REGULATORY AMENDMENTS AND GUIDANCE
During the process of the Dubai Financial Services Authority (the “DFSA”) supervision it was found that there were some unintended gaps and overlaps in the regulation, especially with regards to ‘arranging’ activities. The lack of scope has given rise to some entities trespassing into areas which they are not regulated for. For this reason the DFSA published Consultation Paper 106 [1] (the “Consultation Paper”), amongst others, offering clarifications and suggesting proposed amendments to the DFSA Rulebook General Module (the “Gen Rules”) in order to offer guidance and clarity.
“ARRANGING ACTIVITIES REGULATED BY THE DFSA”
The DFSA regime regulating arranging and advising activities as financial services follows, for the most part, the UK regime. However the DFSA regime also takes into consideration the Dubai International Financial Center (the “DIFC”) specific factors, as well as practices from other comparable jurisdictions.
There are, in the current Gen Rules, seven types of financial services that comprise ‘arranging’ and
‘advising’ activities:
- Arranging credit or deals in Investments [2] ;
- Advising on financial products or credit [3] ;
- Insurance Intermediation [4] ;
- Insurance Management [5] ;
- Arranging Custody [6] ; and
- Providing Trust Services [7] .
Each of these incorporates different forms of intermediation activities. There are three main categories of intermediation activities:
- Advising potential investors or customers about the merits of obtaining a financial product or credit;
- Arranging for other people to transact; and
- Acting as agent for a buyer or seller.
As will be outlined below, the DFSA has offered some refinements to provide greater clarity and regulation along functional lines for the relevant financial services.
The proposals offered in Consultation Paper No. 106 are made to offer greater clarity, certainty and flexibility to those undertaking intermediation activities in the DIFC, and to provide a regulatory framework which is proportionate with the risks associated with their activities.
PROPOSED REGIME- REGULATORY CHANGE
Separating arranging activities relating to credit from deals in investment The DFSA has found there to be no functional similarity between Arranging Credit and Arranging deals in Investments, although both currently form part of a single financial service. The Code of Business (“COB”) requirements are also different and more substantial for investment-related activities than for credit-related activities. Based on this the DFSA is proposing to create two
separate financial services which will require two separate licenses.
Arranging and advising on credit
Is a consequence of the above separation, the DFSA has proposed to create a combined financial service called Arranging and Advising on Credit in order to provide regulation based on the relevant financial sector, credit.
Providing and arranging custody
There have been many questions raised by industry members to the DFSA regarding the scope of the financial service of Arranging Custody and its interaction with the financial service of Providing Custody. While the DFSA has proposed to include extensive guidance in the General (“GEN”) Module of the DFSA Rulebook (discussed below), they have not combined the two Financial Services together. The reason behind keeping services separate is due to the difference in levels of prudential regulations between the two.
PROPOSED GUIDANCE
As mentioned above, in addition to the DFSA’s proposed regulation of the functional lines for the relevant financial services, there are also proposed guidance notes added in the DFSA Rulebook that provide clarity on:
- How different types of intermediation activities differ from each other; and
- How arranging differs from the substantive activities to which arranging relates.
Acting as agent vs. arranging
The primary distinction between ‘acting as agent’ and ‘arranging’, the DFSA explains in its Consultation Paper, is that a person acting as agent has the authority to bind its principal (i.e to execute transactions or otherwise commit its client/principal to a transaction), whereas a person ‘arranging’ for another person to buy or sell investments or insurance is a third party facilitator of a transaction, with no authority to bind any one of the parties to the transaction. [8] As such the DFSA, in its proposed guidance notes [9] has provided that a person acting as an agent either:
- Executed the transaction for its principal; or
- If using another broker to execute the client order, commits the client to the transaction by giving a binding order to the broker.
Whereas a person acting as arranger may, receive and transmit client orders to a broker, but does not have the power to execute or enter into the transaction for the client.
Arranging custody vs. providing custody
The DFSA explains in its Consultation Paper that ‘Arranging Custody’ is an activity of an intermediary. Therefore, an arranger has no direct responsibility to clients for safeguarding and administering their assets where it arranges for such clients to obtain custody services from an appropriately licensed or regulated custodian.
Whilst a person ‘Providing Custody’ is legally accountable to clients for safeguarding and administering their assets. The DFSA further explains that this does not mean that the person providing custody necessarily has to hold clients assets in its name or itself. It may appoint a third party provider as its agent to hold the assets.
As such, the DFSA has proposed to include guidance notes in the GEN module offering clarification on the above. [10]
As part of the guidance notes, the DFSA has included examples of activities that constitute Arranging custody [11] , including:
- Negotiating and settling terms of the contract between the custody provider and the person who is obtaining that service;
- Assisting the client to complete application forms and other others processes;
- Collecting and processing the client’s payments; and
- Transmitting information between the customer and the custody provider.
Footnotes:
[1] Regulation of Arranging, Representative Office Activities and Financial Promotions, Consultation Paper No. 106, available
at http://dfsa.complinet.com/net_file_store/new_rulebooks/c/p/CP_106_Regulation_of_Arranging_Rep_Office_Activities_and_Financial_Promotions.pdf
[2] GEN rule 2.9.1
[3] GEN rule 2.11.1
[4] GEN rule 2.19.1
[5] GEN rule 2.20.1
[6] GEN rule 2.14.1
[7] GEN rule 2.23.1(b)
[8] The proposed Guidance under draft GEN Rule 2.9.1 in Appendix 2 of Consultation Paper No.106, available at http://dfsa.complinet.com/net_file_store/new_rulebooks/a/p/Appendix_2_Amendments_to_GEN.pdf
[9] The proposed Guidance under draft GEN Rule 2.9.1 in Appendix 2 of Consultation Paper No.106, available
at http://dfsa.complinet.com/net_file_store/new_rulebooks/a/p/Appendix_2_Amendments_to_GEN.pdf
[10] The proposed Guidance under draft GEN Rule 2.13.1 in Appendix 2 of Consultation Paper No.106, available
at http://dfsa.complinet.com/net_file_store/new_rulebooks/a/p/Appendix_2_Amendments_to_GEN.pdf
[11] The proposed Guidance under draft GEN Rule 2.14.3 in Appendix 2 of Consultation Paper No.106, available
at http://dfsa.complinet.com/net_file_store/new_rulebooks/a/p/Appendix_2_Amendments_to_GEN.pdf
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