The Dubai Financial Services Authority (DFSA) has released Consultation Paper No.127 that proposes amendments to current regulation relating to the assessment of suitability when providing advice or undertaking discretionary transactions (“relevant financial services”) for Professional Clients. These proposed changes result from some of the unintended consequences and practices that have developed under the current DFSA suitability regulations.
The DFSA found that firms would often:
- Include vague or generic language in the notice to warn a Professional Client about any limitation on the assessment of suitability when providing relevant financial services
- Not sufficiently draw the attention of Professional Clients to the effect of the warning given to them, either by:
- burying the warning amidst other information included in the Client Agreement; or
- not requiring a separate signature indicating the client’s consent for a limited, or no, suitability assessment
The DFSA expressed concerns that some Professional Clients may not be consenting to not having a suitability assessment undertaken at all and that in addition, they may not fully appreciate what impact limiting their right to a suitability assessment may have on the relevant financial services with which they are being provided.
Consequently, the DFSA proposes to remove the currently available flexibility for a full waiver of the suitability assessment but retain flexibility for partial waivers.
It also proposes to amend the current exemption that suitability does not apply to a firm which “undertakes a transaction with a Market Counterparty” to apply to firms that carry on financial services “with, or for, a Market Counterparty”.
The DFSA also stressed that when a firm undertakes a limited suitability assessment, this should always be for the benefit of the relevant Professional Client and not so that the firm has a less extensive or quicker process when making recommendations or carrying out discretionary transactions for such clients.
COB 3.4.2 will have additional extended guidance surrounding the warnings provided to Professional Clients, ensuring that they are given appropriate and effective warning of the consequences of the firm undertaking a limited suitability assessment.
Finally, the DFSA found that firms conducting suitability assessments have varying degrees of information relating to clients and procedures for assessing suitability and so it proposes to add clarity to the expected information, which is likely to include the following:
(a) the Client’s needs and objectives - matters such as the length of time for which the Client wishes to hold the type of financial product and, in some cases, the age and stage of life of an individual Client;
(b) the Client’s financial situation - matters such as the Client’s assets, liabilities (including tax), income and expenses, and general capacity to withstand losses arising from investing in financial products
(c) the Client’s knowledge and experience - the nature, volume and frequency of the Client’s previous investments, and the level of familiarity with relevant financial products and financial services. If the Client is an individual, information on their occupation or profession, former professional experience, and level of financial education will be needed.
The DFSA proposed to provide guidance that, when providing a relevant financial service, firms should consider the overall effect of its recommendation on the Client’s investment portfolio.
The impact this may have on firms who currently waive or partially waive the suitability assessment under the current regulations will be:
- if a firm has an existing arrangement with a Professional Client not to undertake any suitability assessment, they will not be able to rely on that arrangement going forward.
- if a warning notice has already been given to a Professional Client for a limited suitability assessment it should be reviewed to ensure it meets the new requirement before the changes come into effect.
The proposed changes will be of interest to corporate finance firms, private bankers or asset management firms who may limit suitability or undertake discretionary transactions.
DFSA’s Financial Reserve
The second topic discussed in Consultation Paper No.127 is the DFSA’s financial reserve.
Currently, the DFSA builds up a regulatory reserve (based on funds provided by the Government of Dubai and fees paid by regulated entities) so that the regulator can fund its activities if there is an unexpected need for expenditure, or even a breakdown in the normal methods of funding.
It has been recognised that other regulators commonly list in a statute the maximum extent of reserves that can be allowed and the treatment of any surplus funds in excess of that maximum. As a result, an amendment to the Regulatory Law (DIFC Law No. 1 of 2004) will be made so that the DFSA can hold a regulatory reserve of up to two times its annual budget, with any surplus funds above this maximum limit to be remitted to the Government of Dubai.
The DFSA has issued a Feedback Statement regarding Consultation Paper 124: Property Crowdfunding released in December 2018. The Property Investment Crowdfunding Platforms (PICPs) Consultation Paper proposed enhancing its current regime regarding crowdfunding platforms, to include rules and regulations around the financing for assets such as property.
The DFSA received responses which raised questions as to why the DFSA had proposed to impose certain conditions such as:
- the inability of PICPs to invest in, and/or manage, multiple properties on behalf of investors
- the inability of PICPs to offer investments into off-plan properties.
In response, the DFSA acknowledged that firms managing assets may disagree with the condition regarding investing or managing multiple properties on behalf of investors but noted that they do not feel comfortable with the possibility that an operator of a PICP may stray into other financial activities, such as managing assets, providing portfolio management or providing advice which may influence investors to take part in certain investments. Therefore, the DFSA maintains the restriction on platforms managing assets and providing advice and recommends that if a firm finds the regime too restrictive and wishes to offer diversification, then they may be able to establish a Property Fund instead.
This condition was also proposed for firms Operating a Collective Investment Fund (CIF). The DFSA sees a potential “arbitrage” between PICPs and CIFs so to address this issue they have exempted PICPs from the CIF regime. Feedback has not indicated that this gives CIF an unfair advantage and actually there is clear advantage in PICPs being given a unique opportunity to offer investments to investors that would not be possible with the CIF regime exempted.
The DFSA also had concerns about PICPs offering investments into off-plan units, especially in regard to Retail Clients and the potential complexities around these investments, which could be around:
- what the investor is and is not getting
- what happens if a developer defaults and a development is unfinished
The DFSA acknowledges that the proposed regulations are not sufficient or appropriate for the off-plan property market but if those who offer PICPs show that these platforms can operate successfully in the market for completed properties then the DFSA may reconsider in the future whether it is appropriate to extend the parameters of PICPs to include off plan properties.
On the 28th August 2019, the DFSA sent all Money Laundering Reporting Officers (MLROs) of authorised firms four letters regarding changes made to the United Nations Security Council Assets Freeze and Sanctions List.
The letters informed firms of the United Nations Security Council’s amendment to its Sanctions List concerning ISIL (Da’esh), Al‑Qaida and associated individuals, groups, undertakings and entities.
An updated version of the consolidated list can be found on the UN Security Council website and firms are required to review their internal records to ensure ongoing compliance with any UN Sanctions.
The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) has admitted 32 FinTech Firms into its ADGM Regulatory Laboratory (RegLab) out of 83 applications since it began in May 2017. From the first cohort, which accepted five firms, there have now been two graduates who will move from the RegLab and into the wider market. One of the graduate firms is a digital client onboarding solution which is integrated into mobile technology targeted at improving the lives of low-income migrant workers in the UAE, and the other graduate works as a digital payments solution for smartphone users that uses blockchain to transact in online purchases without the need for a bank account or credit card.
The ongoing partnership between the RegLab and FinTech firms continues to foster innovative technological solutions within the financial services whilst working closely with the regulator to adapt and reinvent their regulatory requirements.
The Central Bank of Bahrain (CBB) has approved its first Cryptocurrency exchange. The firm, Rain, obtained a Crypto-Asset Module licence from the CBB after completing the bank’s two-year regulatory sandbox programme.
While other crypto currency exchanges are currently still within regulatory sandboxes across the Middle East, there has not been an official licence provided by a GCC Regulator until this approval by the CBB.
Pakistan has submitted a 27-point plan to the Financial Action Task Force (FATF) which will help determine Pakistan’s exit from the FATF’s Grey List. The Grey List is a list of countries whose domestic laws are considered weak in relation to tackling the challenges of money laundering and terrorism financing in their jurisdiction.
In June 2019, FATF stated that Pakistan had failed to complete its action plan on terrorist financing, but the recently submitted report now covers appropriate areas and planned safeguards that will be put in place against money laundering and terrorist financing by certain firms and professionals providing financial services.
The Government of Brazil has issued a decree which moves the Board responsible for monitoring illegal financial activity such as money laundering, into a new Financial Intelligence Unit (“FIU”) under the Central Bank’s control.
The FIU will be responsible for producing and managing financial intelligence information for the prevention and combating of money laundering and terrorist financing, as well as the development and production of weapons of mass destruction.
The Government expects the FIU to liaise closely with national and international agencies, which will allow Brazil to adopt national and international best practices in combating illegal activity like money laundering in a more effective and productive manner.
The Dutch Central Bank has announced further controls to regulate cryptocurrencies and has stated that cryptocurrency firms in the Netherlands will have to register with the regulator by January 2020.
The introduction of further regulation on cryptocurrency firms reflects the processes that need to be in place to adequately combat money laundering and terrorist financing. The Central Bank is also requiring that all board members and policymakers manage these processes and assess their governance to make sure they comply with anti-money laundering and anti-terrorist financing rules.
Bulgaria’s Commission for Personal Data Protection has fined DSK Bank, $569,930 for a data breach that affected over 33,000 clients.
Data including names, addresses and bank account numbers linked to customers who had taken out loans with the bank were leaked to third parties. DSK Bank has accepted the fine and cooperated with the authorities and intends to further improve its personal data protection measures.
ABN Amro has been ordered by the Dutch Central Bank to review all its retail clients in Netherlands for possible money laundering or other criminal activities and warned that these investigations could lead to fines for the bank.
ABN Amro has already spent €114 million in taking extra measures to increase customer due diligence and has dedicated more than 1000 employees to enhance its controls in relation to anti money laundering and counter terrorist financing.
No fine has yet been levied.