In this article we summarise the Dubai Financial Services Authority's (DFSA) enforcement powers and process, and look at the latest developments in the DFSA's approach to the enforcement of its rules and the legislation it administers. We also summarise the recent and upcoming procedural changes to the enforcement process.
The DFSA's enforcement powers are far reaching, applying not only to firms and individuals that are regulated by the DFSA, but also potentially to all firms and individuals who provide or are involved in the provision of financial services in or from the Dubai International Financial Centre (DIFC).
The approach the DFSA takes to the enforcement of its rules is therefore of relevance to all those providing financial or ancillary services in or from the DIFC.
The DFSA's enforcement powers are very extensive and include:
- powers to obtain information including powers to: enter premises to cease documents and information, compel the production of documents and information, and compel individuals to attend a recorded interview and answer questions;
- powers to suspend or restrict the activities of regulated firms;
- powers to impose a financial penalty of an unlimited amount on firms and individuals (including firms and individuals who are not regulated by the DFSA);
- powers to ban firms for an unlimited period from providing financial services in or from the DIFC, as well as powers to ban individuals for an unlimited period from providing financial services or from being employed by a firm that provides financial services in or from the DIFC; and
- powers to publish any enforcement action it takes.
2019: A busy year for the DFSA's Enforcement Division
In 2019 the DFSA published nine enforcement actions and imposed penalties totalling over USD 315 million. These enforcement actions include the heavily publicised actions against Abraaj Investment Management Limited and Abraaj Capital Limited, and the long anticipated decision from the FMT against Anna Waterhouse, the former compliance officer at Deutsche Bank.
To put 2019's enforcement actions into context, between 2016 and 2018, the DFSA published 12 enforcement actions and imposed penalties totalling c. USD 500,000.
We also understand that the number of investigations the DFSA has opened in 2019 is likely to be higher than in previous years. The precise number of investigations opened in 2019 is yet to published by the DFSA, but we expect it to be in the 2019 Annual Report, due to be published mid-2020.
A change in the Enforcement Division's approach
While it's fair to say that vast majority of the penalties imposed in 2019 consist of the penalties against the two Abraaj entities (c. USD 299m and c. USD 15m respectively), and that these two cases should probably be considered exceptional owing to the nature of the wrong doing found by the DFSA, it is nevertheless clear that the DFSA has adopted a more aggressive approach to enforcement. This is particularly so in relation to the size of the financial penalties it is now prepared to impose, and its approach to the timing of publication of its decision notices.
Regarding financial penalties, in 2019 the DFSA imposed a financial penalty of USD 400,000 and an order to pay restitution of c. USD 500,000 on Dr Mubashir Ahmed Sheikh, the former chairman and acting Senior Executive Officer of the ill-fated MAS Clearsight Ltd (which was also the subject of DFSA enforcement action in 2015). The penalty against Dr Sheikh far exceeds any penalty that the DFSA has ever imposed on any individual (the second highest penalty it has imposed on an individual was a penalty of USD 100,000 on Anna Waterhouse which was subsequently reduced to USD 75,000 by the Financial Markets Tribunal (FMT)).
The DFSA has a published framework which sets out how it will decide on whether to impose a penalty, and if so, how it will calculate the size of that penalty. This framework has remained substantively unchanged since 2013. However, there is a marked change to DFSA's application of the framework. The rationale for this significant change in approach is not clear and was not heralded by public consultation or other public notice, as is arguably required by Article 8 of the DIFC Regulatory Law 2004 (the Regulatory Law). It is however clear that those who find themselves the subject of a DFSA enforcement investigation are at risk of being at the receiving end of a very hefty penalty.
Our recent experience in acting for clients who are facing enforcement action has also shown that the DFSA is taking a much harder line on the extent to which it is prepared to negotiate (or not) during the settlement period on all issues, including the contraventions it alleges, the sanction it proposes and the language of the proposed Decision Notice. This "take it or leave it approach" is in stark contrast to our previous experience with the DFSA where it was more willing to adapt and amend the Decision Notice in the light of submissions we made in order to achieve a timely outcome that is aligned with its regulatory objectives.
We anticipate that the DFSA's new aggressive approach, together with the effect of the proposed procedural changes (discussed further below), will ultimately lead to more and more challenges in the FMT and the DIFC Court of First Instance, as the subjects of DFSA enforcement action are more likely to seek an independent review of the DFSA's decision making.
The current DFSA enforcement process: A summary
The DFSA enforcement process is much like the process followed in the Financial Conduct Authority (FCA) in the UK, and will typically comprise the following steps:
- The investigation period. During this period, the DFSA investigates a matter, using its extensive investigatory powers, such as powers to obtain physical and digital evidence and to interview persons under oath. Note that unlike many other regulators, the DFSA does not provide the subject of the investigation (the Subject) with pre-interview disclosure as to what information or evidence it holds in relation to the matter under investigation which will be the subject of an interview. This means that the DFSA will often question Subjects on a matter where it already has the answer to the question. Another recent DFSA investigation practice that we have observed involves the DFSA using the Dubai Police to enforce its investigatory powers against unregulated persons located outside the DIFC. The legality of this practice is questionable in light of the fact that Article 80(6) of the Regulatory Law clearly specifies that where the DFSA seeks to exercise its investigatory powers in respect of an unregulated person who is outside the DIFC, it may only do so using any arrangements it has with a "regulatory authority" in the relevant jurisdiction or via a DIFC Court order. Given that the Regulatory Law clearly distinguishes between a "criminal law enforcement agency" of the State (i.e. the police) and a "regulatory authority" in the State (see for example Article 40 of the Regulatory Law), we see no legal basis for the DFSA to enforce its Article 80 notice powers using the Dubai Police. It will be interesting to see if this practice survives an eventual judicial review.
- The issuance of a draft Annotated Warning Notice (AWN) to the Subject. The AWN contains the Enforcement Division's decision and sets out its findings and the sanction it intends to impose, together with references to the evidence the Enforcement Division contends support its findings. The use of an AWN is relatively recent for the DFSA, and is modelled on the approach taken by the FCA.
- The settlement period. During this period the Subject is given the opportunity, during a brief 28-day period (or exceptionally 42 days), to review the AWN and the accompanying evidence and enter into negotiations with the Enforcement Division about its findings, the sanction and the language used in the AWN. If the Subject and the Enforcement Division reach agreement during the settlement period, the Subject is likely to receive a settlement discount on any penalty imposed (the amount is variable) and the decision is finalised and published on the DFSA's website as a Decision Notice. As we summarise below, the DFSA intends to amend its rules so that the settlement period is time limited and the settlement discount is fixed at 30%.
- The Decision Making Committee (DMC). If the Subject does not reach a settlement with the Enforcement Division during the settlement period, the Enforcement Division's decision (as set out in the AWN) is reviewed by the DFSA's DMC. The DMC comprises of DFSA staff that were not directly involved in the relevant enforcement investigation. Historically, both the DFSA and the recipient of a Decision Notice were able to make both oral and written representations to the DMC about the Enforcement Division's decision. As we summarise below, it is likely that Subjects will lose their right to make oral representations to the DMC (but not the somewhat asymmetrical situation that the Enforcement Division will retain this right).
- The issuance of the Decision Notice. If the DMC agrees that an enforcement outcome is appropriate, it will issue a Decision Notice to the Subject. The Decision Notice, like the AWN, typically sets out the DFSA's findings and the sanction(s) it considers is appropriate to impose on the Subject. This Decision Notice represents the decision of the DFSA (i.e. not only the decision of the Enforcement Division).
- Referral to the Financial Markets Tribunal (FMT). Upon receipt of the Decision Notice, the Subject is given 30 days to appeal the Decision Notice to the FMT. Historically, the DFSA's policy was not to publish the Decision Notice issued by the DMC during this 30 day period or while the FMT proceedings are ongoing otherwise than in exceptional circumstances. As we set out below, this is set to change so it is likely that even decisions that are subject to appeal to the FMT will be published by the DFSA.
- The issuance of the FMT's judgment. Once the DFSA's decision has been referred to the FMT, the FMT will consider the issues afresh and will likely conduct a hearing in which both the DFSA and the Subject will be permitted to submit evidence and make submissions. Once the FMT has heard the case, it will issue a judgment on the issues. The FMT is an operationally-independent part of the DFSA and its members are selected by the DFSA's Board of Directors. The FMT is chaired by a former English High Court judge and is comprised of a panel of financial services specialists.
- Appeal to the DIFC Court of First Instance. Upon receipt of the FMT's judgment, the Subject and the DFSA have 21 days (unless directed otherwise by the FMT) to seek permission to appeal the FMT's decision to the DIFC Court of First Instance on a point of law only (i.e. the DFSA and/or the Subject cannot appeal on the basis of a factual dispute). If the FMT or the DIFC Court of First Instance grants permission to appeal the FMT's judgment, the DIFC Court of First Instance will consider the submissions of the parties, conduct a hearing and issue a judgment. The DIFC Court of First Instance is a wholly independent judicial authority and is the first opportunity that the Subject will get to have the DFSA's decision independently reviewed.
Upcoming procedural changes to the DFSA's enforcement process
As well as the change in the DFSA's approach to enforcement, in July 2019 the DFSA has issued Consultation Paper No. 126 (CP126) setting out a raft of proposed changes to its decision making processes, including its enforcement decision making. We have published an article in which we summarised and analysed the proposed changes which can be accessed here.
In summary, the proposed changes set out in CP126 include:
- introducing a 28 day settlement period following the issuance of the AWN;
- applying a fixed settlement discount of 30% on any financial penalty imposed by the DFSA if the subject of the AWN agrees to settle during the settlement period;
- removing the Subject's right to make oral representations to the DMC save in exceptional circumstances;
- publishing more information about Decision Notices issued by the DMC (including the Decision Notice itself) even where the DMC's decision is the subject of an appeal to the FMT;
- appointing an external settlement decision maker in appropriate cases; and
- making the decision maker involved in setting the parameters for Enforcement settlement negotiations the same person who approves the outcome of the settlement negotiations.
The consultation period for the proposals set out in CP126 is now closed. We, therefore, expect a further publication from the DFSA setting out the finalised changes to the legal and regulatory framework required to put in place the changes listed above.
In general, while the proposed procedural changes are likely to speed up the current DFSA enforcement process (which can take years), as we discuss in further detail in our article, the proposed changes (if fully implemented) are likely to have a negative effect on procedural fairness for subjects of DFSA enforcement action. The full and final extent of the proposed changes however remains to be seen.