DUBAI REPORT: A WIND OF CHANGE
New regulations in the UAE are set to shake things up, delivering a greater degree of transparency and professionalism
Dubai Marina (Shutterstock.com)
For 20 years or more, Dubai and the United Arab Emirates, and the wider region often abbreviated to the Gulf Cooperation Council (GCC), have been seen by many expats as an area of great opportunity with rapid growth and development with low taxation and an enviable lifestyle in blazing sunshine all year round.
The times, however, they are a-changing. VAT has been introduced in Saudi Arabia and UAE, levies are being raised on medical cover for expats and prices are going up as the region tries to wean itself off oil revenue as countries prepare for the inevitable days when the supply dries up. Eugene Costello reports.
Most expats in financial services, however, will tell you that it remains a fantastic place to do business, even with changes afoot.
Those changes are affecting the way companies can do business there, especially with regards to those in the insurance sector.
Offshore, the Dubai International Financial Centre (DIFC), set up in 2004, is regulated by the Dubai Financial Services Authority (DFSA), and has its own courts. It is also a free zone, which means that companies can be 100% owned by foreign interests without the need for local partnerships.
However, it is in the insurance sector that change is looming, with the regulator (the UAE Insurance Authority, the IA) apparently motivated by so many complaints about mis-selling. It published a first white paper, or “Circular”, in November 2016.
This came after the IA “noticed an alarming amount of complaints” from policyholders who had seen any gains wiped out by excessive upfront commissions. Policies also came with excessively onerous penalties for early exit.
The new proposals would require full transparency on any fees applicable over the full term of the policy. The IA also wanted to introduce a 30-day “free look period” during which clients would be able to withdraw without any fees being imposed.
And in April 2017 it published a second Circular, an update to the first, that led some commentators to believe that the changes were imminent.
“The rumoured planned changes that are likely to come in ‘imminently’ – I’ve been saying “imminently” since last April… are likely to professionalise the market… It can’t come too soon, in my view”
Gordon Robertson, Investme Financial Services
Professionalising the market
Gordon Robertson, owner of Dubai fee-based advisory Investme Financial Services, which is regulated by the Securities and Commodities Authority, told International Investment that the changes are to be welcomed: “The rumoured planned changes that are likely to come in “imminently” – I’ve been saying “imminently” since last April, but there we go – are likely to professionalise the market,” he says. “They will require all advisers to be licensed and regulated, to have two years’ experience and to have some sort of professional qualification.”
He adds: “It can’t come too soon, in my view.”
For too long, says Robertson, many advisers have been acting with impunity regarding suitability, disclosure and fees. For instance, he says, some have been selling insurance-backed products with excessive fees, then layering the account with other products with again excessive fees; these fees can amount to 14-15% in some cases.
Says Robertson: ”If a client saves £1,000 per month over ten years, in other words investing £120,000 into a ten-year plan, the adviser can be compensated by the insurance provider with 10% or more on the entire contracted savings amount, and the adviser is paid their indemnity commission (which comes out of these fees) upfront.
“After being compensated with fees that would be more than you pay a top QC, then what incentive does he now have to look after you? You are often left alone unless the advisor can generate more income for themselves.”
The lack of transparency has been an issue, Robertson points out, saying that, while a client will get a statement showing a deposit of £1,000 per month appearing in their portfolio, “possibly after paying a credit card fee and excessive exchange rate fee on top”, what the client doesn’t realise is that, for the first 18 months, money is going straight to the insurance company to cover the commission that has been paid to the adviser.
He adds: “If the client tries to move their money or whatever in the first 18 months, they will suddenly learn that there investment so far is worthless, it’s all gone in fees – to clarify, the insurance products pay an indemnity commission to advisers and as such will split the initial savings into initial units and accumulation units.”
How will the regulations change advice in the region?
- It will change for the better
- It will make things worse
- No real change at all
These initial units may be priced on statements, he says, but they have zero value as the money to cover fees in the future.
“If you asked for their funds back, they would be taken from your account,” says Robertson. “Always look at your redemption value – the broker will retain the vast amount of these 18 months’ payments as commission.”
Many also generate extra commissions, says Robertson, by selling structured notes with approximately 6-7% in commissions or other funds with upfront fees, backend fees and retrocessions. These structured notes are often restricted in most jurisdictions, he says; “here they are currently being sold with impunity,” clarifying that “Yes, structured notes could play a part in a portfolio, but that size should be limited. I have seen portfolios here with 50% upwards in these notes.”
What will be the practical effect of the changes that the IA is planning to bring in? Robertson lists them: “Indemnity commission will be greatly reduced, paying commission from funds to the adviser will be stopped, calling something a savings plan that consists of only 1% insurance will be stopped, as per the Insurance Authority’s guidance, 1% is not insurance. This portion will most likely be increased to a minimum of 10%. Banks are also included as they sell the same products.”
“I’m going to go out on a limb, and you can quote me on this, I don’t see this white paper being enacted until at least 2019, possibly 2020. As with everything that happens in the UAE, one must consider the role of the families who control commerce”
Robert Parker, Holborn Assets
Robert Parker, chief executive of Dubai-based financial advisory Holborn Assets, also welcomes change, but has an interesting prediction on when these “imminent” changes will take effect.
“I’m going to go out on a limb, and you can quote me on this, I don’t see this white paper being enacted until at least 2019, possibly 2020.”
The reason for that is to do with the unique way in which business is conducted in the region he says: “As with everything that happens in the UAE and, for that matter, the wider GCC, one must consider the role of the biggest families who control commerce.
“In Bahrain, for instance, AXA, formerly Norwich Union, is 50% owned by the Kanoo family where there has been a 50-year association. And, similarly, in UAE, there are big, powerful families who control major business interests.
“So the regulator must consider these families when bringing about change as they have great influence and input.
“I’m certainly not saying that it is right or wrong. We love the way that UAE works and it is a great place to do business. But there must be consultation that takes into account this reality that families here have powerful interests. It’s simply different to how business is done in the west – look at the amount of lobbying by industry that goes on in the US, for instance – there is no difference here.
“So the IA has a very different role to [UK regulator] the FCA.
“All of the big families meet, they talk to the regulator, they go away, they think, they have another meeting, then they go off to consider, then it’s Ramadan, then there’s another meeting… everything moves so slowly.”
As to the final model, Parker thinks he can see which way the wind is blowing.
“The interested parties – insurance companies – met with the regulator to discuss different models: the Hong Kong model, the Singapore model, the [retail distribution review carried out by the FCA] RDR model. The IA listened and that is why nothing further emerged last year.
Whether Parker’s prediction that it could be 2020 before the changes take effect, one thing is certain; nothing will happen overnight. Says Parker: “But the decision is not formal until it is ‘gazetted’. Nothing will happen until then, and even after it is published in the Official Gazette, it takes a minimum of six months for it to come into effect.
So even if it were published today, there would still be no change until at least the end of July.”
A positive development
One thing upon which both Parker and Robertson are agreed is that the professionalisation that it will bring is to be welcomed, with less scrupulous advisers and companies being shown the door. As Parker colourfully puts it: “The days when people were doing the equivalent of smuggling booze across the Canadian border with the authorities taking pot shots at them are gone.”
Or, at least, they will be once the new regulations are in place. Says Robertson: “There seems to have been something of a stampede here in the past few months, with less scrupulous advisers rushing to sign up clients ahead of the mooted changes, take their front-loaded commission and run. If these changes to the landscape mean we see less of this sort of activity, so much the better.
“And it’s not is not just the less scrupulous advisers – the banks are also pushing the same products, aware that they are about to be banned and they know why it will be banned.”
Like Parker, Robertson welcomes anything that will see the less professional or scrupulous advisers and companies move on, leaving the market to reputable companies that have the depth in structure to stay the course.
“There will still be value in the market for professional and reputable companies that are prepared to take the long view,” he says. For instance, I am interested in Neuro Linguistic Programming, NLP, and recognise that, for a client, the emotional journey is as important as the rational, investment one. So I am interested in working with my clients long-term, not just to make a quick buck and run, as some have done in the past here.”
Both men talk freely and positively about Dubai, and welcome this positive wind of change.
Robertson concludes: “Dubai is a great place to do business and there are some really good people out here. Any changes that increase the quality for such professionals and do away with the more questionable practices is a great thing for Dubai longer term.
“Thanks to lobbying by insurance companies, my prediction is that we will go along the lines of the Singapore model, with a reduction in commissions, rather than the Hong Kong model with abolition of commissions. That’s OK, we can absorb it. In fact, we have prepared ourselves for this.”
But there will be pain and misery, says Parker, for small brokers who lack the required depth in their organisations – “it will be very, very tough for them”.