• Home
  • Insights
  • Volume 18 of The DFSA in Action – What does it tell us about the outlook for the year ahead?

19 Jan 2022

Volume 18 of The DFSA in Action – What does it tell us about the outlook for the year ahead?

Linkedin

In what has become a familiar theme as we enter a new year and look to what the next 12 months will hold, uncertainties caused by a new variant abound. Fortunately, events in the world of financial services regulation are easier to predict than the course of a global pandemic, even if only slightly.

On 23 December 2021, the Dubai Financial Services Authority ("DFSA") published Volume 18 of The DFSA in Action, an annual newsletter highlighting its activities in the previous year (the "Newsletter"). While that publication is retrospective by nature, there are nonetheless some useful indicators within it as to areas of regulatory focus we can expect to see in 2022. Our predictions on three of those areas of focus, and what they might mean for DFSA authorised firms, are summarised below.

Notifications relating to internal investigations

In April 2021, the DFSA issued a 'Dear SEO' letter (the "Dear SEO Letter") reminding authorised firms of their obligation to notify the DFSA immediately upon becoming aware, or having reasonable grounds to believe, that a material regulatory event has occurred, or may be about to occur. The Newsletter tells us that the Dear SEO Letter was issued following separate instances of firms making late notifications of events that had prompted internal investigations.

We are further told that there has been a noticeable increase in notifications to the DFSA following publication of the Dear SEO Letter. All of that suggests more than a few scattered instances of late, or non-reporting of material regulatory events. It further suggests that the DFSA will now consider authorised firms to have been given adequate warning of the regulator's concerns in this area, paving the way for a less tolerant approach to similar conduct in the future.

On a practical level, this focus on notifying the DFSA at the appropriate stage of an internal investigation is closely related to another development expected in the early part of 2022. The DFSA's consultation on a proposed whistleblowing regime closed in September 2021 and the introduction of that regime is therefore likely to be imminent. Firms implementing, or revising, their whistleblowing policies, systems and controls in response to that new regime would be well served to treat the Dear SEO Letter as a timely reminder: consideration of what facts and matters need to be notified to the DFSA, and when, should be a prominent and integral part of those arrangements.

Supervisory focus on suitability

The Newsletter summarises the outcome of the DFSA's thematic review of suitability, carried out in the course of 2019 and 2020. The key findings of that review were communicated in March 2021, through a detailed report and outreach session. Those findings showed generally poor compliance with the DFSA's suitability regime across the population of sampled firms, including in suitability assessment processes, record keeping requirements and ensuring firm policies contain adequate guidance for staff.

Interestingly, the findings also revealed that the compliance failures observed did not appear to be resulting in poor outcomes for clients. The relationship managers interviewed as part of the thematic review were generally able to provide, from memory, a good rationale for advice they had given. So overall, the findings can be succinctly summarised as the right outcome being achieved through flawed processes.

While the positive finding that clients were not suffering poor outcomes reduces the likelihood of an immediate escalation of the DFSA's activities to improve standards in this area, that does not mean that affected firms can rest easy. The Newsletter makes it clear that DFSA Supervision will continue to treat suitability as a priority issue and that it considers the improvements required to address the issues identified should be relatively straightforward. The same message could perhaps be more bluntly put, by saying there is now no excuse for firms failing to take timely steps to address the common shortcomings identified in the thematic review.

As an aside, addressing the common failings in record keeping identified would have wider benefits for affected firms. A firm is in a much better position to defend a claim or a complaint by a client that its advice was not suitable, if it has a good, contemporaneous record to demonstrate how that suitability was assessed and justified when the advice was given. That is particularly true as time goes on and relevant relationship managers may have moved on, or their memories fade. The efficacy and efficiency of second and third-line checks can also be improved with better record keeping. A compliance led sample review of client files, for example, can, at best, become unnecessarily complicated and resource intensive where good evidence of suitability cannot be identified in the available documentation.

Finally, all authorised firms may benefit from considering whether the criticism of suitability policies observed in the findings of the thematic review should be read across to other areas. The DFSA observed that suitability policies failed to provide adequate guidance to staff, as they simply copied and pasted rule requirements without considering how the firm had implemented or ensured compliance with those rules. That criticism could equally be applied in respect of other policies that merely repeat rule requirements, where compliance is better ensured by giving staff practical guidance on how to comply with those rules in the context of the firm's activities.

Results of the sectorial review of representative offices

The Newsletter confirms that, in 2021, the DFSA conducted a sectorial review on the activities of representative offices, the results of which will be finalised and communicated through a published report and outreach programme. Representative offices, for those unfamiliar with the firm category, are branches of firms which are incorporated and regulated in a jurisdiction other than the DIFC. They have permission to conduct a limited scope of activity in or from the DIFC, which essentially involves marketing the financial products and services of their related parties, including through making introductions or referrals to those parties.

The results of the sectorial review will obviously be essential reading for those involved in representative office activities. It is also likely, however, to offer insights into the DFSA's current thinking on areas of interest to a broader range of authorised firms.

For example, some of the most prominent areas of compliance risk to address when operating a representative office, are to ensure that introduction and referral activities do not cross the line into arranging, and that other marketing and promotion activities do not cross the line into advising. Those considerations are equally important to firms authorised to conduct arranging and advising activities, as identifying where those lines are drawn can be crucial to determining the point at which a person should be recognised as a client of the firm.

While there is relatively extensive guidance setting out indicators as to when an activity will constitute arranging or advising, it is ultimately a question of fact to be determined on a case-by-case basis. Should the outcome of the sectorial review provide further practical examples of what does, and does not, sit within the definition of these activities, it would provide a useful tool for interested firms to use in checking the assumptions and assessments used in calibrating their related systems and controls. That will particularly be the case if any examples discussed deal with situations where the use of technology has made it more difficult to determine the jurisdiction in which an interaction with a potential client takes place, and with which entity.

It is also worth remembering that the DFSA's current business plan described the issue of firms carrying on financial services activities without the specific authorisation required, as one of the DFSA's areas of focus within the wealth management sector. Should the sectorial review identify a pattern of firms conducting arranging or advising activities without appropriate authorisation, that stated focus would provide an added impetus for the DFSA to act swiftly in taking steps to remedy that position.

Conclusion

The above is, of course, only a snapshot of what we will see on the regulatory front in the coming year. Some developments, such as the evolving conversation on sustainability in finance, adapting to the seemingly inexorable rise of crypto assets and keeping pace with cyber risk, will reflect themes common to the agenda of many international regulators. Others, such as the proposed introduction of a credit funds regime, will reflect more localised objectives, such as encouraging innovation or improving access to finance for start-ups and small businesses. Whatever comes, an important aspect of preparing for it will remain to incorporate recent lessons of the past into planning for the year ahead.

Get in touch

Should you have any queries or require any specific advice, please contact a member of our regulatory and investigations team who will be happy to assist you.

Linkedin

KEY CONTACT

  • Related Services
  • Related Locations