On the 16th January 2023, Mr Fadel Al Ali, the Chairman of the DFSA announced the publication of the DFSA’s Business Plan for 2023/24. At the heart of the plan is very much about the positioning of the DFSA as a leading global financial center with the aim of attracting and maintaining regulated businesses in Dubai and the UAE.
Both the Chairman and the CEO, Mr Ian Johnston outline that the 2 year plan continues to focus on the 4 strategic themes* to drive the DFSA’s schedule of work with a ‘reliance on international standards as the basis of our [the DFSA’s] approaches’. *
Unsurprisingly, the DFSA’s priorities are consistent with other global regulators namely,
- The fight against financial crime aligned with continuing local and federal efforts to meet FATF’s recommendations following the Mutual Evaluation in 2020;
- A regulatory framework which emphasizes at the heart of it, conducts risk set against the backdrop of growth of the DIFC recognizing the challenges of new business models; and
- Alignment with and implementation of international regulatory standards.
Underlying these priorities are several key messages about people investment, use of data, the on-going automation of activities and alignment with the broader Dubai and UAE agenda.
Further, the DFSA’s ESG agenda as part of the Engagement strategic theme resonates as central banks and global regulators are expected to deliver upon the goals of the Paris Climate Agreement.
Banking’s key priorities
Refocus of supervisory strategy and allocation of resources on a risk based forward looking approach. Supervisory focus areas include:
- Prudential Risks: Respond to changes in global monetary policy:
- scrutinize credit risk governance Examine the methods used for impairments and provisioning, as well as the processes used for assessment and underwriting and
- review of liquidity and asset liability management frameworks and systems.
- Non-financial Risks:
- Assess risk management frameworks of Banks in terms of technology, cybersecurity, and financial crime with an increased emphasis on exposure to third-party relationship risks.
- Recognize the potential effects of climate-related financial risks on the financial system.
- Operationalize the DFSA Recovery and Resolution Regime.
Insurance’s key priorities
- Focus on robust risk management culture particularly in terms of underwriting processes, reservation and operational resilience in preparation for stressed events.
- Continued focus on enhancing transparency in reinsurance transactions and safeguarding premiums and claims payments which will be assessed during on-site risk assessments of insurance entities for intermediaries.
- Dedicated appropriate insurance expertise to the licensing process to address low risk applications.
- Working closely with domestic reinsurers for the next 2 years, as they implement IFRS 17 changes and review the impact on solvency and overall stability of the market.
- Promote Sustainable Finance by reviewing the industry’s incorporation of environmental, social, and corporate governance considerations when making decisions, setting risk appetite and developing new products.
Wealth Management’s key priorities
- The DFSA will carry out thematic supervision of the various wealth management sector models while paying close attention to the key risk areas.
Market’s key priorities
- The DFSA will perform an examination of listing, market and takeover regulations while continuing to inform and educate the market.
- To oversee the OTC fixed income market in DIFC, implement an OTC fixed income transaction reporting regime.
- Embed the operational and risk management components of the new investment and cryptocurrency tokens regulations.
- On-going monitoring of market activity to promote appropriate behaviors in the local markets. Promote awareness of Code of Conduct among industry participants. Enhance surveillance capabilities and continue to detect and minimize abusive behavior in the markets DFSA regulates. Take enforcement action where needed.
The DFSA’s enforcement approach is driven by a risk based approach where its enforcement priorities are linked to its set risk tolerance. Investigations and enforcement actions will be prioritized ‘towards activities for which the DFSA has little tolerance’ including:
- Financial Crime
- Misappropriation and Misapplication of client assets;
- Breaches of Principle 4 by authorized firms in dealings with the DFSA;
- Unauthorized financial services in or from the DIFC; and
- Instances of market abuse, market manipulation and insider trading,
Sanctions will be in the form of ‘substantial financial penalties’ for significant violations. The DFSA has also established a Whistleblowing program and an Initial Inquires Team to identify and deter unauthorized activity in or from the DIFC.
Financial Crime’s key priorities
In line with the local and federal priorities, meeting the FATF’s recommendations as per the Mutual Evaluation of 2020 (as updated in the Increased Monitoring comments in March 2022). The DFSA will continue to apply a data led on-going risk based supervisory approach exercising ‘substantive supervisory oversight’ with targeted financial crime risk inspections of regulated institutions. A risk based regulatory approach which seeks to support the development of digital assets will be implemented.
Cyber Resilience’s key priorities
Improving cyber-security awareness, sharing of cyber-threat intelligence and supporting the continued development of cyber resilience within regulated firms/communities.
Audit’s key priorities
The focus on ‘governance and leadership’ within auditors is implemented in line with new quality management standards.
Supervisory Cooperation’s key priorities
Continued cooperation with global regulators and international standard-setting bodies and lead/contribute to the setting of GCC specific and global regulatory approaches and standards.
Cost – Cutting Priorities
Innovation’s key priorities
Continued development of a RegTech favorable regulatory environment. Continued engagement with regional and international regulators including, the Global Financial Innovation Network.
ESG’s key priorities
Alongside with the Office of the Special Envoy for Climate Change, the UAE ministries, regulators and stock-exchanges, the DFSA has set Sustainable Finance milestones (7 in total) in a roadmap linked towards the UAE hosting COP 28 in November 2023. The Roadmap will as relevant, also incorporate the development by the DFSA of regulatory frameworks based on the UAE Policy on Sustainable Finance which was established in October 2021. Various initiatives aimed at increased innovation in cooperation with the innovation Hub, guidance on ESG fund raising and improved standards in terms of ESG ratings and certification of service providers are to be prioritized.
Policy Framework key priorities
Continued development of DFSA Policy Framework. Consultations/Focus areas include: Clients Assets regime, AML/CTF framework, Crypto/Funds regime and DFSA Fees and Charges.
Digitalisation key priorities
Invest in upgrading and streamlining the integration of DFSA systems. Continued development of Forensic Technology as part of its enforcement investigative work. Further focus on data adequacy and quality used for regulatory and non-regulatory needs resulting in enhancements and development of data analytics.
Developing UAE National Capability key priorities
Continued and on-going commitment and support to the development needs of UAE nationals. Continued development programs for senior UAE talent.
The DFSA’s Business Plan for 2023/24 outlines a significant agenda of priorities setting out their vision of a regulatory base-line for the next 2 years which when delivered will continue to support the DIFC’s ambition to become a global financial center regulated by the DFSA as a globally recognized regulator.
It is therefore of no surprise that Anti-Financial Crime, ESG and Cyber Security are at the top of the list of priorities for DFSA with a data driven risk based approach being the key to achieving each of these objectives. As a result further focus on conduct risk (especially in terms of non-financial misconduct) and outcomes based regulation may take more prominence in the DFSA’s regulatory agenda over the next 2 years.
However, one should not lose sight of the on-going challenges facing international regulators such as the DFSA, especially given their often competing objectives. On the one hand the DFSA is expected to partner DIFC Authority with the continued business development of the DIFC, for example take the growth of the digital assets industry in the GCC in the last 2 years as a case in point. This is of course is set against the minimum regulatory objectives expected of a globally recognized regulator ie to ensure the safety and soundness of the local financial markets, consumer protection and the effective supervision (and taking enforcement action where required) of authorized financial institutions, particularly those which are domestically systemically important.
What is clear is that there is no better time for the DFSA to set out its Business Plan in anticipation of celebrating its 20th anniversary in 2 years’ time.