New oversight: Regulations covering the marketing of unauthorised financial services recently introduced

The Central Bank of Bahrain and the Financial Institutions Law, 2006 (“CBB Law”), along with other rules and regulations issued by the Central Bank of Bahrain (CBB) from time to time govern and regulate the financial industry and the provision of financial services in Bahrain.

As per Article 40 of the CBB Law, no person shall carry out regulated financial services unless appropriately licensed by the CBB. Undertaking regulated financial services in Bahrain can generally only be carried out by institutions that are duly licensed by the CBB.

Pursuant to the power granted to the CBB under Article 42 of the CBB Law, the CBB issued the “Regulation No. 16 of 2012 relating to the Prevention of Marketing of Financial Services in the Kingdom of Bahrain” (“Regulation”), published in the Official Gazette on June 14, 2012. It is intended to deal with the widespread unauthorised marketing of financial services.

MARKETING: The Regulation defines “marketing of financial services” as offers, promotions, statements, advertisements or any other means of communication made for the purpose of inducing recipients to purchase or otherwise acquire financial services in return for monetary payment or some other form of valuable consideration. Note that the Regulation also covers marketing in electronic form. In our view, marketing from outside Bahrain appears to be covered as well.

Pursuant to the Regulation, no natural or legal person shall market, promote or offer any financial services in the Kingdom of Bahrain unless: a) He is allowed to do so by terms of a licence issued by the CBB; b) His activities come within the terms of an exemption granted by the CBB by way of Directive; c) He has obtained the express written permission of the CBB to offer the financial services being offered.

FINANCIAL SERVICES: For the purposes of the Regulation, the term “financial services” means: a) any transactions with respect to any financial instruments defined in any volume of the CBB Rulebook; or b) any arrangement where money, goods or services are made available to a person in exchange for his promise to pay at a later date and that arrangement is of a type habitually provided by the other person for commercial gain; or c) any arrangement in which money is solicited from the public (or part thereof) in return for a promise of financial gain on, or safekeeping of, that money; or d) any other financial products or services which are governed and regulated by the CBB marketed and promoted or offered for sale in the Kingdom of Bahrain.

FINANCIAL INSTRUMENTS: The financial instruments for the purpose of interpretation by the CBB include: a) shares, bonds, warrants or notes; b) any other securities giving the right to acquire or sell any such securities, or giving rise to a cash settlement determined by reference to securities, currencies, interest rates or yields, commodities or other indices or measures; c) money market instruments including commercial paper; d) credit derivatives issued as securities which are transferable and/or negotiable (for example credit-linked notes); e) any financial instrument giving rights to, or interests in real estate property; f) Islamic financial instruments, including sukuks and murabaha certificates; and g) any other securities or investment instruments that are deemed to be a financial instrument by the CBB.

In addition, please note that all overseas investment funds/collective investment undertakings (“Overseas CIUs”) that are domiciled in a Recognised Jurisdiction (as defined in the CIU Rules) and registered with or authorised by the financial services regulator in the home jurisdiction may be marketed in Bahrain only in compliance with the requirements of the collective investment undertakings regulations contained in Module ODC issued by the CBB Rulebook, Volume 7, Collective Investment Undertaking Module (“CIU Rules”).

PENALTIES: Any person who breaches the provisions of the Regulation shall be subject to the penalties prescribed by Articles 129 and 161 of the CBB Law.

Article 129 of the CBB Law reads as follows: “Without prejudice to any criminal or civil liability of the licensee, the Central Bank may levy upon the licensee an administrative fine not exceeding twenty thousand (20,000) Bahraini Dinars, if the licensee breaches the provisions of the CBB Law or the regulations and resolutions issued in connection with implementing thereof or by reason of breaching the terms and conditions of the licence”.

Article 161 of the CBB Law reads as follows: “Without prejudice to any greater penalty prescribed under the Penal Code or any other law, any person who contravenes the provisions of Articles 40, 41, and the Regulations issued according to Article 42 of this law shall be liable to a fine not exceeding one million (1,000,000) Bahraini Dinars, and the Court shall confiscate the proceeds of the crime.”

In addition, the CBB may take certain administrative actions such as complaining to the defaulting institution’s regulator in their home jurisdiction(s), and " blacklisting", which would make future authorisations more difficult to obtain.

REVERSE SOLICITATION: While it is not clear whether the Regulation is specifically applicable to reverse solicitation (i.e. where an investor approaches a foreign financial institution [unlicensed in Bahrain] for certain financial services and products, and the financial institution sends marketing materials to Bahrain), we are of the view that, although it may sound impractical, a broad interpretation of the Regulation would warrant its application to reverse solicitation. We advise that firms contact the CBB for clarification of the Regulation on a case-by-case basis.

Notwithstanding the restrictions contained in the aforesaid provisions of the Regulation, some foreign financial institutions have approached investors in Bahrain, in breach of the applicable laws and regulations. In conducting such discreet marketing activities in Bahrain, the following practices were observed: a) any personal visits by the representatives of the foreign financial institutions were discreet, that is: (i) by way of a prior appointment only (i.e. no “cold-canvassing”/“cold-calling”); (ii) held on the premises of the potential Bahraini investor; (iii) the potential Bahraini investors were aware that the representative is not resident in Bahrain and that the foreign financial institution is not licensed by the CBB; and (iv) in all cases, before any materials were are sent to any potential Bahraini investor and/or any meeting was held in Bahrain, the prospective Bahraini investor would provide a written request that would indicate that it was the Bahraini investor that requested such information and/or meeting on a "reverse inquiry" basis. b) all communications would indicate that all services would be rendered outside Bahrain and that the locus of any agreement to purchase investments or services was outside Bahrain; c) documents would ideally be executed abroad, and in the event that the Bahraini investor executed the documents in Bahrain, the foreign financial institution would execute the documents abroad; d) visiting representatives would not be involved in the transfer of funds for investment; e) no investment decisions would be made by the foreign financial institution’s representative while in Bahrain; f) the foreign financial institution’s representative would not give any investment advice whilst in Bahrain; and g) there would be no public presentations or road shows.

Such unauthorised marketing practices, though they may have been prevalent for a long time, do not have the force of law.

CBB RESPONSE: We are aware that the CBB has recently initiated action against certain financial institutions who have conducted unauthorised marketing in Bahrain. We believe that the CBB intends to strictly enforce the law and its rules and regulations and will take strict action. This change in attitude of the CBB is undoubtedly driven by the current financial crisis.

Given its status as a well-respected and responsible financial services regulator, the CBB has long been involved in streamlining the various licensing, authorisation and registration processes related to the offering and marketing of various financial services and products in Bahrain.

In our view, this new Regulation is intended not only to regulate all the financial services and products that are offered in Bahrain, but also to safeguard the interests of the foreign financial institutions who wish to offer or market financial products and services in Bahrain. In case of any doubts, it is always recommended that appropriate advice be obtained from experienced Bahraini lawyers or clarifications be sought directly from the Central Bank of Bahrain.