DIFC – The Legal & Regulatory Environment of the Takaful industry

Simon Gray, Director Supervision

Dubai Financial Services Authority

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Dubai International Financial Centre (DIFC) Region

IntegrityIntegrity

TransparencyTransparency

EfficiencyEfficiency

Fills gap between Europe and Asia

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Characteristics of the DIFC

Financial Free Zone

Foreign Currency Denominated / Zero Tax Rate

Wholesale Centre for Qualified Investors

Onshore Capital Market / International Standards

No Local Partner Requirements

Co-operation With Other Local and International

Regulators

Legal Jurisdiction Independent Judiciary

Tailor Made Laws for the DIFC.

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The Structure of the DIFC

Dubai International Financial Centre

DIFC AuthorityDubai Financial

Services AuthorityDIFC

Judicial Authority

Independent integrated Regulatory Authority with risk- based regulations on

par with International Standards.

Own Court system with DIFC Laws and

Regulations applicable within the DIFC.

Provide overall direction for the development and marketing of the DIFC.

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DFSA – what is it

Purpose built integrated regulator of all financial and ancillary services conducted in or from the DIFC

Setting world class standards based on international best-practice and expertise

An independent body whose autonomy is guaranteed by law

A risk based regulator actively seeking opportunities to reduce regulatory burdens

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Risk Management Cycle

• The DFSA has adopted a continuous Risk Management Cycle.

• This risk based approach to supervision and the risk management cycle are common to both conventional and Islamic financial institutions such as Takaful.

Assessment

Mitigation

Identification

Prioritization

Business Risk

Financial Risk

Systems and

Control Risk

Management and

Governance Risk

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The Shari’a Approach

The fundamental difference between conventional insurers and Takaful is the requirement to be Shari’a compliant.

An authorised firm may operate either as a DIFC incorporated Takaful or as a conventional insurer through an Islamic Window.

There is no consensus on the role of the regulator in the area of Shari’a compliance; in essence the debate is whether the regulator should be a “Shari’a regulator” or a “Shari’a systems regulator” as is the DFSA.

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Challenges facing the regulation of Takaful

The 4 main issues identified are:

♂ Corporate Governance

♂ Financial and prudential regulation

♂ Transparency, reporting and market conduct

♂ Supervisory review process

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Corporate Governance

• The DFSA has high level principles and rules for Authorised Firms to deal with corporate governance

• There are also Corporate Governance and System & Control requirements specific to Islamic Financial Institutions such as Takaful.

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Financial & Prudential Regulation

All insurers are required to apply IFRS or AAOIFI accounting standards, and the rules have been written on that basis. A risk-based capital framework has been adopted, which deals with the major areas of risk and includes an explicit size component.

The DFSA Capital requirements are observant with IAIS Core Principle 23 (Capital Adequacy), however,

The IAIS/IFSB joint working paper identified certain areas in ICP 23 in which differences between a Takaful and a conventional insurer need to be considered.

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Transparency, Reporting and Market Conduct

• These issues are to a certain extent covered in the COB/ISF rules and the DFSA largely observes the IAIS core principles.

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Supervisory Review Process

The DFSA has an established risk based approach to supervision which applies to both conventional insurers and Takaful.

It also has in place specific rules which apply to Takaful.

However it is cognisant of the work carried out by the IAIS/IFSB in identifying those core principles which may need to be adapted for the Takaful industry.

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Thank you