It particular it aims to clarify the distinction between making arrangements for another person to buy, sell or otherwise obtain a financial product or service and providing advice on these products.
The DFSA said that it had become aware of some unintended gaps and overlaps in its regulations covering these types of activities in the Dubai International Financial Centre (DIFC).
Promoting a financial product attracts less onerous regulation than ‘arranging’ activities, it noted.
“This apparently gives an incentive for persons carrying on referrals and financial promotions to ‘trespass’ into ‘arranging’ activities, resulting in regulatory arbitrage,” the DFSA said in a consultation paper released this week.
Greater clarity planned
“Our proposals are designed to provide greater clarity, certainty and flexibility to those undertaking intermediation activities in the DIFC, and to provide a regulatory framework which is proportionate to the risks associated with their activities,” it said.
The DFSA plans to keep the current overall form and level of regulation covering ‘arranging’ and ‘advising’ activities, but to make some refinements to ensure these activities, as well as those of ‘acting as an agent’, are brought more into line with the regulations for similar activities relating to other insurance products.
The regulator said it had identified a number of risks under the current regime for firms carrying out arranging and advising business. For example, it noted an arranger may, for personal gain (e.g. commissions or fees paid to him by the provider of the financial service or product), induce a customer to obtain a financial service or product which is not needed or appropriate for the customer (i.e. misselling).
“If the arranger handles customers’ money or investments, without regulation of that activity, there will be no systems and controls to mitigate loss of such assets in the hands of the ‘arranger’.
“An arranger’s fitness and propriety (which includes integrity) will also not be subject to any scrutiny, allowing unscrupulous players to engage in such activities in an unacceptable manner,” it said.
To address these risks, the DFSA said it proposes to regulate arranging deals in investments as a stand-alone discrete financial service. It said it would look to regulations in the UK, as a proxy for the EU regime, and Australia, Hong Kong and Singapore, as a guide though acknowledged each of these jurisdictions regulates this activity differently.
Rep office activities
The DFSA also plans to remove some of the current ambiguities it found concerning the activities of representative offices in the DIFC.
In particular, it plans to make clear that a representative office can only market financial products and financial services of its head office or those from another part of the company outside the DIFC and can only promote these financial products and services.
These representative offices are not allowed to hold client monies belonging to its head office clients.
“We propose… that a Rep Office could maintain an operating account for business purposes provided it does not contain any monies other than proprietary funds/assets,” the DFSA said.
“We also propose to make certain refinements … to ensure that marketing material that can be distributed by a Rep Office remains general information.”