of Members of Investment Companies
- ADGM Revises Capital Requirements of Managers of Collective Investment Funds
- Five Start Ups Picked for ADGM’s FinTech Regulatory Lab
- ADGM Introduces First Calibrated Venture Capital Managers Framework in MENA Region
- ADGM Proposes New Foundations Regime to Address Regional and Global Needs
Proposed Miscellaneous Amendments to ADGM Regulations
In April, the Abu Dhabi Global Market (ADGM) released their first Consultation Paper for the year and the proposals included the following:
• Private Real Estate Trusts
The existing Financial Services Regulatory Authority (FSRA) Fund Rules permit the creation of Property Funds, which may be either an Exempt Fund or a Qualified Investor Fund (“QIF”). It also permits the establishment of Public Property Funds. Notwithstanding this flexibility, managers of QIF’s and Exempt Private Property Funds have identified a niche in the market where there is demand from investors for private property funds that have the key characteristics of a “Real Estate Investment Trust” or ”REIT”, including the reference to the use of the term REIT. Currently, Fund Section 13.5 restricts the use of the term REIT by Domestic Funds to those Funds which have certain operational and investment features.
The FSRA is considering amending the Fund Rules to enable the establishment of private REITs within the ADGM. These private REITS would only be available to Professional Clients.
Application of Fund Rules to Asset Manager
The Financial Services Regulatory Authority (FSRA) is proposing removing any possible implied conflict between COBS and the Fund Rules created by the current framework that expressly identifies firms engaged in Managing Assets in both rulebooks by simply deleting the reference to Managing Assets in Fund Rule 1.1.1(a).
Publication of the Names of Members of Investment Companies
The Companies Regulations contain an enhanced disclosure regime, which currently also obliges the Regulatory Authority (RA) to publish annual returns received from Investment Companies. Such returns include the names of individual members, who, in the case of an Investment Company which operates as a fund vehicle, constitute the unitholders of the Domestic Fund.
As the public disclosure approach is unique to international standards, the RA and the Financial Services Regulatory Authority(FSRA) believe that a balanced approach is required, reflecting the desirability of maintaining the Registration Authority’s ability to monitor the identities and nationalities of members while maintaining the confidentiality of investments in ADGM funds structured as Investment Companies. The proposed amendment would compel disclosure of Investment Company shareholdings to the RA, while amending the enhanced disclosure regime to eliminate the disclosure of details of unitholders to the public.
ADGM Revises Capital Requirements of Managers of Collective Investment Funds
The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has revised the capital requirements applicable to managers of Collective Investment Funds (CIF). The revisions were made to address the needs of market participants, as well as to provide enhanced alignment with capital-adequacy standards practised in established jurisdictions including the EU and the UK.
Capital requirements serve to ensure that an authorised firm maintains adequate financial resources to conduct regulated activities as a going concern and, in the event of its insolvency, to enable the firm to be wound down in an orderly manner.
Under the FSRA’s current rules, an authorised firm that manages a CIF is subject to a capital requirement that is either determined on a base capital requirement (BCR) of US$250,000 or an expenditure based capital minimum (EBCM) if higher than the BCR.
The FSRA has adopted an enhanced tier structure for BCR, following a review of existing BCR levels against established jurisdictions. For CIF managers of Public Funds, the BCR will be revised to US$150,000, with a lower BCR of US$50,000 for managers of Exempt Funds and Qualified Investor Funds. This recognises that CIF managers of Public Funds present higher conduct risks, and should have a BCR to support the necessary risk management systems and controls to assure compliance with the relevant regulations and rules. The current EBCM requirement will remain unchanged.
Five Start Ups Picked for ADGM’s FinTech Regulatory Lab
The Abu Dhabi Global Market (ADGM) has approved its first batch of FinTech participants for its Regulatory Laboratory, its sandbox for firms with various innovation offerings. These participants are comprised of 5 local and international FinTech start-ups who will use the programme to further develop and test their FinTech innovation.
The firms were picked due to their detailed understanding of the market needs with their transformational solutions and the ADGM will work closely with them to sharpen their solutions while using the support the ADGM has to offer.
The second batch of applications opened from the 16th May and the application period will close on 31st July, the second set will also be open to local and international FinTech participants and businesses to pitch their solutions.
ADGM Introduces First Calibrated Venture Capital Managers Framework in MENA Region
From the 15th May 2017, VC managers will not be subject to any base capital requirement or expenditure based capital within the ADGM. The Financial Services Regulatory Authority (FSRA) of the ADGM has introduced a risk-proportionate regulatory framework for managers of venture capital (VC) funds. This is the first of such framework within the MENA region.
The idea behind this move is to simplify the applicable regulatory requirements while maintaining the necessary safeguards to ensure that they operate in a safe manner. The ADGM is currently moving towards fostering a vibrant environment for FinTech firms and small and medium enterprises and therefore the framework is a further enhancement to the ADGM’s funds regime.
ADGM Proposes New Foundations Regime to Address Regional and Global Needs
The ADGM has issued a consultation paper inviting public feedback on its proposal to establish a legislative and regulatory framework for foundations within the ADGM.
The proposed ADGM foundations regime is designed for individuals, families, organisations and their professional advisors seeking to efficiently manage their private wealth, safeguard their assets and enhance their succession planning in Abu Dhabi and abroad.
The main proposed features of the ADGM foundations regime are:
- Creating a new type of legal structure with its own distinct attributes which have evolved for different purposes and requirements;
- Protecting the confidentiality of the foundation’s arrangements;
- Safeguarding the founder’s ability to exercise control over a foundation; and
- Facilitating migrations from other jurisdictions to the ADGM and vice versa.
The regime is designed to provide client confidentiality, advocate appropriate governance controls, and establish asset protection mechanisms to protect the Founder’s wishes and preserve the assets of the foundations.
The ADGM is currently accepting public and industry participants to submit their comments on the proposed foundations regime by the 5th July 2017.
If you would like further information about establishing a regulated FinTech company in the UAE, please contact:
Clare Curtis (CCurtis@cclcompliance.com)
- Qatar Financial Centre Regulatory Authority issue CP 2017/01
- UAE Insurance Authority Issue Second Draft of Proposed New Regulations
- Bahrain Unveils New Investment Limited Partnership Law to Support Growing Financial Sector
- US, Gulf Countries Form New Group to Stem Flow of Terror Financing
- Central Bank Turns Attention to Complaints of Mis-selling Investment Products
- UAE Central Bank Signs MoU with Abu Dhabi Judicial Department
Qatar Financial Centre Regulatory Authority Issue CP 2017/01
The Qatar Financial Centre Regulatory Authority (“QFCRA”) is seeking public comment on the proposals to the Banking Business Prudential (Liquidity Risk and Miscellaneous) Amendments Rules 2017 and the Islamic Banking Business Prudential (Liquidity Risk) Amendments Rules 2017. The proposals relate to liquidity and form part of an ongoing consultation with QFC authorised banks to upgrade the liquidity framework and bring it in line with standards published by the Basel Committee on Banking Supervision (“BCBS”) and the Islamic Financial Services Board (“IFSB”). The Regulatory Authority is seeking to assess the impact of these proposals on QFC authorised banks and develop a proportionate approach to its implementation of the new quantitative liquidity risk requirements for a Liquidity Coverage Ratio and a Net Stable Funding Ratio.
UAE Insurance Authority Issue Second Draft of Proposed New Regulations
The UAE Insurance Authority issued a second draft of its Circular No 12 last week, demonstrating its proposed overhaul of the life insurance and family takaful business.
The proposed regulations will impose tough requirements for companies selling savings, investment and life insurance policies. The purpose of the enhancement to regulation are to afford insurance customers with better protections than currently exist.
Among the proposals, the Insurance Authority (IA) plans to impose maximum limits on the indemnity commission advisers can earn, and ban them from recouping fees from the investment or insurance products they sell, which currently gives them an incentive to recommend those paying the highest fees.
Under the new regulations, advisors must clearly illustrate all fees and charges the client is likely to pay over the full term of the policy.
Policyholders will also benefit from a 30-day "free look period" during which they can cancel without penalty.
Financial industry professionals have welcomed the IA’s bid to "raise the bar of regulation".
Bahrain Unveils New Investment Limited Partnership Law to Support Growing Financial Sector
Bahrain has implemented an Investment Limited Partnership Law. The law has been created in order to establish limited partnerships nationwide by investors, previously this was only allowed within free zones. This change is expected to support growth in real estate funds, private equity funds, venture capital and technology funds, start-ups and Sharia compliance funds overall giving a strong lift to the financial sector.
The new law joins two others, the Trusts Law and Protected Cells Companies Law, to be highlighted in an outreach programme by the Economic Development Board (EDB) and the Central Bank of Bahrain (CBB) that focuses on the importance of recent changes to the regulatory environment in Bahrain.
US and Gulf Countries Form New Group to Stem Flow of Terrorist Financing
A Memorandum of Understanding creating a Terrorist Financing Targeting Centre (TFTC) has been announced between the United States and six Middle Eastern countries, Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates. The objectives of the TFTC include identifying, tracking and sharing information regarding terrorist financing, with the aim of disrupting the flow of money while providing support to the region. This is to try and stop the flow of money to radical terrorist organisations such as Islamic State and Al-Qaeda and signifies a more collaborative approach to confronting global terrorist threats.
The idea is that participating countries will work together to increase the flow of information sharing and coordinate sanctions and other disruptive methods against terrorist finance networks, with the goals of coordinating action against highest level threats and increasing joint actions as quickly as possible.
Central Bank Turns Attention to Complaints of Mis-selling Investment Products
The Central Bank of the UAE is creating greater protection for customers as it is now advising banks and finance companies to resolve all outstanding mis-selling complaints “amicably” and within a deadline of just 90 days. This decision comes after an increasing number of complaints in relation to the savings and investment insurance/takaful products. The complaints regarding mis-selling all have a common theme, with companies selling policies that are complex in nature and not well understood. There has also been criticism regarding companies using inadequately trained staff to sell policies. The Central Bank thus is now planning to issue a governance structure on how to market these products and it may introduce a proceeded to redress grievances with non-compliance charges for violating guidelines. The action taken by the Central Bank mirrors their previous action in April where the Insurance Authority pushed ahead with tough new regulations to offer UAE investors better protections against the mis-selling of these products.
UAE Central Bank Signs MoU with Abu Dhabi Judicial Department
A Memorandum of Understanding has been signed between the Central Bank of the UAE and the Abu Dhabi Judicial Department. The aim of the MoU is to establish partnerships, organise means of cooperation in matters of mutual interest and develop necessary mechanisms and means such as electronic linking which would ensure prompt and effective execution of judgements, orders, and decisions issues by Abu Dhabi courts.
The MoU symbolises the continuous efforts for the Central Bank to support electronic transformation of services provided by federal and local entities and authorities. The aim is to enhance performance levels in line with best international standards in order to achieve the objectives in “just and complete judicature.”
If you would like to discuss these updates in more detail, please contact:
Nigel Pasea (NPasea@cclcompliance.com)
- ESMA Watchdog Wants Tougher Conditions for Credit Ratings Compiled Outside EU
- FCA and SFC Sign FinTech Cooperation Agreement
- ESMA Finds Improvement in Regulators Supervisory Practices Concerning MiFID Rules on Fair, Clear and Not Misleading Information
- OFAC Updates: New Sanctions Against Several Entities and Individuals
ESMA Watchdog Wants Tougher Conditions for Credit Ratings Compiled Outside EU
Currently, under EU rules, ratings compiled in a "third country" can be used by European customers only if they are endorsed by an EU-regulated rating agency. The European Securities and Markets Authority (ESMA) now proposes to toughen up on conditions in relation to the use of credit ratings compiled outside of the EU, potentially making it harder for rating agencies in Britain to offer their services in the EU after Brexit.
The ESMA authorises and supervises rating agencies in the EU and, in April, published a consultation paper to tighten up guidance on the use of ratings from outside the EU.
There would no longer be an "automatic" endorsement of non-EU ratings, ESMA said. Instead, an EU regulated agency would have to "demonstrate" that the third country agency which compiled the rating meets regulatory requirements on an ongoing basis that are as strict as those in the EU - a much tougher condition.
FCA and SFC Sign FinTech Cooperation Agreement
The Financial Conduct Authority (FCA) in the UK, has entered into a co-operation agreement with the Securities and Future Commission (SFC) in Hong Kong to foster collaboration in support of FinTech innovation. The FCA and SFC will cooperate on information sharing and referrals of innovative firms seeking to enter one another’s markets. The FCA, who have recently signed agreements with China, Japan, Canada and the Hong Kong Monetary Authority have been keen to build a common understanding of the principles of good innovation and therefore their cooperation agreement with the SFC comes at a time where it is most welcome. The SFC have agreed that the agreement will help both regulators stay abreast of innovation in the financial services while providing innovative FinTech firms enhanced channels for communicating with regulators.
ESMA Finds Improvement in Regulators Supervisory Practices Concerning MiFID Rules on Fair, Clear and Not Misleading Information
Since identifying deficiencies in the 2014 Peer Review on the Markets in Financial Instruments Directive (MiFID), the European Securities and Markets Authority (ESMA) has published a Follow-Up Report on the actions undertaken by ten National Competent Authorities (NCAs) in addressing these deficiencies.
The deficiencies lay around organisation, supervision, monitoring activities, thematic work and complaints handling. Six countries of the 10 in Europe addressed all of the deficiencies that the peer review identified however four NCAs still have deficiencies. ESMA will continue to check on progress made by NCAs in implementing recommendations of peer reviews and to foster supervisory dialogue on MiFID rules on fair, clear and not misleading information provided to clients as well as on conduct of business rules in general.
OFAC Updates: New Sanctions Against Several Entities and Individuals
OFAC have announced implementation of three new sanctions against several entities and individuals.
The first new sanction is for Libya-Based ISIS Financial Facilitators/Algerian ISIS Supporter and Arms Trafficker and is aimed at certain Libyan and Algerian financial facilitators for their roles in assisting ISIS’s financial operations in Libya. These individuals whose names can be found on the treasury.gov website is designated for individuals who have engaged in weapon trafficking and other financial facilitation for ISIS.
The second new OFAC imposed sanction is for a Syrian “Research Centre” accused of developing weapons. OFAC is taking action against 271 employees of the Syrian “Research Centre” for “developing and producing non-conventional weapons and the means to deliver them”. This sanction has come as a reaction to the widely-reported sarin gas attack against civilians in Syria. The sanctions also include named individuals who have been “designated for materially assisting, sponsoring or providing financial, material, or technological support for, or goods or services in support of, having acted or purported to act for or on behalf of directly or indirectly the Government of Syria”.
The third sanction has been made by OFAC adding to the Specially Designated Nationals (SDN) list, which designates individuals and companies who are prohibited from dealing with the US and whose assets are blocked. These additions include two Mexican entities and a Saudi individual, Mubarak Mohammed A Alotaibi.
If you would like to discuss these updates in more detail, please contact:
Nigel Pasea (NPasea@cclcompliance.com)
- Saudi CMA Enforcement Action
- Coutts Hong Kong Fined for Breaking Anti-Money Laundering Rules
- AIB Bank Fined €2.3m for Breach of Money Laundering Rules
- Federal Reserve Fines Deutsche Bank for Anti-Money Laundering Failures
- Bank of Ireland Fined for Breaching Money Laundering and Terror Financing Rules
Saudi CMA Enforcement Action
In April, the Saudi Capital Markets Authority (“CMA”) announced the following legal actions which came as a result of their investigations:
- The CMA announced that the Appeal Committee for the Resolution of Securities Disputes has issued a decision with respect to the lawsuit filed by the Capital Market Authority against Mohammed bin Abdulkareem bin Abrahim Almayuof (member of the board of Thimar). The decision lead to the conviction of the defendant for failing to disclose a potential conflict of interest with respect to his business interests outside of Thimar. Mr. Almayouf had previously stated in a CMA disclosure form that he was not involved in any business that would compete with Thimar. However, he was found to have an economic interest in AlSinbla Food Trading Company, which operates in competition to Thimar. The Appeal Committee's decision included the imposition of a fine of 30,000 Riyals and restraining him from working in companies listed on the Saudi Stock Exchange for three months.
- The Appeal Committee for the Resolution of Securities Disputes has issued a decision corresponding to the lawsuit filed by the Bureau of Investigation and Public Prosecution against Hadhal bin Amush bin Hadhal Alsubaie (which was referred from the CMA). The decision convicted the defendant of violating Articles of the Securities Business Regulations for conducting a securities business without obtaining a license. The defendant provided recommendations, via numerous websites, on shares of companies listed on the Saudi Stock Exchange in return for money deposited into his bank account. The Appeal Committee decision imposed a fine for 30,000 Riyals.
Coutts Hong Kong Fined for Breaking Anti-Money Laundering Rules
Coutts Hong Kong has been fined HK$7million ($901,000) for breaking anti-money laundering regulations. Between April 2012 and June 2015, the private banking unit failed to establish effective methods of determining if its clients were politically exposed people, the Hong Kong Monetary Authority (HKMA) said.
The HKMA notice stated that Coutts failed to secure senior management approval to continue doing business with individuals after discovering that they were politically exposed. The failures were linked to Malaysia’s 1MDB scandal.
AIB Bank Fined €2.3m for Breach of Money Laundering Rules
The Central Bank of Ireland has fined Allied Irish Bank plc (AIB) with €2.275million Euros for breaches of anti-money laundering legislation. AIB is the biggest bank in Ireland and has 2.6 million customers and almost 300 branches, business centres and offices.
The breaches are understood to have occurred mainly at EBS, which was acquired by AIB in July 2011. There were six breaches identified which corresponded with failures in anti-money laundering, counter terrorist financing controls, policies and procedures.
Two other failures by the bank were:
- Failure to report suspicious transactions without delay to Gardaí and Revenue Commissioners.
- conduct customer due diligence on existing customers who had accounts prior to May 1995, when anti-money laundering laws became effective.
At one stage AIB’s anti-money laundering unit had a backlog of 4,200 alerts it should have reported to Gardai and Revenue Commissioners. It then took 18 months to clear the backlog. The Bank has since said that a comprehensive risk-mitigation programme was put in place to resolve all of the issues, the bank has also fully cooperated with the Central Bank at all stages of the investigation.
Federal Reserve Fines Deutsche Bank for Anti-Money Laundering Failures
The Federal Reserve has fined Deutsche Bank AG USD$41 million for failing to ensure its systems would detect money laundering regulations and it said the lender had agreed to increase its controls. The Federal Reserve found that the bank had faulty systems to detect suspicious transactions between 2011 and 2015, the central bank said in its filing.
The regulator required the bank to address “unsafe and unsound practices” and the bank also agreed to improve its controls and boost oversight of senior management. The bank’s insufficient monitoring involved billions of dollars in “potentially suspicious transactions” processed between 2011 and 2015, the transactions involved affiliates in Europe that failed to provide “accurate and complete information”.
Bank of Ireland Fined for Breaching Money Laundering and Terror Financing Rules
Bank of Ireland (BoI) has been fined €3.15m by the Central Bank of Ireland after admitting failures in risk assessment, failing to make suspicious transaction reports as soon as possible and failing to carry out enhanced due diligence on a correspondent bank outside the EU. The Central Bank identified 12 occasions where the bank failed to enforce rules to combat money laundering and financing terrorism over three years from 2010. There were significant weaknesses and failures in Bank of Ireland’s controls, policies and procedures. BoI has said it takes its regulatory obligations seriously and regrets that these issues arose. The bank has cooperated fully with the Central Bank throughout the investigation and has completed a “comprehensive multi-year programme of work to anticipate future legislative requirements also addressing these issues”.
If you would like a more detailed discussion on these or other enforcement actions, please contact:
Clare Curtis (CCurtis@cclcompliance.com)