04 May 2017

Proposed Amendments to the licensing and administration of the Wealth Management industry in the DIFC

Authored by: Adele O'Herlihy

In brief:

  • A Working Group was set up in the DIFC to consider changes to the way the wealth management industry is administered in the DIFC
  • Various recommendations were made, including changing the requirements on leasing office space, simplifying the application for a Licence for Non-Regulated Holding Entities, and allowing for the recording of joint ownership of shares
  • This is the first part of a two-part series looking at proposed changes to DIFC administration.

Members of the Hadef Corporate team were recently asked to join a working group commissioned by the Governor of the Dubai International Financial Centre (“DIFC”). The Wealth Management Working Group’s (the “Working Group”) primary purpose was to consider the present status of the wealth management industry and the legislation and regulation in in the DIFC relating to it. The Working Group was requested to formulate and propose strategies, policies and objectives relating to the wealth management industry in the DIFC, and submit these to the DIFC Authority (‘DIFCA”) by way of a white paper for consideration.

Highlighted below are some of the Working Group’s key findings in relation to factors inhibiting potential new clients to the DIFC:

  1. Office Space Lease Requirements

Applicants for a licence in the DIFC are required to rent office space suitable for the operations of the company to be incorporated. This requirement applies to all licence applicants other than (i) entities that share ownership control with an entity that already has a lease in the DIFC; (ii) Intermediate Special Purpose Vehicles; and (iii) Special Purpose Companies.

Typically, the minimum size of the office space to be rented depends on the number of employees the applicant wishes to hire.

The Working Group found that the requirement to lease office space in the DIFC can act as a deterrent, because DIFC office rents are relatively high in the Dubai market; common laws offshore jurisdictions usually don’t require office leases; and the ADGM does not require office leases in some instances.

The Working Group recommended that the DIFC Authority (“DIFCA”) take the following steps:

  1. Consider making a ‘virtual office’ solution available to applicants for a limited period of time, in situations where DIFCA may want to encourage growth in particular industries; and
  1. Publication of clear guidance on the DIFC website as to the requirements for DIFC establishments sharing offices, and the application process regarding obtaining a no-objection letter from DIFCA in this circumstance.
  1. Requirements for a Licence for Non-Regulated Holding Entities

Under the current DIFCA/DIFC Registrar of Companies (“ROC”) regime, the guidelines for the application process to establish or register vehicles in the DIFC is not always clear.  Feedback received from Working Group members indicated that the process can be perceived as subjective, and the application criteria vague. This may deter decision makers when assessing whether a DIFC licence application is a viable path forward for the legal structure of their business.

The requirement to submit a detailed business plan for licence applications in the DIFC was also identified as a potential source of frustration.

The Working Group recommended that ROC and DIFCA simplify the application process and introduce more transparency by:

  1. formulating a detailed set of criteria for application and licence approvals, and publishing them on the DIFCA website;
  2. reconsidering the requirements for the business plan and attempting to streamline these; and
  3. permitting a single business plan to be utilised if trying to establish more than one entity.
  1. Initial Articles of Association – Execution Mode

In order to execute the articles of association at the time of incorporation, the ROC currently requires the shareholders to attend in person to sign two sets of the articles before an officer at the DIFC Registries’ services department. If the shareholders are unable to attend in person, they may nominate an authorised person through a power of attorney to attend on their behalf.  The ROC requires that this power of attorney be duly stamped and notarised by a Court notary public in the UAE, or by way of legalised and notarised documents from the jurisdiction where the shareholders are situated.

While the option to delegate responsibility for executing the articles of association to a person located in the UAE through a shareholder resolution is adequate, the ROC’s views on the acceptable format for this delegation of authority are not clear. The ROC typically does not accept a shareholder resolution on its own, and requires a power of attorney attested by the UAE Department of Foreign Affairs  in addition. Although this requirement is not unique to the DIFC, it can lead to a costly, protracted and inconvenient establishment process.

The Working Group recommended that the ROC utilise the provisions of the pending DIFC Electronic Transactions Law to have the articles of association of companies executed electronically. In addition, it recommended that the ROC follow the common law principle of accepting documents in good faith, as opposed to acting as the verifier of documents, which is more in line with practice in civil law jurisdictions.

  1. Joint Ownership of Shares

Under common law principles, shares can be held jointly by more than one shareholder. The DIFC Registrar of Companies has recognised this principle (referred to in the DIFC Companies Law) in relation to existing DIFC companies.  However, for new incorporations, the DIFC Registrar of Companies’ practice has been to only allow sole shareholdings.

The DIFC Portal does not allow registration of jointly owned shares.  Instead of, for example, allowing 100 shares to be jointly owned by A and B, the DIFC Portal will record that 50 shares are held by A solely and that 50 are held by B solely.

As a result of the Registry practice not to permit joint ownership of shares upon incorporation and the DIFC Portal software limitation under which the joint ownership of shares cannot be reflected, shareholding structure details may be inaccurate. 

The Working Group recommended that the DIFC recognise joint ownership of shares in a company from the point of incorporation, and also upgrade the DIFC Portal software to enable recording of joint ownership of shares.

  1. Allotment of Authorised Shares

It is currently unclear from DIFC Companies Law whether shareholders or directors are the appropriate organ of a company empowered to allot shares within the authorised share capital. The DIFC standard Articles provide that shares can be issued by ordinary resolution of the shareholders. Therefore, the Working Group recommended that the DIFC permit boards of companies to allot and issue shares within the authorised capital by ordinary resolution, subject to any contrary provisions in the articles of association.

  1. Dividend Declaration

In common law jurisdictions, an interim dividend may usually be declared by the board of directors and the final dividend is recommended by the board to the shareholders who then resolve to declare it.  Common law gives companies (acting through the board) an implied power to distribute profits to shareholders. The current DIFC standard articles reflect this position but it is contradicted by the provisions in the DIFC Companies Law.

The Working Group recommended that the requirements for interim and final dividend declarations be clarified in the law and that the standard DIFC articles be amended to clarify the position as to whether both interim and final dividends may be declared by the Board (currently the shareholders can resolve to declare any dividend, but the directors can declare an interim dividend).

  1. No Clarity on the Format of Documents Required

The requirements in the DIFC Client Handbook for providing documents or copies of documents to the ROC does not specify if the document in question needs to be translated into English by a sworn translator, legalised, attested, if a copy or an original is required, etc.

The Working Group recommended that the DIFC Client Handbook be updated to specifically state in what format the documents are required.

  1. Licence Renewal Submission

When a DIFC company’s commercial licence is up for renewal, the entity is required to attach a copy of its renewed and registered lease contract to its DIFC Portal submission. However, in order to register a renewed lease contract, a company is required to upload a renewed licence to the DIFC Portal. This circularity is a cause of frustration.

The lack of a registered renewed lease contract prevents an entity from submitting an application for a new licence. The Working Group recommended that the DIFC revise its procedures so that a new lease contract can be registered without the need to submit a renewed license.

  1. Class of Shares Registration

Under DIFC law, a company limited by shares is permitted to have more than one class of shares. However, if a company wishes to register a new class of shares that the shareholders have resolved to establish, the DIFC Portal rejects the submission. The effect of the DIFC Portal’s current limitation is that a DIFC company limited by shares is not able to register more than one class of shares in its issued capital.

The Working Group recommended that the DIFC Portal form on share capital amendments be modified to allow issued capital shares of more than one class.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.