Regulatory Update: Middle East Edition – April 2021

The Dubai International Finance Centre (“DIFC”) and Dubai Economy have signed an agreement to consolidate efforts to create the UAE’s first Know Your Client (“KYC”) Blockchain Consortium. Using distributed technologies, the platform will facilitate fast, secure and more streamlined customer onboarding by facilitating the sharing of verified e-KYC between licensing authorities and financial institutions. The founding consortium members include Dubai Economy, DIFC, Emirates NBD, Emirates Islamic, Commercial Bank of Dubai, HSBC, Abu Dhabi Commercial Bank, RAKBANK and Mashreq Bank. Presently, the platform is expected to hold almost 50% of all corporate e-KYC records in the UAE.

The DIFC issued Consultation Paper No.3 of 2021, referred to as the “Intellectual Property Regulations”, under Intellectual Property Law No. 4 of 2019 to facilitate the administration and enforcement of the DIFC’s Intellectual Property (“IP”) law, enhancing the regulatory framework in the DIFC. The proposed regulations will clarify the requirements concerning complaints, inspections and investigations, and the issuance of directions following a complaint. The regulations will establish a register of experts who will be available to the IP Commissioner when required to investigate complaints. The IP Commissioner will also be able to cooperate with federal and local authorities in the UAE to pursue enforcement actions.

You can read the full paper here. The deadline for comments was 9^th May 2021.

The DIFC has announced the completion of a ‘first of its kind’ merger using a complex reverse triangle merger structure made possible by the 2018 update to the DIFC Companies Law. The transaction sees United Arab Chemical Carriers Limited join forces with United Overseas Group Limited and has the backing of a newly formed investor consortium to be known as the United Arab Chemical Carriers Limited (“UACC”). The DIFC Companies Law allows public and private companies established in the DIFC to merge with other companies, including those established outside the DIFC. The success of UACC’s merger creates precedent for more complex cross-border merger opportunities in the future.

The Dubai Financial Services Authority (“DFSA”) has issued a notice to amend multiple laws and DFSA rulebooks following Consultation Paper No.131 and the enactment of Regulatory Law Amendment Law, DIFC Law No.1 of 2021.

The amendments affect the following:

• Recovery and Resolution (“RAR”) rulebook, with new chapters covering application and interpretation, recovery and resolution planning, resolution, and miscellaneous (Management Information Systems).
• Glossary Module, which now references the RAR rulebook.
• General Module, which updates the Licensed Functions and Authorised Individuals section to exclude a temporary administrator of an authorised fund under Article 84Q of the Regulatory Law as a licensed function.
• Market Rules include an exception to reporting market disclosure of insider information where the reporting entity is an authorised firm to whom Part 5A of the Regulatory Law applies (or is an entity in the same), and where the DFSA has given its consent in writing to the delay on the basis that disclosure of the information may undermine financial stability in the DIFC or is otherwise in the public interest. The entity must selectively disclose to a person prior to market disclosure and the disclosure must be made in accordance with the rules on selective disclosure. The ‘Persons whose exercise of employment, profession or duties may warrant selective disclosure’ can now include the Resolution Authority.
• Authorised Market Institutions updates its reference to the Regulatory Law.

The changes came into effect on 18^th April 2021. You can read the changes here

His Highness Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum announced the appointment of Fadel Al Ali as Chairman of the DFSA following the retirement of Saeb Eigner on 1st June 2021. Mr Al Ali brings with him his extensive experience in finance from his positions as Deputy CEO and Head of Corporate and Investment banking with First Abu Dhabi Bank, and as CEO for Dubai Holdings.

The DFSA released Consultation Paper No.139, “Updating the Leverage Ratio” to incorporate and exceed the Basel Committee on Banking Supervision’s (“BCBS”) standards and recommendations to adopt a more conservative treatment of leverage on capital.

The paper welcomes comments on:

• The minimum Leverage Ratio (“LVR”) being 3% and, where a breach occurs, the requirements to submit a breach notification
• A higher leverage ratio for globally systemically important banks and a domestic systemically important bank
• The allowance for firms to exclude exposures that are already deducted from its Tier 1 capital from the LVR exposure measures
• Whether the DIFC should depart from the BCBS’s recommendations with regards to treatment of unsettled transactions and cash pooling
• The treatment of collateral posted and received against derivative positions for the purposes of determining the LVR Exposure Measure
• Whether the DIFC should depart from the BCBS’s recommendations with regards to offsetting the Variation Margin against the derivative positions
• Whether to include trade exposures in the LVR exposure measure where the clearing member has provided a guarantee or contractual commitment
• Whether to allow any exposure reduction in the LVR for firms providing clearing services as Higher Level Client (a client of a clearing member or another clearing client)
• Whether to add to the LVR’s simple ratio by including the notional amount of the credit derivative in their LVR Exposure Measure when writing credit derivatives, and that credit protection bought should not be used to reduce the notional amount of written credit protection.

The paper will be of particular interest to authorised firms, or those associated or interested in authorised firms, who are licensed as deposit takers, credit providers and proprietary dealers, dealers as agent on a matched principal basis or as an Islamic banking institution.

The DFSA welcomes comments until the 26^th June 2021 by submitting here.

The DFSA has issued Consultation Paper No.140,  “Miscellaneous” in which it seeks to amend the Regulatory Law and modules of the DFSA rulebook.

The DFSA seeks comments on the following:

• Delegations to the DFSA
• Minimum experience requirement on Restricted Speculative Investments
• Accounting and auditing standards for branches
• Suitability of Money Laundering Reporting Officers (“MLRO”)
• Removing references to LIBOR

The suggested changes would amend the following rulebook modules:

• General (“GEN”)
• Anti-Money Laundering (“AML”)
• Prudential Investment, Insurance Intermediation and Banking (“PIB”)
• Collective Investment Rule (“CIR”)

In addition, the paper seeks to rectify references and errors in the existing rulebooks.

The DFSA welcomes comments until 26^th May 2021 by submitting here

The DFSA ran a suitability bootcamp to remind firms of their obligations to rule COB 3.4.2 – the DFSA suitability rule. Firms were reminded that the DFSA would expect a customised framework which show a consistency of approaches, good suitability outcomes and can be evidenced by reliable documentation.

The DFSA highlighted:

• The importance of understanding key criteria defined in firms’ frameworks, such as ‘reasonable’ and ‘appropriate’ and what that would mean to your firm, rather than producing a ‘copy and paste’ from the rulebook
• That different information is expected from firms conducting Customer Due Diligence (“CDD”) as opposed to suitability assessment
• The requirement for assessments for each transaction
• The expectation that an assessment will be made where a trigger event occurs
• The expectation of a different assessment for execution-only transactions as opposed to advised transactions
• That suitability frameworks should be based on the clients’ specific needs rather than being product driven
• That model portfolios cannot be given a generic rating
• The importance of considering suitability for buy, sell and hold advice

Firms are reminded to customise their framework by considering:

• Business model and the nature of business/ products/ services
• The contributions of different stakeholders, including relationship managers, investment advisers and product teams
• Types of clients
• Product ranges
• The nature and extent of limitations on suitability assessments

The DFSA released a “Dear SEO Letter” reminding firms of their obligation to notify the DFSA of any material regulatory events. Firms are reminded that their obligation to notify the DFSA extends to where they have ‘reasonable grounds to believe’ an event has occurred or may occur. Actions that may meet the threshold include actions or inactions of authorised firms, their officers, employees, third parties or controllers. The requirement will also include events that are outside the control of the authorised firm, such as market movements or where a whistleblowing event occurs.

The Abu Dhabi Global Market (“ADGM”) regulator – the Financial Services Regulatory Authority (“FSRA”) – has introduced a new regulatory framework for the authorisation and supervision of Financial Technology (“FinTech”) firms, for providing third party services to customers of financial institutions. The new framework provides third party providers with appropriate regulatory requirements around data protection and privacy of information, conduct of business, technology risk, anti-money laundering and countering terrorist financing, which facilitates efficient and secure transactions with financial institutions. The Framework gives customers and businesses more control over their financial data by creating a progressive FinTech ecosystem.

You can read the effected FSRA regulations here and the FSRA rules here.

The ADGM announced amendments to the Insolvency Regulations 2015. The regulations enhance the ADGM’s insolvency framework by adding flexibility for administrators following the execution of a deed company arrangement used to restructuring insolvent companies.

The regulations came into effect on 1^st April 2021. You can read the updated regulations here

The Abu Dhabi Global Market Arbitration Centre (“ADGMAC”) announced its Memorandum of Understanding (“MoU’) with the Singapore International Arbitration Centre (“SIAC”) promoting internal arbitration as a preferred method of dispute resolution for international disputes. Both parties agree to hold conferences, seminars and workshops on international arbitration in Abu Dhabi and Singapore to enlighten both arbitration communities, as well as providing preferential rates in each of the respective jurisdictions.

The board of the ADGM has approved the establishment of the ADGM Authority.

The ADGM Authority will drive the ADGM’s growth by leveraging international trends and developments across the financial services sector following the pandemic.

The ADGM authority will hold the functions of:

• The Office of Strategy and Business Development
• Corporate Services
• The Office of Information Security and Enterprise Risk Management

From 1^st June 2021, the ADGM Authority will be led by Mark Nicholas Cutis, CEO, who brings over 40 years in financial and investment experience from his roles at ADNOC, Abu Dhabi Investment Council, Merrill Lynch, Shinsei Bank and Bayerische Vereins Bank.

The ADGM Commissioner of Data Protection released circular No.1 of 2021 clarifying the processing of personal data for all entities within the ADGM. The circular confirmed that all entities, by being established under s.145 of the ADGM Companies Regulations 2020, must process personal data due to the requirement to have at least one natural person as a director.

Firms who have completed their data protection notification are advised to update their responses.

For more details as to how your firm must comply with the ADGM Data Protection Regulations 2021 you can view our knowledge piece here.

The National Committee for Combating Money Laundering and Financing of Terrorism and Illegal Organisations (“NAMLCFTC”) met to discuss the latest developments in Counter Terrorist Financing (“CTF”) and AML in the UAE. NAMLCFTC approved six risk assessment reports relating to terrorism financing, trade-based money laundering, misuse of legal persons, non-profit organisations, lawyers and the gold sector. The reports will align the legislative and operational frameworks to prioritise the current risks and will boost cooperation amongst competent authorities.

In addition, the NAMLCFTC:

• Adopted AML/CTF guidelines for financial institutions, designated non-financial businesses and professions to raise awareness of the importance of adhering to AML and CTF legislation
• Endorsed the initiative of the sub-committee for money laundering crimes investigative authorities regarding the implementation plan of the National Strategy for Combating Money Laundering and Combating the Financing of Terrorism.
• Discussed an updated national action plan for:
  • strengthening financial inclusion efforts through measures aimed at improving access to all segments of society to financial institutions under the supervision of the Central Bank
  • minimising the reliance on Hawala providers or informal money transfer services providers
• Reported on the efforts to enhance financial inclusion in the UAE by developing a Wage Protection System, adopting a risk matrix of product developed by exchange houses and remittance intermediaries, and raising awareness and commitment to AML/CTF measures by exchange houses.

The Central Bank of the United Arab Emirates (“CBUAE”) has launched a new liquidity management facility as part of the implementation of the new Dirham Monetary Framework. The facility will allow eligible participants to access UAE Dirham (“AED”) funding from the CBUAE on an intraday basis ensuring real-time payment settlements, mitigating liquidity risks.

You can read more on the facility here.

The CBUAE has issued Market Conduct Regulation for Small to Medium Sized Enterprises (“SMEs”), following the introduction of the Financial Consumer Protection Regulatory Framework, to promote best practices among licensed financial institutions (“LFI”) when engaging with SMEs. The regulations increase accessibility for SMEs to financial products and services and sets the market conduct standards for LFIs.

The regulations strengthen governance over the design, promotion and sale of financial products and services, and promote responsible financing practices and appropriate disclosure of risks. In addition, it provides SMEs with access to timely and accurate information to make informed decisions, implements clear mechanisms for redress of complaints by SMEs, and requires appropriate debt counselling. The regulations provide LFIs with clarification on the expectation of customer due diligence for SMEs and require a fair and transparent complaints management function.

The UAE’s Securities and Commodities Authority (“SCA”), in collaboration with the General Secretariat of the Gulf Cooperation Council (“GCC”), discussed the recent approaches of corporate governance and controls for Public Joint-Stock Companies. As part of “Mulem” – the Gulf Investment Awareness Programme – the webinar discussed the following themes and lessons learned from the community of attendees:

• The board is expected to hold the responsibility for maintaining balance between realising shareholders objectives and monitoring executive management.
• The board should be provided with the tools that enable effective supervision and responsibilities.
• The responsibilities of the board and executive management should be made clear under the articles of association.
• Shareholder rights should be underpinned by the principles of transparency, disclosures, fairness, responsibility, accountability, and supervision.
• Firms should observe the trend of environmental, social, and corporate governance (“ESG”) which include a criteria of 16, including health, societal development, spreading education and sustainability, amongst others.
• Listed companies should foster an investor relations culture through multiple initiatives.
• The main objectives of the investor relations department should include creating clear and straightforward media messages and spreading them in a consistent manner as part of a communication plan that uses various media outlets, including social media platforms.

The principles were drawn from various sources including the World Bank’s Ease of Doing Business Report, the World Economic Forum’s Competitiveness Report and International Organisation of Securities Commissions and the Organisation for Economic Cooperation and Development, as well as examples provided from attendees including Tabreed, the Central Bank of Bahrain, Oman’s Capital Market Authority and Abu Dhabi Securities Exchange, amongst many other high-profile attendees.

The Central Bank of Bahrain (“CBB”) announced a series of nationwide FinTech innovation challenges named “Bahrain Supernova”. The challenges will be aimed at furthering the development of the FinTech industry in the Kingdom of Bahrain. The Bahrain Supernova will provide real market challenges to innovators and FinTech startups who will have access to a sandbox environment to test their customer centric solutions.

The categories are as follows:

• RegTech Solution: Account Blocking & Unblocking Automation Process. Submit your proposal here.
• Autonomous Finance. Submit your proposal here.
• Extending Payment Services for Proximity/Wearables Devices. Submit your proposal here.
• Banking, User Experience & AI. Submit your proposal here.
• Connecting Customer Accounting System with NBB for Banking Needs. Submit your proposal here.

Participants have until 20^th May 2021 to submit their proposal and entries will be shortlisted prior to pitching their solution to a panel of expert.

The Financial Action Task Force (“FATF”) reviewed their assessment of New Zealand’s Counter Terrorist Financing (“CTF”) AML measures. The FATF found the country to be delivering good results but with notable weakness

around providing beneficial ownership information, general supervision standards and the implementation of financial sanctions.

The full report can be found here.

The Basel Committee sets out its strategic priorities for the Committee over the coming years in its Work Programme agenda supporting the promotion of global financial stability and strengthening the regulation, supervision and risk management practices.

The Work Programme is endorsed by the Group of Governors and Heads of Supervision, and focused on three main themes:

• Covid-19 resilience and recovery, which included monitoring and assessment of risks and vulnerabilities to the global system
• Horizon scanning and mitigation of medium-term risks and trends, which included digitalisation of finance, climate-related financial risks, and the impact on banks’ business models resulting from a “low-for-long” interest rate environment
• Strengthening supervisory coordination and practices which focus on the role of artificial intelligence/ machine learning in banking and supervision, data and technology governance by banks, operational resilience, and the role of proportionality in bank regulation and supervision.

You can read more on the Work Programme here.

The United Nations (“UN”) advised the Committee for Goods and Material Subjected to Import and Export Control to amend names on the UAE Terrorist list. One entity has been amended on the sanctions committee, and one entity has been removed concerning the Central African Republic. One entity on the ISIL Daesh and Al Qaida has been amended. Six entries have been removed concerning Iraq.

Firms should screen their customer databases against the amended list, which can be found here

Keep abreast of sanction list updates by subscribing to the Executive Office of the Committee for Goods and Material Subjected to Import and Export Control here.

The CBUAE imposed a fine of AED 496,000 on an exchange house operating in the UAE for breaching Article 14 of the Federal Decree Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organisations. The exchange house was found to have a weak compliance framework in addition to a poor compliance history.

Firms are reminded to assess the adequacy of their compliance framework on an annual basis, or ad hoc when there is a material change to operations, to ensure the suitability of their framework for their operations. Firms are advised to conduct a thorough and regular compliance monitoring programme to identify then address the gaps.