Bryan Stirewalt has stepped into the CEO’s role at Dubai Financial Services Authority at what is a very busy time for the regulatory body overseeing Dubai International Financial Centre (DIFC).

Stirewalt, who replaced the retiring Ian Johnson as CEO in September 2018 after an eight year-stint running the regulator’s supervisory arm, not only has the forthcoming visit of the Financial Action Task Force (FATF) – the global body overseeing anti-money laundering and terrorist financing regimes – to contend with, he also has to deal with the ongoing fallout from private equity firm Abraaj Group’s collapse, and the challenge of keeping abreast with technological changes as DIFC makes its push to become a global fintech hub.

For the next three months, it is the visit by officials from Paris-based FATF in July that will occupy much of the regulator’s time. The fourth Mutual Evaluation of the United Arab Emirates will be the first to take place since the 2008 financial crisis, and although the DFSA has no jurisdiction over criminal law, as the regulator of the country’s biggest financial free zone, it has been working with a national committee to make sure that its own rules are aligned with national anti-terror financing and anti-money laundering efforts.

Stirewalt said he is acutely aware of the importance to DIFC of ensuring that its rules do their job. When the last review took place, the Centre was only a few years old and they had just been written.

“Simply, our board of directors knew even then that this was going to be our biggest challenge. If anything would go wrong in this space, it could kill us,” he told Zawya on the sidelines of the MENA Regulatory Conference organised by Zawya’s parent company Refinitiv last week.

“They put (in) a large amount of effort to make sure that we benchmarked against international standards.”

Since the last evaluation, however, “the Centre has matured, and as you mature, you get more products, more services, more players”, Stirewalt said.

Moreover, the UAE itself has been sharpening up its rules ahead of the July evaluation, introducing a new anti-money laundering law late last year, as well as new bylaws this year.

No weak link

Stirewalt said the DFSA had been devoting resources towards “making sure that DIFC is not in any way a weak link” in the evaluation.

“Realistically, probably between 8-10 percent of our total staff time has been dedicated to this mutual evaluation over the last year. So you have lawyers, supervisors, policy people... everybody digging in and making sure that we've done the right things.”

Among the actions taken by the Centre as a result of the new laws have included a strengthening of its powers of oversight of Designated Non-Financial Business and Professionals (DNFBPs) working in the Centre (such as notaries, lawyers and company formation agents). It has also made changes to anti-money laundering rules in areas such as customer due diligence checks, record keeping, new technologies and wire transfers, among others.

On top of this, the DFSA has been kept busy dealing with the ongoing fallout from the collapse of the Abraaj Group, the private equity firm founded by Arif Naqvi which became a globally-recognised player in frontier and emerging market investments before its collapse last year.

Although Stirewalt insists that the DFSA’s role as a regulator was limited to its oversight of Abraaj Capital Limited, which was based in DIFC, and not of its holding company (Abraaj Holdings) or its fund management arm (Abraaj Investment Management) which were both based in the Cayman Islands, the Centre has suffered some reputational damage as a result of the collapse.

This was the biggest private equity fund to operate from the region by some distance, with more than $13 billion of funds under management, and its collapse was sparked by investor concerns around its governance.

Yet Stirewalt stressed that the collapse of Abraaj Group was a company-specific issue, rather than a regional, or private equity, issue as a whole.

“This was a problem with one firm,” he said.

Rules don’t stop failures

He also made the point that “regulatory supervision doesn't prevent firms from failing”.

“When a firm fails, regulation should ensure that it's an orderly process - but it doesn't prevent failing. There's reputational damage that goes along with any collapse, and we will do what we can to take the right action in response to this. But again, I would focus on the fact that it's one firm,” he said.

The DFSA is continuing its own investigation into the Abraaj collapse, and Stirewalt said that it will look at its own rules around corporate governance. However, he added that companies are also taking it upon themselves to improve governance.

“Other private equity firms are now using the marketing mantra that 'we are not Abraaj'. So if this collapse causes other firms to improve their own transparency and improve their own governance, then it could have even a positive effect,” he said.

This appears to be happening. The head of Abu Dhabi-based Gulf Capital, Karim El Solh, told the Global Financial Forum in Dubai earlier this month that Abraaj’s collapse was “a concern for the whole region and the whole industry of private equity in emerging markets”, but added that many regional players were investing more in governance and transparency.

“For example, we at Gulf Capital, from day one the majority of our funds came from abroad and we are reporting at U.S. standards,” El-Solh said, adding that its funds are registered with the United States Securities and Exchange Commission and audited in New York.

“But we are still investing in more controls. For example, we are about to issue the first controls report, which is an annual report by one of the big four showing the flow of funds, the segregation of funds,” El Solh said.

He acknowledged, however, that he expects more regulation, which he said was “necessary to give confidence to our global investors”.

Stirewalt said that he was aware as a regulator that any changes required would need to be proportionate.

“A regulator always has a balance to achieve, of where do you draw the line between disclosure, protection and financial stability. And it's not black and white,” he said.

In most instances, the DFSA is overseeing entities operating from DIFC targeting professional, rather than retail, investors. And given the DIFC’s stated intention of becoming a top 10 global financial centre by 2024, it has been helping to simplify some structures, especially in fund management.

Keep it simple

Recent changes to its funds regime have involved removing the number of unit holders an Exempt Fund or a Qualified Investor Fund (QIF) can have, allowing Exempt and QIF funds to set up REITs (Real Estate Investment Trusts, and allowing exchange-traded funds (ETFs) to be established in the DIFC. Later this year, fund managers based in the Centre will be allowed to operate fund platforms.

“We've tried a number of ways to increase funds activity in the Centre. In almost every step of the way, we've tried to listen to the stakeholders of the Centre - what they want, what they need. I think we made a couple of attempts that didn't work the way we thought, but most recently I think we've made the right balance in terms of protection of investors, cost of establishing the fund, and rules governing the fund where now we're in a potential growth area,” he argued.

The most recent advancement in this area has been the agreement between the DFSA, the regulator of Abu Dhabi Global Market and the Securities and Commodities Authority over the ‘passporting’ of funds signed earlier this month. This will allow funds licensed by each entity to be sold anywhere in the UAE.

“I think that is just great for UAE investors overall,” Stirewalt said. “They'll have more choices and more opportunities to make investments.”

DIFC has committed $100 million to a fintech fund, as well as setting up its own accelerator to promote Dubai-based fintechs, including offering an ‘Innovation Testing Licence’ which requires real-time supervision of entities by the DFSA.

It has had to develop its own specialists to ensure it understands the technologies being employed.

“We've staffed that with a mix of supervisors that are traditional supervisors, as well as people from outside,” Stirewalt said. “There's a general rule - in my mind anyway - that it's much easier to teach an IT expert something about supervision than it is to teach a supervisor something about IT.”

So far, robo-advisory firm Sarwa is the only company to graduate from the Innovation Testing Licence regime to become a fully-regulated entity, but Stirewalt expects to be dealing with more fintech-related risks in the future.

“I have a number of objectives as a regulator that are set out in the regulatory law, and none of those say 'except for fintech’ at the end,” he said. “Our regulations and our objectives apply to any firm performing a financial service. The interesting thing is how do you protect the industry and comply with those objectives, while encouraging people to innovate and create?”

Given the events of the past 12 months, a temptation to focus more heavily on the former than the latter would be understandable.

(Reporting by Michael Fahy; Editing by Mily Chakrabarty)


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