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Dubai Financial Services Authority (DFSA): Contents

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Draft



1. Introduction

1.1 General

The draft Regulatory Law for the DIFC requires the Regulatory Authority ("the Authority") to consult on its proposals for Rules. This paper consults on the proposed Rules for the Principles for Authorised Firms and Principles for Authorised Individuals and on some associated Guidance.

Please note that, although each consultation is in near final form, it may still undergo changes before issue. Comments are invited on any aspect of the regime proposed in this paper, on both the principles and the detailed drafting. The Authority 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 Authority 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, where applicable, provide details of the organisation he or she represents. The names of commentators and the content of their submissions may be published on the Regulatory Authority website and in other documents to be published by the Authority. 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
DIFC Regulatory Authority
PO Box 74777
Dubai, U.A.E

or e-mailed to nalves@difc.ae

All comments should be provided in writing, no later than 9th July 2003.

Background and Context

1.2 Context

The draft Rules need to be considered in the context of the draft DIFC Regulatory Law, and other elements of the Rulebook.

The draft Rules also need to be considered in the context of the DIFC as a centre for wholesale business.

The Authority will have the power to waive or modify Rules, and it may be prepared, in certain circumstances, to use this discretionary power to adapt the Rules for individual Authorised Firms or Authorised Individuals.

The Authority's Objectives and Considerations as provided in articles 8(3) and 8(4) of the draft DIFC's Regulatory Law (Consultation Paper 8)have been taken into account when drafting these Rules.

The Principles specify the fundamental principles which Authorised Firms and Authorised Individuals within the DIFC regulatory regime must adhere to. They have the status of Rules and are therefore binding. Rules in other areas of the Rulebook build upon these fundamental principles and are applicable alongside the other Rules and also in new or unforeseen situations which may not be covered by a specific rule elsewhere. Consequently the Rules and Guidance elsewhere in the Rulebook should not be seen as exhausting the implications of the Principles.

1.3 The Rulebook

The draft Regulatory Law provides the Authority 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 will, taken together, make up a Rulebook containing a number of modules. Each module will specify its scope and to whom it applies.

The draft Rules presented here thus cover only part, though an important part, of the regime for firms. These draft Rules form Chapter 2 of the General Module ("GEN").

The draft Rules which follow include definitions. The Glossary contains a list of the definitions used and their meaning. Where a term starts with a capital letter, it is used in its defined sense. Terms starting in lower case have their natural meaning.

The layout and typography follow the conventions which will be used for the Rulebook as a whole. Rules are identified by a three number code in the margin and, appear in Arial 11 point type. Guidance appears in Times New Roman 10 point and is not binding either on firms or on the Authority. It is also identified by the sub-title "Guidance". In the Appendices, Rules are identified by the letter "A" followed by a three number code. The use of Appendices is a convenient means to gather together detailed requirements and Guidance so as not to overload the chapters containing the fundamental high level Rules with detailed provisions.

Square brackets indicate references to material which has not yet been published for consultation.

Summary

1.4 Summary

The draft Rules contain, principally:

• The Application and Purpose of the Principles for Authorised Firms
• The 10 Principles for Authorised Firms
• The Application and Purpose of the Principles for Authorised Individuals
• The 6 Principles for Authorised Individuals
• Schedule 1 will contain Guidance on the Principles for Authorised Individuals, but does not form part of this consultation paper.

2. Principles for Authorised Firms and Principles for Authorised Individuals

2.1 Principles for Authorised Firms - Application and Purpose

2.1.1

The 10 Principles for Authorised Firms, set out in Section 2.2, apply to every Authorised Firm in accordance with Rules 2.1.2 and 2.1.3.

2.1.2

(1) For the purposes of rule 2.1.3 the term "activities" means:
(a) Licensed Services;
(b) activities carried on in connection with a Licensed Service;
(c) activities held out as being for the purpose of a Licensed Service; and
(d) in relation to any particular Principle, any activity specified in (2), (3) and (4).
(2) Principles 3 and 4, also apply in a Prudential Context to an Authorised Firm with respect to the carrying on of all its activities.
(3) Principles 3 and 4 also take into account any activities of other Members of the Group of which the Authorised Firm is a Member.
(4) Principle 10, insofar as it relates to disclosing to the Regulatory Authority, also applies to an Authorised Firm with respect to the carrying on of all its activities, and takes into account any activities of other Members of the Group of which the Authorised Firm is a Member.

2.1.3

(1) The Principles apply to an Authorised Firm only with respect to activities carried on from an establishment maintained by the Authorised Firm in the DIFC, unless an extension in (2), (3), (4) or (5) applies.
(2) Where, another applicable rule, which is relevant to the activity, has a wider territorial scope than that in (1), any Related Principle applies with that wider scope in relation to the activity described in the rule.
(3) Principles 1, 2 and 3 apply in a Prudential Context to an Authorised Firm with respect to activities wherever they are carried on.
(4) Principle 4 and 10 apply to an Authorised Firm with respect to activities wherever they are carried on.
(5) Principle 5 also applies to an Authorised Firm with respect to the activities carried on in or from any place outside the DIFC if and insofar as the activities have, or might reasonably be regarded as likely to have, a negative effect on confidence in the financial markets operating in the DIFC.

2.1.3 Guidance

1. The Principles for Authorised Firms specify the fundamental principles which Authorised Firms within the DIFC regulatory regime must adhere to. They have the status of Rules. Rules in other areas of the Rulebook build upon these fundamental principles. The Principles for Authorised Firms are designed as a general statement of fundamental regulatory requirements applicable alongside the other Rules and also in new or unforeseen situations which may not be covered by a specific rule elsewhere. Consequently the Rules and Guidance elsewhere in the Rulebook should not be seen as exhausting the implications of the Principles for Authorised Firms.
2. Breaching a Principle for Authorised Firms makes an Authorised Firm liable to disciplinary action, in which case the onus will be on the Regulatory Authority to show that the Authorised Firm has been at fault in some way, taking into account the standard of conduct required under the Principle for Authorised Firms in question. Breaching a Principle for Authorised Firms may indicate that the Authorised Firm is no longer fit and proper to carry on a Licensed Service or to hold a Licence and the Regulatory Authority may consider withdrawing authorisation or the Licence (as the case may be) on that basis.

2.2 The Principles for Authorised Firms

Principle 1 - Integrity

2.2.1

An Authorised Firm must observe high standards of integrity and fair dealing.

Principle 2 - Due skill, care and diligence

2.2.2

In conducting its business activities, an Authorised Firm must act with due skill, care and diligence.

Principle 3 - Management, systems and control

2.2.3

An Authorised Firm must have effective systems and controls and must ensure its affairs are managed effectively and responsibly by its senior management. This should also include establishing and maintaining effective risk management systems and compliance arrangements that ensure, as far as is reasonably practicable, that the Authorised Firm complies with any applicable laws including DIFC laws and any Rules made thereunder.

Principle 4 - Resources

2.2.4

An Authorised Firm must maintain and be able to demonstrate the existence of sufficient resources to conduct and manage the firm's affairs. These include appropriate financial and system resources as well as sufficient and competent human resources.

Principle 5 - Market conduct

2.2.5

An Authorised Firm must observe proper standards of conduct in financial markets.

Principle 6 - Information and interests

2.2.6

An Authorised Firm must pay due regard to the interests of its customers and communicate information to them in a way which is clear, fair and not misleading.

Principle 7 - Conflicts of interest

2.2.7

An Authorised Firm must take all reasonable steps to ensure that conflicts of interest between itself and its customers and between one customer and another are identified and then prevented or managed in such a way that the interests of a customer are not adversely affected.

Principle 8 - Suitability

2.2.8

An Authorised Firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for customers who are entitled to rely upon its judgement.

Principle 9 - Assets and money

2.2.9

Where an Authorised Firm has control of or is otherwise responsible for assets belonging to a customer which it is required to safeguard, it must arrange proper protection for them in accordance with the responsibility it has accepted.

Principle 10 - Relations with regulators

2.2.10

An Authorised Firm must deal with Regulators in an open and cooperative manner and keep the Regulatory Authority promptly informed of significant events or anything relating to the Authorised Firm of which they would reasonably expect notice.

2.3 Principles for Authorised Individuals - Application and Purpose

2.3.1

The 6 Principles for Authorised Individuals set out in section 2.4 apply to every Authorised Individual in respect of his Licensed Functions.

2.3.1 Guidance

1. The Principles for Authorised Individuals do not apply to an Authorised Individual in respect of any other functions he may carry out, although his conduct in those functions may be relevant to his fitness and propriety.
2. Breaching a Principle for Authorised Individuals makes an Authorised Individual liable to disciplinary action, in which case the onus will be on the Regulatory Authority to show that he is culpable, taking into account the standard of conduct required under the Principle for Authorised Individuals in question. Breaching a Principle for Authorised Individuals may indicate that the Authorised Individual is no longer fit and proper to perform a role in respect of which the Person is an Authorised Individual and the Regulatory Authority may consider suspending or withdrawing Authorised Individual status on that basis.
3. In determining whether or not the particular conduct of an Authorised Individual complies with the Principles for Authorised Individuals, the Regulatory Authority will take account of whether that conduct is consistent with the requirements and standards relevant to his Authorised Firm, of the Authorised Individual's own role and of the information available to him. The conduct outlined in [Schedule 2] is indicative of the type of behaviour that is deemed to be a breach of the Principles for Authorised Individuals but is not exhaustive of the behaviour that will be considered to be non-compliant.

2.4 The Principles for Authorised Individuals

Principle 1 - Integrity

2.4.1

An Authorised Individual must observe high standards of integrity and fair dealing in carrying out each Licensed Function.

Principle 2 - Due skill, care and diligence

2.4.2

An Authorised Individual must act with due skill, care and diligence in carrying out each Licensed Function.

Principle 3 - Market conduct

2.4.3

An Authorised Individual must observe proper standards of conduct in financial markets in carrying out each Licensed Function.

Principle 4 - Relations with regulators

2.4.4

An Authorised Individual must deal with the Regulatory Authority in an open and cooperative manner and must disclose appropriately any information of which the Regulatory Authority would reasonably expect notice.

Principle 5 - Management, systems and control

2.4.5

An Authorised Individual who has significant responsibility must take reasonable steps to ensure that the business of the Authorised Firm for which he is responsible is organised so that it can be managed and controlled effectively.

Principle 6 - Compliance

2.4.6

An Authorised Individual who has significant responsibility must take reasonable steps to ensure that the business of the Authorised Firm for which he is responsible complies with any applicable laws including DIFC laws and any Rules made thereunder.

Glossary

Except where stated otherwise, or the subject or context does not allow it, the expressions in the following table have the meanings specified.

Defined Term Definition
Authorised Firm a Person who holds a Licence authorising it to carry on one or more Licensed Services
Authorised Individual a natural Person who has been authorised by the Regulatory Authority to perform one or more Licensed Functions
DIFC The Dubai International Financial Centre, established under Article 3(l) of Dubai Law No. 3 of 2002
Licensed Function a function prescribed pursuant to Article 43(l) of the Regulatory Law
Licensed Service a Financial Service prescribed in the Rules made under Article 42(l) of the Regulatory Law
Prudential Context In relation to activities carried on by an Authorised Firm, the context in which the activities might have, or might reasonably be regarded as likely to have, a negative effect on:
(a) confidence in the financial stability of the DIFC;
(b) the ability of the Authorised Firm to meet the applicable Regulatory Authority requirements and standards relating to the Authorised Firm's financial resources; or
(c) the fitness and propriety of the Authorised Firm to remain authorised.
Regulators In addition to the Regulatory Authority, Regulators with Recognised Jurisdiction in relation to Licensed Services, whether in the DIFC or outside of the DIFC.
Regulatory Authority The regulator of the DIFC, established under Chapter 1 of Part 2 of the Regulatory Law
Rules legislation made by the Regulatory Authority under the Law