A delightful guide to becoming friends with regulation

Written with love by

Asim Janjua

In this delightful guide, we recap our journey through financial regulation in the UAE and give readers an inside look at regulatory policy, the goals of regulators and how these goals are achieved, as well as who or what is being regulated.

Why financial regulation is important

Regulation aims to protect consumers and users of financial (and other) services offered by regulated companies, like Mamo. Users need protection from potential risks, while regulators provide frameworks that ensure transparency, fairness, and efficiency, and frameworks that all regulated firms may follow. Regulation provides effective oversight and deters companies from taking excessive risks on behalf of their customers.

Regulation can catalyze entire industries, especially infrastructure industries and businesses that provide critical services to a country. Meanwhile, adaptive and (socially) intelligent regulators help protect and encourage small or new businesses, fostering innovation, competition, and increased consumer choice, attracting talent and growing their economies.

Financial regulators oversee all aspects of financial services from banking to financial markets with the aim of providing protection to consumers. Financial regulators oversee three financial sectors: banking, financial markets, and consumers. Within these, regulators implement a regulatory framework (consisting of rules that need to be followed), which may vary by jurisdiction. We have grouped these frameworks into the following categories that we hope will provide a better understanding of regulation and the work of regulators.

Licensing or registration

First and foremost, it's worth noting that most financial activities cannot be undertaken unless a firm (startups included) has received the proper authority from the appropriate federal or state regulator in the UAE. In the UAE, regulations, and licenses related to financial services are issued by the following: the Central Bank of the United Arab Emirates (CBUAE), Dubai Financial Services Authority (DFSA), the Securities and Commodities Authority (SCA), and the Financial Services Regulatory Authority (FSRA).

Each type of license or registration granted by the respective regulator governs the financial activities that the holder can engage in.

For example, Mamo currently operates under a Category 3C Providing Money Services licensed, issued by our regulator, the DFSA. Mamo’s permitted financial services activities include 'Providing Money Services'. Mamo also has DFSA Endorsements to 'Carrying on authorized Financial Services with or for Retail Clients’; and authority for ‘Holding or Controlling Client Assets.' allowing Mamo to provide you with a plethora of products and services.

To be granted a license, Mamo must accept and abide by the rules outlined in the regulation and implement company policies accordingly. These conditions could include regulatory oversight, training requirements, and compliance requirement to act according to a set of standards or code of ethics. Failure to meet regulatory requirements could result in fines, penalties, remedial actions, license revocation, or criminal charges.

Rulemaking

Regulators issue rules (regulations) through a rulemaking process to implement legislation that provides the overarching regulatory framework. Typically, the legislation provides regulators with a policy goal in general terms, whilst rules and regulations fill in the specifics. Rules lay out the guidelines for how firms, startups included, individuals, or markets may or may not act to comply with the regulatory framework.

Using anti-money laundering as an example, the federal government puts in place legislation that details specific requirements, i.e. to identify all users. As such, regulators define rules that require that all Mamo users do KYC (Know Your Customer), a method of identifying who you say you are through ID checks, photo identification, and proof of address, all of which have specific criteria stipulated by the regulator. The ultimate goal of KYC verifications is to ensure the financial services sector is not utilized by money launderers.

Oversight and supervision

Regulators ensure that rules are adhered to through oversight and supervision. Regulators must understand and observe each firm's services, behaviors, and conduct, providing guidance and instructions that include enhancing systems and controls to prevent improper behavior.

Supervision may entail active, ongoing monitoring and ongoing collaboration between a regulated firm and its regulator. In some cases, supervision and periodic examinations and inspections, whereas in other cases, regulators rely more heavily on self-reporting, through mandated regulatory filings.

Regulators prioritize points of emphasis by issuing supervisory letters and guidance, setting out or reaffirming regulatory expectations; and issuing new rules. This allows firms to take proactive steps to protect their users and the business.

For example, new rules issued by DFSA, which regulates Mamo, introduced a new Whistleblowing regime which came into force on 7 April 2022 and applies to all DFSA Regulated Entities. This regime builds on existing federal requirements and aims to help protect anyone providing information on malpractice; this requires Mamo to have an internal policy and process for reporting such incidents.

Enforcement

Regulators can compel firms to modify their behavior through enforcement powers.

Enforcement powers include:

Issuing fines and penalties
Ceasing orders
Criminal or civil actions in court
Administrative proceedings or arbitrations
Revoking regulatory licenses

For example, regulators can initiate enforcement action when they see any malpractice. Enforcement actions are often made public, which acts as a powerful regulatory tool in deterring other financial services firms from conducting their business inappropriately, thereby increasing consumer protection.

Resolution

Last and in extreme circumstances, regulators have the power to intervene and resolve a failing firm by taking control of the firm and initiating conservatorship (i.e., the regulator assumes day to day operations of the firm on an ongoing basis) or receivership (i.e., the regulator winds the firm down). Other failing financial firms may go through bankruptcy or a judicial process; this could happen for many reasons and usually is in the firm's best interest, its owners, its employees, shareholders, and customers, who may or may not get protection and even compensation.

Conclusion

Regulators provide guardrails for market integrity and efficiency, consumer and investor protection, capital formation and access to credit, illicit activity prevention, state and country competitiveness, and overall state integrity. The road to financial regulation is not an easy one but is the right one.

A regulated firm needs to have exemplary self-regulation mechanisms for self-preservation. At Mamo, we do this through a combination of our own internally built and externally integrated systems.

We are incredibly grateful to the DFSA for their support and guidance since our journey began in 2020. This has helped Mamo foster its principles of security by design, trust, and efficiency.