Regulation

In April 2022 Mamo received communication that it had passed Phase 1 of 3 for its Dubai Financial Services Authority (DFSA) Money Services license (ITL) in the UAE. Phase 1 requires us to build our exhaustive protective security measures, systems, and controls followed by in-depth reviews. It is arguably the greatest test of whether a company will make it through Phases 2 and 3, which require significant work.

In this delightful guide, we summarize and explore our journey through financial regulation in the UAE, a retrospect of our (new) understanding of the policy goals regulators are trying to accomplish and how these goals are attained, and who or what is being regulated.

Why financial regulation is important

Regulation aims to protect consumers and users of financial (and other) services offered by regulated companies, like Mamo. Users need protection from potential risks, while regulators provide frameworks that ensure transparency, fairness, and efficiency, and that all regulated firms may follow. Regulation provides effective oversight and deters companies from taking excessive risks on behalf of their customers.

Innovative regulation helps industries get started, especially infrastructure industries and businesses that provide critical services to a country. Meanwhile, adaptive and (socially) intelligent regulators help protect and encourage small or new businesses, fostering innovation, competition, and increased consumer choice, attracting talent and growing their economies. Less talked about and implemented are regulations that protect social concerns. Without them, businesses will ignore damage to the environment. They will also ignore unprofitable areas, countries, and populations.

Financial regulators oversee all aspects of financial services from banking to financial markets with the aim of providing protection to consumers. Financial regulators oversee three financial sectors: banking, financial markets, and consumers. Within these, regulators implement a regulatory framework (consisting of rules that need to be followed), which may vary by agency and jurisdiction. We have grouped these frameworks into the following categories that we hope will provide a better understanding of regulation and the work of regulators.

Licensing or registration

First and foremost, it's worth noting that most financial activities cannot be undertaken unless a firm (startups included) has received the proper authority from the appropriate federal or state regulator in the UAE. In the UAE, regulations, and licenses related to financial services are issued by the following: the Central Bank of the United Arab Emirates (CBUAE), Dubai Financial Services Authority (DFSA), the Securities and Commodities Authority (SCA), and the Financial Services Regulatory Authority (FSRA).

Each type of license or registration granted by the respective regulator governs the financial activities that the holder can engage in.

For example, Mamo currently operates under an Innovation Testing Licence (ITL) with our regulator, the DFSA. The ITL limits the number of users we are allowed to acquire and onboard to 1,000 (Phase 1), 3,000 (Phase 2), and 8,000 (Phase 3). Mamo’s permitted financial services activities include 'Providing Money Services'. Mamo also has DFSA Endorsements to 'Carrying on authorized Financial Services with or for Retail Clients’; and authority for ‘Holding or Controlling Client Assets.' Allowing Mamo to provide you with Mamo consumer and business products and services.

To be granted a license, Mamo must accept and abide by the rules outlined in the regulation and implement company policies accordingly. These conditions could include regulatory oversight, training requirements, and compliance requirement to act according to a set of standards or code of ethics. Failure to meet regulatory requirements could result in fines, penalties, remedial actions, license revocation, or criminal charges.

Rulemaking

Regulators issue rules (regulations) through a rulemaking process to implement legislation that provides the overarching regulatory framework. Typically, the legislation provides regulators with a policy goal in general terms, whilst rules and regulations fill in the specifics. Rules lay out the guidelines for how firms, startups included, individuals, or markets may or may not act to comply with the regulatory framework.

Using anti-money laundering as an example, the federal government puts in place legislation that details specific requirements. i.e., to identify all users. As such, regulators define rules that require that all Mamo users do KYC (Know Your Customer), a method of identifying who you say you are through ID checks, photo identification, and proof of address, all of which have specific criteria stipulated by the regulator. The ultimate goal of KYC verifications is to ensure the financial services sector is not utilized by money launderers.

Oversight and supervision

Regulators ensure that rules are adhered to through oversight and supervision. Regulators must understand and observe each firm's services, behaviors, and conduct, providing guidance and instructions that include enhancing systems and controls to prevent improper behavior. Supervision may entail active, ongoing monitoring, as with Mamo; this includes working through the phases set out by the DFSA. In some cases, supervision and periodic examinations and inspections, especially during test phases, whereas in other cases, and upon graduation from the test phase, regulators rely more heavily on self-reporting, through mandated regulatory filings Regulators prioritize points of emphasis by issuing supervisory letters and guidance, setting out or reaffirming regulatory expectations; and issuing new rules. This allows firms to take proactive steps to protect their users and the business.

For example, new rules issued by DFSA, which regulates Mamo, introduced a new Whistleblowing regime which came into force on 7 April 2022 and applies to all DFSA Regulated Entities. This regime builds on existing federal requirements and aims to help protect anyone providing information on malpractice; this requires Mamo to have an internal policy and process for reporting such incidents.

Enforcement

Regulators can compel firms to modify their behavior through enforcement powers. Enforcement powers include:

• Issuing fines and penalties.
• Ceasing orders.
• Criminal or civil actions in court.
• Administrative proceedings or arbitrations.
• Revoking regulatory licenses.

For example, regulators can initiate enforcement action when they see any malpractice. Enforcement actions are often made public, which acts as a powerful regulatory tool in deterring other financial services firms from conducting their business inappropriately, thereby increasing consumer protection.?

Resolution

Last and in extreme circumstances, regulators have the power to intervene and resolve a failing firm by taking control of the firm and initiating conservatorship (i.e., the regulator assumes day to day operations of the firm on an ongoing basis) or receivership (i.e., the regulator winds the firm down). Other failing financial firms may go through bankruptcy or a judicial process; this could happen for many reasons and usually is in the firm's best interest, its owners, its employees, shareholders, and customers, who may or may not get protection and even compensation.

Learning by doing

And this is how we become friends with regulation, truly through learning by doing. Regulators provide guardrails for market efficiency and integrity, consumer and investor protection, capital formation and access to credit, illicit activity prevention, state and country competitiveness, and integrity.

The road to financial regulation is not an easy one but is the right one. A startup needs to have exemplary self-regulation mechanisms for self-preservation. At Mamo, we do this through our own internally built systems, including cryptographic security protocols, a fraud detection, and prevention engine, and standardized and automated financial transaction management, minimizing human errors along the way. On the frontend, Mamo has implemented digital KYC that allows users to identify themselves quickly through a user experience that puts the user in control of their personal and private information.

We are incredibly grateful to our partners at the DFSA for their support and guidance as we pass through the three phases of our ITL. This helps Mamo continue to foster its principles of security by design, trust, and efficiency. We look forward to graduating from our current ITL status and being fully regulated this year and providing the UAE with the best financial services and products. User safety and delight are what make our business a success.

Image source: Svetlana Sultanaeva/EyeEm