DIFC Digital Investment Management (Robo Advisory) License - 10 Leaves

  • 24-05-2021
DIFC Digital Investment Management (Robo Advisory) License:
 
DIFC is one of the world’s top eight onshore financial centers and offers a secure and efficient platform for businesses and financial institutions to reach into and out of the emerging markets of the region. The quality and independence of DIFC’s regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in the MENASA region.
 

DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.

Why setup a financial services firm in the DIFC?

The DIFC is a leading financial hub in the region. Besides offering a wide range of financial service activities, the centre also provides an integrated environment and world-class standard of living. It is well regarded in the international community as well.

There exist opportunities for startups as well. The recent focus on fintech led to the DIFC Fintech Hive initiative, that serves as an accelerator for fintech firms to test their products and pitch it to prospective investors. Sarwa (https://www.sarwa.co) and SmartCrowd are two such success stories.

Specific Advantages:

Here are some specific advantages of establishing in the Dubai International Financial Centre:

LEGAL AND REGULATORY FRAMEWORK:

  • Legal framework supports cross-border activities
  • 100% foreign ownership permitted
  • No restriction on foreign talent or employees
  • No restrictions on capital repatriation

TAX BENEFITS:

  • Zero tax for 50 years on profits, capital or assets from 2004
  • Zero tax on employee income

COUNTERPARTY CONFIDENCE:

  • Highly regarded, independent regulator
  • Independent, English-speaking, common law judicial system
  • Distinct from the UAE legal system
  • Risk-based regulatory approach

DIVERSE ECOSYSTEM:

  • Central to regional deal making
  • High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions
  • World-class regional and international law and auditing firms, and other professional services
  • The largest fund domicile in the region

GEOGRAPHIC EPICENTRE:

  • Management offices, holding companies and family offices are located closer to the assets they own or manage
  • The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy
  • Dubai plays a central role in the growing South-South trade, principally between Asia and Africa
  • Well-positioned to harness the potential of emerging markets

DIFC Digital Investment Management (Robo Advisory) License:

The DIFC has provisions for both regulated and non-regulated fintech in the Innovation Hub. While they have issued detailed guidelines on Money Services Businesses, there is no such explicit guidance on Robo Advisory licenses.

What are Robo-Advisors?

Robo-advisors are a class of financial adviser that provide financial advice or Investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms, and use technology to interact with more tech-savvy clients, as opposed to the traditional method of relationship-based advisory. This technology allows investment managers to provide tailored investment management services to clients in a cost-effective and scalable manner.

Why Use a Robo-Advisor?

There are many reasons why investors may choose to use robo-advisors as opposed to a traditional portfolio manager or financial advisor including:

Low fees and no conflict of interest: Many Digital Investment Managers charge significantly lower fees compared to traditional financial advisors. Conflicts of interest are minimized, since there is no bias or pressure to push a certain set of products or solutions.

Low minimum requirements: Most financial advisory firms have higher requirements of initial commitments – usually a minimum in excess of US$ 100,000. Robo advisors have much lower entry requirements (some as low as US$ 1,000) and work on volumes.

Availability: Digital Investment Managers are automated and hence available 24/7.

Prominent robo-advisory firms include https://www.betterment.com, https://www.personalcapital.com, and https://intelligent.schwab.com.

The Dubai Financial Services Authority, or DFSA, reviews applications from firms who wish to carry out financial services from the DIFC.

In the absence of explicit guidance, based on our experience with DIFC Robo-advisory applications, the following activities may be applicable, depending on the business model, whether fully-digital, or hybrid.

Firms that sell white-labeled technology solutions to wealth managers are not covered since they do not require financial services permissions.

DIFC Applicable Activities:

The following regulated activities may be applicable:

  1. Advising on Investments – firms issuing recommendations on portfolios of financial instruments
  2. Arranging Deals in Investments – firms issuing recommendations and passing instructions to brokers (with client consent)
  3. Managing Assets – firms engaging in discretionary management of client portfolios, including discretionary portfolio rebalancing

DIFC Capital requirements:

The category of license determines the amount of base capital required. Firms that engage in activities of Advising on Investments or Arranging Deals in Investments will fall under the Category 4 license requirements, with a Base Capital of US$ 10,000.

Firms that engage in activity of Managing Assets will fall under the Category 3C license requirements, with a Base Capital of US$ 500,000.

Some digital asset managers have business models that present significantly lower risks than what is normally considered for an asset manager license. For instance, in the following conditions:

  • Product offering limited to passive investment products such as ETFs or Index trackers
  • Discretionary asset management activities are limited to portfolio rebalancing (not involving the purchase of new investment products that were not included in the portfolio agreed to by the client)
  • Client assets are held with independent third-party financial institutions under a direct contract with the client.

Currently, the DFSA has no explicit guidance in these cases, and the base capital requirement will still be US$ 500,000. However, this may be open for deliberation on a case-to-case basis.

DIFC Authorisation Process:

Applications for Robo Advisors in the DIFC will go through a rigorous process of authorisation. Applicants will have to demonstrate a credible, comprehensive and sustainable business plan, adequate control mechanisms and robust compliance processes.

The following are mandatory appointments:

Licensed Directors – the DFSA will review the composition of the Board

Senior Executive Officer – Must be UAE resident

Compliance Officer – Must be UAE resident

Money Laundering Reporting Officer – Must be UAE resident

Finance Officer

Senior management positions – Business Heads, Chief Risk Officer, Chief Technology Officer

Key Controls for Digital Investment Managers:

Due to the nature of this business, the DFSA will review in detail the algorithm and technology governance policies and processes, and also the assessments that are in place to determine client suitability. Digital Investment Managers will also have to demonstrate robust data security policies and systems to ensure compliance with all relevant data protection regulations.

In determining algorithmic governance, the DFSA may consider the qualifications and competence of the staff involved, the development, testing and deployment of the model and the ongoing monitoring and review of the same. An emphasis will be placed on client suitability requirements and adequate disclosure mechanisms. These controls will have to be enhanced in case the robo-advisor intends to cater to retail clients, which is usually the case.   

Costs:

Setting up a DIFC Robo Advisory License involves the following interactions:

Dubai Financial Services Authority (DFSA):

Application fee – from US$ 15,000

Annual fee – from US$ 15,000

Registrar of Companies (ROC):

The DIFC ROC helps to set up the legal structure of the DIFC Firm. In most cases, this would be a Private Company Limited by Shares. Shareholders can be individual, or corporate. The costs for setting up such a fintech company are:

Application for reserving a name: US$ 100

Application for Incorporation of a Private Company Limited by Shares: US$ 0

Commercial License on Incorporation: US$ 1,500 (annual fee) (year 1 and 2). This increases to US$ 12,000 from year 3 onwards.

Data Protection:

The data protection notification is part of the process of registering a new entity in the DIFC. The costs involved are as follows:

Registration - US$ 1,250

Annual renewal – US$ 500

Office spaces:

Every entity registered in the DIFC is required to lease a physical office. You can choose from the Gate and surrounding buildings, or other buildings within the DIFC, such as Emirates Financial Towers, Central Park, Park Avenue, Burj Daman and Currency House.

Prices vary, depending on the space availed and the building. Here is an indication of the prevailing rates:

DIFC Business Centre – from a two-desk office at US$ 35,000.

DIFC Fitted Offices – from US$ 55 per square foot.

Other buildings – from US$ 32,000 per annum

For fintech licenses, DIFC has attractive packages starting from US$ 15,000 per annum. Get in touch for more details.

Visas:

Establishment Card Application – US$ 630

PSA Deposit – US$ 682

Visas (per visa) – from US$ 1,500

PSA Deposit (per visa) – US$ 682

Our Services:

We provide turnkey services for Robo-advisory applications. From fintech consulting, to assistance in authorisations, to assistance in preparation of the legal documentation, 10 Leaves helps you navigate the DFSA Rulebook and submit an application that is comprehensive, complete and compliant.

Our services include assistance in:

1. Reviewing the business model and advice on the applicable regulatory framework;

2. Preparation of the Regulatory Business Plan and comprehensive financial projections;

3. Preparation of all policies, processes and manuals required;

4. Provision of Outsourced Compliance Officer and Outsourced Finance Officer services;

5. Finalising the legal structure, including holding company setup and customisation of Memorandums; and

6. Finalisation of leased space, bank account opening and obtaining Financial Services Permissions.

Get in touch today! for more Information on DIFC Digital Investment Mangement (Robo Advisory) License.

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