This article compares and contrasts the Category 3C and Category 3D licenses under the Dubai Financial Services Authority (DFSA) regulatory framework. By analyzing the regulatory requirements and inferring the scope of permitted activities, this comparison highlights the key distinctions between these two licensing categories for financial services firms operating in the Dubai International Financial Centre (DIFC).
1. Definition of Category 3D Authorized Financial Services
According to the Prudential – Investment, Insurance Intermediation and Banking Module (PIB), an Authorised Firm is categorized as Category 3D if its Licence authorizes it to Provide Money Services and it engages in one or more of the following activities:
- Provides or operates a Payment Account
- Executes a Payment Transaction on a Payment Account provided or operated by another Person
- Issues a Payment Instrument
Furthermore, to be classified under Category 3D, the Authorised Firm must not meet the criteria for Categories 1, 2, 3A, 3B, or 5. This exclusionary criterion suggests that Category 3D firms are specifically focused on providing defined Payment Services.
2. Scope of a Category 3C License
According to Rule 1.3.5 of the PIB Module, an Authorised Firm is in Category 3C if its Licence authorizes it to carry on one or more of the following Financial Services:
- Managing Assets
- Managing a Collective Investment Fund
- Providing Custody (other than for a Fund and other than in relation to Crypto Assets)
- Managing a PSIA (which is a PSIAr – restricted Profit Sharing Investment Account)
- Providing Trust Services (where it is acting as trustee in respect of at least one express trust)
- Providing Money Services (where it issues Stored Value)
Similar to Category 3D, a Category 3C firm must not meet the criteria of Categories 1, 2, 3A, 3B, or 5.
The definitions clearly indicate that Category 3C encompasses a range of asset management, custody (excluding funds and crypto assets), trust services, and a specific type of Money Services – issuing Stored Value. This distinguishes it from Category 3B, which focuses on custody related to funds and employee schemes, and Category 3D, which centers around Payment Services.
3. Capital Requirements
The PIB Module specifies different Base Capital Requirements for Category 3C and 3D firms under Rule 3.6.2:
Category 3C
- Standard requirement: US $500,000
- Exception: If the only Financial Service conducted is Managing a Collective Investment Fund:
- US $140,000 if managing any Public Fund or Credit Fund
- US $70,000 for other fund types
Category 3D
- Base Capital Requirement: US $200,000
This clearly indicates that, generally, Category 3C firms are subject to a higher Base Capital Requirement than Category 3D firms, reflecting the potentially broader scope and nature of the Financial Services they undertake, including asset management and trust activities.
Regarding the Expenditure Based Capital Minimum, Section 3.7 of PIB applies to both categories. Rule 3.7.2(a) specifies that for firms holding Client Assets or acting as the Administrator of an Employee Money Purchase Scheme, the Expenditure Based Capital Minimum is 18/52 of their relevant expenditure.
4. Operational Risk Requirements
Section 6.12 of PIB specifies the application of certain Operational Risk rules to Authorised Firms in Category 3B, 3C, 3D, or 4 that undertake one or more of the listed Financial Services, including:
- Providing Custody
- Managing Assets
- Managing a Collective Investment Fund
- Providing Trust Services
- Providing Money Services
Both Category 3C and Category 3D firms fall under this section based on their authorized activities.
Appendix 6 of PIB further details the application of Operational Risk rules. It indicates that firms Managing Assets or Managing a Collective Investment Fund (services typically associated with Category 3C) are subject to Systems and Controls Requirements and Professional Indemnity Insurance (PII) cover, but not necessarily a capital requirement under Chapter 6.
5. Notification and Reporting Obligations
Rule 3.2.6(1) of PIB mandates that Authorised Firms in Category 3B, 3C, 3D, or 4 must notify the DFSA immediately and confirm in writing if their Capital Resources fall below 120% of their Capital Requirement. This notification obligation applies equally to both categories.
Section 2.3 of PIB outlines general reporting requirements to the DFSA. Rule 2.3.8(1) states that an Authorised Firm must submit any annual return required by Table 1 in section A2.4 of App2 within four months of the financial year-end. Rule 2.3.8(2) requires submission of other returns within one month after the reporting period.
6. Conduct of Business Module Implications
The Conduct of Business (COB) module applies to every Authorised Firm with respect to carrying on any Financial Service in or from the DIFC. The specific rules and their emphasis would vary significantly based on the distinct Financial Services each category is authorized to conduct.
For Category 3C firms:
- Rules concerning communication of information and marketing material (Section 3.2 of COB)
- Client agreements (Section 3.3 of COB)
- Rules regarding the safeguarding of client assets for firms Providing Custody
- Specific conduct obligations related to fiduciary duties for firms Providing Trust Services
- Disclosure requirements for firms Providing Money Services by issuing Stored Value
For Category 3D firms:
- Client disclosures
- Terms and conditions of payment services
- Rules ensuring security and efficiency of payment systems
- Additional disclosure requirements outlined in Appendix 7 of COB
7. General Module Distinctions
The General (GEN) module sets out overarching requirements for Authorised Persons. While the module applies broadly, the specific application of its rules often depends on the underlying Financial Services being conducted:
- Fees: The Fees Module (FER) differentiates based on the type of Licence and the Financial Services authorized
- Authorization Process: The specific information and assessments required by the DFSA would depend on the Financial Services the applicant intends to carry on
- Financial Promotions: Content and compliance requirements would differ based on the nature of services offered
8. Key Differences Summary
Based on the analysis of the regulatory framework, the key differences between a Category 3C and a Category 3D license can be summarized as follows:
| Aspect | Category 3C | Category 3D |
|---|---|---|
| Authorized Financial Services | Managing Assets, Managing a Collective Investment Fund, Providing Custody (excluding funds and crypto assets), Providing Trust Services, and Providing Money Services (issuing Stored Value) | Providing Money Services related to Payment Accounts, Payment Transactions, and Payment Instruments |
| Base Capital Requirement | Generally US $500,000 (with exceptions for fund managers) | US $200,000 |
| Business Focus | Asset management, custody, trust services, and stored value issuance | Payment services |
| Operational Risk | Requirements vary based on specific services, with PII requirements for asset managers | Requirements focused on payment service risks |
| Client Interactions | Typically involves ongoing relationships for asset management and trust services | Primarily transactional payment service relationships |
Conclusion
While both Category 3C and Category 3D licenses cater to specific segments of the financial services landscape within the DIFC, Category 3C generally encompasses a broader range of asset-related and trust services, along with issuing stored value, while Category 3D is narrowly focused on providing core Payment Services.
This difference in scope is reflected in the higher Base Capital Requirements for Category 3C firms. The regulatory requirements across the COB and GEN modules, as well as specific Operational Risk considerations, are largely shaped by the distinct nature of the authorized Financial Services under each category.
Financial services firms seeking to operate in the DIFC should carefully consider the nature of their intended activities to determine whether a Category 3C or Category 3D license would be more appropriate for their business model.