Are Client Assets safe in the DIFC?
"Client Assets" is defined in the Dubai Financial Services Authority (DFSA) rules, as "Client Money and Client Investments". "Client Money" and "Client investments", are money1 and investments2, held or controlled by an authorised firm3 on behalf of a client in the course of, or in connection with the carrying on of investment business in or from the Dubai International Financial Centre (DIFC). An authorised firm may, depending on the scope of its license, act as an investment intermediary who holds or controls, or provides or arranges custody, in respect of Client Assets. Such authorised firm must comply with the applicable provisions in the DFSA rules relating to Client Assets. The key requirement4 is that an authorised firm must have systems and controls to ensure that Client Assets are identifiable and secure at all times. Client Assets must be properly segregated from those of the authorised firm and that client account must be established to hold the Client Assets. This article intends to discuss the treatment of Client Assets held by an authorised firm in the occurrence of a Distribution Event. A Distribution Event, according to the DFSA rules is:
The appointment of a liquidator, receiver or administrator, or trustee in bankruptcy, over the authorised firm or its nominee company; The appointment of a liquidator, receiver or administrator, or trustee in bankruptcy, over a third party agent of the authorised firm or its nominee company; or The coming into force of a direction by the DFSA in respect of all Client Assets held by the authorised firm. The laws and regulations of the DIFC5 and DFSA relevant for the discussion of the topic at hand, include the following :
DIFC Insolvency Law (DIFC Law No. 3 of 2009)("Insolvency Law") DIFC Insolvency Regulations ("Insolvency Rules") DIFC Personal Property Laws (DIFC Law No. 9 of 2005) ("Personal Property Laws") DFSA Conduct of Business Rule ("COB Rule"). Rule A5.136 of the COB Rule provides that on the occurrence of a Distribution Event, an authorised firm must distribute money in the following order of priorities:
"Firstly, in relation to Client Money held in a client account, this must be paid to the segregated client7 in full (or, where insufficient funds are held by the authorised firm, proportionately, in accordance with each segregated client's valid claim over that money); Secondly, where the amount of Client Money in a client account is insufficient to satisfy the claims of the...
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