January 27, 2020

Financial introductions: what you need to know about the UAE regime

In this Insight we provide a quick overview of the financial introductions regime in "Onshore UAE" (i.e. outside the financial free zones), and how it impacts the financial institutions (FIs) which appoint local introducers (LIs) to refer UAE clients to them.

The Securities and Commodities Authority (the SCA) regulates "introductions" in Onshore UAE under the SCA Promotions and Introductions Regulations,[1] which were introduced in 2017 (the PIRs). Little has been written about the SCA's introductions regime, to which only 2 articles of the PIRs are dedicated out of a total of 21 articles.

Financial promotions and introductions are both regulated by the SCA. Carrying on financial promotions requires an SCA license, while making introductions only requires the SCA's authorisation. The difference between an "SCA license" and an "SCA authorisation" is not set out clearly in the PIRs and the SCA provides no guidance on the topic. However, the eligibility criteria, application process and requirements for obtaining SCA authorisation are lighter than those for a license. The application for SCA authorisation is only 6-pages long and must be submitted along with supporting documents. The more substantive supporting documents include a list of the financial services which the introduced FI would provide, and copies of the applicant's "internal procedures manual" for making introductions and its "code of conduct". Finally, the lighter authorisation regime also translates into much less onerous conduct of business requirements which are contained in a single, short, article in the PIRs.

What is the scope of application of the PIRs?

We set out below the key issues arising from the SCA's introductions regime.

Which introduction activities are caught by the PIRs?

SCA regulations do not have extra-territorial application. This means that the PIRs would only apply to activities which are carried on in Onshore UAE. In the absence of guidance from the SCA on when an activity would be considered to have been carried on in Onshore UAE, and given that the PIRs are still largely untested, it is not entirely clear in practice when an LI's activity might trigger the PIRs. Where an FI requires its LIs to be regulated (or exempt) it is important for FIs to assess referral schemes on a case-by-case basis to understand how the LI would carry on its activities (usually by understanding the location of the LI and that of the target clients) so that the FI can gauge the regulatory risk, if any, of a particular LI relationship.

An introduction is defined under the PIRs as the act of "presenting and introducing a person to another person who is licensed by the [SCA] or a Regulatory Authority Similar to the [SCA] to obtain a financial service in accordance with the provisions of [the PIRs]". This broad definition potentially captures most, if not all, the referrals an LI would make to an FI. However, activities related to referrals which could amount to "arranging" (e.g. acting as a mailbox between the referred client and the FI, or collecting KYC information), would be outside the scope of the PIRs.

Can individuals make introductions?

We are frequently asked this question, given that many FIs engage with LIs who may act in their individual capacity, referring personal or business contacts.  Although the PIRs only apply to legal persons, there is no express prohibition which would prevent an LI who is a natural person from making introductions. However, care must be taken when dealing with LIs who are individuals since such LIs may still be subject to other licensing requirements in Onshore UAE (e.g. holding a license from the relevant emirate's Department of Economic Development). A common market practice is for LIs to operate through a free zone or overseas company. However, it is important for the LI to assess whether his or her introduction activities need to be authorised in the UAE.

Are there any exemptions from the SCA authorisation requirement?

The PIRs exemptions for financial introductions are much more limited and narrowly drafted than those for financial promotions. For example, there is no reverse solicitation exemption. These exemptions include introductions which are made:

  • by certain SCA-licensed brokers;
  • between members of the same group of companies; or
  • by a "financial consultancy and analysis company" or by a lawyer, during the course of business (i.e. not as a standalone activity).

However, this is balanced by the relatively lighter eligibility criteria for SCA authorisation to make introductions.  SCA authorisation is available to SCA-licensed firms, as well as to local or foreign licensed banks and insurance companies, and to FIs which are licensed by a regulator who is a member of IOSCO (i.e. most financial regulators).

What are the risks for an FI using LIs?

Although the SCA is generally regarded as a complaint-led regulator, there has been a marked uptick in enforcement action against firms and individuals in Onshore UAE, the outcomes of which are now published on the SCA's website.

The main legal risk for an FI is to be found liable for its LI's misconduct. However, such risk, if any, is negligible. That is because only the PIRs only apply to the person making the introduction, so the LI would need to comply with the relevant Onshore UAE laws and regulations. Nonetheless, we generally advise FIs to contractually limit their exposure to such risks.

Recommended mitigating measures

We recommend to FIs to thoroughly assess any proposed introducer agreement (and to regularly review schemes which are already in place), and to ensure they enter into a written referral agreement with their LIs which, at a minimum, should include a set of carefully drafted risk-mitigating provisions such as:

  • including appropriate "no agency", liability, indemnification and non-exclusivity clauses;
  • inserting the necessary representations regarding the LI's compliance with all applicable laws and regulations, including holding all the necessary government authorisations; and
  • for financial free zone FIs, ensuring the introducer agreement designates the appropriate choice of law/jurisdiction clause, and sets the effective time and place of execution, to help mitigate the risk of local courts asserting jurisdiction and local law being applied.

For more information about how the PIRs might apply to you or your arrangement with a LI, do not hesitate to get in touch.

[1] Board Decision No. 3/R.M of 2017.