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Consultation Paper No. 8 Regulatory Law

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May 2003

THIS DRAFT LAW ISPUBLISHED FOR CONSULTATION PURPOSE ONLY. IT IS A REVISED VERSION OF CONSULTATION PAPER NO. 1. THE REGULATORY AUTHORITY RESERVES THE RIGHT TO AMEND THIS DRAFT AT ITS SOLE DISCRETION. THE ENACTMENT OF THIS DRAFT LAW IS CONDITIONAL UPON THE OFFICIAL PUBLICATION OF A FEDERAL DECREE, THE AMENDMENT OF DUBAI DECREE NO. 3 OF 2002, AND THE ISSUANCE OF THE LAW BY THE CHAIRMAN OF THE DIFC.

REGULATORY LAW OF THE DUBAI INTERNATIONAL FINANCIAL CENTRE

Primary Purposes

1. To establish a detailed constitution for the DIFC's Regulatory Authority.
2. To set out the legal framework for licensing Financial Institutions and other service providers in DIFC.
3. To provide a disciplinary and regulatory enforcement scheme that is fair to DIFC participants whilst enabling the Regulatory Authority to uphold the integrity of the DIFC.

Part 1 - General

Articles 2 and 3 refer to Dubai Law No. 3 of 2002, which is the Dubai Law that created the jurisdictional framework within which the Law and the entities it creates will operate. Article 2 of Schedule 1 to the Law explains the legislative hierarchy (Federal law to Rules and Guidance).

The Law contains many provisions which are designed to enable the Regulatory Authority to make secondary legislation within constraints imposed in the Law.

Part 2: The Regulatory Authority

Chapter 1 - The Structure of the Regulatory Authority

Articles 7(1) and 7(3)

The Regulatory Authority is established as a Body Corporate under the Law, with its main constitutional provisions set out at Schedule 2 to the Law. It is anticipated that additional constitutional provisions will be created by means of Rules or less formal documents (for example, the rules and procedures of committees of the Regulatory Authority).

Article 8

In common with equivalent Regulators in, for example, Australia, Hong Kong and the U.K., the Regulatory Authority has been set statutory powers, functions and objectives to govern its activities. Powers and functions may be conferred under this Law or under future legislation to be administered by the Regulatory Authority. Such future law is expected to include law governing the operation of Exchanges and Clearing Houses.

The powers, functions and objectives have been drafted both for the sake of the operation of the DIFC's regulatory regime in the DIFC but also so that the Regulatory Authority may participate in extra-territorial activities such as dealing and co-operating with other Regulators (see further, Chapter 8 of Part 2). This latter Category reflects the increasing need for regulatory issues (which often cross national borders, such as Money laundering) to be addressed in co-operation with Regulators and other bodies in other states.

Article 9

Article 9 sets out the main elements of the structure of the Regulatory Authority. Provisions relating to each element have their own chapters later in the Law. Article 9 also indicates that the Regulatory Authority may appoint further committees.

A diagram showing the different parts of the Regulatory Authority is attached at Appendix 1.

Articles 10 and 11

Article 10 enables the Chairman to appoint an independent Person to review and report to him on the efficiency and effectiveness of the use by the Regulatory Authority of its resources. Article 11 obliges the Regulatory Authority to report to the Chairman annually in relation to its activities. These are important tools with which the Regulatory Authority can be held accountable, both in relation to financial and non-financial aspects of its activities.

Articles 18 and 19

These Articles are designed to ensure that the Regulatory Authority is subject to financial reporting and robust auditing requirements similar to those which may apply to other corporate entities established in the DIFC. Again, these reporting and auditing requirements are designed to aid the transparency of the Regulatory Authority's activities and, therefore, its accountability.

Chapter 2 - The Council of the Regulatory Authority

Article 20

The Council is the supervisory and legislative element of the Regulatory Authority, responsible mainly for supervising the activities of the Chief Executive, approving Rules and exercising powers of appointment in relation to the Chief Executive, Regulatory Appeals Committee and Disciplinary Tribunal.

It is anticipated that much of the Law and Rules will in practice be developed by the Chief Executive and his staff, usually at the initiative of the Council. In the case of proposed law, the draft legislation should be reviewed and may be approved by the Council, prior to such legislation being passed to the Chairman with a recommendation that it be approved and enacted. In the case of proposed Rules, the draft legislation should be reviewed and approved by the Council before it comes into force on being issued by the Council. Further, the Council may correspond with the Chairman in relation to legislative matters beyond its jurisdiction, for example, in relation to Dubai Law.

Article 21

The Chief Executive shall be a Member of the Council by virtue of his office as Chief Executive.

Article 22

The Council has the power of appointment in relation to the Chief Executive, subject to an obligation to consult the Chairman prior to exercising such power.

Chapter 3 - Rules

Article 23

This Article gives the Council a broad power to make Rules "in respect of any matters Related to the objectives, powers or functions of the Regulatory Authority", examples of which are set out at (2)(a) to (h) in the Article. Other provisions appear throughout the Law permitting or requiring the Regulatory Authority to make Rules in relation to particular matters.

Article 24

This Article provides that the Regulatory Authority will normally publish draft Rules before they come into force, together with a commentary and summary. In addition, publication of the draft legislation will normally precede a consultation period of at least 30 days. Under Article 24(4), these publication and/or consultation requirements can be disapplied where the Council concludes that they would be "prejudicial to the interests of the DIFC".

Article 25

This Article permits a Person to apply for waiver or modification of the Rules as they apply to the Person in appropriate cases.

Chapter 4 - The Regulatory Appeals Committee of the Council

Article 26

The Members of the Regulatory Appeals Committee are appointed to the office by the Council. Given the role of the Regulatory Appeals Committee in hearing and determining appeals in relation to decisions of the Chief Executive, Article 26(2) provides that the Chief Executive and his staff may not be appointed to the office of Member of the Regulatory Appeals Committee.

Article 27

The Regulatory Appeals Committee will hear and determine appeals commenced in the circumstances set out in Article 27(2)(a) to (k). The Council may extend the jurisdiction of the Regulatory Appeals Committee (for example, by adding grounds of appeal to those listed at (a) to (k)), by virtue of provision (1). Article 27(5) provides that there shall be no appeal in relation to a determination of the Regulatory Appeals Committee.

Article 28

Article 28(3) requires appeals to be submitted to the Regulatory Appeals Committee within 30 days of the relevant determination, although with the approval of the Regulatory Appeals Committee appeals may be accepted out of time but not exceeding an additional 30 days.

Article 29

This Article sets out the powers of a sub-committee of the Regulatory Appeals Committee, appointed under Article 29(1), to hear and determine an appeal.

Chapter 5 - The Disciplinary Tribunal

Article 31

The President and panel of Members of the Disciplinary Tribunal are appointed to such offices by the Council. As with the Regulatory Appeals Committee, the nature of the proceedings before the Disciplinary Tribunal means that officers, Employees and agents of the Regulatory Authority may not be appointed to an office with the Disciplinary Tribunal.

Article 32

The Disciplinary Tribunal will have jurisdiction in relation to alleged breaches of the Law or of the Rules or of other legislation administered by the Regulatory Authority, such as the envisaged law to be enacted in relation to market conduct, in addition to other matters as may be prescribed in the Rules or provided for in other DIFC legislation. Article 32(5) allows for appeals to the Court from the Disciplinary Tribunal.

Article 33

This Article provides for the commencement of proceedings by the Chief Executive.

Article 34

This Article sets out the powers of the Disciplinary Tribunal both during and at the conclusion of proceedings. Article 34(4) allows the Disciplinary Tribunal to, among other things, impose a fine, censure a Person (including by means of public censure), make an order for restitution or compensation, and order that a Person pay all or part of the costs of the proceedings.

Chapter 6 - The Chief Executive of the Regulatory Authority

Article 36

Article 36 sets out the powers of the Chief Executive. The Chief Executive is primarily responsible for exercising the executive power of the Regulatory Authority, subject to the supervision of the Council. This exercise of executive powers includes the operation of the DIFC's licensing and disciplinary regime and the development of legislation to be passed to the Council. The Article also provides that the Chief Executive may delegate his powers to others, including in certain circumstances to persons outside the Regulatory Authority. This allows, for example, a delegation to a third party to exercise powers for the Regulatory Authority in an investigation under Article 77 (for example, to appoint forensic accountants to conduct an investigation).

Chapter 7 - Conflicts of Interest and Use of Information

Article 38

This Article obliges the Regulatory Authority to keep confidential any information coming into its possession which is subject to a duty of confidentiality. By Article 38(3), this obligation is subject to the power of the Regulatory Authority to disclose confidential information to other Regulators as prescribed. These provisions allow the Regulatory Authority an unfettered right to share information with other Regulators, including information which is confidential to licensed entities. The obligation is also subject to the power to disclose information in good faith for the purposes of the performance and exercise of the functions and powers of the Regulatory Authority or in other circumstances provided for in the Rules.

Chapter 8 - Other Regulators

Articles 39 and 40

As recognised in Article 38(3)(c), it is important that the Regulatory Authority is able to cooperate fully with other Regulators, especially given the cross-border nature of issues such as Money Laundering. Article 39 allows the Regulatory Authority to exercise its powers under the Law to assist another regulator. This would enable the Regulatory Authority to, for example, examine the financial records of a Bank which is licensed in the DIFC, at the request of an overseas regulator. Article 40 allows the Regulatory Authority to delegate its functions and powers to a representative of another regulator.

Part 3: Licensing, Authorisation and Registration

Chapter 1 - The Framework of Regulation

Articles 41 and 42

Articles 41 and 42 are primary provisions governing the licensing regime to be operated by the Regulatory Authority and apply as follows:

• the conduct of "Financial Services" (to be defined by the Regulatory Authority) in the DIFC is prohibited under Article 41(1);
• the Regulatory Authority will designate some Financial Services as "Licensed Services" under Article 42(1)(a);
• a Licensed Service may be conducted by a Person with a Licence from the Regulatory Authority as an Authorised Firm or Authorised Market Institution under Article 42(3).

Article 43

This Article provides that "Licensed Functions" will be carried out by Authorised Individuals as officers, Employees or agents of an Authorised Firm. The Regulatory Authority will prescribe the Licensed Functions under Article 43(1). Under Article 43(3), Authorised Firms cannot allow their officers, Employees or agents to carry out Licensed Functions unless they have been licensed by the Regulatory Authority as an Authorised Individual.

Article 44

The Regulatory Authority may define certain services (such as professional services) as "Ancillary Services". As the conduct of such services in or from the DIFC is prohibited under Article 44(1), they may only be carried out by a Person registered by the Regulatory Authority as an Ancillary Service Provider.

Chapter 2 - Applications for a Licence

Article 45 to 48

Article 45 details the manner in which a Person of a kind specified in Article 45(1) may apply for a Licence as an Authorised Firm or Authorised Market Institution. It also permits a Person who holds a Licence to add Licensed Services to its Licence. The details of the Licence application process will be set out under Rules by the Regulatory Authority. Article 45(4) allows the Regulatory Authority to apply a different set of Licensing Requirements in relation to applicants incorporated and/or licensed in other jurisdictions. This may be used to operate a 11passporting" regime, by which a lighter set of requirements would apply to applicants from certain jurisdictions. Article 45(5) permits the Regulatory Authority to make Rules exempting certain persons to be exempt from some or all the Licensing Requirements. Article 48 provides that Licences may be granted with or without conditions and restrictions.

Chapter 3 - Conditions and Restrictions on a Licence

Article 49

This Article gives the Regulatory Authority a broad power to impose conditions and/or restrictions on a Licence at any time. This power could be used, for example, to limit the types of customers with which a particular Authorised Firm is allowed to deal. Article 49(3) gives some procedural protection to Authorised Firms in such circumstances (the right to make representations to the Regulatory Authority). This right is not available in the circumstances set out in Article 53(4), such as when the delay is "prejudicial to the interests of the DIFC". In such circumstances, the Person may provide submissions within the period of 14 days after the exercise of the power.

Chapter 4 - Withdrawal of a Licence or an Authorisation under a Licence

Articles 50 to 52

Article 50 gives the Regulatory Authority power to suspend or withdraw authorisation in relation to all or part of a Licence in the circumstances set out in Article 50(3), and to withdraw a Licence in the circumstances set out in Article 51. The procedure for such a suspension or withdrawal is set out in Article 52 and provides an affected Authorised Firm with an opportunity to make representations in relation to such action.

Chapter 5 - Authorised Individual status

Articles 53 to 56

Article 53(1) provides that applications for Authorised Individual status shall be made jointly by the relevant firm and individual. Article 53(5) allows the Regulatory Authority to vary the application process in relation to applicants which are already Authorised Individuals in respect of other Licensed Functions. Article 53(6) permits the Regulatory Authority to make Rules exempting certain persons to be exempt from some or all the requirements for an application. Article 56 provides that Authorised Individual status may be granted with or without conditions and restrictions.

Chapter 6 - Conditions and Restrictions on Authorised Individual Status

Article 57

This Article gives the Regulatory Authority a broad power to impose conditions and/or restrictions on Authorised Individual status at any time. The power is essentially similar to that which may be exercised in relation to a Licence in Chapter 3 of Part 3, discussed earlier.

Chapter 7 - Restriction, Suspension and Withdrawal of Authorised Individual Status

Articles 58 and 59

Article 58 gives the Regulatory Authority powers in certain circumstances to prohibit persons from performing functions in the DIFC in or in connection with the provision of Financial Services or Ancillary Services. Procedural protections in relation to this power are provided for in Article 59.

Chapter 8 - Registration of Ancillary Service Providers

Article 60

Article 60 addresses the manner in which a Person of a kind specified in Article 60(1) may apply for registration as an Ancillary Service Provider. The registration process will be set out under Rules made by the Regulatory Authority.

Chapter 9 - Other matters relating to licensing

Article 63

Article 63 extends the Regulatory Authority's powers in relation to a particular licensed entity for a period of two years after the date on which such entity's licensed status is surrendered or withdrawn. This is to prevent the surrender of a Licence being a means of avoiding the disciplinary and investigative powers of the Regulatory Authority.

Part 4: General Regulation of Financial Services

Chapter 1 - General Provisions

Article 64

Article 64 contains a limited notification requirement in relation to the change of control of an Authorised Firm or Authorised Market Institution. It is anticipated that requirements will be imposed by the Regulatory Authority under Rules.

Article 67

Article 67 imposes obligations upon certain persons to make disclosure to the Regulatory Authority of matters in relation to which the Regulatory Authority would reasonably expect notice. Certain protections are provided in Article 67(5) from consequences flowing from compliance with this obligation. Under Article 67(1) the disclosure must be made to the Regulatory Authority (therefore not to a third party such as a newspaper journalist) for such protections to be available.

Chapter 2 - Anti-Money Laundering Compliance

Articles 70 to 72

These Articles address the obligations that persons within the DIFC have under existing anti-money laundering legislation in the United Arab Emirates, and impose further reporting obligations upon licensed entities to the Regulatory Authority. The Regulatory Authority shall make Rules as to creation and implementation of anti-money laundering measures in the DIFC.

Part 5: Powers of Supervision and Investigation

Chapter 1 - Powers of Supervision

Articles 73 and 74

These Articles give the Regulatory Authority the broad powers of information gathering and inspection in relation to licensed entities necessary for it to carry out its supervisory functions. Procedures governing the exercise of these powers may be set out in Rules made by the Regulatory Authority.

Articles 75 to 77

Articles 75 and 76 give the Regulatory Authority a range of powers by which it can control the affairs of an Authorised Firm or Authorised Market Institution in certain limited circumstances. For example, under Article 76(2) the Regulatory Authority may by written notice require an Authorised Firm to deal with Property in a specified manner. The limited circumstances in which such powers may be exercised are set out in Article 77 and include where it appears to the Regulatory Authority that an Authorised Firm or Authorised Market Institution is not a fit and proper Person to remain licensed.

Chapter 2 - Powers of Investigation

Article 78

The powers of the Regulatory Authority to commence an investigation set out in Article 78 may only be exercised when it has reason to suspect that a contravention of the Law or of the Rules or of any other legislation administered by the Regulatory Authority is being or may have been committed. A Person who is subject to or assisting an investigation is entitled to instruct legal representative counsel to advise him under Article 78(2).

Article 80

This Article gives the Regulatory Authority the broad powers of information gathering and inspection necessary for it to conduct an investigation. Procedures governing the exercise of these powers may be set out in Rules made by the Regulatory Authority. The powers include a power to require a Person to attend an examination and answer questions on oath. In these circumstances certain protection is provided in relation to self-incrimination in Article 80(5).

Chapter 3 - Compliance with Requirements of the Regulatory Authority

Article 81

This Article provides protection to a Person from certain consequences arising from compliance with a requirement to provide information or documents to the Regulatory Authority.

Articles 83 to 84

These Articles address the consequences of failure to comply with a requirement of the Regulatory Authority in the exercise of its supervision or investigative powers, including the Commission of a contravention, and the powers of the Regulatory Authority to seek an injunction from the Court or to Execute a search warrant.

Part 6: Contraventions and Fines

Articles 85 to 87

In addition to contraventions expressly provided for in different Articles under the Law, Article 85 provides that it shall also be an offence to breach a provision of the Law or of the Rules or of any other legislation administered by the Regulatory Authority. Article 86 provides that where persons are knowingly concerned in a contravention, they also commit a contravention. Article 87 governs the fines applicable in respect of contraventions.

Part 7: Enforcement

Articles 88 to 91

These Articles provide a range of administrative remedies from which the Regulatory Authority may select in appropriate circumstances. For example, under Article 88, the Regulatory Authority may by written notice appoint one or more managers to manage the business of an Authorised Firm or Authorised Market Institution, which may be an appropriate remedy where the exercise of supervisory or investigative powers indicate that an entity is non-compliant or in financial distress. Under Article 89, the Regulatory Authority may accept a written Undertaking to resolve a matter. Articles 90 and 91 empower the Regulatory Authority to impose administrative fines or censures.

Articles 92 to 95

In an appropriate matter, the Regulatory Authority will refer a matter to the Court for appropriate orders. These Articles empower the Regulatory Authority to seek injunctions, orders for compensation and restitution, and winding up. They also empower a Person to apply to the Court for remedies where they have suffered loss or damage arising from a contravention, and provide a right to the Regulatory Authority to formally intervene as a party in any such proceedings in appropriate circumstances.

Submission of Comments

Please note, that although each draft is in near final form, it is still 'work in progress' and may therefore undergo some further amendments prior to enactment. However, it is anticipated that any amendments would be technical in nature rather than substantive and therefore the Regulatory Authority believes it is a sensible time to engage in consultation.

Any persons wishing to submit comments should, where applicable, provide details of the organizations they represent. In addition, persons suggesting alternative approaches are encouraged to submit the proposed text of possible amendments that would be necessary to incorporate their suggestions.

Please note that the names of the commentators and the content of their submissions may be published on the Regulatory Authority website and in other documents to be published by the Regulatory Authority. If you wish your name to be withheld from publication by the Regulatory Authority, please indicate this when you make your submission.

Any comments should be addressed to Ms. Roberta Calarese, Legislative Counsel, Regulatory Authority, P.O. Box 74777, Dubai, u.a.e. All comments should be provided in writing no later than 21 June 2003.