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Dec 8 2005 onwards

Consultation Paper No. 22 Trust Service Providers Rules (TSP)

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DECEMBER 2005

THE DUBAI FINANCIAL SERVICES AUTHORITY (“DFSA”) CONSULTATION PAPER ADDRESSED TO PARTIES INTERESTED IN THE DEVELOPMENT OF FINANCIAL SERVICES WITHIN DUBAI’S FINANCIAL FREE ZONE (THE “DIFC”)

Download this Consultation Paper in PDF format.

1. Introduction

This paper consults on the DFSA’s proposed Rules in respect of the regulation of Trust Service Providers in the DIFC.

The amendments to the GEN module are attached as Annex A; the amendments to the AUT module are attached as Annex B; the amendments to the COB module are attached as Annex C; the amendments to the AML module are attached as Annex D; the amendments to the PIB module are attached as Annex E; the amendments to the ASP module are attached as Annex F; and the amendments to the GLO module are attached as Annex G.

The draft Rules are published for consultation purposes only. Please note that, although the draft Rules are in near final form, the DFSA reserves the right to amend the drafts at its sole discretion.

The Rules will be made under powers contained in 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 using the proposed Rules 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:

Ms Roberta Julfar
Legislative Counsel
DFSA
PO Box 75850
Dubai, UAE

or e-mailed to rjulfar@dfsa.ae

All comments should be provided in writing, on or before 9 January 2005.

2. Background and context

The draft Rules in relation to Trust Service Providers and the associated changes to the Glossary (GLO) of the DFSA Rulebook need to be considered in the context of the following laws — the Regulatory Law 2004, and the Trust Law 2005 and the objectives or purposes set out therein.

The DFSA has not previously consulted upon these Rules.

3. 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 on the DFSA, 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 DFSA Rulebook may be viewed on the DFSA’s website (www.dfsa.ae) along with all the DIFC Laws and Regulations.

The DFSA has power to waive or modify Rules, and is prepared to use this to adapt the Rules to specific circumstances which may arise.

4. Interpreting the Rulebook

Defined terms are identified throughout the Rulebook by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO). Please note that Annex G contains further definitions. Unless the context otherwise requires, where capitalisation of the initial letter is not used, an expression has its natural meaning.

Every provision in the Rulebook must be interpreted in the light of its purpose. The purpose of any provision is to be gathered first and foremost from the text of the provision in question and its context among other relevant provisions. A provision means every type of provision, including Rules and Guidance.

Where reference is made in the Rulebook to another provision of the Rulebook or other DIFC legislation, it is a reference to that provision as amended from time to time. If a provision in the Rulebook refers to a communication, notice, agreement, or other document ‘in writing’ then, unless the contrary intention appears, it means in legible form and capable of being reproduced on paper, irrespective of the medium used. Expressions related to writing must be interpreted accordingly. Any reference to ‘dollars’ or ‘$’ is a reference to United States Dollars unless the contrary intention appears. References to Articles made throughout the Rulebook are references to Articles in the Regulatory Law 2004 unless otherwise stated.

Unless the contrary intention appears:

•   words in the Rulebook importing the masculine gender include the feminine gender and words importing the feminine gender include the masculine; and
•   words in the Rulebook in the singular include the plural and words in the plural include the singular.

Unless the contrary intention appears, a day or business day refers to:

•   in relation to anything done or to be done in (including to be submitted to a place in) the UAE any day which is not a Friday or Saturday or an official UAE bank holiday; and
•   in relation to anything done or to be done by reference to a market outside the UAE any day on which that market is normally open for business.

5. Introduction to the regulatory regime for Trust Service Providers

Trust Service Providers are firms that engage in the business of acting as trustees or administering trusts. They may also create trusts or arrange for third parties to act as trustees. The DFSA has defined Trust Service Providers as Authorised Firms carrying on the Financial Service of Providing Trust Services. Providing Trust Services has been defined as:

(a) the provision of services with respect to the creation of an express trust;
(b) arranging for any Person to act as a trustee in respect of any express trust;
(c) acting as trustee in relation to an express trust;
(d) the provision of Trust Administration Services in relation to a trust; or
(e) acting as protector or enforcer.

Carrying on a Financial Service in or from the DIFC requires a Person to be licensed by the DFSA in accordance with the Regulatory Law 2004 and the DFSA Rulebook. As Authorised Firms, Trust Service Providers need to comply with the full regulatory regime prescribed in the DFSA Rulebook, except as provided otherwise. The rational of the DFSA in adopting this approach was to ensure that Trust Service Providers are fully regulated in accordance with international standards and best practice adopted in other financial centres.

6. Purpose and summary of the material provisions of the Rules relating to the regulation of Trust Service Providers.

The Rules in respect of the regulation of Trust Service Providers are created under powers contained in the Regulatory Law 2004, however they have to be read in conjunction with the Trust Law 2005 which provides the basic legal framework for trusts and the powers, duties and functions of trustees. The purpose of these Rules is to:

•   Prescribe a new Financial Service activity, namely Providing Trust Services.
•   Exclude certain categories of Persons from the requirement to obtain a Licence.
•   Provide Rules in relation to the conduct of a Trust Service Provider in respect of exercise of discretion, conflicts of interest, communications, marketing material, professional indemnity insurance cover, dual control, internal reporting, qualification of staff and fitness and propriety of third parties acting on behalf of the Trust Service Provider.
•   Amend the Glossary module (GLO) by the addition of new defined terms with regard to the Provision of Trust Services.

In addition to the aforementioned rules, various consequential and clarificatory amendments have been made to the General module, Authorisation module and Prudential module (PIB).

The Rules in the General module (GEN) create the new Financial Service of Providing Trust Services. An exclusion to the ”by way of business” Rule has been provided only for an individual who acts as trustee, enforcer, protector or arranges for a Person to act as a trustee in respect of less than three trusts. In addition, Private Trust Companies as defined in the Glossary Module (GLO), lawyers and accountants have been excluded from the requirement to obtain a Licence subject to certain conditions outlined below. Private Trust Companies have been excluded as long as they provide trustee services to Related Persons as defined in the Glossary module (GLO) and they appoint a Trust Service Provider for the administration of the trust. Lawyers and accountants have been excluded when arranging for a Person to act as trustee or providing services with respect to the creation of an express trust if such activities are incidental to the practice of law or accounting as the case may be.

In relation to fees, it is proposed that the fee for the Financial Service of Providing Trust Services is $10,000. The application, initial annual and subsequent annual fees are calculated on a case by case basis in accordance with GEN Appendix 5. The DFSA may also charge a supplementary fee under GEN Rule 7.2.4 in circumstances where it expects to incur substantial additional costs in dealing with an application or conducting ongoing supervision in relation to a Trust Service Provider.

The Rules contained in the Authorisation module (AUT) implement provisions in relation to the assessment by the DFSA of an application by a Person or an Authorised Firm to Provide Trust Services. Specific requirements have been prescribed when a Trust Service Provider applies to have its Licence withdrawn and when the status of an Authorised Individual is withdrawn or suspended. A restriction has been imposed on the Compliance Officer and Money Laundering Reporting Officer who cannot also act as trustees on behalf of the Trust Service Provider.

The Conduct of Business Rules (COB) have been amended by the inclusion of a new Chapter 18 which is intended to regulate the conduct of Trust Service Providers operating in or from the DIFC. Trust Service Providers are required to maintain adequate knowledge of, and comply with, all applicable laws, rules and regulations relevant to the Provision of Trust Services in addition to complying with appropriate standards of corporate governance. Specific provisions have been inserted to ensure that Trust Service Providers deal with conflicts of interest in a specified manner to ensure fair treatment of Clients. Specific requirements have been imposed on Trust Services Providers in respect of communications with, and marketing material to, the public. A Trust Service Provider must maintain at all times professional indemnity insurance cover and must notify the DFSA of any changes or renewal of the cover. All staff employed or Persons recommended by a Trust Service Provider must have appropriate qualifications and experience. The DFSA has not at present prescribed what types of qualifications such Persons must have but it expects Trust Service Providers to exercise their discretion and use their experience in establishing what would be appropriate qualifications for specific roles. All relevant staff must be kept up to date through training and continuous professional development as appropriate. When a Trust Service Provider arranges for a Person who is not an employee of the firm to act as a trustee, it must ensure that such Person is fit and proper and it must contractually bind such Person to comply with the same legal and regulatory requirements as if he was an employee of the Trust Service Provider.

In relation to prudential requirements, the DFSA considered it adequate that Trust Service Providers fall within prudential Category 3 which requires a minimum level of capital of $500,000. Consequential amendments have been made to the Prudential — Investment, Insurance Intermediation and Banking Business module — (PIB) to reflect the new Financial Service of Providing Trust Services.

The Glossary module has been amended to include new definitions such as Trust Service Provider, Private Trust Company and Related Persons.