The regulator of the Dubai International Financial Centre has said that it does not think that it is necessary to ban commission, despite moves in other countries to do so.
The backing of the DIFC regulator the Dubai Financial Services Authority (DFSA), via comments from its chief executive Ian Johnston, will be seen a welcome endorsement of the region’s financial advisers, particularly as it follows Dubai-based United Arab Emirates Insurance Authority’s announcement of plans to ban indemnity commissions in November last year.
As reported, the region’s life companies, which are understood to include such well-known names in the international arena as Zurich, Generali, Metlife and Friends Provident International (FPI), were rallying together to respond to the IA proposals.
Despite moves to ban commission elsewhere, Ian Johnston, chief executive of the DFSA, has told International Investment that the organisation has no intentions to follow suit and to ban commission within the DIFC, pictured above.
“While we always note developments in other markets, we have not seen the need to ban commission in the DIFC,” said Johnston. “The DFSA continues to meet the International Organisation of Securities Commission’s standards for disclosure of conflicts of interest and remuneration.
“A fundamental premise of our regulation is that we meet the requirements of international standard-setting bodies. This is true for banking insurance and securities and funds. We also meet the Financial Action Task Force requirements’ for anti-money laundry on which we place high importance.”
[image_library_tag 3e8c5a01-8c76-4609-92ca-983119626df7 300x200 alt="Ian Johnston DFSA, CEO" title="" width="300" height="200"class="alignleft size-medium wp-image-41531 "]Johnston, pictured left, was appointed as chief executive of the DFSA in June 2012 after originally joining the DFSA in November 2006, as a managing director, to head the policy and legal services division.
The UAE Insurance Authority is set to release its final plans for the implementation of the proposed indemnity commission ban on offshore bond sales early this year, potentially by the end of January.
The UAE is seeking to align itself with other jurisdictions, including Hong Kong and the UK, which have changed their regulations in recent years to phase in.
Circular No. 33 a ‘game changer’
Indemnity commissions are paid by life companies to the financial adviser or insurance broker who recommends the policy to a client, and are based on the full value of the product, which, in the case of life insurance-based products and offshore bonds, typically run for 20 years or more.
The UAE Insurance Authority is proposing to require the total commission charged to be spread out over the life of the policy, with commissions to be paid based on the premium collected, and paid out in equal monthly instalments.
A recent report on the Middle East investment marketplace by Dubai-based Insight Discovery, citing industry observers there, noted that the IA’s proposed regulations, contained in what is being called Circular No. 33, are seen as “a ‘game changer’ for the life insurance segment and for the UAE’s organised savings landscape generally”.
The insurance companies say that the first they were made aware of the IA’s plans to consult on plans to ban indemnity, or initial, commission on insurance products was in the middle of November.
They say that they need as long as 12 months, if not longer, to prepare new products to offer the market in place of the ones that are to be banned, in order to ensure that their clients – financial advisers in the UAE, with mainly expatriate clients – will have regular premium savings plans and offshore bonds to sell.
Financial advisers in the region revealed some mixed views on the matter when they spoke to International Investment at the time of the announcement. Robert Parker, chief executive of the Holborn Group, said that larger firms like his would normally survive a transition period of this kind without a problem, but that “many small brokerages [could be put] out of business if the IA moves too quickly”.
“To move from an indemnity to non-indemnity model, for the smaller broker, requires eighteen months to two years,” Parker added.
“The banning of indemnity commission in the UAE can’t come quickly enough,” said Sam Instone, chief executive of AES International, a London-based advisory firm with a sizeable outpost in Dubai.
Tim Searle, founder and chairman of the Globaleye advisory business, pictured left, said that the IA’s move should “come as no surprise” to any company that has watched the trend of regulation in this sector and that a model more aligned to that of the UK’s RDR was “only inevitable”.
“What is alarming is the pace at which implementation [in the UAE] is being suggested, and the lack of engagement from the various stakeholders,” said Searle. “[Product] providers have not had sufficient dialogue to help create a workable solution, with agreed milestones, which we know in the complex insurance world cannot conceivably happen overnight.
“Notwithstanding, change is coming, and there will be a period of consolidation – as Globaleye have already experienced in other regulated markets in which we operate,” he added.