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Wednesday 05, July 2017 by Nabilah Annuar

Keeping in check

Banker Middle East catches up with Bryan Stirewalt, Managing Director, Supervision at Dubai Financial Services Authority (DFSA) to discuss the current state of financial regulation at the DIFC and in the wider GCC.

How do you view the development of the supervisory landscape in the region?

We believe that all regulators in the UAE and the GCC strive for consistency with global best practises, and we continue to see harmonisation of regulations and supervisory practises in the future.

The UAE is a vibrant hub for financial services and trade, which sets it apart from many emerging markets. Logistics for global trade and trade finance alternatives in the UAE are, in my opinion, more advanced than many emerging markets.

How do supervisory efforts in the DIFC compare on a global platform?

The DFSA compares well with all other regulators around the globe in terms of how we regulate the various business models in the DIFC. We are committed to adhering to core principles and international best practises for supervision and regulation that emanate from the major standard setters and other leading regulators of the financial services industry. We are actively engaged with the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions, the International Association of Insurance Supervisors and the International Forum of Independent Audit Regulators.

What is the DFSA’s approach to assisting financial institutions in implementing new regulations such as the Basel III and IFRS 9?

The DFSA has been and continues to be fully committed toward the implementation of the International Financial Reporting Standards (IFRS), including the new and revised IFRS 9, which will come into force in 2018. In the DIFC, the majority of the financial institutions engaged in the activity of providing credit, operate as branches. Therefore, the impact of IFRS 9 will be absorbed at the parent entity level.

From our continuous communication with these entities, as well as their home regulators, we believe that they are well positioned to deal with the new standard. We are watching closely for guidance from the Basel Committee on loan loss provisions and their relevance to capital calculations.

Basel III has a set of implementation target dates, which we aim to meet. We must tailor the text of our regulations to be consistent with Basel III, while recognising the business models that are present in the DIFC. The DFSA has taken a proactive approach to the implementation of Basel III and IFRS 9. For the larger DIFC community, we have prepared and delivered outreach sessions and work closely with industry associations. At the same time, we are also working towards training the DFSA staff internally. The DFSA Supervision staff is available to authorised firms to answer any questions which they may have on these revised standards. 

What is the DFSA’s approach to regulations such as the digital payments and virtual currency law?

We recognise the importance of new technologies, including payments providers and virtual currencies, to consumers of the financial services industry. In particular, we see a major benefit to improving financial inclusion goals around the globe.

We have received a number of enquiries from the industry about the regulation of these activities and instruments. The DIFC’s strategic location is important to act as a gateway to the MENA region and across Africa. We should recognise that not all financial services activities require regulation, and we should be a risk-based regulator even for those financial services that do require regulation. This assessment will continue as a matter of normal course of business for the DFSA.

What can the banking and finance community in the DIFC expect from the DFSA this year?

From a supervisory focus we can expect more attention to liquidity management at DIFC regulated firms. Where these firms adopt group policies and procedures, they need to ensure that these policies are appropriately tailored to the DIFC entity’s unique environment. Firms will also need to have adequate stress testing and contingency planning around liquidity management. In addition to a continued focus on financial crime, anti-money laundering and counter terrorist financing risks, we will also be expecting firms to pay particular attention to managing operational risk arising from cybersecurity concerns.

International standard setters are on record in their commitment to slowdown the issuance of new standards and move toward focusing on implementation. At the DFSA we will continue to monitor the development of international standards and right-sizing these to the firms operating in the DIFC. Update of capital rules and introduction of the leverage ratio and net stable funding ratio are some of the Basel III reforms that are not yet completed. 

What is the DFSA’s view on fintechs?

Fostering an environment for innovation is a new strategic theme for the DFSA, which is directly related to fintech. We certainly want to be part of Dubai’s greater vision of becoming an information-based society and a smart city. The creation of the FinTech Hive at the DIFC, for example, is an exciting new avenue of development in the DIFC. Our approach to fintech is to ensure that what needs to be regulated is regulated, and regulated with a ‘right-touch’ approach. Balancing regulations with risk and the impact of a firm and its activities, has been a continuing exercise for the DFSA and our risk-based approach to supervision. Fintech, in that regard, is not different.

As part of our plans to deal with innovative financial service providers, we are creating a new team to oversee the activities of fintech firms. This team, although in its formation phase, is already working towards concluding the consultation papers we issued on crowdfunding and our innovation testing licence (ITL), a framework designed to test these new business models as well as regulations. This is an important initiative and I can say that the amount of work that has gone into it has been substantial.

I should note that we received some very constructive commentary from the industry covering these papers and the team is in close contact with the industry for this purpose. We will conclude these papers as well as the fintech regulatory framework in conjunction with our operational reviews in the near term.

What are some of the other areas of focus for the DFSA?

With a backdrop of the current regulatory, economic, global and DIFC environment and taking into consideration the DFSA’s risk tolerance, the DFSA Business Plan for 2017/18 highlights four key regulatory priorities—financial crime, conduct, alignment with international standards and fintech.

Our key areas of supervisory focus include governance arrangements—we continue to assess the governance of firms, which starts with the Board and senior management of the firm. Subject to the nature, scale and complexity of its activities, we would expect firms to have a robust risk management framework with adequate systems and controls, whether to monitor financial, conduct, financial crime or operational risks. This includes appropriate remuneration practises and incentives as this will have an important influence over the firm’s culture.

We continue with our risk-based supervision of all firms in respect of financial crime risk. We published a report outlining the findings from our trade finance thematic review in late 2016 and propose to publish the findings from our recent financial crime thematic review in the third quarter of this year. The DFSA will also be working with other UAE authorities as they prepare for any future mutual evaluation assessment by the FATF.   

We will later publish findings from our client classification and suitability thematic review. This is an important area of focus for conduct of business risks given differences in how firms document their client’s knowledge, experience and understanding of financial products and services. Other areas of supervisory focus include product governance requirements, the safeguarding of client assets, and ensuring firms have strong systems and controls around the offering of OTC leveraged products to retail clients.

Operational risks including cyberrisks are high up the list, if not at the top, of the concerns for governments, international standard setting bodies, regulators and the private sector including financial institutions. We will be designing our regime in this area. 

Financial risks continue to ensure relevant firms that carry prudential risks have adequate systems and controls around capital, liquidity and leverage to conduct their business in a prudent manner.  

What is your outlook on the development of financial regulation in the region over the next five years?

We see continued harmonisation in the development of financial regulation over the next five years. We are actively engaged with the fintech firms that are innovators in the financial services sector, and we see innovation as a key focus for our development as well. As does the private sector, we need to carefully examine what data we collect and how we use that data to become smarter and more efficient as a regulatory body.