Companies based in the DIFC are not conducting proper review and assessments of third party agents prior to dealing with their clients' investments and custody deals, its regulator said on Tuesday.
The lack of proper assessment of a third party agent could result in company becoming of frauds and losing clients' funds.
During the second quarter of 2010, the Dubai Financial Services Authority (DFSA) conducted a thematic review in relation to authorised firms' compliance with the client money provisions, safe custody provisions and insurance monies provisions. A total of 16 firms were selected for the thematic review.
The scope of the review was to assess the effectiveness and adequacy of systems and controls to safeguard client assets and insurance monies.
The Dubai Financial Services Authority (DFSA) has alerted public and financial services community to an increase in fraudulent activities by people claiming to be associated with or agents of the regulator of Dubai International Financial Centre (DIFC).
"While we did not find any instances where a client had suffered losses as a result of custody arrangements, we did find certain areas where improvement was needed," Bryan Stirewalt, Acting Managing Director, Supervision, DFSA said in an alert on Tuesday.
"The review found that a number of firms were not able to satisfactorily demonstrate their prior assessment of Third Party Agents. Not only must a firm undertake prior assessment of the Third Party Agent, but it must have systems and controls in place to ensure that the Third Party Agent continues to remain suitable having regard to the guidance in Appendices 5 and 6 of the Conduct of Business Module. This assessment must be documented," he said.
He also stated that when a firm opens a client account with a third party agent it must obtain a written acknowledgement from the third party agent stating, among other things, that the third party agent is not entitled to combine the account with any other account or to exercise any charge, mortgage, lien, right of set-off or counterclaim against Money in that account in respect of any sum owed to it on any other account of the firm. A similar requirement exists for firms passing on safe custody investments to a third party agent.
The review found that a number of firms were not able to reproduce copies of the written acknowledgement while a small number of them indicated that they had difficulties obtaining such written acknowledgement from certain banks.
In respect of client money, firms must obtain such written acknowledgement within a reasonable time period. DFSA rule states that if such acknowledgement is not obtained within a reasonable period, then the firm must refrain from making further deposits of client money with that third party agent and withdraw any client money from that client account.
It also stated that if a firm controls or holds client money or insurance money, it must require its auditor to produce a report.
Also, if a firm holds or controls client investments, arranges custody or provides custody in or from the DIFC, a safe custody auditor's report must be produced. But DFSA's review found that though a number of firms are licensed to arrange custody, many of them had not required their auditors to produce a safe custody auditor's report. Such report should state an audit's opinion on whether the firm has, through the year, maintained systems and controls to enable it to comply with the safe custody provisions.