Skip to main content
Entire section Custom print Text Only Rich Text Print

Article (16) Operational and Shari’ah Non-Compliance Risk

CBUAE/BSD N 1198/2021 Effective from 25/2/2021
  1. 16.1IBs must have in place an appropriate framework, adequate systems, controls and limits for Operational and Shari’ah Non-Compliance Risk management.
  2. 16.2IBs must consider the full range of material operational risks affecting their operations, including the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. IBs must also incorporate possible causes of loss resulting from Shari’ah non-compliance and the failure in their fiduciary responsibilities.
  3. 16.3IBs must be aware of being exposed to risks relating to Shari’ah non-compliance and risks associated with the IBs’ fiduciary responsibilities towards different fund providers. These risks expose IBs to fund providers’ withdrawals, loss of income or voiding of contracts leading to a diminished reputation or the limitation of business opportunities.
  4. 16.4IBs’ must be prudent towards Shari’ah compliance and such compliance requirements must permeate throughout the organization and their products and activities. The perception regarding IBs’ compliance with Shari’ah rules and principles is of great importance to their sustainability.
    In this regard, Shari’ah compliance is considered as falling within a higher priority category in relation to other identified risks. If IBs do not comply with Shari’ah rules and principles, the impacted transactions should be referred to the ISSC to decide on the appropriate treatment (remedy of contracts, derecognition of profit, etc.) and if needed such incidents may be escalated to the HSA.
  5. 16.5IBs must ensure that their contract documentation complies with Shari’ah with regard to formation, termination and elements possibly affecting contract performance such as fraud, misrepresentation, duress or any other rights and obligations.
  6. 16.6IBs must keep track of income not recognized due to Shari’ah non-compliance and assess the probability of similar cases arising in the future and ensure that appropriate controls are in place to avoid recurrences. This may include monitoring of income not recognized due to origination from Shari’ah non-compliant activities.
  7. 16.7IBs must establish and implement a clear and formal policy for undertaking their different and potentially conflicting roles in respect of managing different types of investment accounts. The policy relating to safeguarding the interests of their IAH may include the following:
    • -identification of investing activities that contribute to investment returns and taking reasonable steps to carry on those activities in accordance with the IB’s fiduciary and agency duties and to treat all their fund providers appropriately and in accordance with the terms and conditions of their investment agreements;
    • -allocation of assets and profits between the IB and their IAH will be managed and applied appropriately to IAH having funds invested over different investment periods;
    • -determination of appropriate reserves at levels that do not discriminate against the right for better returns of existing IAH; and
    • -limiting the risk transmission between current and investment accounts.
  8. 16.8IBs must adequately disclose information on a timely basis to their IAH and the markets in order to provide a reliable basis for assessing their risk profiles and investment performance.