Consultation Paper No. 1 Regulatory Law

January 2003



Primary Purposes

1. To establish a detailed constitution for the DIFC's Regulatory Authority.
2. To set out the legal framework for licensing Financial Institutions and other service providers in DIFC.
3. To provide a disciplinary and regulatory enforcement scheme that is fair to DIFC participants whilst enabling the Regulatory Authority to uphold the integrity of the Centre.

Part 1 - General

Articles 2 and 3 refer to Dubai Law No. 3 of 2002, which is the Emiri law that created the jurisdictional framework within which the Law and the entities it creates will operate. Article 2 of Schedule 1 to the Law explains the legislative hierarchy (Tiers 1 to 4 and Guidance) and explains that the Law is Tier 3 Legislation.

The Law contains many "enabling" provisions. These are designed to enable the Regulatory Authority to make secondary legislation within constraints imposed in the Law. Many of the operative provisions of the regulatory regime, such as descriptions of which Financial Services activities will constitute licensable activities, will be contained in Tier 4 Legislation made by the Regulatory Authority under the Law.

Part 2: The Regulatory Authority

Chapter 1 - The structure of the Regulatory Authority

Articles 8(1) and 8(3)

The Regulatory Authority is established as a Body Corporate under the Law, with its main constitutional provisions set out at Schedule 2 to the Law. It is anticipated that additional constitutional provisions will be created by means of Tier 4 Legislation or less formal documents (for example, the rules and procedures of committees of the Regulatory Authority).

Article 9

In common with equivalent Regulators in, for example, Australia, Hong Kong and the U.K., the Regulatory Authority has been set statutory objectives to govern its activities. These objectives have been drafted both for the sake of the operation of the DIFC's regulatory regime in the DIFC but also so that the Regulatory Authority may participate in extra-territorial activities such as dealing and co-operating with other Regulators (see further, Article 23). This latter Category of objectives reflects the increasing need for regulatory issues (which often cross national borders, such as Money laundering) to be addressed in co-operation with Regulators and other bodies in other states.

Article 10

Article 10 sets out the main elements of the structure of the Regulatory Authority. Provisions relating to each element have their own chapters later in the Law. Article 10 also indicates that the Regulatory Authority may appoint further committees.

A diagram showing the different parts of the Regulatory Authority is attached at Appendix 1.

Articles 11 and 12

Article 11 enables the Chairman to appoint an independent Person to review and report to him on the efficiency and effectiveness of the use by the Regulatory Authority of its resources. Article 12 obliges the Regulatory Authority to report to the Chairman annually in relation to its activities. These are important tools with which the Regulatory Authority can be held accountable, both in relation to financial and non-financial aspects of its activities.

Articles 19 and 20

These Articles are designed to ensure that the Regulatory Authority is subject to financial reporting and robust auditing requirements similar to those which may apply to other corporate entities established in the DIFC. Again, these reporting and auditing requirements are designed to aid the transparency of the Regulatory Authority's activities and, therefore, its accountability.

Article 22

This Article gives the Regulatory Authority the broad powers of information gathering and inspection in relation to licensed entities necessary for it to carry out its regulatory functions. A set of restrictions on the exercise of these powers may be set out in Tier 4 Legislation by the Regulatory Authority.

Article 23

It is important that the Regulatory Authority is able to co-operate fully with other Regulators, especially given the cross-border nature of issues such as Money Laundering. Accordingly, this Article allows the Regulatory Authority an unfettered right to pass and receive information to and from other Regulators, including information which is confidential to licensed entities. Article 23(2) allows the Regulatory Authority to exercise its powers under the Law to assist another regulator. This would enable the Regulatory Authority to examine the financial records of a Bank which is licensed in the DIFC, at the request of an overseas regulator.

Chapter 2 - The Council of the Regulatory Authority

Article 26

The Council is the supervisory and legislative element of the Regulatory Authority, responsible mainly for supervising the activities of the Chief Executive, approving Tier 4 Legislation and exercising powers of appointment in relation to the Chief Executive, Regulatory Appeals Committee and Disciplinary Tribunal.

It is anticipated that much Tier 3 and 4 Legislation will in practice be developed by the Chief Executive and his staff, usually at the initiative of the Council. In the case of Tier 3 Legislation, the draft legislation should be reviewed and may be approved by the Council, prior to such legislation being passed to the Chairman with a recommendation that it be approved and enacted. In the case of Tier 4 Legislation, the draft legislation should be reviewed and approved by the Council before it comes into force on being issued by the Council. Further, the Council may correspond with the Chairman in relation to legislative matters beyond its jurisdiction, for example, in relation to Tier 2 Legislation (Emiri law).

Article 27

The Chief Executive shall be a Member of the Council by virtue of his office as Chief Executive.

Article 28

The Council has the power of appointment in relation to the Chief Executive, subject to an obligation to consult the Chairman prior to exercising such power.

Article 29

This Article gives the Council a broad power to make Tier 4 Legislation "in respect of any matters Related to the objectives, powers or functions of the Regulatory Authority", examples of which are set out at (a) to (q) in the Article. The definitions of prohibited and licensable Financial Services activities will be issued by means of Tier 4 Legislation under (b) and the Related Licence application procedure will be set out by means of Tier 4 Legislation under (a).

Article 30

This Article provides that the Regulatory Authority will normally publish draft Tier 4 Legislation before it comes into force, together with a commentary and summary. In addition, publication of the draft legislation will normally precede a consultation period of up to 90 days. Under Article 30(4), these publication and/or consultation requirements can be disapplied where the Council concludes that they would be "prejudicial to the interests of the Centre".

Chapter 3 - The Regulatory Appeals Committee of the Council

Article 31

The Members of the Regulatory Appeals Committee are appointed to the office by the Council. Given the role of the Regulatory Appeals Committee in hearing and determining appeals in relation to decisions of the Chief Executive, Article 31(2) provides that the Chief Executive and his staff may not be appointed to the office of Member of the Regulatory Appeals Committee.

Article 32

The Regulatory Appeals Committee will hear and determine appeals submitted under the circumstances set out in (a) to (1). The Council may extend the jurisdiction of the Regulatory Appeals Committee (for example, by adding grounds of appeal to those listed at (a) to (1)), by virtue of provision (m).

Article 33

This Article sets out the powers of a sub-committee of the Regulatory Appeals Committee, appointed under Article 34(3), both while hearing and on determination of an appeal. Further, Article 33(5) provides that there shall be no appeal in relation to a determination of the Regulatory Appeals Committee.

Article 34

Article 34(2) requires appeals to be submitted to the Regulatory Appeals Committee within 30 days of the relevant determination, although appeals may be accepted out of time at the discretion of the Regulatory Appeals Committee.

Chapter 4 - The Disciplinary Tribunal

Article 35

The President and panel of Members of the Disciplinary Tribunal are appointed to such offices by the Council. As with the Regulatory Appeals Committee, the nature of the proceedings before the Disciplinary Tribunal means that officers, Employees and agents of any Authorised Firm, Exempt Firm or Ancillary Services Provider may not be appointed to an office with the Disciplinary Tribunal.

Article 37

The Disciplinary Tribunal will have jurisdiction in relation to alleged breaches of the Law or legislation made under the Law, in addition to other matters determined by the Council or provided for in other DIFC legislation.

Article 39

This Article sets out the powers of the Disciplinary Tribunal both during and at the conclusion of proceedings. Article 39(2) allows the Disciplinary Tribunal to, among other things, impose a fine, censure (including by means of public censure), order restitution or compensation to be paid and pay all or part of the costs of the proceedings. Article 39(3) allows for appeals to the Court from the Disciplinary Tribunal.

Chapter 5 - The Chief Executive of the Regulatory Authority

Article 41

Article 41 sets out the powers of the Chief Executive. The Chief Executive is primarily responsible for exercising the executive power of the Regulatory Authority, subject to the supervision of the Council. This exercise of executive powers includes the operation of the DIFC's licensing and disciplinary regime and the development of legislation to be passed to the Council.

Part 3: The Regulation of Financial Services in the Centre

Chapter 1 - The Regulation of Financial Services

Article 42

Article 42 is the main provision governing the licensing regime to be operated by the Regulatory Authority and works as follows:

• the conduct of "Financial Services" (to be defined by the Regulatory Authority) in the Centre is prohibited under Article 42(3);
• the Regulatory Authority will designate some Financial Services as "Licensed Services";
• a Licensed Service may be conducted by a Person with either a Licence from the Regulatory Authority (such as an Authorised Firm or Authorised Market Institution) or an exemption (an Exempt Firm).

Article 43

This Article allows the Regulatory Authority to exempt particular persons or Categories of Person from the Financial Services Prohibition contained in Article 42.

Article 44

The Regulatory Authority may define certain services (such as professional services) provided in relation to Licensed Services as "Ancillary Services". As the conduct of such services in or from the Centre is prohibited under Article 44(2), they may only be conducted by a party licensed by the Regulatory Authority as an Ancillary Service Provider.

Article 45

This Article allows the Regulatory Authority to establish a licensing regime in the Centre in relation to Exchanges, clearing and settlement institutions and Alternative Trading Systems.

Chapter 2 - The Initial Licensing Process (Authorised Firms)

Article 49

The details of the Licence application process will be set out under Tier 4 Legislation by the Regulatory Authority. Article 49(2) allows the Regulatory Authority to apply a different set of Licensing Requirements in relation to applicants incorporated and/or licensed in other jurisdictions. This may be used to operate a "passporting" regime, by which a lighter set of requirements would apply to applicants from certain jurisdictions.

Article 53

This Article gives the Regulatory Authority a broad power to impose conditions and/or restrictions on a Licence. This power could be used, for example, to limit the types of customers with which a particular Authorised Firm is allowed to deal. Article 53(3) gives some procedural protection to Authorised Firms in such circumstances (the right to make representations to the Regulatory Authority). Even when this procedural protection is disapplied (under Article 53(4) it may be disapplied when the delay is "prejudicial to the interests of the Centre"), it may only be disapplied for 15 day periods at a time, after which further opportunities to make representations must be given.

Chapter 3 - Extending a Financial Services Licence

This Chapter allows for an Authorised Firm to add Licensed Services to its Licence. The Regulatory Authority is empowered to make Tier 4 Legislation governing this procedure.

Chapter 4 - The Financial Services Licence - Variation, Suspension and Withdrawal

Article 58 gives the Regulatory Authority power to suspend or withdraw authorisation in relation to all or part of a Licence in the circumstances set out in Article 58(3). The procedure for such a suspension or withdrawal is set out in Article 60 and provides an affected Authorised Firm with an opportunity to make representations in relation to such action.

Chapter 5 - The Regulation of Authorised Individuals

The Regulatory Authority may define a list of "Licensed Functions" under Article 62, including those set out at Article 62(2). Under Article 61(l), Authorised Firms cannot allow their officers, Employees or agents to carry out Licensed Functions unless they have been licensed by the Regulatory Authority as an Authorised Individual. The Regulatory Authority may make exemptions to this licensing regime, under Article 61(3).

Chapter 6 - The Licensing Process (Authorised Individuals)

Article 63 provides that applications for Authorised Individual status shall be made jointly by the relevant firm and individual. Article 64(3) allows the Regulatory Authority to vary the application process in relation to applicants which are already Authorised Individuals in respect of other Licensed Functions.

Chapter 7 - Restrictions on Authorised and Exempt Individuals

Article 68 gives the Regulatory Authority power in certain circumstances to prohibit persons from performing Licensed Functions or other functions which relate to the conduct of a Licensed Service. Procedural protections in relation to this power are provided for in Article 69.

Chapter 8 - Other matters relating to licensing

Article 74 extends the Regulatory Authority's powers in relation to a particular licensed entity for a period of twelve months after the date on which such entity's licensed status is surrendered or withdrawn. This is to prevent the surrender of a Licence being a means of avoiding the disciplinary and investigatory powers of the Regulatory Authority.

Chapter 9 - Change of Control of Authorised Firms

This Chapter contains a limited notification requirement in relation to the change of control of an Authorised Firm. It is anticipated that additional requirements will be imposed by the Regulatory Authority by means of Tier 4 Legislation.

Part 4: Investigation and Enforcement

Chapter 1 - The Conduct of Investigations

Article 78

The broad investigatory powers of the Regulatory Authority set out in Article 78 can only be exercised when it has "reasonable cause to believe" that the relevant Person "has committed or is committing an offence under the Law or legislation made under the Law". A Person who is subject to an investigation is entitled to instruct counsel to advise him under Article 78(6).

Article 80

Some procedural protections for persons subject to investigation are provided. For example, the Regulatory Authority is obliged under Article 80(l) to provide the relevant Person with written notice of the investigation prior to its commencement, "unless such notice is reasonably likely to hinder the investigation".

Article 81

This Article allows the Regulatory Authority to appoint a third party to conduct on its behalf an investigation under Article 78 (for example, to appoint forensic accountants to conduct an investigation). Article 82 indicates that representatives of Foreign Regulators may be appointed as Investigating Officers under Article 81, subject to appropriate supervision.

Part 5: Powers of Intervention

Articles 84 to 87 give the Regulatory Authority a range of powers by which it can control the affairs of an Authorised Firm in certain limited circumstances. For example, under Article 87, the Regulatory Authority may by written notice appoint one or more managers to manage the business of an Authorised Firm. The limited circumstances in which such powers may be exercised are set out in Article 88 and include where it appears to the Regulatory Authority that an Authorised Firm is not a fit and proper Person to remain licensed.

Under Article 89, the Regulatory Authority may present a petition to the Court for the winding up of a company which is or has been an Authorised Firm, Exempt Firm or conducting Financial Services in breach of the Financial Services Prohibition.

Part 6: Miscellaneous

Article 90

This Article obliges the Regulatory Authority to keep confidential information coming into its possession which is subject to a duty of confidentiality. This obligation is expressly subject to the powers of the Regulatory Authority to disclose confidential information to other Regulators under Article 23 or in other circumstances provided for in Tier 4 Legislation under Article 90(3).

Article 91

In addition to offences expressly provided for in different Articles under the Law, this Article provides that it shall also be an offence to breach a provision of the Law or legislation made under the Law.

Article 92

This Article provides that where offences are committed by a Body Corporate with the "consent or connivance" of an officer of such Body Corporate or be "attributable to any neglect on his part", the officer as well as the Body Corporate can also be guilty of the offence. This Article also extends to Bodies Corporate managed by their Members, to partnerships and to unincorporated associations.

Article 93

This Article makes for provision for actions for breach of statutory duty under the Law, although exclusions in respect of some aspects of such liability may be provided for in Tier 4 Legislation by the Regulatory Authority.

Article 94

This Article creates a public interest disclose obligation whereby a broad range of licensed and other persons are obliged to make such a disclosure in circumstances listed in Article 94(5), such as where the Person has a reasonable belief that such disclosure tends to show that a provision of the Law is being breached. Disclosures made in good faith are not actionable (under Article 94(3)) and "whistle blowers" are given some protection from their employers under Article 94(4).

The disclosure must be made to the Regulatory Authority (therefore not to a third party such as a newspaper journalist) for such protections to be available (otherwise the disclosure would fall outside the definition of a "public interest disclosure" under Article 94(5)).

Submission of Comments

Please note, that although each draft is in near final form, it is still 'work in progress' and may therefore undergo further amendments prior to enactment. However, it is anticipated that any amendments would be technical in nature rather than substantive and therefore the Regulatory Authority believes it is a sensible time to engage in consultation.

Any persons wishing to submit comments should, where applicable, provide details of the organizations they represent. In addition, persons suggesting alternative approaches are encouraged to submit the proposed text of possible amendments that would be necessary to incorporate their suggestions.

Please note that the names of the commentators and the content of their submissions may be published on the Regulatory Authority website and in other documents to be published by the Regulatory Authority. If you wish your name to be withheld from publication by the Regulatory Authority, please indicate this when you make your submission.

Any comments should be addressed to Ms. Roberta Calarese, Legislative Counsel, Regulatory Authority, P.O. Box 74777, Dubai, u.a.e. All comments should be provided in writing no later than 28 February 2003.