DFSA Annual Supervision Outreach Breakout Group #1 Conduct of Business Risks. 25 June 2018

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1 DFSA Annual Supervision Outreach Breakout Group #1 Conduct of Business Risks 25 June 2018

2 Breakout Group 1 - Agenda Opening Comments - Lawrence Paramasivam General Issues & Trends - Hend Al Budoor & Maryam Al Zarooni Clients Assets & Market Conduct - Dean Miller Governance, Conflicts of Interests & Remuneration - Amit Karode Reporting Obligations - Ahmed Al Noman Closing Remarks - Chris Cameron

3 Opening Comments Lawrence Paramasivam Director, Supervision

4 Supervisory Changes Stronger focus on highest areas of risk Stronger focus on most complex firms Embedding subject matter expertise Better linkages between teams More consistency in supervision, overall

5 What are some of the Key Conduct Risks for 2018/2019? Safeguarding Client Assets Client Classification and Suitability Product Governance

6 General Issues and Trends Hend Al Budoor & Maryam Al Zarooni, Senior Managers, Supervision

Client Classification Issues & Trends Client Classification in the Client Agreement letters Option for a Professional Client to be classified as a

7 Client Classification Issues & Trends Client Classification in the Client Agreement letters Option for a Professional Client to be classified as a Retail Client Reliance on a classification made elsewhere and Group Clients Multiple Classifications provision of new Financial Services and financial products

8 2017 Q Suitability

9 So when does the risk of the provision of unsuitable advice and/or product occur?

10 So when does the risk of the provision of unsuitable advice and/or product occur?

11 1 Incentivized to do it for personal or shareholder interests 2 Failure in having proper systems and controls in place

12 what product will sell the most

13 Is this the right product for them?

14 The DFSA observed the need for improvement in the practices applied by Firms when undertaking client suitability assessment

15 Clients Knowledge and experience Clients Financial situation Clients Investment Objectives

16 Firms addressed these three elements as part of their clients assessment questionnaires and used tick-box approaches to obtain information from Clients about their financial knowledge and experience

17 1. Assessing the risk a client is willing to take 2.Updating and recording clients information 6. Risk Parameters 3.Clients net asset assessment 5. Switching 44.Dealing with similar risk profiling

18 5. Sw 1. Assessing the risk a client is willing to take Firms did not record their customers attitude towards risk 6. Risk Parameters

19 5. Sw 1. Assessing the risk a client is willing to take 1. Risk appetite: High 2. What's your capacity for loss: 0% Files did not contain any evidence that there had been 6. Risk discussions Parameters with the client to clarify the clients true attitude and appetite toward risk

20 1. Assessing the risk a client is willing to take 2.Updating and recording clients information Firms providing advisory and discretionary portfolio management services must be able to demonstrate that the client information they use to asses the suitability of the portfolio is up to date.

21 1. Assessing the risk a client is willing to take 2.Updating and recording clients information 3.Clients net asset assessment Firms should seek to obtain other information and analyse the clients overall financial position and to create file notes to bridge any gaps between the data and their conclusions regarding the clients overall net assets

22 1. Assessing the risk a client is willing to take 2.Updating and recording clients information Firms offering a package of financial instruments that has been provided to a group of clients with similar risk rating. The issue with a combined package may not necessarily fit the risk appetite of each client 4.Dealing with similar risk profiling 3.Clients net asset assessment

23 1. Assessing the risk a client is willing to take 2.Updating and recording clients information Firms must undertake an analysis of the costs and benefits of switching to the new investments and be able to demonstrate why the new investment is more beneficial to the client 3.Clients net asset assessment 5. Switching 4.Dealing with similar risk profiling

24 1. Assessing the risk a client is willing to take 2.Updating and recording clients information Investment Firms should carry investments in accordance with their client risk parameters 6. Risk Parameters 3.Clients net asset assessment 5. Switching 44.Dealing with similar risk profiling

25 client risk parameters

26 Other COB Issues

27 1. We recommend CO/MLRO to carry sample check reviews on the traded transaction to ensure they are in line with the clients risk profile

28 2. We noted some weaknesses reported on the systems and controls related to client communications and financial promotions. The DFSA observed that some compliance functions review was only limited to ensure standardised disclaimers of the Firms marketing material.

29 Client Assets and Market Conduct Dean Miller Senior Manager, Supervision

30 Client Assets Requirement for Client Asset Endorsement Client Reporting/Client Statements COB A5.10 Client Money COB A6.8 Client Investments Unequivocal for Retail (monthly for Client Money, halfyearly for Client Investments) Professional Clients according to intervals agreed in writing If relying on Third Party Agent (TPA), must document your arrangement with Client

31 Client Assets TPA Due Diligence COB A5.6.2 Guidance Client Money

32 Client Assets TPA Due Diligence COB A6.5.2 Guidance

33 Client Assets TPA Due Diligence Insolvency regime Does the relevant legal framework in that jurisdiction ensure ring-fencing/protection of Client Assets? Arrangements or use of agents and service providers Does the manner in which the TPA holds Client Assets or its use of third-party providers affect the level of protection ultimately afforded to Client Assets? TPA must be suitable Suitability = provides protections equivalent to COB Apps Firms must demonstrate to DFSA how/why you consider your TPA suitable

34 TPA Due Diligence Record Keeping Opportunities for improvement in firms practices Due diligence is subject to record keeping requirements Due diligence is not a record keeping requirement Firms should maintain: All documentation gathered or used in connection with TPA suitability assessment (i.e., information from or about the TPA); and Documentation in respect of your assessment; how/why you determined TPA to be suitable (i.e. information you create) Update periodically: underlying data and conclusions

35 Market Conduct Code of Market Conduct (Sourcebook: CMC) Effective 1 Jan 2015 GEN A Notification Regime Effective 1 Feb 2017

36 Market Abuse Very low numbers of notifications Firms must have systems and controls for : Preventing market abuse Detecting potential market abuse Notification Notifications Details regarding order or transaction Your rationale for suspecting market abuse Information used to develop or substantiate your suspicion (such as Client profile, Client trading history, market data, rumours, other publicly available information)

37 Governance, Conflicts of Interests and Remuneration Amit Karode Senior Manager, Supervision

38 Corporate Governance A cohesive set of systems, policies, procedures and controls designed to promote sound and prudent management of Firms in the interest of it s stakeholders DFSA benchmarks it s regulations with standard-setters like Basel, IAIS and IOSCO. DFSA s three tier approach for Authorised Firms: Overarching Principles: Setting out the outcome to be achieved. (Principle 11 Compliance with high standards of corporate governance and Principle 3 Management, systems and controls) Foundation Requirements: Set out in the Rules(GEN Management, Systems and Controls, Corporate Governance) Best Practices: Set out the ways to achieve compliance with the Principles and Rules (GEN - App3 - Best practice relating to Corporate Governance and Remuneration)

39 Impact of Governance Failure General impact of governance failure could lead to: Lack of Accountability Failure to address conflicts of interest Lack of internal controls Lack of effective challenge Enhanced Financial Crime Risk Increased regulatory scrutiny, actions and fines

40 DFSA s Observations Firms should have a written charter to define roles, powers and responsibilities of the Governing Body, Committees Frequency of meetings should be in line with business needs Detailed meeting minutes. Minutes must cover the material aspects, issues raised, discussions conducted by the members and resolutions arrived Board Resolutions by circulation alone do not demonstrate deliberations and brainstorming

41 Conflicts of Interest - Overview Principle 7 An Authorised Firm must take all reasonable steps to ensure that conflicts of interest between itself and its customers, between its Employees and customers and between one customer and another are identified and then prevented or managed, or disclosed, in such a way that the interests of a customer are not adversely affected. COB 3.5: Fair treatment of Clients; Prevention and management of conflicts of interest Inducements and Soft Dollar Agreements

42 Potential for Conflicts Potential for Conflicts across Business Lines Discretionary and Non Discretionary Business Funds - Related Party Transactions, Valuation practices Proprietary and Client Business Soft Dollar Arrangements Sales Practices

Conflicts of Interest Identification, Prevention and Management Detection Management, Front Office and Compliance Identify conflicts specific to your

43 Conflicts of Interest Identification, Prevention and Management Detection Management, Front Office and Compliance Identify conflicts specific to your business Prevention Fit for Purpose policies and procedures Awareness & training Chinese Walls Management Disclosure to Clients Written Policy of Independence

44 Remuneration Principle 12 Remuneration Practices and GEN App A3.2 Incentives and Remuneration Remuneration Committee Remuneration policies and procedures Incentives connected to quantitative measures such as revenue generation Non financial goals (behaviour towards risk and compliance) can be part of performance assessment. Inducements, Gifts, and Benefits Gift Policy Annual declaration Disclosure to Compliance function

45 Thank You

46 Reporting Obligations Wealth Management Ahmed Al Noman Senior Manager, Supervision

47 Current PIB Forms Two main forms that relate to Wealth Management reporting: - PIB Form B210 Wealth Management activity - PIB Form B220 Fund and Account Management Consistency of Firm Reporting

48 Consistency of Reporting Completing the appropriate PIB Forms Numbers should reflect the Financial Services undertaken Cross referencing forms / cells with the relevant PRU guidance notes

49 Proposals for PIB forms (B210 / B220) Having two standalone forms to avoid duplication and overlap of information Providing more guidance Adopting a risk-based approach Focusing on the Financial Service activity undertaken Identifying where the activity is taken place Identifying who undertakes the activity Further breakdowns of information is requested.

50 Proposed Asset Management Form Only applies to Authorised Firms which engage in asset management Adopt a risk based approach in designing the form: Where the assets are managed In the DIFC or outside Who manages the assets DIFC Firm or activity delegated Type of mandate Discretionary Vs Non Discretionary

51 Risk-Based Approach Example Current Proposed

52 Next Steps Soft consultation with selected firms has already been completed. Feedback and recommendations have been taken into consideration Formal consultation will commence later this year New forms will come into effect next year (subject to consultation and final approval)

53 QUESTIONS

54 Thank You

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