In April this year the Dubai Financial Services Authority ("DFSA") introduced its new financial promotions regime. The new regime takes the form of a financial promotion prohibition and is modelled on section 21 (Restrictions on Financial Promotions) of the UK Financial Services and Markets Act 2000. The prohibition is contained in Article 41A(1) of DIFC Regulatory Law No.1 of 2004 (the "Regulatory Law") and is supplemented by Part 3 of the General Rulebook ("GEN"). The effect of Article 41A(1) is to prohibit a person from making a financial promotion unless that person is an Authorised Person (that is, an Authorised Firm or an Authorised Market Institution ("AMI") ), or is otherwise permitted by the Rulebook.
While the DFSA regime previously regulated financial promotions in relation to offers of securities and offers of units in a collective investment fund, it did not permit the DFSA to take action against unauthorised persons undertaking marketing or promotional activities in the Dubai International Financial Centre (the "DIFC"). The new regime seeks to simultaneously: (i) provide clarification on who can make a financial promotion in or from the DIFC and under what circumstances; and (ii) provide the DFSA with authority to more effectively supervise and bring enforcement actions against persons making financial promotions in the DIFC. Importantly, the DFSA has provided clarification on which activities (when conducted in or from the DIFC) are licensable by the DFSA.
In drafting the legislation and the accompanying guidance, the DFSA has sought to maintain a broad degree of flexibility. As such, where legal uncertainty exist dialogue with the DFSA will be necessary.
1. The old regime
Uncertainty previously surrounded the question of whether marketing or promotional activity undertaken physically within the DIFC constituted a Financial Service requiring authorisation (depending on the nature and scale of the activity and the way it was communicated) for either Arranging Credit or Deals in Investments or Operating a Representative Office. The DFSA has sought to remove this uncertainty by introducing a blanket prohibition with specific exemptions and exclusions, which has the effect of permitting financial promotions in certain circumstances and by specified persons without needing to obtain a DFSA license.
2. What is the prohibition?
The financial promotion prohibition prohibits any person from making a financial promotion in or from the DIFC unless permitted by the Rules. A "financial promotion" is any communication, however made, which invites or induces a Person to (i) enter into, or offer to enter into, an agreement in relation to the provision of a financial service; or (ii) exercise any rights conferred by a financial product or acquire, dispose of, underwrite or convert a financial product.
The prohibition is comprehensive, prohibiting all forms of financial promotion activity including financial promotions, in respect of offers of securities or fund units. The prohibition encompasses "financial products", defined in GEN Rule 3.3.1 to mean an Investment (including Securities and Derivatives), a Credit Facility, a Deposit, a Shari'ah compliant Profit Sharing Investment Account or a Contract of Insurance.
The prohibition applies to the broad spectrum of methods that may be used for communicating information including written communications such as advertisements, promotional brochures and other printed or written marketing materials, electronic communications such as emails, mailshots, faxes, and webcasts and oral communications such as telephone calls, meetings, roadshows, conferences and booths. DFSA guidance specifies that the use of a disclaimer stating that a communication does not constitute a financial promotion will not prevent a communication from constituting a financial promotion (GEN Rule 3.2.1).
3. Exemptions and exclusions from the financial promotions prohibition
GEN contains the following exemptions and exclusions from the prohibition contained in Article 41A of the Regulatory Law:
- a person who makes an Offer of Securities, in accordance with the Markets Law 2004 and the Offered Securities Rules ("OSR") (GEN Rule 3.1.2(a));
- a person who makes an Offer of fund units, in accordance with the Collective Investment Law 2010 and the Collective Investment Rules ("CIR") (GEN Rule 3.1.2(b));
- exempt persons (GEN Rule 3.4.1(1) and (2)(a) to (c));
- exempt financial promotions made by persons that are not exempt persons (GEN Rule 3.4.1(2)(d)); and
- excluded financial promotions (GEN Rule 3.4.2).
4. Offers of Securities and Fund Units
The definitions of "financial promotion" contained in OSR Rule 2.2.1(3) and Article 19(3) of the CIL are captured within the definition of "financial promotion" contained in Article 41A(3) of the Regulatory Law, but have been specifically exempted in GEN Rule 3.1.2. The regime including the restrictions and detailed rules relating to financial promotions for Offers of Securities (contained in the Markets Law and the OSR) and Offers of fund units (contained in the CIL and the CIR) will continue to be applicable.
5. Exempt persons under the financial promotions prohibition
Financial promotions undertaken by an Authorised Firm or an AMI will not trigger any additional licensing requirements from the DFSA. Authorised Firms and AMIs already comply with the Conduct of Business Module ("COB") (and in particular COB Rule 3.2) when conducting marketing activities and distributing promotional information, and as such the DFSA considers it unnecessary to impose any additional regulatory requirements.
Firms already licensed and supervised by a Financial Services Regulator in the UAE (for example the Central Bank or the Emirates Securities and Commodities Authority) are classified as exempt persons. UAE regulated firms will however need to monitor their activities carefully to ensure that their activities do not constitute a Financial Service requiring DFSA authorisation. The DFSA has waived the requirement for UAE regulated firms to comply with the rules for financial promotions contained in GEN Rule 3.5.1 (relating to ensuring the promotion is clear, fair and not misleading) when communicating with existing clients. However, when making a financial promotion to a prospective client, the rules in GEN Rule 3.5.1 will need to be complied with.
Recognised Bodies (exchanges, clearing houses and settlement facilities which are permitted to carry on certain Financial Services in or from the DIFC without having a physical presence in the DIFC) and Recognised Members (that is persons with no physical presence in the DIFC who trade on or use the facilities of a DFSA authorised exchange or clearing house) are required to comply with the requirements of the Recognition Module ("REC") and as such have been exempted from the prohibition. Similarly, external fund managers (meaning, offshore fund managers of DIFC domiciled funds), licensed outside of the DIFC in a jurisdiction recognised by the DFSA, are considered exempt for the purposes of the financial promotions prohibition.
Finally, GEN Rule 3.4.1(3) exempts any person making an "exempt Financial Promotion" from the prohibition.
6. Exempt financial promotions under the financial promotions prohibition
A promotion by an unauthorised person that has been authorised by an Authorised Firm in accordance with GEN Rule 3.6 is considered an exempt financial promotion. An Authorised Firm may approve a financial promotion made by a firm (not authorised by the DFSA), provided that the financial promotion: (a) includes a clear and prominent statement that it has been “approved by” the relevant Authorised Firm; and (b) it is made in accordance with the requirements in GEN Rule 3.5. Where the financial promotion appears to be directed at retail clients in the DIFC, the Authorised Firm may only approve the promotion, if the Authorised Firm is permitted by its licence to carry on a Financial Service with or for a retail client and the scope of its license includes the Financial Service and, if applicable, the particular financial product, to which the financial promotion relates.
Other promotions considered to be exempt financial promotions include: (a) financial promotions directed at and capable of acceptance by persons who appear to be Professional Clients, of the type specified in COB Rule 2.3.2(2); (b) financial promotions made at the unsolicited request of a person located in the DIFC; and (c) financial promotions made or issued by or on behalf of a government or non-commercial government entity. Further clarification may be required from the DFSA to ascertain exactly which government entities will fall within this classification.
All exempt persons (apart from UAE regulated firms communicating with existing clients based in the DIFC) are required to comply with the rules relating to financial promotions, including the requirement that the promotion must be clear, fair and not misleading. GEN Rule 3.5.1(1)(c) and (d) also contain additional requirements in relation to promotions directed at professional clients and retail clients.
7. Excluded financial promotions
GEN Rule 3.4.2 further carves out three additional categories of activity which will not breach the prohibition. This includes:
- financial promotions that are not made for a commercial or business purpose;
- promotions made in the course of providing a facility which is a mere conduit for the making of a financial promotion, for example a venue which hosts a presentation on financial services;
- communications made by persons located outside the DIFC, which appears on reasonable grounds not to be intended to be directed at or intended to be acted upon by, a person in the DIFC.
8. Implications of the new financial promotions regime
Unauthorised persons making financial promotions in the DIFC will need to monitor the nature and scale of the activities they are conducting on a continual basis. The DFSA guidance contained in the General Rulebook makes it clear that if a person makes financial promotions on a regular basis (i.e. anything more that occasional) or for a prolonged period (usually anything more than three consecutive days), while physically located in the DIFC, the DFSA may consider such activities to constitute carrying on a Financial Service in breach of the Financial Services Prohibition contained in Article 41 of the Regulatory Law. To ensure that their activities do not constitute the financial service of Operating a Representative Office, unauthorised firms should consider GEN Rule 2.26.1(2). An activity will constitute marketing and DFSA authorisation to operate a representative office will be required (for the purposes of GEN Rule 2.26.1(1)), if the firm or person is:
- providing information on one or more financial products or services;
- engaged in promotions in relation to one or more financial products or services; or
- making introductions or referrals in connection with the offer of financial services or products.
The new financial promotions prohibition seeks to fill the gap (previously existing under DIFC law and the DFSA Rulebook) relating to financial promotions, which did not previously encompass all financial products or permit the DFSA to bring enforcement actions. The new regime now provides clarity on which activities constitute marketing (particularly in relation to offshore marketing), by creating a comprehensive regime encompassing financial promotions relating to financial products and services which do not fall within the offer restrictions contained in the Markets Law 2004 and the Collective Investment Law 2010. The DFSA now has power to bring enforcement actions against persons in breach of the financial promotions prohibition, thereby enhancing its ability to more effectively police marketing by unauthorised persons and realise its aim of ensuring that the DIFC is not used for unregulated financial promotions. While it is too soon to comment on the success of the financial promotions regime in practice, it is apparent that it is likely to have the most significant impact on unauthorised firms seeking to undertake promotional activities in the DIFC, particularly those targeting individuals in the DIFC.
- Anti-Money Laundering and Combating the Financing of Terrorism Changes for Designated Non-Financial Businesses and Professionals: Following the completion of the consultation period (on 21 May 2011) in relation to Consultation Paper No.74, changes to the Regulatory Law 2004 and a new rulebook module, the DNF Module are anticipated to come into force in early to late September 2011. The proposed changes will affect non-financial services businesses and professions and Single Family Offices (referred to as Designated Non-Financial Businesses and Professionals or "DNFBPs") operating in the DIFC.
- New Markets Law regime (DFSA Consultation Paper No.75): The DFSA is proposing significant changes to the current Markets Law regime as contained in the Markets Law 2004 and the Offered Securities Rules. The proposed changes are designed to more closely align the DFSA's markets law regime with the EU Prospectus Directive and the Market Abuse Directive. The DFSA's consultation period will end on 18 July 2011, and the DFSA is following up the consultation period with Outreach Sessions to be held during the course of the year.
- UAE new funds regime transition period: In January this year the Emirates Securities and Commodities Authority ("ESCA") published its draft Investment Funds Regulation (the "Regulations") for public comment. Following on from the consultation period ESCA has redrafted the Regulations and anticipates that it will come into force later in the year. In the interim, ESCA and the Central Bank have put in place provisional arrangements which deal with the placement of units in foreign funds. As part of these arrangements, the Central Bank and ESCA authorisation for a private placement will be required and the Fund will be required to appoint a bank or investment company licensed by the Central Bank to place its units.