Middle East Outlook for 2019
Financial services regulators in the Middle East continue to focus on a number of themes which we believe will remain relevant in 2019: AML/CFT: regulators will continue to focus on failings in client on-boarding processes. With this in mind, firms need to ensure that their AML/CFT policies and procedures are robust and able to meet the challenges of their ongoing business while ensuring legal and regulatory compliance. Enforcement Whistleblowing Suitability Legal developments Contacts 4 5 5 5 7 FinTech and financial inclusion: we anticipate ongoing engagement with peer regulators, licensees and potential new market participants and services providers to ensure that the correct environment exists to facilitate innovation while ensuring appropriate protections are in place for customers and other market participants. Enforcement: increased pressure to demonstrate swift enforcement actions will result in further enforcement actions being taken by regulators including some prudential regulators. Suitability and protection of client assets: firms will need to address and assess the suitability of products and services for their clients and ensure that they have put in place proper safeguards for client assets. Compliance: regulators will continue to demonstrate interest in the compliance function and identifying any deficiencies. Outsourcing and group structures: licensees should be mindful of their ongoing obligations under relevant legislation and rules and will need to be able demonstrate ongoing understanding of roles and activities undertaken by other group entities or third parties and the ability to obtain information on an 1 MIDDLE EAST FINANCIAL SERVICES E-BULLETIN ongoing basis to ensure legal and regulatory compliance. We hope to see further clarification on regulator's expectations in the form of new regulations and guidance. Corporate governance: will remain an ongoing theme and area of interest. Conduct of activity within financial free zones and scope of licence: with the UAE's unique offering for financial institutions and related service providers within the two financial free zones (ADGM and DIFC) in addition to regulations applicable onshore in the UAE, the UAE's financial services regulators will continue to be vigilant in their supervisory approach to ensuring that their licensees are acting with the scope of their licenses and within the bounds of the jurisdiction in which they are licensed, while at the same time looking at opportunities to facilitate specified defined low risk activities onshore, as demonstrated by the Dubai Economic Department's steps to permit DIFC entities to undertake limited marketing activities onshore in Dubai. Individual accountability Middle East regulators have adopted a `wait and see' approach vis vis their peer overseas regulators in relation to implementation of their own senior management accountability regimes. Based on the size of their markets and the number of licensees, regulators generally appear satisfied that their existing regulations allow them to effectively supervise firms closely and to make individuals accountable for their actions. That said, individual accountability remains top of the agenda from an enforcement perspective with regulators in the UAE and Kuwait taking action against individuals, which has included imposing fines and restricting activities. We anticipate that as part of their supervisory approach regulators will look closely at their licensees and will expect firms to clarify roles and responsibilities of senior managers and other key individuals, to ensure such information is documented, to set out the firms requirements or expectations with respect to accountability and to ensure that this is communicated through all levels of the organisation by the Board. Anti-money laundering Financial services regulators continue to place primary importance on anti-money laundering and combatting of financing of terrorism (AML/CFT) and sanctions compliance. This is particularly the case in jurisdictions such as Saudi Arabia whose Financial Action Task Force (FATF) Mutual Evaluation Assessment Report was issued in 2018 and the UAE where financial services regulators are currently preparing for the UAE's FATF Mutual Evaluation Assessment in mid-2019. The UAE's last assessment was undertaken in 2007. Regulators are particularly concerned about failures by licensees to implement AML/CFT policies, procedures, systems and controls, failings in client on-boarding processes, particularly in the light of identified weaknesses in documentation relating to source of wealth and unexplained complex legal structures. With this in mind, authorised firms need to ensure that their AML/CFT policies and procedures are robust and able to meet the challenges of their ongoing business while ensuring legal and regulatory compliance. Competition regulation In the Middle East, the first quarter of 2018 saw the UAE Competition Committee (Committee) finally become operational with the Committee meeting to discuss guidelines and standards for the implementation of competition rules and in particular the merger control regime. In 2019 we anticipate that the Ministry of Economy's Competition Department (supported by the Committee) will turn its attention to the review of mergers and acquisitions. Saudi Arabia, Kuwait, Qatar and Oman all have in place competition law regimes and (with the exception of Oman) are active members of the International Competition Network. Encouraging financial innovation and financial inclusion Middle East regulators continue to seek to address the opportunities and challenges posed by the development of financial technology (FinTech) including how it might be used as a tool to facilitate and 2 MIDDLE EAST FINANCIAL SERVICES E-BULLETIN promote financial inclusion and the enhancement of efficiency of markets, by trying to find balance between engaging with market participants in a facilitative and engaging manner (taking a risk based approach) while recognising that the full implications of FinTech innovation (including the impact for protection of consumers) are yet to be fully understood. We anticipate that regulators will continue to engage with peer regulators, market participants, licensees and services providers to ensure that the correct environment exists to facilitate such innovation while ensuring appropriate protections are in place for customers and other market participants. With this in mind, we have seen: a number of regulators set up sandboxes including the Dubai International Financial Centre (DIFC) Authority, the Dubai Financial Services Authority (DFSA), Abu Dhabi Global Market (ADGM) Financial Services Regulatory Authority (FSRA), UAE's Emirates Securities and Commodities Authority (ESCA), the Kuwait Central Bank (KCB), Central Bank of Bahrain (CBB), Saudi Arabian Capital Markets Authority (Saudi CMA) and most recently the Saudi Arabian Monetary Agency (SAMA) in February 2019 with the release of its Regulatory Sandbox Framework. the issue of trial FinTech licences, including by the Saudi CMA in respect of equity crowdfunding investment services, the ADGM FSRA, the DFSA and the CBB. memoranda of understanding (MOUs) between regulators and market participants such as telecoms providers, for example the MOU signed by ADGM with leading UAE telecom providers aimed at boosting digital innovation in the ADGM financial freezone. international MOUs between peer regulators and Middle East regulators aimed at sharing of information, international cooperation and sharing of experience in the field of training and qualification for example relating to FinTech, including the Exchange of Letters between the DFSA and the Financial Services Agency of Japan and the MOU with the Monetary Authority of Singapore (MAS), MOUs between CBB and MAS and ADGM FSRA. domestic MOUs reflecting increased cooperation between financial services regulators, for example in the UAE the DFSA, SCA and the ADGM's FSRA entered into an MOU aimed at facilitating licensing of domestic funds for promotion across the UAE. This has resulted in the publication of consultation papers by the regulators aimed at amending their respective regulations. This regime will mean that an investment fund established in one of the financial freezones or onshore in the UAE will be able to promote and market across the entire UAE, a move welcomed by market participants. dialogue and collaboration between regional regulators, such as the UAE Central Bank and the Saudi Arabian CMA's current Aber project which involves both regulators working together on a proof of concept to experiment with blockchain technology to facilitate cross-border payments. collaboration between regulators and market participants such as the agreement between SAMA and Ripple to support KSA banks settle payments using blockchain software. The pilot program has been described as the first of its kind to be launched by a central bank, and allows banks in Saudi Arabia to use Ripple's software to settle payments sent into and out of the country instantaneously. the development of new regulations, such as the SCA's directive on Regulatory Controls of Fintech which regulates the Initial Coin Offerings (ICOs) and recognises them as securities and CBB's draft rules on trading in virtual currencies which rules cover requirements for licensing, financial resources, safeguards for client/customer interests, technology standards and cyber security risk management measures. Consumer protection Following regulatory response to concerns identified in 2016 arising from an increase in complaints in relation to the marketing and distribution of products to investors, the UAE Insurance Authority issued circulars aimed at reinforcing plans to overhaul how products are sold to investors. Similarly, the UAE Central Bank urged banks and financial companies in May 2017 to resolve outstanding mis-selling complaints amicably, at the time imposing a deadline of 90 days. Since then UAE regulators have continued to focus on consumer protection, introducing specific consumer protection provisions for example in the new UAE Central Bank Law, Decretal Federal Law No. 14 of 2018 regarding the UAE Central Bank & Organization of Financial Institutions and Financial Activities and the new Finance Companies Regulations, 3 MIDDLE EAST FINANCIAL SERVICES E-BULLETIN Circular No.112/2018 and also introducing new complaints mechanisms. Similarly, in Bahrain we have seen the CBB introduce new provisions in relation to services covered under its crowdfunding rules which introduce a consumer protection mechanism, whereby the lender or investor has the right to withdraw the commitment made within 48 hours from the time he /she makes a commitment to lend or invest. Enforcement In line with international regulatory developments, in 2018 we saw prudential regulators such as the UAE Central Bank bolstering their enforcement teams in an effort to be able to deliver swift enforcement outcomes. Some of the more significant enforcement outcomes during 2018 include: the DFSA demonstrated its commitment to take the necessary steps to enforce its regulatory actions (in this case a fine imposed on an individual) by taking formal legal steps to pursue that individual in the United Kingdom to enforce payment. The individual had been fined USD 52,500 for undertaking Insurance Intermediation activities in contravention of DFSA legislation, failing to take reasonable care to ensure his business complied with DIFC legislation, and for misleading the DFSA. the Saudi CMA issued a fine of SR100,000 (approximately USD 26,700) and sanctions on a telecoms company for presenting misleading and incorrect information to the CMA relating to developments arising from its participation in and winning of a bidding offer. The CMA also imposed a fine of SR 40,000 (approximately USD10,700) on the same company for failing to announce the same developments on the Tadawul website. Kuwait's CMA issued fines and sanctions on three licensees due to defaults in the settlement of some trading transactions on Boursa Kuwait as well as findings from investigations undertaken by the CMA which indicated non-compliance with: (a) some provisions of Law No. (7) of 2010 regarding the Establishment of the Capital Markets Authority and Regulating Securities and its Executive Bylaws and (b) `the precautious measures of defaults in paying for some of the trading operations at one of the licensees. The regulatory sanctions imposed included: referral of suspected violations set out in the CMA's previous reports for investigation; restrictions on one licensee's business activities, in particular practicing financial brokerage activity; restrictions on another licensee from practicing all activities licensed by the CMA, pending the conclusion of the CMA's investigation; restrictions on the activities of the Board and the CEOs of all three licensees, so as to limit their roles to the management of the company and a prohibition on registration for any new positons relating to Registered Employment Positions, pending the conclusion of the investigation; restrictions on the activities of an individual broker of one of the licensees restricting him from the activity of practising brokerage activities registered with the CMA; suspending the decisions for any nomination applications for Registered Employment Positions; The Kuwait CMA also revoked the securities activities license of another licensee preventing the licensee from acting as a collective investment scheme manager, subscription agent and custodian and deleted licensed persons on its register. Oman's CMA issued disciplinary decisions which included: suspending one accounting firm from accepting new engagements to audit regulated entities for a period of one year. The suspension related to significant accounting and financial irregularities identified by the CMA during its inspection of certain listed entities which resulted in the CMA taking immediate corrective measures in those listed entities to protect investors and stakeholders. a second accounting firm was also suspended from auditing CMA regulated entities after the CMA's findings that the firm had accepted practices by some CMA regulated entities that were 4 MIDDLE EAST FINANCIAL SERVICES E-BULLETIN inconsistent with international accounting practices causing adverse effects on certain market participants. The second firm was prevented from accepting new engagements; upholding a disciplinary decision issued by the Accountability Committee against a power company for violating Article 5 of the Capital Market Law and imposing an obligation on the company to modify its financial statements to be consistent with ISA 17. the QFCRA imposed fines on a licensee for systemic failures in implementing AML/CTF policies, procedures, systems and controls and for making misrepresentations to QFCRA regarding its conduct and implementation of such policies, procedures, systems and controls. Whistleblowing A number of regulators across the region have issued new whistleblowing provisions aimed at protecting whistleblowers from unfair treatment, including: the Oman CMA's launch of a whistleblowing window (in January 2019) which aims to provide a `swift system for reporting irregularities that might have harmful impact on the company so [that the] CMA can take timely remedial action', including reporting of illegal and unethical acts. The window will act as a conduit allowing the whistleblower to report information to the CMA such as suspected violations and illegal activities or acts. a royal decree issued by Saudi Arabia's King Salman to protect whistleblowers in corruption cases after reports that some whistleblowers had been mistreated following submission of reports relating to misappropriation and embezzlement. the DIFC Authority includes new whistleblowing provisions in its new Operating Law aimed at protecting whistleblowers where a report is made in good faith. A fine of USD30,000 may be imposed for a failure to comply with the whistleblowing provisions of the Operating Law. in Abu Dhabi the Public Prosecution launched a new app called `Inform the Prosecution' which can be downloaded on mobile phones aimed at providing a means for members of the public to report any illegal act and provide information about suspicious activities or behaviour. The app permits any user to explain the illegal act, its location, time of happening and attach evidence. Suitability The DFSA completed a thematic review on client classification and suitability practices. The DFSA observed that while client classification and suitability assessments had improved since 2012, concerns such as insufficient staff training and guidance, inadequate and unclear documentation to support assessments and a lack of detailed qualitative assessments remained. Legal developments 2018 was a busy year for financial services regulators in the Middle East, with the issue of a plethora of new laws and regulations, some of the highlights include: The regulatory agenda both onshore in the UAE and in the financial free zones was very active with a number of new laws and regulations introduced in 2018. This included the issue of the new UAE Central Bank Law, Federal Law No.4 of 2018, the new AML law, Federal Law No. 20 of 2018 (see above) and the capital adequacy regulations. The highly anticipated passporting legislation and rules which will enable UAE wide promotion of investment funds was launched by the SCA, ADGM and DFSA on 11 March 2019. The new passporting legislation and rules were the subject of extensive consultation in late 2018 following the signing of the Passporting Agreement by the three regulators and will facilitate the development of investment funds while attracting foreign investment and facilitating cooperation between market leaders, investors and companies and encouraging diversification of investments opportunities and products. The passporting legislation and rules are publicly available on the relevant regulators' websites. 5 MIDDLE EAST FINANCIAL SERVICES E-BULLETIN In the DIFC, the old DIFC Companies Law was repealed and replaced in November 2018, with DIFC Law No. 5 of 2018 (Companies Law 2018). The Companies Law 2018 was enacted alongside a suite of other laws, regulations and amendments, including new Companies Regulations, DIFC Law No. 7 of 2018 (Operating Law) which (amongst others) introduced new whistleblowing provisions, Operating Regulations, the Ultimate Beneficial Owners Regulations and Special Purpose, Investment and Protected Cell Company Regulations. A summary of the key changes to the laws and regulations relating to companies incorporated and operating in the DIFC has been set out in our briefing. Please see our briefing for further information. Following a self-assessment in preparation for the upcoming FATF Mutual Evaluation review in 2019 (see above) the DFSA introduced amendments to the Regulatory Law and the AML module (see above). The amendments introduce a prohibition from conducting Designated Non-Financial Businesses or Professions (DNFBPs) activities in or from the DIFC, unless registered with the DFSA, and requiring identification of the money laundering reporting officer, senior management and beneficial owners. The changes also seek to bolster the approach to customer due diligence to bring the module into alignment with FATF Recommendations. Other amendment to the DFSA Rulebook included: amendments to the rules relating to the maturity mismatch approach in the Prudential Investment, Insurance Intermediation and Banking Business Module (PIB), which includes which measures an authorised firm's liquidity by assessing the mismatch between assets and liabilities within different time bands on a maturity ladder; clarification in relation to the exclusions applicable in respect of the financial services activity of Dealing in Investments as Principal in the General Module (GEN); clarification in relation to holding or controlling client assets. The DFSA has now clarified that where assets are held in the Client's name under a discretionary portfolio mandate, only specific rules in the client money provisions and safe custody provisions of the Conduct of Business Module (COB) will be relevant, as the assets are held by the client but controlled by the authorised firm. In this situation the firm will need to ensure it has an endorsement to hold or control client assets and will need to comply with the audit report obligations relating to client assets; and new obligations in the Markets Rules (MKT) requiring a reporting entity to have in place adequate systems and controls on an on-going basis and the obligation to be able to demonstrate compliance with the requirements set out in the Regulatory Law and the DFSA Rulebook. ESCA issued a Directive to Draft Crowdfunding Regulations which was approved by the SCA Board. The Draft Directive will allow those seeking finance to receive investments in return for incorporation shares via a platform programmed to display crowdfunding applications in the market. In Oman, the CBO issued a number of regulatory amendments with the intention of encouraging business activities in the financial sector. Some of the amendments include reducing the capacity adequacy ratio from 12% to 11% which will increase banks' lending capacity, and increasing the prudential limit ratio of credit exposure to non-residents and placement of banks funds abroad to banks' local net worth from 50% to 75% to enable banks to better manage their liquidity surpluses, diversify their revenues and increase their external borrowing capacities to finance local projects of national importance. The Kuwait CMA announced its intention to facilitate opening trading accounts for foreign investors and the development of the disclosure requirements of insiders among the series of continuous developments and improvements carried out by the Authority in regulating securities activity. The amendment is a result of cooperation between the CMA and Kuwait Clearing Company to improve the mechanisms of open trading accounts. The CMA also issued Resolution No.(135) of 2018 Regarding Amending Some Provisions of Module One (Glossary) and Module Sixteen (Anti-Money Laundering and Combating Financing of Terrorism) of the Executive Bylaws of Law No.(7) of 2010 Regarding the Establishment of the Capital Markets Authority and Regulating Securities Activities and their Amendments. In Qatar, the Cabinet issued a draft law opening up foreign investment to non-Qatari investors. The draft law will allow foreign investors to hold 100% of the capital of an entity across all economic sectors and will also permit foreign investors to hold up to 49% of the share capital of Qatari listed companies on Qatar Exchange, subject to approval of the Ministry of Economy and Commerce on the percentage proposed in the 6 MIDDLE EAST FINANCIAL SERVICES E-BULLETIN company's memorandum of association and articles of association. The draft law also includes investment incentives which will permit the Cabinet (upon a proposal by the relevant minister concerned) to allow foreign investors to hold a percentage exceeding the mentioned percentage with the approval of the Cabinet and to grant investment projects incentives and benefits in addition to those set out in the draft law. Meanwhile Saudi Arabia's CMA issued a number of announcements approving amendments in relation to Closed-Ended Investment Traded Funds Instructions which have been drafted to take into account best international practice and also amendments to the Real Estate Investment Traded Fund Instructions. The CMA also issued draft instructions seek to regulate the provisions, requirements and conditions of ownership by a strategic foreign investor in a strategic shareholding while also determining any restrictions and obligations on the strategic foreign investor. Finally, amendments to the Corporate Governance Regulations were approved. Finally, in Bahrain the CBB issued a consultation on the Requirements for Payment Service Providers and expanded the scope of services covered under existing rules on crowdfunding to include: a reduction in minimum capital; removing the prohibition on business to business lending or investing through platforms; raising the limits for lending; the removal of certain restrictive conditions for lending /investing; and a consumer protection mechanism whereby, the lender or investor has the right to withdraw the commitment made within 48 hours from the time the investor makes a commitment to lend or invest. Contacts Natasha Mir, Senior Associate T +971 4 428 6340 M +971 5055 94523 [email protected] Stuart Paterson, Partner T + 971 4 428 6308 [email protected] Chris Skordas, Partner T +971 4 428 6377 M +971 56 177 2942 [email protected] If you would like to receive more copies of this briefing, or would like to receive Herbert Smith Freehills briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please email [email protected] Herbert Smith Freehills LLP 2019 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein. 7 8
