The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has issued a public consultation paper seeking views on changes to client classification, client asset and certain conduct requirements relating to the investment sector.
The specific areas of focus within these suggested enhancements include:
- Client classification – simplifying the assessment standards for professional clients;
- Client assets – providing clarity on the requirements in relation to holding or controlling client assets, and other client protection measures; and
- Conduct requirements in relation to investment business – additional client protection measures in terms of the duties owed by authorised firms to their clients.
The proposed amendments affecting the Regulated Activity of Providing Custody are also a part of this consultation paper.
The consultation period will close on 25 May 2023.
Retail investor marketing
The FSRA has examined conduct of business rules in a number of leading financial service jurisdictions to determine whether additional client protection measures may be warranted.
The regulator said that “some of the benchmarked client protection requirements reflect the relative size of the retail investor market and thus may not be warranted in ADGM”.
However, the FSRA proposes to adopt a number of changes, consisting of:
- requiring marketing material intended for retail clients to include a warning that it is marketing material and not to be considered investment advice;
- mandating that an authorised person which provides investment advice disclose whether such advice was given on an independent basis;
- whether financial instruments recommended by an authorised person have been restricted to those issued or provided by an entity having close links to the authorised person;
- whether the authorised person will provide the client with a periodic assessment of the suitability of the Financial Instruments recommended to the client;
- entitling clients to obtain price information for each tranche of a transaction where the execution of a transaction investment has been performed in multiple tranches; and
- disclosure of itemised management and execution fees and charges incurred by a retail client in each periodic statement, with an obligation to provide a more detailed breakdown of fees and charges upon request by the client.
Client assets
In respect of client assets, comprising client money and client investments, the FSRA currently imposes the following requirements:
- Client assets must be identified, segregated and placed with qualified third-party agents, which the authorised person must initially assess and continue to monitor as to their ability to provide ongoing and secure safeguarding of those assets;
- Clients must be informed of the protections offered by the FSRA’s client assets regime;
- Reconciliations must be performed periodically by persons not subject to conflicts of interest and both the client and the FSRA must be periodically made aware of the status of such client accounts; and
- A detailed and up-to-date set of records must be maintained such that, in the event of the failure of an authorised person, an insolvency professional may return assets to clients.
Client money rules
The FSRA also proposes streamlining the client money rules to provide a clearer and easier to apply set of obligations.
Specific features of the proposed amendments include:
- Distinguishing the obligations placed on authorised persons which hold client money from those that merely control client money pursuant to a mandate over an account which is maintained by a client;
- Incorporating references to the obligations in relation to relevant money held by a payment service provider;
- Providing additional guidance on considerations when selecting a third-party Agent for the provision and maintenance of a client account;
- Replacing the concept of a statutory trust with a simplified deemed trust concept; and
- Amending the client money distribution rules, which operate as an alternative to the distribution procedure in the Insolvency Regulations 2015.
Professsional clients
The FSRA also wants to change the rules around professional clients.
The regulator eyes views on the following questions:
- Do you agree with the FSRA’s view that single family offices which do not otherwise qualify as a “deemed” professional client should be required to be assessed before qualifying as a professional client?
- Do you agree with the FSRA’s proposed increase of the verifiable net assets requirement for “assessed” professional clients from $1m (£810,000, €920,000) to $500,000 for both individuals and undertakings?
- Do you agree with the FSRA’s view that that the assets which may be counted to meet the net assets test for prospective “assessed” professional clients should remain broader than cash and securities-type investments?
- Do you agree with the FSRA’s proposed addition of a duty to inform professional clients of the need to advise authorised persons of relevant changes to their circumstances which may impact their ability to retain their professional client classification?
