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Consultation Paper No. 11 The law regulating Islamic financial business and The Islamic financial business module of the DFSA Rulebook
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Consultation Paper No. 11 The law regulating Islamic financial business and The Islamic financial business module of the DFSA Rulebook

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June 2004

A DUBAI Financial Services AUTHORITY ("DFSA") CONSULTATION PAPER ADDRESSED TO PARTIES INTERESTED IN THE DEVELOPMENT OF Financial Services AND MARKETS Regulation WITHIN DUBAI'S FINANCIAL FREE ZONE (THE "DIFC")

1. Introduction

This paper consults on the proposed law and rules for Islamic Financial Business. The draft law and rules are published for consultation purposes only. Please note that, although the draft law and rules are in near final form, it is still 'work in progress' and the DFSA reserves the right to amend the drafts at its sole discretion. The enactment of the draft law and the making of the draft rules is conditional upon the issuance, inter alia, of the Regulatory Law 2004.

Comments are invited on any aspect of the regime proposed in this paper, on both the principles and the detailed drafting. The DFSA would be particularly interested to have the views of firms considering establishing themselves in the DIFC, and views on how this regime compares with those in other major centres. In the light of the comments received, the DFSA may determine to adopt in whole, or in part, the proposals outlined in these papers, or may amend the proposals.

Anyone wishing to submit comments should provide details of the organisation he or she represents. The names of commentators and the content of their submissions may be published on the DFSA website and in other documents to be published by the DFSA. If you wish your name to be withheld from publication, please indicate this when you make your submission.

Any comments should be addressed to:
Mr Nicholas Alves
Legal Counsel
DFSA
PO Box 74777
Dubai, UAE

or e-mailed to nalves@dfsa.ae

All comments should be provided in writing, on or before 10 July 2004.

2. Background and context

The draft Law Regulating Islamic Financial Business 2004 and the draft rules forming the Islamic Finance module need to be considered in the context of the Regulatory Law 2004 and the DFSA's Rulebook. The draft law and rules also need to be considered in the context of the DIFC as a centre for wholesale business.

3. Purpose and summary of the material provisions of the law

The purpose of this law is to regulate Islamic Financial Business activities undertaken in the DIFC. The material provisions of the law are:

• A prohibition from conducting Islamic Financial Business unless an Authorised Firm or Authorised Market Institution has an appropriately endorsed licence
• A requirement to appoint a Shari'a Supervisory Board

The law also defines Islamic Financial Business and enables the Council of the DFSA to make rules prescribing circumstances in which an Authorised Firm or Authorised Market Institution will be taken to, or will be taken not to, hold itself out as conducting Islamic Financial Business. The purpose of this provision is to enable the Council to take account of developments in Islamic Finance in the DIFC and elsewhere.

The remainder of the law deals with various endorsement matters including:

• The Council's power to make rules in relation to endorsements
• The DFSA's right to refuse to grant or to vary endorsements
• The DFSA's power to impose or to vary or withdraw conditions and restrictions in relation to endorsements
• A licensee's right to make representations in respect of certain endorsement matters or to appeal a decision of the DFSA in relation to an endorsement issue to the Regulatory Appeals Committee

4. The DFSA rulebook

The Regulatory Law 2004 provides the DFSA with a wide range of powers, including powers to make Rules and to issue Guidance. This Guidance is not binding, nor does it create a "safe harbour" protecting those who comply with it from action for breach of the underlying rule.

The Rules together make up a Rulebook containing a number of modules. The entire DFSA Rulebook may be viewed on the DFSA's website along with all the draft DIFC Laws and Regulations.

The DFSA will have power to waive or modify rules, and it will be prepared to use this to adapt the rules to the specific circumstances of individual firms.

5. Purpose and summary of the material provisions of the rules

The purpose of the Rules set out in the ISF Module is to provide the necessary detail in relation to:

• The appointment of Shari'a Supervisory Boards
• The conduct of Shari'a reviews
and to provide certain protections to Clients or Commercial Customers by way of:
• Disclosure requirements
• System and Controls requirements

The Rules impose a number of requirements upon an Authorised Firm which is an Islamic Financial Institution or which operates an Islamic Window. In addition to ensuring that its constitutional documents State that its business operations will be conducted in accordance with Shari'a, such an Authorised Firm must maintain an Islamic Financial Business policy and procedures manual, which addresses certain prescribed matters as part of its Systems and Controls. There are additional rules in this regard for firms which operate PSIAs.

The rules set out various criteria in relation to the appointment of a Shari'a Supervisory Board including the requirement to take reasonable steps to ensure that its Shari'a Supervisory Board is independent and not subject to any conflicts of interest with respect to the Authorised Firm and that the Members appointed are competent to perform their functions. There are also rules which relate to the relationship between the Shari'a Supervisory Board and the Employees of the Authorised Firm in relation to such matters as providing assistance and allowing access at all reasonable times to relevant records and information. In addition the rules set out how Shari'a reviews are to be carried out and prescribe the AAOIFI standards to be applied when doing so.

In relation to the disclosure regime, the rules require that an Authorised Firm disclose certain information to each Client or Commercial Customer at the outset of the relationship and thereafter whenever the information changes. There are further detailed provisions in respect of conduct of business standards. These relate to transactions involving Clients becoming PSIA holders, Authorised Firms operating Islamic Windows and Authorised Firms communicating marketing material.

Rules relating to Authorised Market Institutions in respect of Islamic Financial Business will be set out in another module namely the Markets module which will be the subject of consultation in due course.

6. Appendixes

In Appendixes 2 and 3, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phase and are defined in the Glossary (GLO) which can be found on the DFSA website.