David Knott, CEO of the Dubai Financial Services Authority (DFSA), regulator of the Dubai International Financial Centre, explains how he is strengthening standards.
Do you expect the credit crisis to affect any financial institutions in the DIFC?
I would be very surprised if there was a direct impact. Having said that, if the situation deteriorates significantly further, I don't think anyone can be immune in the financial world because it is a globalised world. If you took the centre here, a very large number of the firms are international firms.
We are fine-tuning all the time.
None of them is going to find themselves in serious financial difficulty, but if they become distracted by issues that they have in the US or elsewhere, it could slow down programmes that they would otherwise have here. Against that, everybody accepts that this region provides a safety valve in the sense of activity levels and growth so perhaps this centre could in fact be a beneficiary of the slowdown.
You have signed several Memorandums of Understanding with other regulators. What benefits do these give you?
It's very important for two reasons. Basically what they do is commit both of the jurisdictions to information sharing and cooperation, both through the licensing process and subsequently in supervision. We have focused from that perspective on jurisdictions where there are existing entities in, or we think more entities are on the way to, the centre.
We have several Japanese institutions in the centre already - we think we'll see more. It's important to have a strong commitment to cooperation with their home regulator. One of the first we did was with the FSA in London for the same reason. You have that very strong operational imperative. There's also that relationship and reputational advantages for us.
For example, we signed with the four banking regulators in the US. From our point of view it's important because we have some large American institutions here, but it's equally important to be demonstrating to the Americans that we have a very high standard of regulation here, and it's important not just to the centre but to Dubai as a whole.
Did the recent Forsyth Partners insolvency test the DFSA's framework?
I think what we've done in the last two years in a number of cases has demonstrated that we will enforce the law if we think the reputation of the DIFC is threatened. We have had three cases before the DIFC court where we have obtained injunctions against entities and people, we've closed down a quite complicated internet scam, so we've been out there showing that we will enforce when we need to. The Forsyth case is certainly the first where a licence was withdrawn, and in the end it was withdrawn with the consent of the firm itself.
Are there any regulatory changes on the way from the DFSA in the near future?
We're always looking at our system, and we are a risk-based regulator which means we want to ensure that any compliance costs we are imposing are proportionate to the risk. We are fine-tuning all the time. We introduced [in 2006] three or four deregulatory changes. We have done the same [in 2007] and I'm sure we haven't finished this process. I think within a relatively short timeframe you will see some further proposals from us of a deregulatory nature.
Are we getting closer to having common standards for the region's exchanges?
I do think that we're likely to see greater conformity and consistency developing in the securities markets across the region and this new Federation of Arab Securities Regulators, of which we're a member, is looking at ways in which greater consistency could be achieved in regulation. I think as the region develops and traded activity develops, opportunities to address fragmentation will be important. It's the customers themselves who will push this direction, it won't be regulators, maybe not even exchanges. The customers over time will say fragmentation equals expense, and we need to get the cost down.
Is there an argument for having a Shariah council in the DIFC?
It would be a much better model than the one we have. The Malaysian model is much more coordinated, but we take the view that this is an issue for the industry and governments to determine, not for us. I think Nasser Al Shaali [CEO of the DIFC Authority] made the point that if the industry is really to progress as a mainstream financial industry, the bottleneck that is currently represented by the Shariah sign-off will have to be addressed.For all the latest banking and finance 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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