Regulatory Update July 2022

Dubai Financial Services Authority (UAE)

DFSA moves to an open window format for accepting ITL applications

The DFSA has started accepting applications from local and international firms interested in joining its Innovation Testing Licence (ITL) Programme as of the 15^th July 2022. ITL is a regulatory sandbox which enables approved firms to test new and innovative financial products, services, and business models within and from the Dubai International Financial Centre (DIFC).

This open window format adopted by the DFSA means that interested firms may apply as soon as they are ready to test their product and are able to provide a clear explanation of their planned business model and the proposed innovative product or service offering.

DFSA takes action to protect the integrity of Islamic Finance

The DFSA has taken action against an individual for poor conduct whilst working on a firm’s Commodity Murabaha Broking Desk.

During the period between January 2014 and October 2016, the Senior Executive Officer (SEO) was found to have:

• Been aware that the Desk did not find alternative suppliers to source the commodities required to facilitate the Murabaha transactions for the Desk’s clients.
• Been aware that a Supplier was required for the Murabaha transactions, including that it satisfied the Client Banks’ Shari’a requirements.
• Failed to stop the Desk from continuing to facilitate the Murabaha transactions over the period by reusing title to commodities which were not owned by the Desk; and
• Failed to stop the Desk from misrepresenting to a client that the Desk had a Supplier when, in fact, it did not.

Please refer to the enforcement notice for further details.

Dear SEO letters

The DFSA has issued the following Dear SEO letters:

• Crypto Token Regime Survey: Seeks public feedback on the DFSA’s proposal for a regulatory regime for persons wishing to provide financial services activities in or from the DIFC in respect of Crypto Tokens
• Hosting Group-related staff in the DIFC: A reminder from the DFSA to Authorised Firms of their obligations in relation to hosting staff in the DIFC from group-related entities in other jurisdictions.
• The Role of Money Laundering Reporting Officers (MLRO’s) at Relevant Persons: To reiterate DFSA’s expectations and particular elements of the DFSA’s Rule requirements and accompanying guidance for those individuals performing the role of MLRO

Outcomes of 2020/2021 Representative Office Sectoral Review

The sectoral review was conducted in 2020 and 2021. The scope of the review assessed whether Representative Offices were able to:

• Operate within the scope of their licence.
• Demonstrate a sound understanding of their obligations under applicable DFSA Rules; and
• Implement an appropriate control framework to monitor and ensure compliance with applicable DFSA Rules.

The DFSA noted the following key findings:

• Several Principal Representatives* are not residents of the UAE.
• Rep Offices’ key business documents do not reflect the DFSA Rule requirements concerning disclosure of their Representative Office regulatory status.
• Rep Offices’ promotional materials do not reflect the DFSA Rule requirements concerning marketing content
• Rep Offices do not have updated and current Business AML Risk Assessments available for review.
• Rep Offices relied on group AML policies and procedures without considering or referencing applicable DFSA Rules and requirements.
• Implement an appropriate control framework to monitor and ensure compliance with applicable DFSA Rules.

* Principal Representatives are individuals designated by a Representative Office in accordance with REP (Representative Office Module).

UAE (ADGM, DIFC, Dubai Internet City, Dubai South, DMCC, EmiratesNBD and Wio)

UAE launches ‘NextGen FDI’ to attract world’s digital businesses and talent

The UAE Ministry of Economy has launched an initiative to attract more than 300 digital focused businesses to establish bases in the UAE over the next 6 to 12 months.

Entitled the ‘NextGen FDI’, this initiative will provide companies with the necessary market entry support to launch and scale from within the UAE. Support will take the form of faster incorporation processes, bulk visa issuance, accelerated banking services, and providing commercial and residential real estate incentives for companies relocating personnel to the UAE.

The programme will focus on new-gen companies who specialise in software development, data scientists, computer programming and digital asset entrepreneurs.

BNP Paribas and ADGM explore key areas of climate action

International banking group, BNP Paribas and ADGM have co-authored a white paper entitled “UAE and the Energy Transition: Towards COP28”.

The paper formalised the discussion amongst UAE-based prominent business leaders who attended a roundtable on the topic in November 2021.

Top findings from the whitepaper include:

• Encouraging stronger collaboration between the public and private participants, and to set clear, credible, and timely plans to deliver on net-zero targets.
• Rules and guidelines must be clear and achievable to make actors more accountable and reduce the risk of greenwashing.
• If climate change projects do not meet the requirement of private finance, then sustainable finance will be hard to scale up, unless subsidies, guarantees or other incentives are offered by governments and supernational entities, like multilateral development banks.

UK Financial Conduct Authority (FCA)

The Bank of England, PRA and FCA set out potential measures to oversee Critical Third Parties (CTPs) in a move to increase resilience of the financial sector

UK regulators have noted the potential for CTPs (businesses that provide services to regulated financial services firms and financial market infrastructure firms) to affect financial stability and cause harm to consumers if they fail or are disrupted.

In response, the regulators have produced this discussion paper setting out potential measures for how the supervisory authorities could use proposed powers to address these risks, which include:

• A framework for identifying potential CTPs, which would inform the supervisory authorities’ recommendations for formal designation by HM Treasury.
• Minimum resilience standards, which would apply to the services that designated CTPs provide to firms and FMIs.
• A framework for testing the resilience of material services that CTPs provide to firms and FMIs using a range of tools, including but not limited to scenario testing, participation in sector-wide exercises, cyber resilience testing, and skilled person reviews of CTPs.

FCA consultation aimed at improving UK equity markets

The FCA has commenced a consultation on rule changes aimed at improving trade execution and post-trade transparency for investors. The FCA is also seeking views on future guidance on outages and the structure of UK markets for retail orders.

The changes the FCA are consulting on aim to:

• Improve the content and consistency of post-trade transparency reports.
• Establish a newly designated reporter status for OTC trades.
• Allow UK trading venues to use reference prices from overseas markets where those prices are robust, reliable, and transparent.
• Permit the use of the tick size regime from overseas primary markets.

Switzerland Swiss Financial Market Supervisory Authority (FINMA)

FINMA revises capital requirements for banks

In response to the last financial crisis and in alignment with international Basel III standards, FINMA is adjusting its implementing regulations regarding capital requirements for banks.

The international Basel III banking standards include rules on eligible capital, on the amount of capital required to absorb losses, on risk diversification, liquidity, and disclosure. The final Basel III standards change the rules for calculating capital requirements, particularly for credit and market risks as well as for operational risks.

FINMA will conduct a consultation commencing between now and 25 October 2022 with changes scheduled to come into force on 1 July 2024.

Singapore

Monetary Authority of Singapore (MAS)

Joint Exercise by MAS, BdF and ACPR to Strengthen Cross-border Cyber Crisis Response and Preparedness

The purpose of the joint exercise was to test the effectiveness of cyber crisis coordination and response by the three financial authorities when managing scenarios such as ransomware, zero-day vulnerabilities and IT supply chain attacks.

The joint exercise demonstrated the commitment of firms in advancing their collective response to major cyber-attacks targeted at financial institutions, which occur on a cross border basis.

Considering the global nature of cyber threats and the interconnectedness of our financial systems, the participants agreed that it has become increasingly important to safeguard financial stability and the resilience of essential financial services.

MAS Strengthens Financial Institutions Business Continuity to Address Evolving Threats

The Monetary Authority of Singapore (MAS) has issued revised Guidelines on Business Continuity Management (BCM) for Financial Institutions (FIs). The main objective of this update is to help FIs strengthen their resilience against service disruptions arising from IT outages, pandemic outbreaks, cyber-attacks, and physical threats.

The revisions consider learnings from the handling of the COVID-19 pandemic and increased digitalisation in the financial sector.

EU European Central Bank (ECB)

ECB takes further steps to incorporate climate change into its monetary policy operations

The Governing Council of the European Central Bank (ECB) has decided to take further steps to include climate change considerations in the Eurosystem’s monetary policy framework. This includes:

• ECB accounting for climate change in its corporate bond purchases, collateral framework, disclosure requirements and risk management, in line with its climate action plan
• Measures that aim to reduce financial risk related to climate change on the Eurosystem’s balance sheet, encouraging transparency and support the green transition of the economy
• Measures that are regularly reviewed to ensure they remain fit-for-purpose and aligned with the objectives of the Paris Agreement and the EU’s climate neutrality objective.
• Establish a new designated reporter status for OTC trades.
• Allow UK trading venues to use reference prices from overseas markets where those prices are robust, reliable, and transparent.
• Permit the use of the tick size regime from overseas primary markets.

Please contact j. awan & Partners by email at [email protected] for regulatory support in relation to any of the above jurisdictions.