RPP 3 RPP 3 Supervision — Being Regulated
RPP 3-1 RPP 3-1 DFSA's Approach to Supervision
Chapter 3 focuses on the
DFSA'srisk-based approach to supervision and the ongoing relationship between the DFSAand an Authorised Person, DNFBPor Registered Auditor(collectively referred to as firms in this Chapter unless otherwise stated).
Section 3-1 outlines the
DFSA'sgeneral approach to risk based supervision; the remaining sections (3-2 to 3-6) provide additional information in relation to the DFSA'sapproach to the supervision of particular types of firms.
The appropriate use of the
DFSA'ssupervisory powers plays an important part in ensuring that the DFSAachieves its statutory objectives and has regard to its guiding principles which are set out in chapter 1.
DFSAhas adopted a risk-based approach to the regulation and supervision of all regulated firms in order to concentrate its resources on the mitigation of risks to its objectives. The DFSAwill work with a regulated entity to identify, assess, mitigate and control these risks where appropriate.
DFSA'ssupervisory risk-based approach involves:(a) the DFSA's continuous risk management cycle, which utilises macro-prudential data, risk assessments and a risk matrix to form risk-based classifications of firms, as set out in paragraphs 3-1-8 to 3-1-24;(b) where applicable, developing a strong relationship with a firm and its senior management, as set out in paragraphs 3-1-25 to 3-1-31;(d) using appropriate supervisory tools; and
where applicable, considering any lead or consolidated supervision which a firm or its Group may be subject to in other jurisdictions, taking into account the DFSA's relationship with other regulators, set out in paragraphs 3-1-34 and 3-1-35;
DFSA'srisk-based approach to the supervision of a firm may vary depending upon the size, scale, nature and circumstances of each individual firm and the specific risks it poses to the DFSA'sobjectives.
DFSAis concerned with a firm's behaviour that affects both its overall financial condition and its interaction with individual customers and market counterparties. We do not aim to prevent all failures. A 'zero failure' regime would place an excessive regulatory burden on firms. Instead, we aim to reduce the probability of excessive risk taking or inappropriate conduct through increased intensity of supervision where it is both appropriate and likely to be effective.
Risk management cycle
DFSAhas adopted a continuous risk management cycle. This comprises the identification, assessment, prioritisation, monitoring and mitigation of risks.
Our risk management cycle starts with a macro-prudential view of the
DIFCas a whole. We produce a comprehensive set of quarterly data which highlight demographics of all types of regulated entities. This data set provides an overview of the risk profile of regulated entities, including the aggregate financial position.
Based on the analysis of this data set, we might increase assessment activity with respect to certain entities, or use thematic reviews to target certain products, services or practices across a set of firms.
Our Board of Directors use these data, amongst other factors, to set organisational risk tolerances which are used to prioritise risks.
Risk Matrix — Impact and Probability Ratings
The impact rating is an assessment of the potential adverse consequences that could follow from the failure of, or significant misconduct by, a firm. The potential adverse consequences include not only the direct financial impact on such firm's customers and stakeholders, but also the potential for damage to the reputation and objectives of the
We do not have a single proxy for the impact rating. We consider a variety of factors such as:(a) the amount of firm revenue generated by activity in or from the Centre;(b) the number of employees in the
DIFC;(c) the potential scale of damage to the firm's customers based on the firm's level of activity in or from the DIFC;(d) whether the firm holds deposits or any other form of client money;(e) the potential for an individual firm or entity's failure or misconduct to directly damage other firms or entities; and(f) the potential damage of failure or significant misconduct on the reputation and objectives of the DFSA.
The probability rating covers four broad risk groups:(a) Corporate Governance, Strategy and Business Model Risks;(b) Financial and Operational Risks;(c) Conduct of Business Risks to Clients and Markets; and(d) Anti-Money Laundering, Counter Terrorist Financing and Financial Crime.
Within these risk groups are risk elements which the
DFSAmay review, according to the type of firm, to identify risks that could inhibit the achievement of our objectives.
A risk matrix is then used to identify, assess and further prioritise risks using these impact and probability ratings, resulting in a risk based classification of a firm.
Risk-based classification of firms
Risk assessments allow the
DFSAto allocate its resources in such a way that its supervisory tools are targeted towards those firms and activities which pose a higher risk to the DFSA'sobjectives.
DFSAhas in place intra-departmental challenges and measures to check that our supervisory activities are proportionate to a firm's risk-based classification.
We will generally only allocate a Relationship Manager to a firm with a higher level of resultant risk from the combined assessment of impact and probability risk ratings. This means that a significant number of firms will not have a dedicated Relationship Manager, but will be supervised by a team — the Thematic Supervision Team (TST).
Firms supervised by the TST will be subject to onsite and thematic surveillance reviews, however, the review cycle will differ from those firms supervised by dedicated relationship managers. In addition to risk assessments, the TST will use high-level management meetings and self-certifications as considered necessary.
Thematic reviews will cover a sample of all relevant firms. Such reviews may be conducted at any time.
DFSAmay discuss certain information with a firm, in particular the specific risks that lead it to assign an overall risk classification to the firm and any necessary remedial actions, it will not usually disclose the final risk classification.
Whenever appropriate, the
DFSAmay inform the firm of the steps it needs to take in relation to specific risks. The DFSAthen expects the firm to demonstrate that it has taken appropriate steps to mitigate the risks it poses to the DFSA'sobjectives.
Where necessary, risk mitigation programmes may be developed with a firm in order to mitigate or remove identified areas of risk.
DFSA's Relationship with Firms
In order to meet its objectives, the
DFSArequires an open, transparent and co-operative relationship between itself and each firm. The DFSAexpects to establish and maintain an on-going dialogue with the firm's senior management in order to develop and sustain a thorough understanding of the firm's business, systems and controls and, through this relationship, to be aware of all areas of risk to the DFSA'sobjectives.
The DFSA seeks to maintain an up-to-date knowledge of a firm's business. However, a firm is also required to keep the DFSA informed of significant events, or anything related to the firm of which the DFSA would reasonably expect to be notified, including as set out in paragraphs 3-1-32 and 3-1-33.
The nature and intensity of the
DFSA'srelationship with a firm will depend first on the extent of risk a firm poses, but after that will also depend on a number of factors. The DFSA'slevel of supervision will be proportionate to the risks which the firm poses to the DFSA'sobjectives and will emphasise the responsibilities of the firm's senior management in identifying, assessing, mitigating and controlling its risks. The greater the impact and probability of the firm's perceived risks, the more intensive the supervisory relationship may be.
For those Firms who have a dedicated Relationship Manager, their Relationship Managers will be the Firms' main point of contact with the
DFSA. This includes any notifications, changes or queries.
For those Firms without a dedicated Relationship Manager, who will be supervised by the TST, a "Supervised Firm Contact Form" (Contact Form), is available only to Firms on the DFSA website and provides a mechanism to securely and efficiently communicate with us.
This Contact Form can be used for any questions or queries you have of us and for the lodgement of any required forms (except EPRS returns). The Contact Form also allows for the attachment of any related supporting documents. Once received, all enquiries will be acknowledged and an appropriate
DFSAstaff member will be allocated to each enquiry. The DFSAhas put in place service standards to ensure that all enquiries are responded to in a timely manner.
In addition, we have also published, on our website, a set of Frequently Asked Questions (FAQs). These FAQs include the most commonly asked questions from our regulated entities ranging from general "Where can I find … ?" queries to more specific supervisory processes or reporting requirement queries. We will update the FAQs on a regular basis and we encourage all regulated entities to visit and revisit this resource frequently.
Notifications to the DFSA
Section 11.10 of the GEN module sets out Rules on specified events, changes or circumstances that require notification to the
DFSAby an Authorised Person(other than a Representative Office). The list of notifications outlined in section 11.10 is not exhaustive and other areas of the Rulebook may also specify additional notification requirements.
Authorised Firmand Authorised Market Institutionare required to comply with the high level principles in GEN Rule 4.2.10 and AMI Rule 9.2.1 respectively. These Rules require an Authorised Personto deal with the DFSAin an open and co-operative manner and keep the DFSApromptly informed of significant events or anything else relating to such person of which the DFSAwould reasonably expect to be notified.
Co-Operation with Other Regulators
DFSAviews co-operation with other regulators as an important component of its supervisory activities. Effective co-operation arrangements with other regulators will provide for prompt exchange of information in relation to supervision, investigation and enforcement matters. Usually, co-operation arrangements will be in the form of memoranda of understanding or other arrangements. The information exchange may enhance, for example, the DFSA'sunderstanding of the operations of an Authorised Firm's Groupand the effect on the firm.
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RPP 3-2 RPP 3-2 Supervision of Authorised Firms
Section 3.2 provides additional information in relation to
DFSA'sapproach to the supervision of an Authorised Firm. Where relevant, some of these requirements may apply to a Representative Office.
In supervising an
Authorised Firm, the DFSAexpects an Authorised Firmto comply with a number of high level principles in relation to its activities.
Authorised Firm, other than a Representative Office, must comply with the twelve principles set out in section 4.2 of the GEN module. In brief, these are:(a) Principle 1 — Integrity;(b) Principle 2 — Due skill, care and diligence;(c) Principle 3 — Management, systems and controls;(d) Principle 4 — Resources;(e) Principle 5 — Market Conduct;(f) Principle 6 — Information and Interests;(g) Principle 7 — Conflicts of Interest;(h) Principle 8 — Suitability;(i) Principle 9 — Customer assets and money;(j) Principle 10 — Relations with regulators;(k) Principle 11 — Compliance with high standards of corporate governance; and(l) Principle 12 — Remuneration practices.
DFSAlicenses an Authorised Firm, it takes into consideration the relationship with any wider Groupto which the firm may belong or with other Personsclosely linked to it. The DFSAmay also take into account lead or consolidated supervision to which an Authorised Firmor its Groupmay be subject in another jurisdiction.
Authorised Firmis expected to provide information as required or reasonably requested under legislation applicable in the DIFCrelating to the Authorised Firmand, where applicable, its consolidated or lead regulatory arrangements. This information may include prudential information, reports on systems and controls relating to an Authorised Firm's Group, internal and external audit reports, details of disciplinary proceedings or any matters which may have financial consequences, reputational impact or pose any significant risk to the DIFCor to the Authorised Firmand the group-wide corporate governance practices and policies and the remuneration structure and strategies adopted. This information may initially be taken into account as part of DFSA'sfit and proper test as set out in section 2.2 and may subsequently be utilised in the supervision of the Authorised Firm. Further Rulesand Guidancewith regard to obtaining information from an Authorised Firm'slead regulator are set out in GEN Rule 11.1.5.
DFSAhas an interest in the relationship of an Authorised Firmwith other regulators, particularly in order to determine the level of reliance the DFSAmay place on a regulator in another jurisdiction concerning any lead supervision arrangements. Depending on the legal structure of an Authorised Firmand the relationship of the DFSAwith the regulator in question, the DFSAmay place appropriate reliance on the supervision undertaken by this regulator.
Domestic Firm's Group With DIFC Head Office
DFSAwill usually be the lead and consolidated regulator of any Groupheaded by a Domestic Firm. Members of the Group, that is any of the Authorised Firm's Subsidiariesor branches, will be either subject to DFSA'sexclusive supervision or, where members of the Groupare located in a jurisdiction outside the DIFC, generally subject to lead or consolidated supervision by the DFSAin co-operation with another regulator.
Subsidiary of a Non-DIFC Firm
DFSAwill routinely be the lead regulator for the purpose of prudential supervision of an Authorised Firmwhich is a DIFCincorporated Subsidiaryof a non-DIFC firm.
Authorised Firmis a Subsidiaryof a regulated non-DIFC parent company, the DFSAmay have regard to any consolidated prudential supervision arrangements to which the Subsidiaryis subject and will liaise with other regulators as necessary to ensure that these are adequately carried out, taking into account the Subsidiary'sactivities. The DFSAmay place appropriate reliance on the Subsidiary'sconsolidated regulator in another jurisdiction if it is satisfied that it meets appropriate regulatory criteria and standards.
Authorised Firmcarrying on Financial Servicesas a Subsidiaryof an unregulated non-DIFC parent company may be subject to the DFSA'sconsolidated prudential supervision, taking into account the parent's activities.
Branch of a Non-DIFC Firm
Authorised Firmcarrying on Financial Servicesthrough a branch will be subject to supervision by both the DFSAand the regulator in its head office jurisdiction.
DFSAwill have regard to any lead or consolidated prudential supervision arrangements to which a branch is subject. The DFSAmay place appropriate reliance on a Branch'slead regulator in another jurisdiction and, where appropriate, its consolidated prudential regulator if it is satisfied that it meets appropriate regulatory criteria and standards. Where an Authorised Firmis subject to lead regulation arrangements with a foreign regulator, the DFSAwill usually not seek to impose consolidated prudential supervision on the Authorised Firm's Group.
During the authorisation process the
DFSAwill take into account the nature and scope of the regulation and supervision to which the applicant is subject in its head office jurisdiction. Notwithstanding that an Authorised Firmmay be subject to lead or consolidated regulatory arrangements, the DFSArequires it to remain fit and proper in respect of its Groupand Controllers. Certain changes or events will require notification to, or prior approval from, the DFSA.
DFSAwill determine the level of regulatory and supervisory oversight which is subsequently required for a specific Branch. As part of DFSA'srisk assessment process, during the authorisation process the DFSAundertakes a two-tier approach to the risks to its objectives posed by the Branch, thereby taking into account the characteristics of the applicant and its head office. The first part of this assessment includes a judgement on the degree of home country supervision and considers the strength of support, both financial and managerial, which the head office is capable of providing to the Branch, taking into account the Branch'sactivities and the adequacy of, among other things, the corporate governance framework and practices and remuneration structure and strategies adopted at the head office. The second part of the assessment considers the risk and control mechanisms within the Branchitself.
As a result of the assessment, the
DFSAmay consider granting a waiver or modification notice in respect of specific prudential or other regulatory requirements relating to a Branch.
Periodic Returns for Authorised Firms
Authorised Firmis required to submit periodic returns. In addition, an Authorised Firmmay be required to submit copies of its Group'sannual interim and audited accounts. The DFSAmay also require an Authorised Firmto provide copies of Groupreturns which are sent to any other regulator.
Collecting this data in a timely and accurate manner is imperative to our risk management cycle, which is the primary reason we have automatic fees for late financial reports.
On-going Risk Analysis
DFSAconducts an ongoing analysis of risks relating to each Authorised Firm, although the information required may vary from firm to firm. Authorised Firmswith a higher risk classification may be subject to closer regulatory attention and would typically be subject to supervisory reviews specifically designed to address particular causes of risk.
Authorised Firmswill be subject to an individual on-site risk assessment, except where more than one Authorised Firmbelongs to the same Group, in which case the DFSAmay decide to carry out a Grouprisk assessment.
The risk assessment process is ongoing. The
DFSAwill, on a continuous basis, review notifications and reporting of information, maintain an ongoing dialogue with senior management and make appropriate visits to the Authorised Firm, so that the DFSAhas current information on key risk areas of the Authorised Firm.
There are also a number of trigger events which may affect the frequency of a risk assessment and the
Authorised Firm'soverall risk classification. Examples include:(a) a notification from a non-DIFC regulator or other authority of an issue concerning the Authorised Firmor its Group;(b) a material change in an Authorised Firm'sbusiness and new business activities;(c) a change in the Authorised Firm's Controllers;(d) an Authorised Firm'sdevelopment of high risk products or business lines;(e) an Authorised Firm'sdevelopment of business areas with characteristics such as unusual profitability;(f) an Authorised Firm'sappointment of new personnel in key business areas;(g) an Authorised Firm'sacquisition of new or revised information systems or new technology;(h) a rapid growth in specific areas of activity of an Authorised Firmwhich is not matched by appropriate systems and controls to manage such growth;(i) an Authorised Firm'scorporate restructuring, merger or acquisitions;(j) an Authorised Firm'sexpansion or acquisition of non-DIFC operations including the impact of changes in related economic and regulatory environments; or(k) the DFSA'sresponse to industry-wide concerns or themes.
Review of Risk Management Systems
Under GEN Rule 5.3.4, an
Authorised Firmmust ensure that its risk management systems provide the Authorised Firmwith the means to identify, assess, mitigate and control its risks. In addition to undertaking its own assessment of the Authorised Firm, the DFSAmay review the results of the Authorised Firm'sinternal risk assessment and determine the extent to which each of the Authorised Firm'srisks impacts on DFSA'sobjectives, the likelihood of the risk occurring and then will consider the controls and mitigation programmes the firm has in place.
Desk Based Reviews
DFSAmay undertake desk based reviews in order to review compliance with legislation applicable in the DIFC. They assist the DFSA'sunderstanding of an Authorised Firm'soperations. For example, monitoring its financial position and detecting emerging problems or concerns to be explored in greater detail through prudential meetings, examinations, or otherwise. A desk based review may involve analysing information provided by the firm through periodic returns, internal management information, published financial information or specially requested information.
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On-site visits provide the
DFSAwith an overview of the Authorised Firm'soperations and enable it to form a first-hand view of the personnel, systems and controls and compliance culture within the Authorised Firmas well as identifying and evaluating the risks to the DFSA'sobjectives, taking into account any mitigation by the Authorised Firm. They enable the DFSAto test the soundness of the Authorised Firm'ssystems and controls and the extent to which the DFSAcan continue to rely on them and the Authorised Firm'ssenior management to prevent or mitigate risks to the DFSA'sobjectives. On-site visits will also assist the DFSAto assess the extent of supervision and the use of other supervisory tools required to address certain key risk areas.
There are various types of on-site visits by the
DFSAto an Authorised Firmwhich differ in their objective and frequency:(a) Periodic visits are undertaken at frequencies determined by the DFSAand focus on the main risk areas within an Authorised Firm as well as providing the DFSAwith a thorough understanding of the Authorised Firm, its business and any major changes that have taken place within the Authorised Firmsince a previous visit or risk assessment and their probable effects;(b) Theme visits are designed to address a current or topical risk or issue either within a particular type of Authorised Firmor the market place in general. They tend to be short in duration and are focused in their approach. Examples of theme visits are anti-money laundering, client assets and conflict management;(c) Follow-up visits are often required to assess the implementation of any action that may have been agreed as part of a risk mitigation programme or to satisfy the DFSAthat the Authorised Firmhas taken appropriate action arising from a previous visit or communication;(d) Special visits are unique to a particular Authorised Firmand are generally scheduled following a particular event or notification from an Authorised Firm. They are generally short, focused visits usually targeted to a particular area of an Authorised Firm. These visits allow the DFSAto review certain high risk areas of an Authorised Firm'sbusiness in isolation. Occasionally, special visits may be unannounced. These assist in keeping firms to the need to maintain a continuously high quality of compliance; and(e) The DFSAmay, from time to time, hold high level meetings with an Authorised Firm'ssenior management. Such meetings enable the DFSAto assess issues including any prudential concerns arising from desk based reviews or elsewhere.
DFSAis committed to open and transparent communication with Authorised Firms. From time to time, the DFSAmay issue letters to Senior Executive Officersor equivalent persons across the DIFC(commonly referred to as 'Dear SEO Letters'). Frequently, these letters will be issued as a means of communicating findings arising from completed thematic visits. However, they may also be issued in response to other major events or changes. For example, such a letter may include an update from relevant United Nations Security CouncilSanctions or Resolutions or the Financial Action Task Force, in relation to the prevention of money laundering and combating the financing of terrorism.
In addition to the
Senior Executive Officerletters, the DFSAmay issue s and warnings in response to particular matters of concern. An example of this could be in relation to matters concerning fraudulent activity that the DFSAhas become aware of.
DFSAholds outreach sessions from time to time, to interact with firms operating in the DIFC. These sessions are held to discuss regulatory matters in an open manner.
From time to time, the
DFSAmay consider a particular item of communication to an Authorised Firmto be of key regulatory importance. For this reason, the DFSAmay consider it necessary to issue such communications directly to a senior member of staff at the Boardlevel of the DIFCentity copied (where appropriate) to the group's home state regulator. For entities established as a Branchin the DIFC, these communications will likely be delivered to the Chairman of the Boardat the DIFC Branchentity's head or Parentoffice. For DIFCincorporated entities, communications will likely be delivered directly to the Chairman of the firm's Boardor head office. These communications may include, for example, the results of DFSA'srisk assessment visits where a risk mitigation plan has been sent that contains significant matters of concern to DFSA'sobjectives.
External Auditor Reports, Statements and Tripartite Meetings
DFSArequires an Authorised Firm'sregistered external auditor to co-operate with the DFSAin a number of ways, including the submission of specific audit reports and statements. As part of an audit, the DFSAwould expect an auditor to review any relevant correspondence between the DFSAand the Authorised Firm. Further, tripartite meetings between the Authorised Firm'ssenior management, the auditor, and the DFSAmay be requested at the DFSA'sinitiative. Finally, an auditor is required to disclose to the DFSAthose matters outlined in Article 104(3) of the Regulatory Law.Derived from DFSA GM8/2011 (Made 28th April 2011). [VER 1/02-11]
Amended (Made 21st August 2014). August 2014 Edition
Requiring Information and Documents
Apart from reports such as regular prudential returns, the
DFSAmay from time to time also request from an Authorised Firmadditional supplementary information and documents, including non-financial information such as an Authorised Firm'sinternal policies on particular areas of risk and compliance.
Requirements relating to a Change in Control
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Personwho proposes to become a Controllerof a Domestic Firmor an existing Controllerwho proposes to increase the level of control which that Personhas in a Domestic Firmbeyond the threshold of 30% or 50% is required to obtain the DFSA's prior approval before doing so. The DFSA's assessment of a proposed acquisition or increase in control of a Domestic Firmis a review of such a firm's continued fitness and propriety and ability to conduct business soundly and prudently. Accordingly, the DFSA takes into account the considerations specified in paragraph 2-2-13 relating to Controllerswhen making such an assessment.
Under GEN Rule 11.8.5(1), a
Personwho proposes either to acquire or increase the level of control in a Domestic Firmmust lodge with the DFSAan application for approval in the appropriate form in AFN. The DFSAmay approve of, object to or impose conditions relating to the proposed acquisition or the proposed increase in the level of control of the Authorised Firm. If the information in the application form lodged with the DFSAis incomplete or unclear, the DFSAmay in writing request further clarification or information. The DFSAmay do so at any time during the processing of such an application. The period of 90 days within which the DFSAwill make a decision will not commence until such clarification or additional information is provided to the satisfaction of the DFSA. The DFSAmay, in its absolute discretion, agree to a shorter period for processing an application where an applicant requests for such a period, provided all the information required is available to the DFSA.Added by Notice of Updates (Made 20th December 2012). December 2012 Edition
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Where the DFSA proposes to object to or impose conditions relating to a proposed acquisition of or increase in the level of control in a
Domestic Firm, the DFSA will first notify the applicant in writing of its proposal to do so and its reasons. The DFSA will take into account any representations made by an applicant before making its final decision.Added by Notice of Updates (Made 20th December 2012). December 2012 Edition
The DFSA may consider whether a
Personhas become an unacceptable Controlleras a result of any notification given by an Authorised Firmunder Rule 11.8.11(2) or as a result of its own supervisory work. The considerations which the DFSAwill take into account in assessing whether a Personis an acceptable Controllerare those set out in paragraph 3-2-34 above.Added by Notice of Updates (Made 20th December 2012). December 2012 Edition
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Application for a Change of Scope of Licence
Authorised Firmapplies to change the scope of its Licence, it should provide the following information:(a) a revised business plan as appropriate, describing the basis of, and rationale for, the proposed change;(b) details of the extent to which existing documentation, procedures, systems and controls will be amended to take into account any additional activities, and how the Authorised Firmwill be able to comply with any additional regulatory requirements; and(c) descriptions of the Authorised Firm'ssenior management responsibilities (GEN chapter 5) where these have changed from those previously disclosed, including any up-dated staff organisation charts and internal and external reporting lines.(d) details of any transitional arrangements where the Authorised Firmis reducing its activities and where it has existing customers who may be affected by the cessation of a Financial Service;(e) the appropriate financial reporting statement where the variation may result in a change to the Authorised Firm'sprudential category or the application of additional or different financial rules. If a capital increase is required in order to demonstrate compliance with additional financial rules but such capital is not paid up or available at the time of application, proposed or forecast figures may be used;(f) details of the effect of the proposed variation on the Authorised Individualsincluding, where applicable, submitting any application forms for individuals to perform additional or new Licensed Functions, or to remove existing Licensed Functions; and(g) revised pro forma financial statements.
Insurerwhich wishes to vary its Licenceto remove the Financial Serviceof Effecting Contracts of Insuranceor to reduce the classes of insurance should refer to the run-off provisions in PIN chapter 9.
In considering whether an
Authorised Firmis fit and proper with respect to a change in the scope of its Licence, the DFSAmay take into account those matters in Chapter 2 of the RPP Sourcebook, which provides Guidanceon fitness and propriety for Authorised Firms.
Notification to the DFSA relating to a Major Acquisition
GEN Rule 11.10.8 provides that an
Authorised Firmwhich makes or proposes to make a Major Acquisitionas defined must comply with either GEN Rule 11.10.9 or 11.10.10, depending on whether it is a Domestic Firm.
Authorised Firmshould provide to the DFSAinformation that would enable the DFSAto consider factors noted in GEN Rule 11.10.9(3). Although the DFSAdoes not prescribe the form in which such information is to be provided to the DFSA, Authorised Firmsshould consider any relevant industry and international practices when providing information to the DFSAfor similar purposes.
The 45 day notice period referred to in GEN Rule 11.10.9(1) commences to run from the first business day after the date on which the
DFSAreceives the notification. However, if any critical information that the DFSArequires in order to assess the notification has not been provided to the DFSAat the time of the notification, the relevant notice period for considering that notification will only commence to run after the Authorised Firm has provided to the DFSAthat information upon a request made by the DFSAunder its powers in GEN Rule 11.10.11(1).
Upon the request of an
Authorised Firm, the DFSAmay, at its sole discretion, agree to consider a notification within a shorter period than the 45 days referred to above. The onus is on an Authorised Firmwhich wishes to obtain a DFSA decision under this Rule within a shorter period to make a request to that effect to the DFSAand provide all the information that the DFSArequires to enable the DFSAto process the notification within a shorter timeframe.
DFSAmay exercise its powers under this provision to object to a proposed Major Acquisitionor impose any conditions relating to a Major Acquisition. In these cases a Personaffected by such a decision may refer the decision to the Financial Markets Tribunalfor review. Provisions on the referral to the Financial Markets Tribunalare in GEN Rule 11.10.12.
DFSAreceives a notification under GEN Rule 11.10.10(1)(b), it will to the extent necessary, liaise with the home regulator in taking any appropriate action relating to the proposed Major Acquisition.
Authorised Personmust comply with those requirements in GEN Rules 5.3.21 and 5.3.22 when outsourcing functions or activities. In relation to Funds, there are additional outsourcing and delegation requirements applicable for Fund Managersand Trusteesin section 8.12 of the CIR module.
DFSArequires an Authorised Personto notify it of any material outsourcing arrangements. In the case of an Authorised Market Institution, any material outsourcing arrangements require the DFSA'sprior approval under AMI Rule 5.5.3(1). An outsourcing arrangement would be considered to be material if it is a service of such importance that weakness or failure of the service would cast serious doubt on the Authorised Firm'scontinuing ability to remain fit and proper or comply with applicable Laws and Rules.
The outsourcing of functions or activities does not absolve management or
Governing Bodyof responsibility and accountability for ensuring proper administration and execution of these functions or activities.Derived Notice of Updates (Made 11th February 2015). February 2015 Edition
Application for a Withdrawal of Licence
In considering requests under GEN Rule 11.4.1, an
Authorised Firmwill need to satisfy the DFSAthat it has made appropriate arrangements with respect to its existing customers, including the receipt of any customers' consent where required and, in particular:(a) whether there may be a long period in which the business will be run-off or transferred;(b) whether deposits must be returned to customers;(c) whether money and other assets belonging to customers must be returned to them; and(d) whether there is any other matter which the DFSAwould reasonably expect to be resolved before granting a request for the withdrawal of a Licence.
In determining a request for the withdrawal of a
Licence, the DFSAmay require additional procedures or information as appropriate including evidence that the Authorised Firmhas ceased to carry on Financial Services.
Authorised Firmshould submit detailed plans where there may be an extensive period of wind-down. It may not be appropriate for an Authorised Firmto immediately request a withdrawal of its Licencein all circumstances, although it may wish to consider reducing the scope of its Licenceduring this period. Authorised Firmsshould discuss these arrangements with the DFSA.
DFSAmay refuse a request for the withdrawal of a Licencewhere it appears that customers may be exposed to adverse effect.
DFSAmay also refuse a request for the withdrawal of a Licencewhere:(a) the Authorised Firmhas failed to settle its debts to the DFSA; or(b) it is in the interests of a current or pending investigation by the DFSA, or by another regulatory body or Financial Services Regulator.
Some other matters which an
Authorised Firmshould be mindful of in relation to the withdrawal of its Licenceinclude:(a) Under Article 63 of the Regulatory Lawwhere the DFSAgrants a request for the withdrawal of a Licence, the DFSAmay continue to exercise any power under the Regulatory Lawor Rulesin relation to an Authorised Firm, Authorised Individualor any other officer, employee or agent of the Authorised Firmfor three years from the date on which the DFSAbecomes aware of the act or omission that gives rise to the right to exercise that power;(b) Article 43(4) of the Regulatory Lawstates that Licensed Functionsof an Authorised Firmshall be carried out by its Authorised Individuals. Accordingly, where an Authorised Firm's Licenceis withdrawn, the authorised status of its Authorised Individualswill also be withdrawn from the same date. However, this does not remove the obligation on an Authorised Firmto provide a statement under GEN Rule 11.7.3 where an Authorised Individualhas been dismissed or requested to resign; and(c) Where a Fund Manageror the Trusteemakes a request under GEN Rule 11.4.1, the Fund Manageror the Trusteewill need to satisfy the DFSAthat it has made appropriate arrangements in accordance with the requirements under the Collective Investment Law 2010 and the CIR module with respect to the continuing management of the Fundfor which it is the Fund Manageror the Trustee, as the case may be.
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RPP 3-3 RPP 3-3 Supervision of Representative Offices
DFSAexpects to undertake periodic visits to Representative Officesas part of its risk based approach to supervising firms. The DFSAmay also include Representative Officesin thematic visits.
Onsite visits to
Representative Officesare likely to focus on issues including:(a) confirming that activities undertaken by the Representative Officeare allowed under its licence;(b) reviewing the adequacy of its systems and controls to comply with its AMLresponsibilities;(c) reviewing the material distributed by the Representative Officeto ensure it is clear, fair and not misleading;(d) any solvency concerns with the head office or Group; and(e) the firm's disclosure of its regulated status.
The onsite visit is likely to include interviews with the
Principal Representativeand a review of relevant records.
RPP 3-4 RPP 3-4 Supervision of DNFBPs
DFSAexpects to undertake periodic visits to the place of business of a DNFBPas part of its risk based approach to supervising firms. The DFSAmay also include DNFBPsin thematic visits.
Onsite visits to
DNFBPswill generally focus on their compliance with relevant AML/CTF Laws and the Rulescontained in the AML module. This may include the DFSAtesting the firm's systems and controls for conducting a money laundering risk assessment, customer due diligence and complying with relevant United Nations Security Council Sanctions and Resolutions.
The onsite visit is likely to include interviews with senior management and a review of relevant records. Depending on the outcome of the visit, the
DFSAmay provide a letter to the firm to discuss its findings.
DFSAwill also receive an Annual AML Return from a DNFBP(see AML Rule 14.5.1) which will assist the DFSAin its supervision of DNFBPs.
RPP 3-5 RPP 3-5 Supervision of Registered Auditors
DFSAundertakes periodic visits of Registered Auditorsas part of its risk based approach to supervising firms. The DFSAmay include Registered Auditorsin some thematic visits.
Registered Auditormust complete an annual information return form for each calendar year and submit the form to the DFSAby 31 January of the following year.
DFSAis likely to undertake a desk based review of the content of the annual information return form it receives from a Registered Auditor. Prior to scheduling an onsite visit, the DFSAmay make a request for further information from the Registered Auditor.
The onsite visit is likely to include interviews with senior management and a review of files/documentation.
RPP 3-6 RPP 3-6 Supervision of Authorised Market Institutions
Regulatory Lawestablishes a principles-based framework for the licensing and supervision of Authorised Market Institutionsand for taking regulatory action against those licensed institutions. This framework is supplemented by supervisory powers and other requirements in the Markets Law 2012.
The Markets Law 2012 establishes a framework in relation to how an
Authorised Market Institutionmay administer and operate an Official List of Securitiesand stipulates some specific Rulerequirements in respect of this.
Official List of Securities
Exchangeadministers and operates an Official List of Securities, the risk-based approach to supervision also applies to the carrying on of this activity.
DFSAlicenses an Authorised Market Institution, it takes into consideration the relationship with any wider Groupto which the Authorised Market Institutionmay belong or with other Personsclosely linked to it. The DFSAwill also take into account lead or consolidated supervision to which an Authorised Market Institutionor its Groupmay be subject in another jurisdiction. This may lead to the DFSAplacing some reliance on the supervisory arrangements in another jurisdiction or creating and participating in special arrangements for the supervision of the Authorised Market Institutionand its Group. The Authorised Market Institutionis expected to provide information required or reasonably requested in relation to these consolidated or lead supervisory arrangements before final supervisory arrangements are established.
Each relationship will be considered on a case by case basis and according to the risks posed by the
Authorised Market Institution'sactivities identified during supervisory arrangements. Such supervisory arrangements may include a process to be agreed by the DFSA, the Authorised Market Institutionitself and other relevant regulators.
Effective co-operation with regulators will provide for prompt exchange of information and co-operation in relation to supervision and enforcement between jurisdictions. This may include exchanges of information and co-operation in respect of activity conducted by an
Authorised Market Institution. Usually co-operation arrangements will be in the form of memoranda of understanding. The information exchange will enhance the DFSA'sunderstanding of the operations of the Groupand the effect on the Authorised Market Institution.
Application for a Change in Control
Article 26 of the Markets Law 2012 empowers the
DFSAto give an Authorised Market Institutioncertain directions in relation to the Authorised Market Institution'sduties under DFSA-administered laws. It also gives the DFSAa power to direct an Authorised Market Institutionto do specified things including closing the market, suspending transactions and prohibiting trading in Investments. Article 26 also empowers the DFSAto exercise the powers contained in the Authorised Market Institution's Rulesfor participants as though it was the Authorised Market Institutionwhere it considers that the Authorised Market Institutionhas not exercised the powers under those Rules.
In considering whether to exercise such powers, the
DFSAmay take into account factors including:(a) what steps the Authorised Market Institutionhas taken or is taking in respect of the issue being addressed in the planned direction;(b) the impact on the DFSA'sobjectives if a direction were not issued; or(c) whether it is in the interests of the DIFC.
The written notice given by the
DFSAwill specify what an Authorised Market Institutionis required to do under the exercise of such powers. Though the DFSAis not required to do so under the Markets Law 2012, in most cases the DFSAwill contact the Authorised Market Institutionprior to issuing such a direction.
Article 35 of the Markets Law 2012 allows the
DFSAto direct an Authorised Market Institutionto suspend or delist Securitiesfrom its Official List of Securities. Such directions may take effect immediately or from a date and time as may be specified in the direction. Chapter 9 of the MKT contains details in this regard.
RPP 3-7 RPP 3-7 Business Transfer Schemes
This section sets out information relating to a financial services business transfer scheme, i.e., a scheme by an
Authorised Firmto transfer all or a part of a financial service business to another body. A reference in this section to "the Law" is to the Regulatory Law, to an "Article" is to an Articleof the Law and to a "transfer scheme" is to a financial services business transfer scheme.
Part 9 of the Law sets out requirements applying to financial services business transfer schemes. In particular, Article 106 provides that no transfer scheme is to have effect unless a
Courtorder has been made in relation to the scheme.
Article 107 defines a "transfer scheme" as a scheme where:(a) the whole or part of the business carried on through an establishment in the
DIFCby an Authorised Firm("the firm concerned") is to be transferred to another body ("the transferee") and the business to be transferred consists in whole or in part of financial services business; or(b) the Fund Propertyof a Fund, or of a sub-fund of an Umbrella Fund("the Fund concerned"), is to be transferred to another Fund.
The need for a
Courtorder sanctioning a transfer scheme arises because a transfer of business may interfere with agreements between an Authorised Firmand its clients (without the consent of each client), and may also affect the rights of other persons, such as creditors. The Courtis best placed to hear and consider representations from persons who may be adversely affected by the scheme. It is then able, if appropriate, to make various orders binding all persons concerned that are necessary to give legal effect to the transfer.
Applying to the Court
Under Article 108 the
Authorised Firmconcerned, the transferee or both may apply to the Courtfor an order sanctioning a transfer scheme.
Authorised Firmor transferee is considering a transfer scheme, it should discuss the scheme with the DFSAas soon as practicable, to enable the DFSAto consider whether any particular issues are likely to arise, and to establish a practical timetable for the scheme.
It is important for an applicant to plan a timetable as there are various steps it must take under Article 111 (some of which involve the
DFSA) before the Court may determine an application. For example, an applicant to the Courtmust:(a) arrange for a report on the terms of the transfer scheme (a "scheme report") to be prepared by a person nominated or approved by the DFSAwho appears to have the skills necessary to enable him to make a proper report (an "independent expert");(b) give written notice of the transfer scheme to all interested parties (as determined by the DFSA); and(c) publish a notice in a newspaper best suited to bringing the transfer scheme to the attention of any persons who may be affected by it. Depending on where the Authorised Firm's business and clients are located, notice may be necessary in more than one newspaper.
The scheme report is a key document in the process that will assist and be relied upon by the
Courtin deciding whether or not to approve the proposed scheme and will also inform and be relied upon by the DFSAand persons potentially affected by the scheme. The DFSAwill, therefore, only nominate or approve a person to make the report if the person has appropriate expertise and is independent of both the proposed transferor and transferee. That is, the person should be neutral and not have any potential conflicts of interest, so that the report is objective. The scheme report, as well as being objective, must set out clearly and in sufficient detail, the independent expert's opinion as to the likely effects and impact of the scheme on clients and third parties and each opinion must be supported by appropriate analysis and rationale.
In limited circumstances the
DFSAmay direct that a scheme report or notice is not required. However, the DFSAmay only do so if it appears to the DFSAthat, by reason of urgency, it is in the interests of the DIFCthat the scheme report or notice is not provided (see Article 111).
Article 109 provides that when an application is made to the
Court, the following persons may be heard by the Court:(a) any person who alleges that he would be adversely affected by the carrying out of the scheme; and(b) the DFSA.
Under Article 108 the
Courtmay grant an order sanctioning the transfer scheme if it considers that, in all the circumstances of the case, it is appropriate to do so. Under Article 112 the Courtmust also be satisfied that:(a) before the transfer takes effect, the transferee will have any authorisation necessary to enable the business to be carried on in the place in which it is to be transferred; and(b) the transferee will possess adequate financial resources to carry on that business in accordance with the legislation applicable in that place.
Article 110 sets out the various types of orders that the
Courtcan make relating to a transfer scheme.
The effect of GEN Chapter 12 is that a business transfer scheme is not required to be sanctioned by a
Courtorder to be effective if certain other alternative arrangements have been made. These alternative arrangements apply only to transfer schemes that do not involve a transfer of:(a) Banking Business;(b) Insurance business; or(c) Fund Property
The first type of arrangement is if the
Authorised Firmor transferee has been able to obtain the consent of each client who will be affected by the scheme. This option recognises that sometimes, if there are only a small number of clients, it may be practicable to obtain the agreement of all clients whose interests may be affected. Any communication sent to the client should set out clearly what the client is being asked to consent to. Also, it should then be clear that the client has provided its consent.
The second type of arrangement is if the transfer of business is expressly permitted under agreements between clients and the
Authorised Firmor transferee concerned and the procedures in those agreements have been complied with. For example, in some cases agreements expressly provide for the transfer of accounts or novation of contracts to another person in accordance with a specified procedure.
Finally, in limited cases, a person may apply to the
DFSAfor its written consent to the transfer scheme. The DFSA does not expect Authorised Firmsto regard this as their first option. The DFSAexpects to receive applications seeking its consent to a transfer scheme only in very limited circumstances if the scheme is not complex or contentious. Under GEN 12.1.5, the DFSAmay give its consent only if it is reasonably satisfied of a number of matters including that:(a) it is more appropriate and proportionate, and in the overall interests of clients, for the DFSA's consent to be sought rather than an application being made to the Court;(b) the applicant has taken all reasonable steps to pursue other options for giving effect to the scheme (e.g. seeking the consent of clients or using procedures in existing agreements);(c) the scheme is not likely to result in any material prejudice to the interests of clients of the Authorised Firm; and(d) implementation of the scheme will not result in the Authorised Firmor transferee contravening a law or Rule.
The onus is on the
Authorised Firmand the transferee to ensure that a transfer of business under an alternative arrangement is legally effective. For example, obtaining the consent of the DFSAmay mean that it is not necessary to apply for a Courtorder, but it does not of itself give legal effect to the transfer.
Further, just because an alternative mechanism in GEN 12 may be available does not prevent the
Authorised Firmor transferee from applying for a Courtorder sanctioning a transfer scheme under Part 9 of the Law if they consider it appropriate to do so. For example, an application for a Courtorder is likely to be more appropriate if the scheme is complex (e.g. there are complex property interests involved), is likely to be contentious, is likely to affect a large number of persons or if additional legal certainty is sought.
The following flowchart sets out in simplified form some of the options available to an
Authorised Firmor transferee. The flowchart and the information in this Chapter is only intended to be a summary of the procedures for a transfer of business. For full information a person reading this Chapter should also read Part 9 of the Law, Chapter 12 of GEN and Chapter 16 of CIR.
BUSINESS TRANSFER SCHEMES