The Dubai Financial Services Authority ("DFSA"), the regulator of financial services in the Dubai International Financial Centre ("DIFC"), has recently issued a consultation paper setting out proposed changes to its Enforcement and Supervisory decision making processes, which are likely to affect all DFSA regulated firms and individuals. In this article, we summarise the 7 key proposals set out in the consultation Paper, discuss some concerns and risks raised by the proposals, and provide the details on how to respond.
The proposed changes
On 8 July 2019, the DFSA issued Consultation Paper No. 126 ("CP126") setting out proposed changes to its decision making processes in a move that seeks to align many of its regime with that of the UK's Financial Conduct Authority ("FCA") and other international regulators.
These are the 7 key proposed changes to the DFSA's decision making processes:
- Introducing a 28 day period in which Enforcement settlement negotiations should usually take place;
- If Enforcement matters are settled within a 28 day period (or an appropriate period agreed by the DFSA), applying a fixed discount of 30% to the financial penalty (excluding any disgorgement elements of the penalty);
- Removing the right to make oral representations to Enforcement and Supervisory notices in all but exceptional cases. The right to make written representations will remain;
- Publishing much more detailed information about the Enforcement and Supervisory decisions (which could include the Decision Notice itself and publication of an individual's name) even when the DFSA's decision has been appealed to the DFSA's Financial Markets Tribunal ("FMT");
- Making the decision maker involved in setting the parameters for Enforcement settlement negotiations the same person who approves the outcome of the settlement negotiations;
- In appropriate cases, appointing an external settlement decision maker;
- Determining the interest payable on any disgorged benefits included in a penalty calculation on a case by case basis by reference to prevailing market lending rates. The DFSA proposes implementing a range of between 1% - 12%;
Impact of the proposed changes
On the whole, some of the proposed changes should be beneficial to the DFSA's decision making processes, and should help to reduce the duration of DFSA enforcement actions, which can take several years. However, if as the DFSA claims, the changes proposed in CP126 are designed to "lead to more effective and timely decision making in future", the timeliness and effectiveness of its enforcement decisions could be more easily be improved by increasing the resources available to the DFSA, both in its enforcement team and in legal review, without compromising the fairness of its decision-making processes. Interestingly, the DFSA has not set out how the proposed changes to procedural fairness in enforcement cases would make the decisions more effective.
Additionally, we note the following more fundamental issues raised by some of the proposals which, in our view, risk a significant reduction to the fairness of the DFSA's decision making processes, particularly in enforcement cases:
- The DFSA's proposal to severely restrict the right of a person to make oral representations to its Decision Maker is based on limited and generally unsupportive benchmarking. The DFSA cites 5 regulators, 3 of which permit oral representations as a right (FCA, Australia's ASIC and Canada's OSC) but it determines that oral hearings are not appropriate based on the SFC (Hong Kong), and the UK's PRA, which is a banking regulator, so conduct issues are far less prevalent;
- By legislating to mandate publication of any or all information
about a decision notice prior to the completion of a full merits
review by the FMT (the first "independent" body to review
the decision) ("Pre-FMT Publication") the DFSA may cause
significant prejudice and loss to a person who is subject to an
enforcement action. The DFSA cites as benchmarking the UK FCA and
ASIC as regulators which follow similar procedures. However, with
respect to the FCA:
- The FCA has a more robust internal review process (including legal review and its more independent Regulatory Decisions Committee) which acts as a safeguard against poor decision-making by the regulator; and
- The DFSA's proposed changes to the law regarding Pre-FMT Publication do not provide that publication of its decisions should be subject to a test of proportionality. This leaves far too much discretion for the DFSA to publish whatever it wants, without considering the intended purpose of publication, or the potentially prejudicial impact on the person subject to the decision;
- The DFSA's proposed changes to the law regarding Pre-FMT Publication do not require it to consider, prior to publishing information about a matter, whether publication would be prejudicial to the person(s) referred to in the publication, but rather to consider the nebulous concept of whether publication would be "prejudicial to the DIFC". There can be months, and in some cases years, between an enforcement matter being referred to the FMT and the FMT's judgement being published. During that period, the company or individual which is subject to the enforcement case will be judged in the court of public opinion and faces the risk of loss or their business or livelihood;
- The DFSA's proposed power (indeed obligation) to publish information about its decisions prior to review by the FMT may occur where a person subject to the relevant decision has not had a single opportunity to make representations in person to the DFSA;
- Although the DFSA's proposed changes to the law regarding Pre-FMT Publication permit the FMT to make an order prohibiting publication of information, the FMT may only make such an order if it is satisfied that such publication would be likely to cause "serious harm" to the person to whom the decision relates or to some other person. The hurdle of "serious harm" is arguably too high (a fairness test would be more appropriate), and is likely to encourage persons to automatically seek such an order where the DFSA seeks to publish the decision notice, given the potential for reputational damage;
- The DFSA's proposed Pre-FMT Publication has not been considered in light of the UAE Penal Code protections of a person's honour and reputation. We can see the potential for a person whose reputation is harmed by Pre-FMT Publication to seek a criminal prosecution against the DFSA, or one of its directors or employees, for defamation, particularly in a case where one or more substantive parts of the DFSA's case are eventually found by the FMT or a court to be wrong on the law or facts;
- The DFSA has not set out in its Regulatory Policy and Procedures manual what the internal decision-making processes would be where the DFSA proposes to publish the decision notice prior to the hearing of the review by the FMT, or what criteria would be applied to such decisions. In light of the significant risk of financial loss and reputational damage to affected parties, some transparency would be welcomed;
- The DFSA's proposed Pre-FMT Publication policy does not address the fact that some affected persons may not have any, or any adequate, legal representation in their matter. In such situations, there may have been little or no substantive challenge to the DFSA's proposed decision, risking a serious miscarriage of justice;
- For individuals subject to DFSA enforcement action, there is often a disparity in resources compared to corporates to be able to challenge and protect their personal positions. If the proposed Pre-FMT Publication changes come into force, this disparity will become even more acute given the legal resources required to seek an order from the FMT preventing publication; and
- The DFSA's proposed Pre-FMT Publication, once enacted, should not apply retrospectively to enforcement actions which were commenced prior to the relevant legislative changes. This would be unfair to affected parties, as this would, among other things, change the dynamic of any ongoing proceedings.
Although some of the proposals in CP126 are welcome, the DFSA's proposal to mandate publication of its decisions prior to independent review by the FMT is disproportionate to the regulatory objectives which it seeks to achieve, and appears designed in part to encourage parties to DFSA enforcement action to settle the matter early, by hanging the sword of Damocles over the person in the form of the threat of publication of the whole decision.
This particular proposal would be a big step backwards in terms of the fairness of the DFSA's decision making processes and an over-reaction to recent, well-publicised events in the DIFC. Individuals in particular should be entitled to protection of their reputation, and to the presumption of innocence. This is all the more important when the DFSA seems to have limited safeguards in place to ensure independent review of its decisions prior to an FMT hearing.
Responding to CP126
We strongly recommend that you read CP126 in full and provide responses to the DFSA. These changes are likely to impact on all DFSA regulated firms and individuals as well as applicants for DFSA authorisation. Responses to the consultation paper are therefore encouraged and should be submitted to the DFSA by 6 September 2019. Responses should be made online by completing the survey accessible by following this link: https://survey.dfsa.ae/f/133900/12e3/
For more information about the proposed changes to the DFSA decision making processes or for assistance with submitting your response to CP126, please contact one of our specialist partners.