On Agenda: DIFC regulatory regime should focus on products

While the DIFC is not done yet drawing up its regulatory framework, it is more or less clear that players licensed by the financial centre would be able to do business outside its physical boundaries.

In principle, DIFC players are not supposed to do business in any retail banking or retail investment products, but Philip Thorpe, the chief commissioner of the Regulatory Authority, had recently indicated that asset management companies and investment banks setting up shop in the DIFC would be able to do business with high net worth individuals in the local market. High net worth in local parlance means anything above Dh5 million.

More recently, the Regulatory Authority published its second paper, detailing the broad parameters of the centre's regulatory regime. The paper talks about a mass of regulatory laws, which are stringent enough to match the world's toughest legal safeguards against abuse by players enlisted with DIFC.

According to the current thinking, the regulatory focus would be on firms rather than products, with the rule book setting out key standards of 'appropriate competence, care and attention' to be followed the firms. There will be a code of conduct relating to market abuse, but the determination of the nature and extent of the offence is yet to be concluded.

Broadly, the DIFC regulatory jurisdiction will cover wholesale commercial and investment banking activities, but without overlapping the jurisdiction of the Central Bank. Wherever DIFC has made a rule, that will take precedence and if there is no specific DIFC rule, the Central Bank rule will apply. Although the nature of activities covered in this wholesale concept is yet to be finalised, indications are that it would include the distribution and trading of equities and debt securities as well as financial advisory services.

With the nature of business under consideration being what it is, some overlapping will surely be there. From experience we know that areas falling under this category generally end up as a 'no man's land' rather than an over-regulated territory. And that would be the licence for predators to swoop down. It has to be ensured that the overlapping does not leave grey areas; otherwise these practitioners, passing off as the so-called independent financial advisors (IFAs), or something else, would continue to find their preys and make their killing.

Thus, unless proper conditions are created, the marketplace will have players who are as wide apart as two ends of the earth in terms of regulatory discipline operating side by side. On the one end of the spectrum would be the DIFC players whose products and activities are permanently on the supervisory radar of the regulators while on the other there would be the likes of suitcase consultants and bucket shops, peddling all kinds of things without ever being obliged to show up before an arbiter.

It will be least desirable that there can be a situation where the rules will be followed by those who volunteer to do so while the rest of the market chooses to do whatever it wants. For this to be prevented, it is not enough that there are very stringent laws meant for players within the DIFC fold. The rules that apply outside must equally be harsh.

A solution to the problem will demand all the genius of the regulatory authorities because the issue is complicated. How does one deal with an investment merchant who has sold in the local market a product sourced from a centre that is beyond the reach of the regulators and yet seeks a presence to 'service' his clients from close quarters? If the merchant is not allowed, his clients would surely feel aggrieved, but if he is allowed, he might continue to seek and secure custom for products and services that may be suspect in the eyes of the regulators.

Stories abound in the local media about investment scams created by these operators. The argument that the investors have only themselves to blame and that they should have considered the full implications before committing their money may be good rhetoric, but does not absolve the regulators of their responsibility. They clearly have a responsibility to prevent such products and services being offered.