Abu Dhabi, UAEWednesday 16 October 2019

Frank Kane’s Working lunch: the music lover who regulates the DIFC

Ian Johnston is a big fan of music and you could say his approach to regulating the DIFC is to give offenders a rap of the baton, then show them how to hit the right note. Over a lunch of Chinese food, he tells Frank Kane of the path that led to this mindset.
Illustration by Mathew Kurian / The National
Illustration by Mathew Kurian / The National

I wanted to talk to Ian Johnston – lawyer, hard-nosed regulator, and head of the Dubai Financial Services Authority – about football.

Glasgow-born Mr Johnston and I do not see eye to eye on this matter. My Scottish football team is Celtic, currently runaway leaders of the league and destined to be champions for the sixth successive season; his, on the other hand, is another team from the same city (I can’t bring myself to type the name) who have had a hard time of it, financially and footballing, in recent years.

In fact, Mr Johnston’s tenure as chief executive of the DFSA has coincided with the worst period in his football club’s history. He wouldn’t like having that pointed out.

When we were planning lunch, we originally decided on the Capital Club in the Dubai International Financial Centre that serves as a locus for business meetings and social events in the emirate’s investment hub. But the morning of our meeting I had a call from his office saying that the venue had changed. Mr Johnston would like to go to Royal China.

I was happy with that. Nothing against the CapClub, as its members call it, but the Chinese restaurant by the Gate building is one of the best in Dubai, even if it does have a reputation for being a little pricey (like most restaurants in DIFC). And, given our footballing antagonism, a neutral venue seemed a wise choice. You never know what supporters of his team will do.

“I knew you were going to want to talk football,” he said as we were shown to a discreet table at the back of the restaurant. It turned out he was disillusioned at the state of Scottish football, and not just because of his team’s dire straits.

“The English league has sucked all the money out of the game in Britain, and that’s had an effect on the quality of players in Scotland. It used to be almost parity between England and Scotland, now Scotland is just getting third or fourth rate,” he said, obviously miffed.

That’s the price of globalisation, I observed, and Mr Johnston should be well used to the international forces that shape our lives. Most of his career he has been involved in efforts to develop and adopt international standards of regulation in the financial services industry, first in Australia, where he emigrated with his family as a 10-year-old, then in Hong Kong, and finally in Dubai, where he arrived as the DIFC’s head of policy and legal services in 2006.

He had trained as a lawyer and was running one of Australia’s major trust companies when he took a change of direction to join the country’s main financial services regulator, the Australian Securities and Investments Commission. This was a move from private to public sector, but he found nothing bureaucratic and dull there.

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“I enjoyed the big picture policy aspect of regulation. It taught me that you can create better outcomes knowing when to fix a policy, when to leave it alone, and when to enforce it. It was enjoyable knowing you were making a difference, if you got the calls right. I was also impressed by the calibre of person in regulation, the intellectual capability and the rigour. It blew me away,” he said as we looked over the menu.

We chose dishes from the lunchtime set menu: edamame, wasabi prawns, wonton and crispy duck rolls, some soup, followed by Beijing duck for him and chicken in black bean sauce for me. I love the variety of these lunch menus, which seems to be a particularly Chinese feature – lots of small dishes that allow you to experiment.

But there were now two issues. First the restaurant was getting crowded. A table of sleek-looking executives sat right beside us and launched into a heated exchange about the pros and cons of a deal they were doing. On the other side, a young child, at lunch with mother, began to cry. It was quite difficult to concentrate on what Mr Johnston was saying.

The other issue was one of logistics. I’ve written before about how it is quite challenging to simultaneously eat and take notes at a lunch table. Chopsticks magnify the problem tenfold. I persevered.

The call to join DIFC back then came from David Knott, the first boss of the DFSA who played a big role in setting up the DIFC regulatory structure in the early 2000s. Mr Johnston had known him from his Australia days and had no hesitation accepting his offer.

“I placed great store in the fact that David was here. He was very well regarded and had come out of retirement to do the job. The DIFC wanted to establish a name for recruiting people with an international background and reputation,” he explained.

It was easy now, sitting in a fine restaurant in the heart of Dubai’s bustling financial hub, to forget how truly innovative the DIFC was when it was launched back in 2004. An independent, autonomous financial centre, run under principles of common law, in the heart of the Islamic emirate.

There were sceptics who said it would never succeed, that the indigenous business, legal and courts system would suffocate it, and that no global financial players would want to be there.

The DFSA – a regulator run to international standards independent of the DIFC structure – was one way of reassuring international financial institutions that they would get a top level environment in which to do business.

“DIFC needed an international centre from day one, with an international reputation. It’s to Dubai’s credit that they understood this early on,” said Mr Johnston.

International back then meant largely expatriate, but the DFSA realised that training and promoting local talent was an essential role. “We did that by establishing a thing called ‘Tomorrow’s Regulatory Leaders’ as a graduate programme with a very intensive investment bias. Now 30 per cent of the DFSA workforce is Emirati, and virtually all of them came through that programme.

“Needless to say, they are all well up for the job, otherwise they wouldn’t last with me,” he said. A large proportion of the participants are Emirati women.

He was passed over for the top job at DFSA when Mr Knott left, but got it in 2012 after Dubai had gone through the financial crisis. That had led to a bigger workload at DFSA, and a more prominent global role as other financial centres began to take notice that Dubai had weathered an existential financial threat. Surely it must be doing something right, the world said, and wanted to hear from DFSA experts at international forums and conferences.

“Come 2012, I think it was time for us to refocus on our core mission. The DFSA was full of lots of very clever people, and the crisis had raised the profile. We were much in demand for international speaking engagements and other ‘reputational’ work. But it could be a distraction. If something went wrong again while we were off promoting the DFSA around the world, nobody would ever trust us again.”

That refocus involved an increased emphasis on enforcement and risk-based regulation, but also required a subtle shift in resources to ensure maximum efficiency. “For example, we should not assign a direct relationship manager to a business like a financial advisory firm, because if their systems go wrong they really only hurt themselves. But if a deposit holding bank goes wrong, it has people’s money in it, consumers would get hurt,” he said.

Since the financial crisis, some observers regard regulators as the “rock stars” of finance, with the power to make or break companies and individuals with fines and bans. Mr Johnston does not see himself in that category, and is wary of talking about the big cases under his time as CEO. “I don’t believe in punishing a firm twice by naming and shaming them again,” he said.

But he did mention two high- profile cases as significant for the DFSA under his leadership. “Damas was a landmark case where DFSA told the company to replace virtually the whole board,” he said, in reference to the jewellery retailer that floated on Nasdaq Dubai before encountering a storm of controversy over business practices. It eventually delisted completely.

The other was the record US$10 million fine imposed on Deutsche Bank for breaches in its private banking practice in the UAE. “There was a big fine, yes, but we also showed them how to improve their governance. You don’t just hit them with a big stick, you encourage them too,” he said.

We chatted for a while about corporate culture, which he saw as the crucial underlying reason for financial failure. He believes that some financial institutions see fines and bans as just another cost of doing business, and as long as that philosophy comes down from the top, banks and others will never learn from their mistakes. There will be more failure and scandal. We agreed that some, like Deutsche’s new global CEO John Cryan, were trying genuinely to change the corporate culture of their institutions.

Other big issues were also on his mind. The launch of a rival financial market to DIFC just down the road in the capital, the Abu Dhabi Global Market, with its own regulator, was of interest, but he played down the competitive nature of the relationship. “We’ve signed an MoU with the ADGM regulator and we will share information with them and cooperate. We don’t compete with them, we cooperate,” he said.

He pondered the regulatory challenge facing Saudi Arabia as it gears up for the biggest public listing in history with Saudi Aramco, but he believed the kingdom had the mechanisms in place to see the flotation through. “We have good relations with the Saudi regulators and I think they’re well up to the job,” he said.

The lunchtime crowd at Royal China had thinned out, and the noisy young child had left, so we could chat more informally. In his spare time, Mr Johnston loves music in all its forms. He plays and conducts brass instruments, but said, “I love it all, opera, jazz, rock ‘n’ roll. I saw the Rolling Stones in Melbourne on one of their biggest ever tours.”

So, financial services regulators: rock stars, football fans, musicians, Rolling Stones fans. How the world has changed, I thought, as we shook hands and said goodbye.

business@thenational.ae

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Updated: March 18, 2017 04:00 AM

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