Navigating the financial regulatory landscape of a country can be daunting. The myriad of regulators and regulations can make you feel stuck in a grey area – not a comfortable place for someone who wants black and white.
This article seeks to answer some of the most asked questions of the financial regulatory system in the UAE and will hopefully help you find your foot as you chart out your business’s financial activities in the country.
What financial activities are regulated in the UAE?
It is not easy to put on paper the full range of financial activities that are regulated by financial regulators in the UAE but broadly they would cover raising funds from the public at large, managing funds or assets of natural or legal persons, operating any sort of exchange, bank, or a financial services firm.
Who are the financial regulators in the UAE?
It helps to have some context before introducing the regulators. By way of background, there are two key jurisdictions where business may be carried out in the UAE:
- mainland UAE, also known as onshore; and
- one of the free zones in the UAE.
In addition, note that there are two specific financial free zones in the UAE with their own financial regulators i.e. the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). The DIFC and the ADGM (i) are considered independent jurisdictions from the rest of the UAE, (ii) have their own legal system, and (iii) do not fall under the supervision of the onshore financial regulators. As such, the jurisdiction where your business is incorporated plays a key role in determining which regulator your financial activities is likely to fall under the purview of.
Onshore Financial Regulators
Depending on the nature of the financial activities, persons conducting financial services onshore or in one of the free zones (other than the DIFC or the ADGM) are regulated either by:
- the UAE Central Bank (“Central Bank”);
- the Securities and Commodities Authority (“SCA”); or
- the Insurance Authority (“IA”).
financial Regulators in the Financial Free Zones
In respect of financial free zones in the UAE, such activities are regulated by the Dubai Financial Services Authority (the “DFSA”) in the DIFC and the Financial Services Regulatory Authority (the “FSRA”) in the ADGM.
As a starting point, what are the responsibilities and licensing functions of each of the financial regulators?
The Central Bank
The main responsibility of the Central Bank is formulation and implementation of banking, credit and monetary policies, and to ensure the growth of the national economy of the UAE in a balanced manner. The Central Bank currently regulates and licenses commercial banks, investment banks, financial investment companies, money changers, finance companies, financial and monetary intermediaries, and representative offices of foreign banks established onshore.
The SCA’s key roles include organizing and regulating the UAE capital markets, safeguarding the rights of financial market investors, and promoting good corporate governance practices.
The SCA licenses and regulates listed public joint stock companies, financial brokers, commodity brokers, financial consultants, financial analysis providers, foreign investment funds, local investment funds, private equity funds, venture capital funds, and real estate investment funds.
In addition, two main financial securities exchange markets operate onshore under the SCA:
- Abu Dhabi Securities Exchange, which lists equities, funds, and bonds; and
- Dubai Financial Market, which lists equities, debt instruments, ETFs (exchange-traded funds), and SLBs (securities lending and borrowing).
The SCA also regulates the Dubai Gold and Commodities exchange (DGCX), which is the first commodities derivatives exchange in the region dealing in metals, currencies, hydrocarbons, and equities. Note that the DGCX is a subsidiary of the Dubai Multi Commodities Centre (DMCC), a trade-focused free zone in Dubai.
The IA regulates the insurance sector in the UAE and, in particular, licenses insurance companies, actuaries, insurance agents, insurance brokers, insurance consultants, surveyor and loss adjuster companies, and health insurance third party administrators (TPAs).
The DFSA is the financial regulator in the DIFC and individuals or entities need to seek authorization from the DFSA in order to conduct any financial services through the DIFC.
The DFSA primarily licenses banks, investment companies, asset management companies, companies operating collective investment funds and providing trust services, financial advisors, financial and insurance intermediaries, insurance management firms, and Islamic finance business. Note that DIFC companies are involved mostly in wholesale and investment banking, and not retail banking. Additionally, the transactions in the DIFC are carried out primarily mainly in USD, and not in the local currency.
In addition, the DFSA currently regulates two authorized market institutions:
- the NASDAQ Dubai (formerly known as DIFX), which deals with equities, sukuk and Islamic products, conventional bonds, futures and derivatives, exchange-traded funds, exchange-traded commodities, and Real Estate Investment Trusts (REITs); and
- the Dubai Mercantile Exchange (DME), which deals in energy futures and commodities.
The FSRA is the independent financial regulator in the ADGM and broadly comprises:
- the banking and insurance team which regulates banks, insurance companies, and insurance intermediaries, and
- the capital market team which regulates (a) financial market infrastructures such as exchanges, clearing houses and trade repositories, (b) capital market intermediaries such as fund managers, securities and futures intermediaries, corporate finance advisers, and investment advisers, (c) the offering of securities, collective investments schemes and unit trusts and (d) the conduct of takeover and merger transactions.
Which regulator will regulate my business?
The short answer is that if your business is incorporated onshore or in one of the free zones (other than the financial free zones), then your business is likely to be regulated by the Central Bank or the SCA depending on the nature of your financial activity. If your business is incorporated in the DIFC, then the DFSA would regulate your business’s financial activities, and likewise, the FSRA would be the appropriate regulator if your business is incorporated in the ADGM.
The long answer is that there are grey areas, particularly if you are operating onshore.The Central Bank is in the process of delegating some of its licensing functions (particularly relating to financial brokerage and intermediaries) to the SCA. Accordingly, there is an element of uncertainty as to the appropriate authority for licensing certain financial activities due to some overlap in the powers of the onshore financial regulators.
How do I establish myself as a fintech company in the UAE?
The UAE is fast emerging as a hub for fintech companies and both the DIFC and the ADGM are playing a major role in providing an enabling environment to budding companies in this field.
DIFC’s Fintech Hive
The DIFC has recently launched ‘Fintech Hive’, an accelerator programme for fintech companies, that allows fintech companies to apply for a restricted class of financial services licence known as an Innovation Testing Licence (ITL). The ITL provides a controlled environment for a firm to develop and test innovative fintech ideas without being subject to the regulatory requirements that would otherwise apply to an authorised firm. The areas that Fintech Hive encourages include big data analytics & protective modeling, robo advisors, biometric & digital identification, the blockchain, P2P & crowdfunding, cybersecurity, artificial intelligence & machine learning, InsurTech, Islamic fintech and RegTech.
In addition, the DIFC is continually issuing new regulations to keep up with the times and has recently issued regulations to regulate crowdfunding platforms, a welcome development for firms serious about launching crowdfunding platforms.
Similar to the DIFC, the ADGM has implemented its own fintech regulatory framework and launched Regulatory Laboratory (RegLab) which offers a tailored regulatory regime for fintech participants. RegLab allows the participant to develop and test its fintech proposition for a period of up to two years while not putting undue regulatory burden on the participant.
Note that, in line with its objective of spurring innovation, the ADGM has recently issued a guidance note on the regulation of initial coin/token offerings and virtual currencies which sets out the ADGM’s approach to regulating such offerings.
SCA’s proposed Fintech Initiative
The SCA has recently launched a fintech initiative jointly with PriceWaterhouseCoopers (PWC) which envisages formulating a fintech regulatory framework, developing a regulatory sandbox, and preparing a business plan for establishing a fintech hub in the UAE.