As the global financial meltdown swept across the globe in 2008, bankers became the main target for public and political venom. And as the banking black hole began sucking in more and more bailouts, regulators were soon blamed for taking their eye off the ball and allowing the excesses and extremes to take place. Now that economies are beginning to pick up pace again, regulators the world over are taking some of the world’s biggest and most famous banks to task.
JPMorgan Chase was last year slapped with a $13bn fine for routinely overstating the quality of its mortgages to investors. This month it was also fined $1.7bn for violating anti-money laundering laws and failing to alert authorities to warning signs its employees encountered in dealings with convicted infamous Ponzi schemer Bernie Madoff.
Wall Street believes fines related to subprime mortgages could go as high as $50bn, but many other high-profile names have been rapped over the knuckles: HSBC was hit with $1.9bn for money-laundering lapses; UBS paid $1.53bn for LIBOR manipulation and Goldman Sachs coughed up $577m for misleading investors. Even Coutts, the 320-year old private bank which counts Britain’s Queen Elizabeth II among its clients, was slapped with a $14m fine for failings in its money laundering controls.
In the Middle East, Dubai is the region’s financial hub and the Dubai International Financial Centre (DIFC) is the city’s main nucleus for doing business. The DIFC’s own regulator — the Dubai Financial Services Authority (DFSA) — has also been making headlines and is showing that as the emirate’s economy begins to move back into the fast lane it too is not prepared to accept any of the mistakes and lapses in judgement which passed under the radar in the boom days.
Last year, a former BNP Paribas private banker was fined for executing two transactions worth $8.4m for a client without his consent, while the CEO of a major private bank based in the DIFC was fined for claiming his client was worth $5m in a bank letter, when his actual wealth was only around $190,000.
Global headlines also came when the Dubai regulator sued Deutsche Bank, claiming Germany’s biggest lender had unlawfully refused to provide information as part of an investigation into alleged breaches of DFSA rules.
While the case is the first court action the regulator has filed in at least three years, DFSA chief executive Ian Johnston says industry chatter that the regulator has suddenly decided to get tough is wide of the mark. For him, it’s business as usual.
“You’re not the first person who has asked that...it’s just coincidental,” Johnston says modestly. He claims the number of enforcements has not increased in number over the last year and it is simply a case that some of the recent reports have been more high profile and attractive to the wider media. Also, the growth in the number of firms and the resurgence in economic activity in the UAE has been a catalyst.
“The DFSA regulates the Dubai International Financial Centre and everything that takes place within it... One of the changes that has taken place over the last 18 months has been a solid record in terms of the number of firms that have been registered to operate.
“Also the depth of their activity has really increased quite a lot, so some of the bigger institutions that have come in during the last year or two have a real deepening of activity... So the amount of deals flowing and depth of the balance sheets is significantly better than two years ago,” he says.
In October the DIFC passed the 1,000 mark in terms of the number of companies operating within it, with a quarterly growth rate of 3 percent and around 7 percent annually.
These firms include 21 of the world’s top 25 banks, 11 of the top 20 money managers, six of the world’s ten largest insurers, and six out of the ten top law firms, meaning Johnston and his team are under a lot of pressure.
“The sheer volume of the work coming in has kept our authorisation and licensing team busy. That team is working very, very hard due to the new business,” he says, while adding that he has not been given any major increase in staff to keep up with the mounting workload.
“Staff haven’t increased greatly over the last year, hence why we are so busy. We have topped up our senior level but we haven’t seen a major increase in staff. We have an ongoing programme called ‘Tomorrow’s Regulatory Leaders’. Some people would call it a graduate programme — it is where we bring Emirati graduates and we train them.”
While Johnston can’t comment on specific cases, especially the ongoing Deutsche Bank debacle, he points out that a lot of their cases come about through anonymous whistleblowers or firms themselves coming forward.
“The more firms you see, the more regulatory issues you are likely to see. It is related to the growth in the centre rather than any particular outbreak of bad activity. In some of the cases publicised the firms themselves have come to us and said their own compliance procedures had detected something.... Firms don’t actually want to have people misbehaving.
“We also have a complaints portal for consumer complaints and some activity we pick up through that and it’s a really good source of intelligence. Anyone who uses the DFSA portal will be able to remain anonymous and we work hard to preserve the anonymity of people who complain to us. They need to provide us with enough information to investigate the matter but we wouldn’t disclose to a firm who it was that made the complaint.”
Appointed in 2012 but with the DFSA since 2006, Johnston is quick to point out that enforcement only makes up about a tenth of a regulator’s activity.
“If you look at any regulator, probably more than 90 percent of their work is in policy setting and rule making and doing education and training seminars and supervising firms. Enforcing makes up a small part but it is the most visible and the part the media is most interested in and I understand that,” he says.
“I have always believed that strong enforcement, provided we use our powers proportionately, is to the benefit of the industry. The reason I say that is because there are many examples where if bad behaviour breaks out it’s [incorrect] to introduce more and more layers of regulation if it is a small number of people involved. It is better to go in and take action and let everybody else get on with their business.”
As the Dubai economy looks to be recovering, Johnston says the real task is to make sure that the regulatory environment has enough checks and balances but does not stifle growth with paperwork.
“These things go in cycles,” he says. “When business is going well people expect regulators to get out of the way and then when something goes wrong they complain there hasn’t been enough regulation. As regulators we need to be a bit smarter than that, we have to regulate the need for appropriate regulation when times are good.
“There has been a tendency, when times were good, [where] many governments would have said ‘stay out of the way’. When the tide went out and the shipwrecks were visible they say ‘where are you’.
“Going into next year we will slow down the pace of regulatory change as we have a mature centre and a mature rule book and we need to avoid the temptation to make rules just because we can and give compliance officers a bit of a breather. But anything we need to introduce to meet international standards we will.”
With Abu Dhabi currently looking to replicate the DIFC model with its own financial hub, does Johnston have any tips for his neighbours, who are starting from scratch?
“It is critical is to have a clear legal structure and for that to be as open and transparent as possible... Secondly: to have everything to international standards.”
With Dubai’s awarding of World Expo 2020 and global aspirations, the DFSA is certainly set for the international stage. It also looks like the right man is in place to take it there.For all the latest industry news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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