The Apex Directors Club breakfast event, held on September 3, 2024, and hosted by 
, featured insights from Natasha Zahid and David de Ferrars. The discussion highlighted crucial issues in financial mis-selling, including the importance of due diligence, proper client classification, and ensuring product suitability and transparency. Additionally, the event covered recent updates in UAE foreign fund regulations, such as new marketing rules and regulatory changes. The session also addressed the FCA’s final notice on H2O AM LLP, highlighting the need for robust governance and compliance.
Financial mis-selling
Financial mis-selling occurs when advisors or financial institutions misrepresent investment products, leading clients to make unsuitable investment choices. Landmark cases like Al Khorafi, and subsequent cases stemming from it, demonstrate that courts focus on several key aspects, including:
- Due diligence: Assessment of a client’s investment sophistication and financial experience.
- Client classification: Is the client a professional client or retail customer? What are their investment objectives, and what is their risk tolerance?
- Product suitability: Match the product to the client’s objectives and risk profile. For example, is the client seeking a guarantee of capital?
- Transparency: Ensure that clients fully understand what they are committing to. Is the advice generic or designed to influence the buyer? "But for" the conduct or statements of the advisor, would the clients have invested in these products?
- Advising entity: Only the entity with a registered place of business in the DIFC should provide financial services, and only within the scope of its licence. Companies can be held liable for the actions of their employees (as their agents), even if they are unaware of the employee’s conduct.
- Damages: Courts can award up to three times the actual damages.
These points highlight the need for senior management to ensure their firms comply with all regulatory requirements. Robust due diligence must be in place to thoroughly assess each client’s financial situation. Financial products should be tailored to meet the specific financial needs of clients.
New developments in UAE foreign fund regulations
The UAE has updated its rules on marketing foreign funds, aligning more with international standards. Below are highlights of some key points:
- Retail funds: Promotion to retail investors in mainland UAE is prohibited.
- Professional funds: These can be marketed to professional investors through SCA-licensed entities, provided the funds are registered with the UAE SCA.
- Cayman Islands funds: These funds can now be marketed with a CIMA good standing certificate, subject to the conditions applicable to professional funds.
- ADGM and DIFC passporting: Funds from these free zones can be marketed in mainland UAE under the passporting regime.
- Reverse solicitation: Marketing is permitted when a mainland UAE investor approaches a foreign fund manager. To avoid issues, maintain copies of correspondence and ensure robust documentation, including representations and warranties in the subscription documents, where applicable.
- Reduced capital requirements: For UAE SCA fund managers.
- Full foreign ownership: Permitted with new legal structures.
- Processes: Streamlined accreditation, licensing, and new fund classifications.
Legal advice is always required—one size does not fit all.
FCA final notice in the case of H2O AM LLP
This case involved investigations by both the French regulator AMF and the UK FCA into H2O AM LLP. The FCA identified breaches of its Principles 2, 3, and 11. H2O’s lack of a formal investment committee resulted in risky investments and significant regulatory breaches and failures. The FCA issued a censure rather than a financial penalty to ensure the maximum amount was available for return to the investors.
- Governance: What is the quality of the investments being made? What level of control is the Board exercising? What due diligence is being conducted, and to what extent?
- Regulatory compliance: Ensure robust compliance and never provide the regulator with false or misleading information.
How can we help?
If you are looking to establish a presence in the UAE? Our comprehensive guide is curated for fund managers interested in establishing a presence in the UAE for investment management or capital raising purposes.
Claim your copy of Unlocking the Emirates: A fund managers guide to the UAE below.
