DIFC and DFSA Latest Developments

The DFSA’s new consultation paper on Proposals for Money Services (PMS) proposes a new permission for providing a regulatory framework for the effective supervision of firms that provide money services, thereby protecting the users of said financial services. The high money laundering risks in regard to PMS have previously prohibited this service being performed in or from the DIFC but the DFSA now considers greater protection is available to users in the DIFC through advances in technology allowing the ability to closely monitor those firms allowing PMS activities. It is thought that PMS could promote the growth of regulated financial services activities.

The proposed changes to the rules will expand the current definition of PMS to include:

  • Providing a payment account
  • Performing transactions on a payment account held by another person. PMS activities will be allowed in respect to electronic currency only (no cash).

The proposal also includes the introduction of a new financial service “Arranging or Advising on Money Services” (AAMS) which will fall under prudential Category 4. PMS prudential category will depend on the specific services to be provided and could fall under Category 4, 3C or the new Category 3D.

The proposed changes will trigger amendments to the GLO, GEN, COB, AML, FER, PIB and AUD[1] modules.

Key proposed changes to the current rules:

  • PMS and AAMS will be subject to an independent annual Money Services audit report. This will be in addition to the Client Money Audit report (that can be combined into one report).
  • PMS and AAMS will have tighter time frames in which to resolve disputes than firms with other financial permissions and where a complaint is not resolved to the satisfaction of the complainant, access should be available to an independent third-party complaints’ resolution service (such as the DIFC Court’s ‘small claims’ section), free of cost to the complainant (unless unsuccessful).
  • MS are by nature retail services, so PMS and AAMS will generally need a retail endorsement to provide services to retail clients.
  • Conducting PMS will require an endorsement to hold client money. This is not applicable to AAMS.
  • Sections 4 - 14 AML will be applicable to PMS firms

The proposed changes will be of interest to:

  • employees of DIFC companies
  • DIFC employers
  • Persons interested in PMS or AAMS in or from the DIFC,
  • Persons intending to obtain a licence for PMS or AAMS
  • service providers who intend to assist persons conducting these activities
  • potential users of money services
  • licensees conducting money services in connection with, and as an incidental part of, their regulated activities,
  • other industry participants

[1] GLO: Glossary Module, GEN: General Module, COB: Conduct of Business Module, AML: Anti-Money Laundering Module, FER: Fees Module, PIB: Prudential Investment Business Module, AUD: Auditor Module

The DFSA has released proposals for a regulatory regime that will permit Small or Medium Sized Enterprises (SMEs) to list their shares on an Authorised Market Institution (AMI) in the DIFC.

As SMEs contribute significantly to the economic growth of the UAE, the DFSA believes that providing access to the equity capital markets in or from the DIFC would allow SMEs to contribute to the funding access issues that many currently have.

Limited changes will be made to the DFSA rulebook as many of the current rules cover SMEs appropriately.

Current areas that cover SMEs without changes are:

  • Primary Disclosure – Prospectus
  • Secondary Disclosures – periodic: financial reporting and audit standards
  • Secondary Disclosures – ongoing: inside information
  • Corporate Governance
  • Shares in public hands

The areas which will require a new SME framework and rule changes are:

  • introducing a definition of an SME
  • minimum market capitalization requirements for regular listing
  • trading record
  • lock-in arrangements
  • prohibition on share repurchases
  • website disclosures
  • compliance adviser
  • fees

The proposals will be of interest to:

  • potential SME applicants
  • persons who operate or intend to operate an Authorised Market Institution or ATS that facilitates trading in the shares of a SME
  • those providing legal, accounting, audit or compliance services to SMEs in the DIFC
  • potential investors in listed SMEs.

 

The DFSA has signed a Memorandum of Understanding (MoU) with the Saudi Arabian Monetary Authority (SAMA) to strengthen cooperation between the two regulators. The areas of cooperation will be in the supervision of banking and insurance and will provide both regulators a chance to further knowledge and exchange information while strengthening both their regulatory regimes.

ADGM and FSRA Latest Developments

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) has released Consultation Paper No. 5 of 2019 – Updates to the “Prudential – Investment, Insurance Intermediation and Banking” Rulebook.

The FSRA has made proposals to make amendments to the prudential regime to align it more closely to the Basel Framework. The largest changes are in relation to the Net Stable Funding Ratio (NSFR) and the Large Exposures (LE) requirements.

The key proposals are to:

  1. introduce the Net Stable Funding Ratio
  2. update the LE requirements
  3. make the disclosure requirements more proportionate
  4. make miscellaneous amendments to address inconsistencies and provide additional guidance including qualifying holdings, operational risks and credit valuation adjustment

The proposals will be of interest to authorised persons with a financial services permission in the ADGM, other institutions operating in the investment, insurance intermediation and banking sectors, and professional advisors.

 

Changes were made to several modules following the Consultation Paper No. 4 of 2019 of which firms in the ADGM should be aware.                                                                                                                                                                                     

AML Rulebook

Annual AML Return

The guidance relating to the Central Bank bi-annual return and reference to Cabinet Resolution No. 38 of 2014 has been removed. Firms now need to follow new MLRO Reporting as explained below:

MLRO Reporting

MLROs are now required to prepare a report on a semi-annual basis to the Governing Body/Senior Management pertaining to:

a) the results of the review under Rule 4.1.1(4) (a Relevant Person must review the effectiveness of its AML policies, procedures, systems and controls at least annually)

b) the Relevant Person's compliance with applicable AML laws including these rules

c) the quality of the Relevant Person’s AML policies, procedures, systems and controls

d) any relevant findings, recommendations, guidance, directives, resolutions, sanctions, notices or other conclusions and how the Relevant Person has taken them into account

e) any internal Suspicious Activity Reports (SAR) made by the Relevant Person's employees and action taken in respect of those reports, including the grounds for all decisions

f) any external SARs made by the Relevant Person and action taken in respect of those reports including the grounds for all decisions

g) any other relevant matters related to AML as it concerns the Relevant Person's business.

MLROs must send a copy of the report within 14 days of governing body/senior management’s assessment.

GEN Rulebook

Business Plan & Strategy

When updating the business plan with activities forecast for the next 12 months, firms must be sure to consult and update the IRAP and ICAAP, where applicable.

Waivers

Modification added to the section for waivers i.e. any firm applying for a waiver or modification must apply in writing etc. under the same process.

Best practice relating to Corporate Governance, roles of the governing body and Senior Management

The governing body should also approve the approach and oversee the implementation of key policies pertaining to risk identification and management, capital and liquidity plans, compliance policies and obligations, and the internal control systems.

The governing body should also ensure that the senior management is responsible for carrying out regular stress testing on credit, operational, market, and liquidity risks. The governing body should annually review the stress scenarios and take action to address any perceived issues arising from those reviews.

COB Rulebook

Guidance

Reference to ‘Representative Office Licence’ changed to ‘Representative Office Financial Service Permission.’

Suitability Assessment

Firms must consider ongoing suitability.  Where a firm is managing a discretionary portfolio for a professional client for more than 12 months it must reconsider every 12 months whether or not the account remains suitable for that particular professional client.

Amendments were made to the Fees’ Rules on 18 November 2019, following the release of Consultation Paper No. 3 of 2019.

Some of the key amendments relate to:

  • Section 1.1.1 which states who the rules apply to, has been amended to include a person in relation to:  
  • an application for recognition as a Remote Body or Remote Member and fund managers
  • a notification of intent to manage an exempt fund or a qualified investor fund
  • a notification of intent by a foreign fund manager to manage a domestic fund pursuant to FUNDS Rule 7.1.1
  • filing a Replacement Prospectus for a public fund pursuant to FUND Rule 9.3.1(3)
  • Throughout the rules ‘financial year’ has been replaced with ‘calendar year’
  • Section 3.1 has been amended so that supervision fees are payable by the applicants, authorised persons, and recognised bodies. Approved persons are no longer included in this list.
  • Section 3.7 relating to ‘Recognition as a Recognised Body’, or ‘Remote Body’ now also includes ‘Remote Member’.

The below changes are in relation to specific fund rules:

  • Section 3.10 relating to ‘Application to register a Fund’ has now been expanded to include the mention of ‘Public Fund or provide notification for an Exempt Fund or a Qualified Investor Fund’.
  • Section 4.1.1 (b) now also relates to structured products ‘$10,000, where the Prospectus to be filed in either one or more documents relates to Structured Products,’
  • Section 4.2 now relates to different FUND Rules ‘Filing a Prospectus pursuant to FUND Rules 9.2.1(b), 9.3.2(1)(b) or 9.4.2(1)(b).

The ADGM has signed agreements with several new partners to foster collaboration and share expertise between regulatory and governmental bodies.

  • ADGM and RAK ICC

The Registration Authority (RA) of the ADGM and the Ras Al Khaimah International Corporate Centre (RAK ICC) has signed an agreement to help advance business operations between Abu Dhabi and Ras Al Khaimah.

  • ADGM and the Croatian Financial Services Supervisory Agency

The FSRA and the Croatian Financial Services Supervisory Agency (HANFA) have signed two MoUs to enhance their regulatory collaboration in the areas of financial technology (FinTech) and Investment Management.

  • ADGM and Umm Al Quwain Municipality Department

The RA of the ADGM and the Municipality Department of Umm Al Quwain (MDUAQ) have signed a cooperation agreement that aims to foster collaboration between both Emirates and drive economic growth in the UAE. Both parties have signed a commitment to ensure institutional integration and the consequential enhancement of the UAE’s stature and, in particular, Abu Dhabi and Umm Al Quwain’s positions as economic destinations.

Middle East Regulatory Updates

The Emirates Securities and Commodities Authority (SCA) has announced its membership of the Global Financial Innovation Network (GFIN). The GFIN was launched in January 2019 by a group of more than 50 regulators and related organisations with the aim of supporting international financial innovation for consumers.

The SCA’s aim is that by joining the network the State can promote the role of innovation and creative methods within securities and strengthen its competitiveness and participate in innovative projects whilst also learning from other GFIN members in the field.

The GFIN provides a forum and platform for the joint action for cooperation, exchange of knowledge and discussion of learned lessons within the FinTech field. 

International News

FATF has updated the list of jurisdictions with strategic deficiencies, adding three countries to those that have strategic deficiencies and removing three countries which are no longer subject to the FATF’s on-going global AML/CFT compliance process. The update comes after the October plenary meeting which included an ongoing review of the standards of countries across the world and identifies those that have deficiencies, but who work with FATF to develop an action plan to combat these shortcomings.

The list of jurisdictions with strategic deficiencies are:

  • The Bahamas
  • Botswana
  • Cambodia
  • Ghana
  • Iceland – new addition
  • Mongolia – new addition
  • Pakistan
  • Panama
  • Syria
  • Trinidad and Tobago
  • Yemen
  • Zimbabwe – new addition

Resulting from the significant progress made in rectifying the deficiencies identified by FATF in February and November 2017, Ethiopia, Sri Lanka and Tunisia are the only countries which have been taken off the list and are no longer subject to ongoing AML/CFT compliance processes.

The United Kingdom’s (UK) Financial Conduct Authority (FCA) has announced it will ban the mass marketing of speculative mini-bonds to retail customers.

The ban comes as the FCA has significant concerns with the widespread marketing and promotion of numerous products that have been reviewed and which contain limited explanations of risks and fees or costs involved but which may include misleading information, suggesting these products are more secure or less risky than is the case.

The FCA defines speculative illiquid securities as unlisted bonds and preference shares where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop property.

The restrictions will mean financial promotions of speculative illiquid securities will be restricted to sophisticated or high-net worth retail investors. Where products continue to be marketed to high net worth or sophisticated investors, the promotions will have to clearly state the risks to consumers of losing all their investment and fully disclose all costs or third-party fees.

The restriction will come into force on the 1st January 2020 and last for 12 months while the FCA makes permanent rules.

The US Government’s Financial Crimes Enforcement Network has planned to enforce a rule requiring cryptocurrency firms engaged in money service businesses to share information about their customers.

The rule, referred to as a “travel rule” requires cryptocurrency exchanges to verify their customers’ identities, identify the original parties and beneficiaries of transfers of $3000 and above and transmit that information to counterparties if they exist. 

While the rule has existed before, there was no expectation placed on cryptocurrency firms - except crypto exchanges - to be included. The move comes from guidance from the FATF released in June this year.

Enforcement Action

The UK’s FCA has fined Henderson Investment Funds Limited (HIFL) £1,867,900 for failing to treat fairly more than 4,500 retail investors in two of its funds which were managed by HIFL’s investment manager Henderson Global Investors Limited (HGIL).

When HGIL decided to reduce the level of active management of Japan and North American Funds there was subsequently a large difference in the treatment of institutional investors to its retail investors.

HGIL informed nearly all of the institutional investors who were affected by this change and offered to manage these two funds for those investors without charge. However, the firm did not communicate the change in investment strategy to any of the retail customers either by amending the funds’ prospectus or otherwise.

Subsequently for nearly five years HGIL charged these investors the same level of fees as it had before the decision was made, without providing the same level of active management. HIFL charged investors £1,784,465.32 more than if they had invested in a passive fund. HIFL has now disclosed the matter to all affected customers and compensated them for the additional costs they incurred.

The FCA agreed to reduce the original fine and without this discount the firm would have been fined £2,668,547.40.

The UK’s Prudential Regulation Authority (PRA) has imposed a combined fine on Citigroup’s UK operations (Citi), Citigroup Global Markets Limited (CGML), Citibank N.A. London branch (CBNA London) and Citibank Europe Plc UK branch (CEP UK), of £43.9 million for submitting incomplete and inaccurate regulatory information to the PRA between 2014 and 2018.

The PRA identified that Citi had fallen short of relevant requirements in the PRA handbook and that there were serious and widespread problems which led to the firm not properly providing an accurate representation of its financial position. There were also clear deficiencies in their internal controls and governance arrangements and significant errors in the firms’ returns.

Citi would have faced a fine of £62.7m, but the bank cooperated with the PRA and therefore qualified for a 30% discount.

The Financial Industry Regulatory Authority (FINRA), the largest independent regulator for all securities firms doing business in the United States, has fined BNP Paribas Securities Corp. and BNP Paribas Prime Brokerage, Inc. (collectively, BNP) $15 million for anti-money laundering programme and supervisory failures.

FINRA found that between 2013 and 2017 BNP did not develop and implement a written AML programme despite its penny stock activity, that could be reasonably expected to detect and cause the reporting of potentially suspicious transactions. BNP’s AML programme did not include any surveillance targeting potential suspicious transactions involving penny stocks, even though BNP accepted the deposit of nearly 31 billion shares of penny stocks from its clients.

FINRA stated that “When customers engage in high-risk transactions involving low-priced securities and foreign currencies, the firm must devote sufficient resources to its AML programme, including transaction and wire movement monitoring, to ensure that the system is tailored to the business’ unique money laundering risks”. With BNP this was clearly not the case.

As part of the settlement, FINRA required BNP to certify within 90 days that BNP’s procedures are reasonably designed to achieve compliance in these areas.

 

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