DIFC and DFSA Latest Developments

The DFSA have released Consultation Paper No.117 which covers the following proposed changes:

Definition of Credit Facility

The DFSA has observed that a number of businesses it considers to be credit facilities do not have the relevant permissions. The DFSA has therefore proposed to add “invoicing financing or discounting and factoring” to the definition of Credit Facility.

Currently, Credit Facility has been defined as: “any facility which includes any arrangement or agreement which extends monetary credit whether funded or unfunded to a Person including, but not limited to, any loan or syndicated loan, mortgage, overdraft, financial lease, letter of credit, financial guarantee, trade finance, transaction finance, project finance or asset finance.”

Calculation and reporting of the Maturity Mismatch Ratio (MMR)

The DFSA proposes to revise Electronic Prudential Reporting System (EPRS) FormB80- Liquidity schedule- maturity mismatch, to capture more specific details of time buckets and items collected. This will:

(a)   facilitate reporting and monitoring of different business models in the DIFC, such as retail funding and the increased reliance on collateralised funding. Both are not captured in the current reporting form

(b)  collect granular data that allows the DFSA to perform liquidity stress testing and provide better insight into liquidity profile of the individual firms.

This will enable the DFSA to adopt international best practice on liquidity reporting standards and monitoring tools outlined in the Basel Committee on Banking Supervision’s paper (BCBS).

Currently, the existing form B80 monitors cash flow mismatches and calculates MMR as outlined in PIB 9.3.10, PIB 9.3.11 and PIB A9.3.2. Given the granularity and classification of items proposed in the revised form, it is not currently possible to perform the mismatch ratio calculation as precisely as defined in the PIB.

The proposed calculation of MMR would use the same detailed data as the Liquidity Coverage Ratio (LCR), which will help in aligning the cuts applied to liquid assets under the two measures of short term liquidity (in LCR & MMR). While the change in MMR calculation will help the supervisors with a more consistent set of short term liquidity monitoring tools. The proposed changes would also clarify the treatment of Contingent Liabilities. The likelihood of liabilities being triggered will cover the period for which the MMR is being calculated.

The DFSA proposes to introduce the new EPRS reporting form and to make necessary changes in the Prudential – Investment, Intermediation and Banking Module (PIB) rules to allow calculation of MMR using the data from the new proposed reporting form.

This change will affect Category 1 and 5 firms only and is of particular interest to banks.

Fees Applicable to Funds

Currently the DFSA charges application and annual fees for managing funds (other than umbrella funds) and a separate application and annual fee for managing an umbrella fund and its sub funds. The DFSA considers this a complication in the fee rules and proposes to remove these separate requirements.

FER 3.9 &3.10 set out the fees to be paid per fund for initial and subsequent periods.

As per 3.9, the initial fee of $4,000 will be paid by a Fund Manager to the DFSA in respect of each Domestic Fund for which it is the Fund Manager, and covers the period immediately following registration or notification until the end of the calendar year.

The DFSA proposes that the initial period fee for authorised firms is prorated i.e initial annual fee of $4000 multiplied by the number of whole months between the date of registration and the end of the calendar year and then divided by 12.  As a consequence, the initial period fee will be less for the majority of funds that are registered with the DFSA.

Holding and Controlling Client Assets

The DFSA has proposed changes to the COB rulebook to clarify that the Client Assets rules do apply in situations where a firm holds a discretionary mandate - often through a Power of Attorney - regardless of whether the assets are held in the Client’s own name. The new rule now states that Client Assets are held or controlled by an Authorised Firm if:

All Money held or controlled on behalf of a Client in the course of, or in connection with, the carrying on of Investment Business or the Operation of a Crowdfunding Platform in or from the DIFC is Client Money, except Money which is:

d) in an account in the Client's name over which the Authorised Firm has a mandate or similar authority and where the Authorised Firm is in compliance with COB Rule 6.11.3 (2), provided it is not a mandate to manage the Money on a discretionary basis;”

These changes will have an impact on Firms such as Wealth Managers and Asset Managers who have a discretionary mandate e.g. Power of Attorney, over accounts in client’s own names. If the rules are implemented by the DFSA, such Firms will need to consider the implications of the Client Money Provisions.

Client Money

When Client Money is held in a jurisdiction outside the DIFC, a clear and concise summary of how the market practices, insolvency and legal regimes applicable in that jurisdiction differ from the regime applicable in the DIFC and any consequent risks to the Client.

This is also applicable to Safe Custody Investments under COB APP 6.

CCL recently submitted feedback on Consultation Paper No.117 and we suggest firms review the Consultation Paper in detail. If you would like to discuss the changes with your Firm and how they may affect you please contact Clare Curtis (CCurtis@cclcompliance.com).

ADGM and FSRA Latest Developments

Following feedback received regarding proposals to the November 2017 Consultation Paper No. 5, regarding the introduction of the new Remote Membership framework, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) is adding enhancements to its Capital Market regime by introducing the Remote Membership framework. The Remote Membership framework is a system in which brokers located outside the ADGM can access exchanges and clearing houses located within the ADGM in order to expand the pool of international investors, cross border flows and increase liquidity for the ADGM’s Capital Market. Other proposals that have been implemented include:

  • Simplifying transaction reporting requirements for ADGM firms
  • Clarifying the availability and constraints of the price stabilisation regime permitted by the Markets Rules
  • Amendments have also been made to naming conventions in order to clarify distinction between ADGM-based exchanges and clearing houses, compared to remote exchanges and clearing houses.

The FSRA has published a discussion paper setting out its proposed regulatory framework for operators of financing platforms for non-public companies, also known as Private Financing Platforms (PFPs).

Recently, the FSRA has identified the importance of growth and is actively seeking to boost the economic growth and diversification in the private enterprise sector. With this growth in mind, the FSRA is seeking to develop alternative financing solutions for private enterprise to bridge commercial funding gaps and ease cashflow issues - two issues that can stunt the growth of firms in this sector. PFPs will provide a specialised landscape for private enterprises to launch and grow their businesses and spur innovation and enhance competitiveness.

The FSRA is proposing a regulatory framework for PFPs that would facilitate access by start-ups and Small and Medium sized Enterprises (SMEs) to new and alternative sources of funding from Professional Clients while tailoring the regulatory framework to safeguard these clients and their interactions with small private businesses.

The FSRA’s main proposals are:

  • The creation of a new Regulated Activity (Operating a Private Financing Platform) which permits both investment-based and loan-based PFP transactions
  • Loans or investments may be held directly by lenders or investors, or indirectly through a Special Purpose Vehicle (SPV). The PFP Framework will be supported by the range of SPVs available in the ADGM which will offer flexibility in various financing, securitisation and asset transfer options
  • Participation in PFP transactions is targeted at Professional Clients as there are higher risks associated with these transactions. The FSRA may allow PFP operators to serve Retail Clients, on an exceptional basis, subject to the PFP operator putting in place risk-appropriate retail protections in line with the nature and scale of the PFP operator’s business.
  • The requirement for PFP operators, to have appropriate systems and controls including, but not limited to: due diligence arrangements for those accessing the PFP, client asset protections, and disclosure obligations, whilst at the same time retaining sufficient flexibility to accommodate innovative business models.

Private Financing Platforms is a similar idea to crowdfunding platforms, which tend to target retail clients. The FSRA’s proposal will allow small firms to use PFPs to reach out to bigger clients and therefore offer a larger scope in funding opportunities. 

CCL provides advice and support for SMEs in the ADGM as well as firms seeking to be licensed as Operating a Private Financing Platform. If you would like to discuss this in more detail please contact Clare Curtis (CCurtis@cclcompliance.com)

The ADGM and Jersey Financial Services Commission (JFSC) have announced a collaboration agreement in order to develop and circulate trends on registries, services and operations to promote growth in both jurisdictions.

Much like existing agreements between the ADGM and other jurisdictions, the agreement is aimed at reaching mutually beneficial goals through the exchange of information, views and development in both jurisdictions. Methods to foster the exchange of views and expertise include joint activities and training initiatives to encourage best practice.

Middle East Regulatory Updates

The UAE’s Central Bank has ordered money exchange houses to raise standards in anti-money laundering and counter-terrorist financing in order to improve compliance and protect their relationships with US correspondent banks. Standards have been released that exchange houses must comply with by January 2019 or risk fines or license revocation.

Guidance includes:

  • Requiring exchange houses to appoint a compliance officer
  • The need to check and record the identification of senders and receivers of all money transfers (currently only required on transactions of more than 2,000AED)
  • Money transfers between exchange houses will be made via the Central Bank’s electronic transfer system
  • Exchange houses should avoid cash for trade-related transactions and only conduct transactions for charities and other societies which have permission from the government to collect donations and transfer funds abroad.

In order to spur secondary market trading of debt and strengthen state finances, the Capital Market Authority (CMA) has approved the listing of local currency government bonds on the Saudi Stock Exchange. The CMA has stated over 204.4 billion riyals will be available to trade, including floating, fixed rate bonds and Islamic instruments.

The motivation behind the move is that this will help expand ownership beyond banks to insurers, mutual funds and individual investors in order to make it easier for the government to finance its budget deficit. Creating transparent benchmark prices for debt will encourage more Saudi companies to issue corporate bonds and reduce Saudi’s reliance on bank lending.

Bahrain has recently launched its Bahrain FinTech Bay which the financial regulator, the Central Bank of Bahrain has stated is the largest in the Middle East and North Africa region. Like many other regulatory sandboxes, the Bahrain FinTech Bay is a regulatory framework where FinTech firms can showcase their technology through lower capital requirements and lighter entry requirements.

Within Bahrain’s sandbox there are currently seven entities with four being cryptocurrency exchanges. The regulator’s view on cryptocurrency such as Bitcoin is that while it is a commodity that can be exchanged, it is not formally recognised as legal tender. Currently however, Bahrain much like many other GCC countries is fully supportive of developing its FinTech businesses and culture of entrepreneurship within the FinTech sector.

The Central Bank of Bahrain has launched a private network connecting all retail banks. The network will boost the communication between banks using real-time inter-bank payments settlement and strengthen the system’s resiliency further while aligning it with global payment system best practices. The system will still use the existing SWIFT network as a backup but this network will act as the primary communication hub.

The Central Bank of Bahrain’s director Dr Huda Al Maskati stated that “This network provides a secure environment to complete the settlement of payments in an efficient way, while at the same time ensuring that the participants’ payment messages retain the securities and confidentiality needed”.

International Developments

The UK National Crime Agency (NCA) has secured two unexplained wealth orders to investigate assets totalling £22 million believed to be owned by a politically exposed person (PEP). The two orders in question relate to a property in London and another in the South East of England. The investigative order will require a person who is a PEP from outside the European Economic Area or is someone connected to such a person and who has unexplained wealth of over £50,000 in the UK to explain the origins of their assets, the extent of their interest in the property and how it was obtained. A respondent’s failure to comply with the order may lead to a presumption that the property has been obtained through unlawful conduct in any subsequent court civil recovery proceedings.

It is the first time the NCA has exercised this power after its introduction through the Criminal Finances Act 2017. The power enables the UK to target money laundering more effectively through unexplained wealth orders and reduces the appeal of the UK as a destination for illicit income. The authorities hope this will send a clear message to those who seek to launder corrupt wealth through acquiring assets in the UK.

In addition to the unexplained wealth orders, interim freezing orders were granted, meaning that the assets cannot be sold, transferred or dissipated while subject to the order.

Estonia's Financial Supervisory Authority (FSA) is planning to launch an investigation into Danske Bank's local branch after media reports suggested the lender had been aware of money laundering allegations at the unit as far back as 2013. The regulator issued a statement saying it would look at whether Danske Bank knowingly withheld information from the FSA during a series of inspections that took place at the bank’s Estonian branch in 2014.

The investigation by the FSA follows a report in Danish newspaper Berlingske and other media outlets reporting that a whistle-blower had alerted the bank in December 2013 about suspected money laundering activities through its Estonian branch which had links to Russia.

The German regulator (BaFin) believes that the compliance monitoring of German banks’ internal control systems could be optimised. BaFin carried out a market study into 110 selected banks to understand how they comply with the German Securities Trading Act.

The regulator found wide disparity in the approaches taken by different institutions when checking not only the quality and accuracy of client documentation but also the timing and thoroughness of such checks. BaFin pointed out that institutions which had highly formalised control functions were better at identifying the issues than their counterparts.

The regulator also noted the absence of escalation procedures to deal with errors in a timely manner. Recommendations to improve the quality of client documentation and record keeping were also made by the regulator.

A group of asset managers in the UK has paid £34 million in compensation to investors for failing to clearly state how their funds are managed.

The Financial Conduct Authority (FCA) has conducted a review of how asset managers charged fees to their investors and whether some funds charged higher fees for active management while in practise were simply tracking or partly tracking a benchmark index. The FCA looked at 84 “potential closet tracking funds”, and found that only 20 of the funds adequately explained to investors how they were managedand64 failed to spell out clearly enough how controlled they were in choosing what to invest in.

One asset manager is facing a further investigation that could potentially lead to sanctions.

The drive to push asset managers to be clearer on marketing funds to retail investors follows a broader "value for money" review of the funds sector by the FCA in 2017. The FCA expects Funds Managers to take their duty to consumers seriously and maintain full transparency and disclosure of information in the promotional material for investment funds.  The move by the FCA follows similar action across Europe, including from the European Securities and Markets Authority, which said it would analyse data from across the region and potentially take action.

Transparency is also at the heart of the European Union's Markets in Financial Instruments Directive II (MiFID II) which went live in early January.

The FCA found that nearly one in three firms it visited last year had failed to be compliant in anti-money laundering/counter-terrorist financing (AML/CFT) requirements.

The overall figures include the FCA's "deep dive" reviews of 14 major banks and in desk-based reviews, where the FCA found that more than half of firms failed to achieve compliance.

In 2017, the FCA visited 100 firms and assessed four as non-compliant, while 27 firms visited were "generally compliant", meaning remediation was required of the firm, using either its own or external resources.

The FCA found 74 firms reviewed were "generally compliant". The statistics included the deep dive reviews of 14 major retail and investment banks that are conducted on a four-year cycle. The FCA’s 2016/17 AML annual report pinpointed that each deep dive review took several months and anticipated that in the next round of assessment it planned to reduce the length of each review to four months by taking a more risk-based approach.

The FCA identified significant risks in the deep dives such as a weak governance system with insufficient oversight and weaknesses in systems and controls to identify and manage high risk clients. The FCA said that recent findings in major banks include recognition that AML needs attention and a strong tone from the top, demonstrating that the regulator was setting its standards correctly and that the banks were responding.

The UK’s government and regulators will look in detail at the potential risks from cryptocurrencies like Bitcoin. British junior finance minister John Glen stated there has been an "explosion of growth" in crypto assets like Bitcoin, which may pose risks even though the underlying technology has immense potential.

He also specified that the upcoming FinTech strategy will involve the government working further with the FCA and the Bank of England to consider in more detail issues relating to crypto-currencies.

Meanwhile, the Bank of England Governor Mr. Mark Carney has stated that some crypto-currencies will gain from being regulated but, in contrast, many others will fail. In a speech earlier in March, the Governor said crypto-currencies were failing as a form of money and showed many characteristics of a bubble but he added that the technology showed some promise in cutting financial transaction costs.

The European Banking Authority (EBA) set out groundwork to fill in gaps and evaluate how rapidly the evolving financial technology sector is regulated. The EBA will analyse the nature of the services provided by FinTech firms to ensure similar services with comparable risks are regulated in a consistent way across the EU. The regulator will report on its assessment by the end of the year and allow FinTech firms to try out new apps on customers. Brussels proposed to introduce optional licensing system for crowdfunding, to bring FinTech firms and banks that develop new services jointly under the same supervisory authority.

The EBA may also recommend certain changes to the existing EU financial rules to make them technologically neutral and proportionate for FinTech start-ups.

As for the developments in the regulation for cryptocurrency, the EU has said it "stands ready" to regulate cryptocurrencies if no action is taken at the global level after the Group of 20 economies (G20) met to discuss possible rules.

Following the poisoning of a former Russian spy and his daughter in Salisbury, Wiltshire on March 4 2018, The UK’s Prime Minister announced planned Magnitsky amendments to the Sanctions and Anti Money Laundering Bill which will give banks more work in scrutinising individuals and related financial institutions.

The Magnitsky amendments refer to modifications of the Global Magnitsky Act adopted by the US to redress impunity of human rights abusers around the world. The UK is considering using similar methods to stem the flow of cash from abroad which may be tainted by corruption or gains from human rights abuse.

The nature of the sanctions is still under question, but they may include travel bans and other restrictions including asset freezes, and, potentially, restrictions on access to certain sectors, as also seen with the current Russian sectorial sanctions. Financial institutions directly connected to or linked with parties connected with sanctioned names, including elements of control and ownership, will also come under scrutiny.

It is likely the UK will seek to strengthen the bill by conjoining the issues of human rights and threats to national security. “Sanctioned individuals frequently use complex steps to disguise their ownership of assets and inevitably some sanctioned individuals will be able to by-pass controls. This does not necessarily imply a failure on the part of a bank or its employees but the heightened public interest in this issue will mean banks will want to avoid any mistakes," said a lawyer familiar with acting on Russian matters.

In addition to the Magnitsky amendment, it is suspected there would be a focus on the UK’s current legislative framework, including the use of powers such as unexplained wealth orders which had already started being used with the NCA currently investigating two such unexplained wealth orders.

The anticipated legislative framework and the new Magnitsky amendment may not come into force, however, until after Brexit in March 2019.

Coinbase, the virtual currency exchange will use its Financial Conduct Authority authorisation to passport into Europe so that it can roll out faster payments functionality to its entire European customer base through the Barclays Bank partnership. Contingency plans will also be made by the firm to ensure it could still operate on the continent post-Brexit.

Coinbase secured its e-money licence from the FCA in 2017 however it only began offering faster payments functionality to a limited number of UK customers in March. It aims to scale up in the coming weeks to offer faster payments to it entire customer base.

Until today Coinbase had relied on the Single Euro Payments Area (SEPA) system for customers to transfer money into or out of their accounts which meant higher processing times for the funds to register back in the customer’s bank account when moved out of their Coinbase account and vice versa. With faster payment options, after securing accounts with Barclays Bank to its customer base, Coinbase will be able to offer processing times of up to 2 hours to transfer money in and out of the accounts. 

Global securities regulators have proposed that stock exchanges talk to each other and have safeguards in place to mitigate bouts of extreme market volatility that can undermine investor confidence. As stocks and bonds in the US and Europe have suffered rapid and large falls, investors were prompted en masse to ask for their money back from bond funds, setting off a wave of instability and volatility in the financial markets.

The International Organisation of Securities Commissions (IOSCO) set out draft recommendations for public consultation to stop big market moves becoming disorderly. Although certain changes have already been made nationally in recent years, IOSCO aims for a more consistent approach across financial markets and to share best practices.

To that effect, IOSCO proposed that trading venues like exchanges should have mechanisms to manage extreme volatility, though this could differ according to asset class and how much they are traded.

While exchanges have already introduced controls such as trading halts, or only allowing orders within certain price bands, IOSCO said these must be regularly reviewed and tweaked to reflect the market changes.

Regulators, market participants and, if appropriate the public, should be told when the mechanisms are triggered, and identical or related securities are traded on multiple trading venues in particular jurisdictions.

Enforcement Action

The Singapore regulator, the Monetary Authority of Singapore (MAS) has imposed fines of S$5.2 million on the Singaporean branch of Standard Chartered (SCBC) for anti-money laundering breaches and countering financing of terrorism requirements and S$1.2million on Standard Chartered Trust (Singapore) Ltd (SCTS).

The breaches occurred when trust accounts of SCBS’ customers were transferred from Standard Chartered Trust (Guernsey) to SCTS from December 2015 to January 2016.

The bank stated that they took responsibility for inadequately mitigating the risks “involving some clients who might have attempted to avoid reporting obligations under the Common Reporting Standard by transferring their trusteeships.”

The Hong Kong regulator, the Securities and Futures Commission (SFC) has fined Deutsche Bank Aktiengesellschaft (DBAG) and its wholly-owned unit Deutsche Securities Asia (DSAL) for breaching several regulatory rules.

DBAG failed to report 792 short positions and published 49 research reports on future contracts without the correct and required registration and DSAL failed in segregating client funds within the prescribed timeline between January 2010 and December 2014.

Both entities self-reported these breaches as well as cooperated with the regulator and, this has been considered in the settlement and fine amounts.

The FCA have fined Deutsche Bank trader, Guillaume Adolph £180,000 for his involvement in manipulating the Libor interest rate benchmark as well as banning him from ever working in any regulated financial activity.  

Mr Adolph benefited his own trading positions by making requests to Deutsche’s Libor submitters to change Swiss franc and Japanese yen figures. The FCA said that he “acted recklessly, and therefore with a lack of integrity, in deliberately closing his mind to the risk that his behaviour in relation to submission of CHF and JPY Libor rates was contrary to proper standards of market conduct.”

The FCA also stated that he was not a fit and proper person to perform any function in relation to any regulated activity carried on by any authorised person due to his lack of integrity.

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