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Retail endorsement at DIFC; Pledge Law 14 of 2008

Retail endorsement at DIFC

Since the establishment of the Dubai International Financial Centre (DIFC) in late 2004, banks and other financial service providers established or registered within the DIFC have been restricted to operating only in the wholesale market. However, since July 1 2008 it has been possible to provide financial services to retail customers in or from the DIFC.

Initially, the DIFC was described as a wholesale financial services environment. Authorised firms were prohibited from dealing with retail customers. These were defined (broadly) as natural persons who had less than $1 million in liquid assets and who were not knowledgeable in financial markets.

There are now two types of client, namely retail and professional. Retail clients are all clients that have not been properly classified as professional clients.

One reason for the change was that the original Dubai Financial Services Authority (DFSA) regime was already at or close to the strength of those in retail markets elsewhere. Authorised firms in the DIFC therefore bore many of the costs of retail-strength regulation, without the ability to address the full range of potential customers.

The growing maturity of the DIFC, as well as increased convergence across markets, prompted the DFSA to conduct a review and consultation process of, among other things, the retail restriction. The consultation process has resulted in amendments to the DFSA Rulebook. The amended rules came into effect on July 1 2008.

Much of the business done in the DIFC is in areas that in Europe are covered by the Markets in Financial Instruments Directive (Mifid). The DFSA appears to have examined its own regime in the light of Mifid, with the aim of making it easier for firms who are subject to Mifid to enter the DIFC without big changes to their compliance regimes. The DFSA also appears to have looked at other European legislation, such as the Insurance Mediation Directive (IMD).

The DFSA has now brought its conduct of business regime closer to the Mifid regime: where a firm meets the requirements of Mifid, it should be able to carry its compliance arrangements into the DIFC with relatively few changes.

The key changes include the following.

Conduct of business

  • Client classification into retail and professional clients.
  • Enhanced list of entities that may be treated as market counterparties (a subset of professional clients).
  • Enhanced suitability and client agreement provisions when dealing with retail clients.
  • Marketing material directed at retail clients needs to reflect a fair and balanced view when presenting future forecasts or representations based on past performance.
  • Enhanced training and competency requirements for firms' staff.
  • Firms to have complaints-handling procedures for retail clients, including timeframes and manner of redress.
  • Conduct of business requirements for insurance more closely aligned with those for other financial services.

Collective investments

  • Public funds are open to all clients, while private funds are available only to professional clients.
  • Public funds may now use fund administrators in Zone I or recognised jurisdictions, subject to due diligence requirements.
  • Private funds may use fund administrators in any jurisdiction.
  • Revised requirements for outsourcing and delegation agreements, including removing the requirement for DFSA approval.
  • Base capital requirement for fund custodians reduced from $10 million to $4 million.
  • New regime for supplementary prospectuses encompasses replacement prospectuses and 12 month-end dates for prospectuses (where units are still on offer).
  • Prohibition on single property funds removed and replaced with a disclosure regime.
  • Sharia Board conflicts prohibition replaced a with disclosure regime.
  • Marketing of foreign funds broadly aligned with new domestic funds regime.

Retail endorsement

In order to deal with retail clients, firms must obtain a retail endorsement on their licence. Both new applicant firms and existing firms can apply for the endorsement. There is no application fee.

In order to obtain a retail endorsement, a firm needs to:

  • have adequate internal complaints-handling procedures;
  • provide enhanced disclosure in all new marketing material; and
  • have adequate systems, controls and procedures to be able to provide financial services to retail clients.

Transitional arrangements

There is transitional relief available for firms who hold a licence to operate in the DIFC. The objective of these arrangements is to ensure that firms can continue to conduct their existing business with minimum disruption. It is important to note that there is little or no change for firms who do not wish to deal with retail clients.

In short, there is no client classification required for existing clients, as long as the firm continues to provide to such clients the same services as before. No notice or consent is required for existing marketing counterparties to continue to be treated as such. No new client agreement is required for dealing with existing clients. Firms can continue to distribute existing marketing material and prospectuses for six months after implementation (until 2009), mostly in the same manner as before.

Stuart Walker


Pledge Law 14 of 2008

Pledge Law 14 of 2008 of the Emirate of Dubai seeks to register the contract of pledge of property with the Land Department. The announcement of this law will serve to add further transparency and predictability for the mortgage market. The law stipulates that the size of the loan, the repayment period and the value of the property be registered with the department. The law will become effective 60 days after it is published in the Official Gazette.

The provisions of this law applies to the pledge of property or property units as security for a debt whether the debt is secured by the whole property sold on plan, common part thereof, or real or personal right thereof.

The pledgee will be a bank or a financing company or institution duly authorised and registered with the Central Bank of the United Arab Emirates for practicing property-financing activities.

The pledge will accrue only when it is registered with the Land Department, with any agreement to the contrary to be deemed invalid. The pledgor will incur the contract fees unless otherwise agreed by the parties.

Legal effect of security pledge

The pledgor may not dispose of the pledged property unit or property by sale, grant or otherwise or create any real or personal right thereon without the approval of the pledgee, and provided that assignee accepts to replace the pledgor in the obligations arising under the pledge contract.

The pledgee may stipulate in the pledge contract that the pledgor will act as a guarantor to the assignee in the performance of all such obligations.

If it is stipulated in the pledge contract that the pledgee will own the pledged property for its debt if the pledgor fails to pay its debt on the appointed date, or that the property will be sold without regard to legal procedures, the pledge will be valid but the condition will be void in both cases, even if it is agreed subsequently.

Article 11 contemplates that the remedy of self help is not available in the UAE. The pledgee will obtain a court order from the execution judge to sell the property through public auction. The pledgor will have the right to manage its property and receive its revenues until the date it is forcedly disappropriated by public auction for failure to discharge the debt (Article 12).

The pledgor has a right to receive revenues out of the pledged property. If there is any default by the pledgor in paying his EMI against the pledge, the pledgee can recover the loan amount only through the proceeds collected out of the public auction of the pledged property.

The pledgee may assign its right to a third party provided that the debtor will approve such assignment and the deed of assignment will be registered at the department.

A purchaser of a property unit sold off-plan or under-construction may pledge the same as security for the debt amount, provided that such units or properties are entered in the initial property register with the Land Department.

As per this provision, if the property unit is sold off-plan but is not registered in the initial property register, then it cannot be pledged for security.

Attachment of pledged property

The pledgee may commence procedures to sell the pledged property if the debt is not settled on the date, provided that the debtor or the possessor of the pledged property or unit is served a notice within a period not exceeding 30 days.

In the event that the pledgor fails to discharge the said debt within the time period stipulated under the law, the execution judge will at the request of the pledgee issue a decision for attaching the pledged property in preparation for selling the same by public auction pursuant to Land Department procedures.

Article 27 provides that without prejudice to Article 26, in the event that the debtor petitions the execution judge to delay the public auction, the execution judge may delay the sale by not more than 60 days for one time only, if the judge is convinced that:

  • the debtor can discharge its debt if given such time; and
  • the sale of the pledged property or unit may cause serious damage to the debtor.

As per Article 28, if the debt is not settled within the fixed time, the pledged property will be sold by public auction in accordance with the procedures applicable at the Land Department not later than thirty 30 from the date of expiry of the term. The pledgor may discharge the debt secured by pledge before the due date.

The Pledge Law provides a logical framework for the granting, registering and enforcing of mortgages and other pledges against property in the Emirate of Dubai. Such a law is a most welcome development for lenders and borrowers alike.

Shahram Safai and Saurbh Kothari 

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