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Middle EastAugust 6 2006

Preventative supervision

Phillip Thorpe, chairman and chief executive of the Qatar Financial Centre Regulatory Authority, tells Richard Dean of a heady year spent establishing a workable framework.
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Q Qatar Financial Centre [QFC] recently celebrated its first year of operations. What’s been your main focus, as a regulator, over that period?

A Over the past 12 months we’ve gone from being barely a twinkle in the eye to being operational. To put all that in place so quickly was quite a feat.

First, we had to establish a regulatory framework. We had a fairly straightforward objective: high standards and an international model. We wanted to use existing laws to make it familiar and comfortable, to make it attractive to people looking to come and set up a base.

We knew we didn’t want to reinvent any wheels. We looked at the FSA [The Financial Services Authority, the UK regulator] as the best model of an integrated regulator. That allowed us to get up to speed very quickly.

We also adopted a ‘one licence’ FSA-style approach. If someone comes to QFC to do investment banking, but is thinking that further down the line they might also want to do asset management and private banking, they only need one licence. Twelve months on, we’re delighted we made those assumptions. That has helped convert interest into applications and licences.

Q How will you manage the transition from creating regulation to implementation?

A There is a difference between regulation on paper and regulation delivered on the ground. How does it work in practice? Until there is a track record, you have to make some assumptions. Most importantly, institutions are looking at the staff we are bringing on. They are seeing if these people bring their own track record and experience. We try to hire people from established jurisdictions, and our recruitment has been successful. Similarly, the board of directors collectively must represent a vast pool of expertise that is appealing to institutions.

[QFC Regulatory Authority (QFCRA) board members include Robert A O’Sullivan, formerly senior vice-president in the Bank Supervision Group of the Federal Reserve Bank of New York, and Jean-Francois Lepetit, formerly CEO of Bank Indosuez and then chairman of BNP Group’s market risk committee.]

Q How will you enforce QFC regulations if someone breaks those rules?

A If regulation works really well, it is helping firms avoid breaking the rules. The supervisory role is heavily focused on prevention rather than correction. We work with firms so that they are doing the detective work. However, where we find problems they have not detected, or have detected and not properly dealt with, we have disciplinary staff who are part of our enforcement division. They will investigate and take action where there have been failures. We can issue a statement saying that a breach has been found, we can deregister them, and we have recourse to Qatar criminal law.

Q What steps are you taking to combat money laundering and terrorist financing?

A It is always on everybody’s mind – though not because Qatar has a particular problem. It can be annoying, but because of the perception, we have been sensitised to have money laundering regulations in excess of any international standards. Partly through rules, but also through supervision. Firms are receptive to the idea that we are perhaps a little over the top here. They are also keen to dispel any myth.

Q Some bankers looking at QFC worry that the lines between the central bank and QFCRA could lead to excessive red tape. What’s your response?

A The QFC is a creation of primary stature. Where you have QFC legislation, that displaces state law. So where you have QFC companies law, Qatar companies law is disapplied. The only exception is Qatar criminal law. The boundary between us and the Qatar Central Bank is the same as our relationship with the Bahrain Monetary Agency or the FSA. It doesn’t create any jurisdictional issue any different from cross-border.

Similarly, some international bankers active in the Gulf worry that they will be overburdened by regulation, as each Gulf state has a central bank. Now there are more regulators, such as QFCRA in Qatar, and the Dubai Financial Services Authority.

Each jurisdiction is different, not because of the regulatory regime, but because of the underlying differences in the economies. Qatar is an industrial economy, very much driven by oil and gas exploration and developing a range of industrial products. Bahrain is a much more service[-led] economy, Dubai is similar. Abu Dhabi is different again, as are Kuwait and Saudi Arabia.

The question is how can we make it easy to do business in Qatar. If you can do it jumping on a plane from London, you do that. But maybe you have to have a presence in Qatar, Bahrain, Dubai, Riyadh and so on. We are not being inventive about regulation. We are not alone. Dubai is doing it. Bahrain is doing it. If there is pressure, it is constant pressure to high standards.

Some institutions have expressed concern about the fact that Sheikh Mohammed bin Jassem Al Thani, minister of economy and commerce and chairman of the Qatar Financial Centre Authority [QFCA], was dismissed without explanation earlier this year. Governments appoint ministers, and there are always times when ministers change. The minister of economy and commerce is chairman of the QFCA, but the regulatory authority reports directly to the Council of Ministers, not to one minister.

Q QFC’s main focus so far has been project finance, which is relatively straightforward to regulate. How will you regulate more complex areas such as fund management and insurance?

A From a regulatory perspective, we don’t want to spend a lot of time getting between investment banking organisations that know what they are doing. We adopt a risk-based approach. Investment banking is low to medium risk, so it doesn’t take too much from our perspective. Regulating collective investment schemes is not to be done lightly. It will be a little bit later in the year that we are rolling that out.

That means quite a bit of work, and going into an area that means more work for us on an ongoing basis, because it involves retail advice, where the regulatory burden is greater.

Similarly, with insurance we took a wait-and-see approach. And enquiries have come from all ends of the insurance industry – life, non-life, reinsurance, takaful [Islamic insurance], captive. There’s a lot of work to put it in place, and a lot of work to run it.

Q What will keep you busy over the next 12 months?

A There is increasing wealth, there is increasing sophistication and increasing investor awareness in Qatar and the region. There is also government awareness of the need to encourage citizens to save and invest effectively. We have seen interest from the alternative investment community to use Qatar as a registration point. And there is a strong private banking market here, as well as demand for asset management and insurance.

This is going to be a much bigger regulatory challenge than investment or commercial banks. We had bargained on increasing our staff to 40 by the end of 2006. But in the first quarter of the year we had to recruit up to 70. There are new regulations, and there is the sheer volume of business. For example, Qatar is creating IMEX, a new derivatives exchange focusing on energy.

They said they would like the QFCRA to regulate it. We are happy to do that, but there is a lot that needs to be done in terms of a regulatory framework.

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