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FINANCIAL SERVICES REGULATORY AND FUNDS PRACTICE GROUP 

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FINANCIAL SERVICES REGULATORY AND FUNDS PRACTICE GROUP  1

DIFC Market Abuse Regime DFSA publishes Code of Market Conduct 

On 16 December the Dubai Financial Services Authority (‘DFSA’) published its Code of Market Conduct (the ‘Code’) which will apply from 1 January 2015.  The Code is intended to provide guidance and clarity to the market abuse regime which, in its current form, has been in place in the Dubai International Financial Centre (‘DIFC’) since 2012.  At that time, changes were implemented to align the DIFC’s market abuse regime with that applicable in the European Union under the Market Abuse Directive, as implemented in the UK.

Jawad Ali

Jawad Ali

The Code is the first practical guidance issued by the DFSA on the application of the market abuse regime in the DIFC.  Assuming the DIFC regime is the same as that applying elsewhere, especially the UK, is an easy mistake to make. The Code being published presents firms with an opportunity to review current policies, procedures, systems and controls in this area and test them against the DFSA’s understanding of the application of the regime.

This is especially important for those international firms relying on policies and procedures of home office entities because, as discussed below, although the DIFC regime is to an extent harmonised with EU legislation in this regard, it is unique in certain respects. The starting position is to understand in what respects the DIFC market abuse regime is the same and where it is different.  Firms should undertake a comprehensive gap analysis of both internal policies and procedures and the underlying legislation to ensure they are in full compliance.

Particularities of the DIFC market abuse regime in many jurisdictions, market abuse offences can constitute criminal offences, conviction of which can lead to imprisonment. Given the legal construct of the DIFC and its position as a financial free zone in the Emirate of Dubai, the imposition of a criminal regime in respect of DIFC markets is not possible without the legislative intervention of the UAE. The DIFC market abuse regime is therefore a civil regime, carrying no threat of imprisonment, based largely on the civil market abuse regime currently in effect in the UK.  Sanctions are civil and administrative in nature and can include fines, public censure, and for regulated persons, revocation of authorisation.

Jodi Griffiths

Jodi Griffiths

The application of the regime is broad and has the potential to be applied to any person, including a corporate person, whether or not they are regulated by the DFSA.  It not only captures conduct undertaken inside the DIFC but extends to that undertaken outside the DIFC where that conduct affects DIFC markets or DIFC market users.   Furthermore, it applies to conduct relating to ‘Investments’ generally. This is in contrast to the EU position which limits the application of market abuse provisions to financial instruments admitted to trading on specified markets (or financial instruments the value of which relates to the value of financial instruments admitted to those markets).   The DIFC market abuse regime is therefore extra-territorial in its application and has the potential to apply to a greater range of investments than its European equivalent.  Sanctions may not currently extend to criminal sanctions but civil penalties are available and give the DFSA teeth in its enforcement of the regime.  Code of Market Conduct The Code provides further information and guidance on the application of the market abuse regime, mostly through examples of the types of conduct that may be considered market abuse under the Markets Law.  For example, the type of conduct which, in the DFSA’s view, could constitute market manipulation include: wash trades, ‘painting the tape’, layering, momentum ignition, quote stuffing, marking the open/close, abusive squeezes, directly or indirectly fixing prices or creating unfair trading conditions, colluding in the after-market of an initial public offering and creating a floor/ceiling in the price pattern. The Code also sets out the factors that the DFSA may take into account when considering whether conduct amounts to market abuse.  The Code provides for general factors, for example the knowledge and experience of the users of the market, the structure of the market, the level of liquidity in the market, the legal and regulatory requirements of the market which it will consider when determining whether or not conduct constitutes market abuse. Additionally, the Code sets out specific factors that the DFSA will take into account in determining whether or not conduct constitutes some form of market abuse. The examples and factors set out in the Code are intended to be illustrative and not exhaustive. Firms should review compliance policies and procedures to ensure that the examples and factors listed in the Code are adequately reflected.  Firms may wish to revisit any training and training materials provided to employees regarding market abuse.

Philip Sacks

Philip Sacks

The Code also provides guidance on any defences available, for example regarding insider dealing, where dealing occurs as a result of a person’s legitimate performance of its functions as an underwriter, liquidator or receiver, or market maker.  The availability of some defences will be dependent on compliance systems in operation. For example, firms undertaking execution only transactions for clients without advising or encouraging the client in respect of the transaction and those operating effective Chinese wall arrangements will not be considered engaging in insider dealing.  To ensure the viability of such defences, firms should review compliance arrangements relating to execution only transactions and Chinese wall arrangements to ensure that they are sufficiently robust to avoid market abuse.

In some respects, however, the Code is thin and fails to take into consideration recent global developments in this area (such as changes arising out of the EU Market Abuse Regulation and recent case law in Europe and the UK).  For example, regarding the definition of inside information, it provides no further guidance on what qualifies as “information of a precise nature” beyond that set out in the Markets Law.  Firms will be aware that the Upper Tribunal in the UK has recently considered what is meant by events reasonably expected to occur in its review of enforcement action taken by the Financial Services Authority (FSA) against Ian Hannam.  The Tribunal concluded that there must be a ‘realistic prospect’ of the events occurring as opposed to ‘a more likely than not’ scenario for it to be considered inside information. It would be helpful if the Code could clarify whether this is the approach to be adopted in the DIFC also.  It would be prudent for firms to not only consider the guidance in the Code but look to external sources of guidance when designing and implementing compliance policies and systems.

Preventing, detecting and reporting market abuse The DFSA believe that the Code will assist persons in monitoring and preventing market abuse and, where they are under an obligation to do so, report suspected market abuse.  At present, the DFSA places such obligations on authorised market institutions and authorised firms operating an alternative trading system (which, consistent with the scope of EU regulation, can be either a multilateral trading facility or organised trading facility). Of course, the application of the DIFC’s market abuse regime is broader than just investments traded on exchange or an alternative trading system and extends to all investments in the DIFC. All regulated entities should operate compliance policies to assist in the identification, deterrence and prevention of market abuse which include reporting processes. Regulated firms are obliged to assist in the deterrence and prevention of market abuse by establishing and maintaining systems and controls that ensure, as far as reasonably practical, the firm or its employees do not engage in conduct, or facilitate others to engage in market misconduct.  Little guidance on the nature of the systems and controls required is provided beyond the requirement for investment firms to implement policies and procedures in respect of personal account transactions.  The guidance of the Code provides a benchmark for assessment of the systems and controls firms currently operate.

Unlike in the UK where regulated firms are under a specific obligation to notify the regulator without delay where there are reasonable grounds for suspecting market abuse in respect of a transaction it has executed or arranged, there is no equivalent obligation on DFSA regulated firms.  However, it is likely that the DFSA would expect to be notified of any reasonable suspicion of market abuse under Principle 10 of the Principles for Authorised Firms (relations with regulators). Accordingly, authorised firms should review their current compliance monitoring processes to ensure that they are adequate to monitor transactions for potential market abuse and incorporate adequate reporting processes.

King & Spalding comment Firms operating in the DIFC and those whose securities and trading actions have effect in the DIFC may wish to take this opportunity to review their compliance policies, procedures, systems and controls as they relate to the identification, deterrence and prevention of market abuse.  The additional guidance provided under the Code could also make for valuable refresher training for employees Although modelled on the requirements of the EU Market Abuse Directive as implemented in the UK, the DIFC regime has been sculpted to fit the specific characteristic of its market resulting in some significant differences between the EU and DIFC regimes.  Firms relying on market abuse policies, procedures, systems and controls modelled on the European requirements should undertake a thorough gap analysis to ensure that they are in full compliance with the DIFC regime.

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The Psychology Behind a Strong Security Culture in the Financial Sector

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The Psychology Behind a Strong Security Culture in the Financial Sector 2

By Javvad Malik, Security Awareness Advocate at KnowBe4

Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.

Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.

With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.

Defining Security Culture: The Seven Dimensions

In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:

  • Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
  • Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
  • Cognition: The understanding, knowledge and awareness of security threats and issues.
  • Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
  • Compliance: Written security policies and the extent that employees adhere to them.
  • Norms: Unwritten rules of conduct in an organisation.
  • Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.

All of these dimensions are inextricably interlinked; should one falter so too would the others.

The Bearing of Banks and Financial Institutions

Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.

Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.

Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.

Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.

Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?

Towards Achieving Excellence

There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.

By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.

Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.

Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.

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Has lockdown marked the end of cash as we know it?

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Has lockdown marked the end of cash as we know it? 3

By James Booth, VP of Payment Partnerships EMEA, PPRO

Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.

Has cashless gone viral?

Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.

Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.

More choice than ever before

Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them[1].

As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z[2].

Does social distancing mean financial exclusion?

As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.

Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.

There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.

Supporting the transition away from cash

Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.

Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies 4
  • UnionPay International today announces that two of Europe’s leading travel companies, Logitravel and Destinia, have started accepting UnionPay.
  • This acceptance will enable users of the groups’ travel websites to make purchases using UnionPay payment methods.

The acceptance partnerships between the OTAs and UnionPay began in July 2020 for customers across 13 European countries and another 90 countries and regions worldwide.  The European countries covered by the agreements include the UK, Germany, France, Italy, Spain, Portugal, Norway, Denmark, Sweden, Austria, Switzerland, Hungary and Ireland.  The brands covered by these acceptances include Logitravel.com and Destinia.com which together deliver more than 8.5 million worldwide travel bookings each year covering flights, hotels, holidays, car hire and other experiences.

With over 8.4 billion cards issued in 61 countries and regions worldwide, UnionPay has the world’s largest cardholder base and is the preferred payment brand for many Chinese and Asian expatriates and students based in Europe, as well as an increasing number of global customers. These cardholders are also particularly attractive to the two OTAs.  Despite the impact of Covid-19, Logitravel and Destinia expect to see the demand for travel across the European continent as well as that between Europe and Asia return to growth in the coming years. They are now placing significant focus on offering more payment options and smoother payment services to meet this demand.

The partnerships incorporate UnionPay’s ExpressPay and SecurePlus technology, which will ensure seamless transactions for the customers, contained within a single process through the relevant websites.  UnionPay’s technology also provides for the requirement to authenticate transactions under the EU regulation Payment Services Directive 2 (PSD2) ensuring that sites will be compliant as soon as the relevant countries apply the requirements.

Wei Zhihong, UnionPay International’s Market Director, said: “This is a major partnership with two of Europe’s leading online travel companies.  Logitravel and Destinia are brands which have been at the forefront of e-commerce for many years and we are very excited to be working with them to extend their reach to new audiences. This highlights the work that we have carried out in ensuring that our technology provides effective solutions for the biggest e-commerce sites both in Europe and around the world. We look forward to announcing many more similar agreements in the near future.”

Jesús Pons, Chief Financial Officer at Logitravel Group said: “UnionPay has always been on our radar, and since travel has become a crucial part of its development, Logitravel felt it important to develop this important partnership. It really was an obvious decision for Logitravel since both companies share a passion for e-commerce and emphasising the payment experience for their customers.”

Ricardo Fernández, Managing Director at Destinia Group said: “We believe that this is the beginning of a really strong relationship.  Our discussions with UnionPay in reaching this partnership have demonstrated their understanding of the needs of major online merchants and their ability to deliver the highest quality systems.  We look forward to working together on further partnership as we move forward.”

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