DIFC Innovation Testing License | DFSA Innovation Testing License

  • 25-10-2021

DIFC is one of the world’s top ten 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?

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.

 

DIFC Innovation Testing License

The Innovation Testing License is a regulatory sandbox offered by the Dubai Financial Services Authority (or DFSA), which is the independent regulator of all financial services companies that seek authorisation or are currently authorised in the DIFC.

The objective of the DFSA ITL is to provide a controlled environment where startups can test innovative products and services. The ITL does not eliminate regulation, rather, it provides a gateway to innovative firms, especially startups, to test their products with live clients.

 

The ITL process

 

DFSA ITL Application process

 

Step 1

DFSA Cohort – expression of interest

The DFSA typically opens for ITL applications in cohorts, once a year. July 2021 was the most recent cohort.

The expression of interest period is typically one month. Interested firms are required to fill in a form and submit the same online. The DFSA reviews the application over a period of 2 weeks and then invites successful cohort applicants to make a detailed application.

Step 2

ITL Application Process

The detailed application comprises a comprehensive Regulatory Testing Plan, in which the applicant details their arrangements for systems and resources, along with their testing objectives. This step also involves filling out detailed KYC forms and information for all the prospective Authorised Individuals, which include shareholders, directors and senior management.

The DFSA typically takes eight weeks to review the ITL application, following which they issue an In-Principle Approval (IPA), if the application is successful.

Step 3

Fulfilling the In-Principle conditions

The IPA is subject to some conditions, which usually include:

  1. Setting up the legal structure of the entity
  2. Opening a bank account in the name of the company
  3. Appointment of outsourced functions such as the Compliance Officer, Finance Officer and Risk Officer
  4. Submission of the Compliance, AML and Risk Management Policies

In general, the DFSA expects that the applicant become operationally ready. Once done, the Innovation Testing License is issued.

 

What kind of firms are eligible for the DFSA Innovation Testing License?

The proposed business should meet certain criteria to be eligible for the ITL. These criteria include:

  1. Use of innovative fintech – offer of a new type of product or service, or application of an innovative fintech to existing products or services
  2. The intended activity should be considered a financial service
  3. The business must be ready to commence live-testing with actual customers

The goal of the ITL is to prepare the startup for eventual full-scale licensing in the DIFC.

The stage of development of the product or service is also assessed. If too early, then there is no product or service to offer, and hence no requirement for regulation. On the other hand, if the startup is already operational with customers, then they can also consider applying for the full-scale license directly. Read here to know more about the licensing categories in the DIFC.

What kind of details are required for the ITL application?

The DFSA requires details on the background of the applicant, it’s shareholders, directors and senior management, the proposed activities, technology and third-party partners and providers. It also requires details on sources of funding, proof of funding, financial models and in some cases, stress-testing of the financial model.

How long is the testing period in the ITL?

The testing period is normally twelve months, but can be as low as six months in some cases.

What is the “Regulatory Test Plan”?

The RTP is the core document of the application, and details the product/service, the technology involved and the firm’s plans for the testing period.

What information is required in the Regulatory Test Plan?

The RTP typically details the following information:

  • The firm’s business model and the proposed product/service;
  • The objective and parameters for the testing;
  • The timeline and key milestones for testing;
  • The number and type of clients that will take part in testing;
  • How clients will be sourced for the purposes of testing;
  • The key risks involved and plans for their mitigation;
  • How the firm ensures that clients understand that the product or service is being tested and the resulting risks;
  • The safeguards that will be put in place to protect clients in the event of a problem arising from use of the technology or the failure of the business;
  •  Handling of client communication, including how the firm deals with questions, feedback and complaints;
  •  How the success of the testing will be measured;
  •  How testing progress will be reported to the DFSA;
  •  The next steps if the testing is successful;
  •  A clear exit plan if the testing is not successful, including how the firm will fulfil its obligations to its testing clients;
  •  Financial projections for the testing period; and
  •  Other relevant information requested by the DFSA.


Can the firm begin operations or testing once the In-Principle Approvals are obtained?

No. The IPA, as the name suggests, is a conditional approval. The firm will have to satisfy certain conditions as laid down by the DFSA in the IPA, in order to commence testing.

The IPA is subject to some conditions, which usually include:

  1. Setting up the legal structure of the entity
  2. Opening a bank account in the name of the company
  3. Appointment of outsourced functions such as the Compliance Officer, Finance Officer and Risk Officer
  4. Submission of the Compliance, AML and Risk Management Policies

In general, the DFSA expects that the applicant become operationally ready. Once done, the Innovation Testing License is issued.

Does the ITL mean lesser regulation?

Not really. The firm will still be expected to comply with the DFSA Rules and Regulations, as they apply to the firm’s business. However, the DFSA does allow for waiver or modification of certain requirements on a case-by-case basis. These waivers/modifications can include lowering of standard capital requirements, the requirement to appoint certain authorised individuals such as finance or compliance, internal and external audit etc.

The DFSA will not modify key requirements such as rules related to holding and controlling client assets, AML requirements and federal law requirements.

What are the capital requirements during the ITL?

The category of license will determine the amount of capital required. The base capital requirement for a Category 4 firm is $10,000. This rises to $500,000 for a Category 3 firm, $2 million for a Category 2 firm and $10m for a Category 1 firm.

Actually, there are three components of capital - base capital, risk-based capital and expense-based capital. The higher of the three is set to be the capital requirement. These figures are calculated using the financial models that we make for the Regulatory Testing Plan during the ITL application process, and so are mostly unique to the firm that applies for the license.     

The figures given above are for base capital only, and actual capital may vary depending on the business model and the associated expenses and risks.

In general, for

(a) firms that hold Client Assets or Insurance Monies or act as the Administrator of an Employee Money Purchase Scheme, 18/52;

(b) firms that carry out Insurance Intermediary activities and hold Insurance Monies but not Client Assets, 9/52;

(c) firms in Category 2, 3A, 3B or 3C (unless they hold Client Assets or Insurance Monies or act as the Administrator of an Employee Money Purchase Scheme), 13/52;

(d) firms in Category 3D, 9/52; or

(e) firms in Category 4, (unless they hold Insurance Monies), 6/52;

Of the projected annual expenses of the firm.

Capital waivers may be available to the DIFC branch of a regulated financial institution having its head office in a recognised regulatory jurisdiction. However this may not apply to firms in the ITL, and so modifications of capital requirements are typically considered.

Calculation of capital is a detailed process and involves many factors. We recommend that you contact us for more details on the application process and capital calculations.

Can I operate the ITL from outside the DIFC?

No. The firm will have to be based within the DIFC in order to be licensed under the ITL. It can source customers from all over the UAE though.

What restrictions are imposed on the firm during the testing period?

The DFSA will impose appropriate restrictions and conditions on the firm for the duration of the testing period.

These typically include restricting the number and type of clients that can take part in testing and the number and value of transactions conducted during the testing period. These restrictions and conditions will be determined on a case-by-case basis. A determining factor will be the level of systems and controls the firm implements during the testing period.

What happens on completion of the testing period?

The firm is expected to, within one month of the end of the testing period, to

  1. Request for a removal of the restrictions on the ITL and demonstrate to the DFSA that they can meet the requirements of a full license; or
  2. Request for a withdrawal of the ITL

What is the cost of the ITL?

The DFSA’s ITL fee is USD 5,000. This fee covers the application process and the testing period.

Other costs include including registration, incorporation and license fees, and rent.

For technology companies:

DIFC Incorporation and License fee: US$ 1,600

Co-working space in the DIFC Innovation Hub – from US$ 500/desk.

 

Our Services

We provide turnkey services for ITL applications in the DIFC. From initial 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 Testing 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! to know more Information on DIFC Innovation Testing License

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