Developments to the DFSA’s Framework in the DIFC

On 01 February 2017, a number of changes were made in the Dubai International Financial Centre (DIFC) to the Dubai Financial Services Authority (DFSA) Rulebook in accordance with previous DFSA consultation papers. The key changes relate to greater clarity guidance on:

• the concept of "arranging", relating to financial products, credit, insurance and custody, and
• the remits of a DFSA-authorised Representative Office.

DFSA Authorised Firms should review their existing business activities to ensure that they are consistent with the issued guidance and that they hold the appropriate authorisations and approvals with respect to the financial services, endorsements and the financial products on their DFSA licenses.

New category of financial service

The General (GEN) Module of the DFSA Rulebook describes certain activities which constitute regulated financial services in the DIFC and illustrates the approach a firm must take in carrying out regulated activities. Two specific regulated activities:

• “Arranging Credit or Deals in Investments”, and
• “Advising on Financial Products or Credit”,

both of which fall within a DFSA prudential Category 4 license, have been re-organised into:

• “Arranging Deals in Investments”
• “Advising on Financial Products”, and
• “Arranging Credit and Advising on Credit” (a new category).

The new category - “Arranging Credit and Advising on Credit” - is defined as “(a) making arrangements for another Person, whether as a principal or agent, to borrow money through a Credit Facility; or (b) giving advice to a person in his capacity as a borrower, potential borrower or as an agent for a borrower or potential borrower on the merits of his entering into a particular Credit Facility.”

The separating out of "Credit" from the previous "advising" and "arranging" categories highlights the distinction that "Credit" warrants different considerations beyond other investment products, such as funds, shares, bonds and structured products.

Further guidance on the concept of "arranging"

Detailed guidance on the concept of "arranging" and what this does or does not entail has now been incorporated into the DFSA’s GEN Module. The guidance goes through a number of key questions that have surrounded the activity of "arranging" for some time, such as how the activity differs from "Dealing as an Agent" and what is excluded from the activity of "arranging".

Custodial services - further guidance

Additional guidance has been provided in the DFSA’s GEN Module on the differences between “Providing Custody” and “Arranging Custody”. The main highlighted differences between the two are that a person providing custody will be legally accountable to its client for safeguarding and administering client investments, whilst a person arranging custody does not assume any responsibilities with respect to the client for the safe custody of the client’s investment. As such the ‘arranger’ does not become a party to the arrangement to "provide" custody. Thus, "Arranging Custody" means arranging for one or more persons to carry out the activities that are listed under the "Providing Custody", such as “(a) safeguarding and administering Investments belonging to another Person; (b) in the case of a Fund, safeguarding and administering Fund Property; or (c) acting as a Central Securities Depository.”

The developments remove the unnecessary regulatory burden on DFSA-Authorised Firms that are “Arranging Custody” by reducing certain safe custody requirements which might have otherwise applied. Accordingly, such firms will not be required to submit a safe custody auditor’s report with respect to the financial years ending in 2016 or 2017, or any part of those financial years, as otherwise required.

Developments to the Conduct of Business framework

New rules relating to “Advising on or Arranging direct Long-Term Insurance” have been added to the Conduct of Business (COB) Module of the DFSA Rulebook, following the regulatory developments to the DFSA’s rules on insurance and insurance-intermediation in Q4 2016.

In summary, the amended COB rules state, amongst other things, that investment firms which provide advice or arrange direct long-term insurance contracts for "Retail Clients" must provide a comprehensive list of certain detailed disclosure (eg method of bonus calculations, an indication of surrender values and paid-up values, etc). These changes are similar to the mandatory disclosure requirements contained in the draft regulations for life insurance and family takaful (Shariah-compliant insurance) regulations, contained in Circular No (33) of 2016 released by the UAE Insurance Authority (IA) - the UAE’s "onshore" federal insurance regulator. These types of mandatory product disclosures are similar to those under the EU’s Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation with regards to PRIIP products made available to retail investors as defined in the Markets in Financial Instrument Directive (MiFID) or customers as referred to in the Insurance Mediation Directive (IMD) (they would not qualify as professional clients under MiFID). As a result of the new rules, investment firms and insurance intermediaries should review their existing systems and controls in order to confirm their compliance with the updated rules.

Remits of a Representative Office

One of the key concerns with regards to DFSA Authorised Representative Offices for both those operating under such a license in the DIFC, or those contemplating obtaining such a license, has been its limitations - namely a DIFC Representative Office being prohibited from having its own clients and the inability to engage in the financial regulated activities of "arranging" and "advising" (which requires a DFSA prudential Category 4 license). As a result, the DFSA responded to a long list of questions on the remits of a Representative Office within its "Frequently Asked Questions" (FAQ) guidance document. As part of the 01 February 2017 update, much of this guidance has been both incorporated and expanded upon in the Representative Office (REP) Module of the DFSA Rulebook, in particular:

• what types of "Financial Promotions" and "marketing activities" can a Representative Office undertake
• prohibitions related to distribution of information related to third-party products, and
• what would otherwise constitute "advising" and "arranging".

Updated AML/CTF framework

The Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module (AML) of the DFSA Rulebook has been updated to reflect developments within the wider Federal UAE legal framework in this area - namely UAE Federal Law No. 7 of 2014 on Combating Terrorism Offences and Federal Cabinet Resolution No. 38 of 2014 on the Implementing Regulations of Federal Law No. 4 of 2002 on Combating Money Laundering and Terrorist Financing.

In order to facilitate compliance with the wider Federal regime, the DFSA has issued a list of requirements as a reminder to relevant persons. This is inclusive of guidance on the identification and verification of beneficial owners, freezing assets, training and awareness as well as the preparation of AML reports. The DFSA has also issued additional guidance to provide clarity and assist relevant persons to understand their expectations resulting from certain provisions. This includes guidance on low risk customers, tax issues and understanding and verification of the source of wealth and the source of funds.

The DFSA has also removed the prescribed low risk customer (PLRC) categorisation and related provisions so as to align it with the Federal AML legislation and the Financial Action Task Force (FATF) recommendations. Accordingly, the characteristics of the PLRC definition are now covered by newly issued guidance on low risk customers.

For their financial year ending in 2016, DFSA Authorised Firms must complete and submit their annual AML Return forms within four months of their financial year end. For the 2017 calendar year, AML Return forms must be submitted by the end of September 2017 and the return must cover the period from 01 August 2016 until 31 July 2017.

Capital requirements

The Prudential - Investment, Insurance Intermediation and Banking (PIB) Module of the DFSA Rulebook has now been amended with regards to the capital requirement for fund managers. Firms which only undertake the regulated financial activity of "Managing a Collective Investment Fund", which falls within a DFSA prudential Category 3C license, will now only require a "Base Capital Requirement" of US$140,000 for managing a public fund or US$70,000 for managing any other collective investment fund - as opposed to the standard DFSA prudential Category 3C "Base Capital Requirement" of US$500,000. However, the capital requirement for a Category 3B, 3C and 4 license continues to be the higher of the applicable "Base Capital Requirement" or the applicable "Expenditure Based Capital Minimum" (which for Category 3C continues to be calculated at 13/52 of the "Annual Audited Expenditure" where no "Client Assets or Insurance Monies" are being held).

Conclusion

In conclusion, firms should conduct reviews at regular intervals to make certain that they fully comply with and have the correct authorisations on their licences for the financial service activities they undertake in or from the DIFC. All DFSA Authorised Firms should ensure that their business activities are carried on in accordance with the applicable laws and rules.