The regulatory regime applicable to banksi UAE
The regulatory framework for banking in the UAE is based on the Banking Law. The Banking Law came into force on 30 September 2018 and repealed the previous banking law, Federal Law No. 10 of 1980. Under the Banking Law, the Central Bank of the UAE was created and entrusted with the issuance and management of the country's currency, and the regulation of the banking and financial sectors. The Banking Law provides for the licensing and regulation by the Central Bank of:
- banks, which are defined to include institutions licensed to primarily carry on the activity of accepting deposits and other licensed financial activities such as granting loans, issuing and collecting cheques, placing bonds, trading in foreign exchange and precious metals, or carrying on other operations allowed by law or by customary banking practice;
- exchange houses and money intermediaries (i.e., foreign exchange dealers who purchase and sell currencies);
- Islamic financial institutions, which are defined as financial institutions licensed to undertake all the activities of a commercial bank, but in accordance with the principles of Islamic shariah; and
- other financial institutions.
The Banking Law does not apply to statutory public credit institutions, governmental investment institutions, and development funds, private savings and pension funds, or to the insurance sector. It also does not apply to the free zones or financial institutions established therein. The Central Bank does, however, have the right to exercise its powers over financial institutions outside the UAE or in free zones after consulting the relevant authority.
The Banking Law has introduced several changes to the previous regime. Some of the key changes are:
- Federal Law No. 10 of 1980 Concerning the Central Bank, the Monetary System and the Organisation of Banking and Federal Law No. 6 of 1985 Concerning Islamic Banks, Financial Establishments and Investment Companies have been repealed. All existing Central Bank regulations, circulars and decisions issued under these repealed laws will remain in force for a period of three years, unless replaced by new regulations, circulars and decisions;
- licensed financial institutions are now prohibited from charging customers interest on accrued interest charged on any credit or funding facilities;
- the establishment of a Financial Activities Committee under the Ministry of Finance (composed of a member from each of the Central Bank, the Emirates Securities and Commodities Authority and the Insurance Authority) has been contemplated to opine on the introduction of new financial activities within the purview of the Banking Law;
- provisions pertaining to mergers of licensed financial institutions have been introduced;
- provisions pertaining to governance, financial infrastructure system oversight and maintenance of customer confidentiality have been introduced;
- provisions concerning credit control within banks (including restrictions on loans to management) have been introduced; and
- the Central Bank's enforcement powers have been strengthened by granting it authority to impose a wider range of penalties.
While the Central Bank is the principal regulatory authority of banks and financial institutions in the UAE, all such entities are also subject to additional registration and licensing requirements at the federal and emirate levels.
All commercial banks incorporated in the UAE must be established as public shareholding companies, and must be majority-owned by UAE nationals. A majority of directors of such companies must be UAE nationals. The minimum UAE national shareholding requirement for finance companies, banks and exchange houses is 60 per cent. Unlike branches of foreign companies in the UAE, foreign banks are not required to appoint a national agent in order to establish a branch in the UAE.
In recent years, only banks incorporated in Member States of the Gulf Cooperation Council (GCC) have been allowed to establish branches. GCC banks have also been allowed to acquire controlling stakes in UAE banks and financial institutions. A few non-GCC banks were issued wholesale banking licences in 2014 and 2015.
The number of UAE banks reduced by one to 21 as the result of a merger between the First Gulf Bank and the National Bank of Abu Dhabi. Discussions are also ongoing between Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank in relation to a potential three-way merger. The number of foreign banks registered in the UAE remained unchanged at 26.
The principal difference in the treatment of local and foreign commercial banks is that local banks are not subject to any taxation on their income, whereas foreign banks are subject to tax at the emirate level.
Non-resident banks can grant bilateral credit facilities and participate in syndications in the UAE. They are not deemed to be resident, domiciled or carrying on business in the UAE, and are not liable to pay tax in the UAE merely on account of such bilateral facilities or participation in syndications. All licensed financial institutions are required under the Banking Law to maintain the confidentiality of all customer data and information.ii Emirates Securities and Commodities Authority
The Emirates Securities and Commodities Authority (SCA) regulates the securities markets in the UAE. All UAE banks are listed in one of the two onshore markets, the Abu Dhabi Exchange and the Dubai Financial Market. The SCA licenses all brokers, consultants and custodians who provide services related to listed securities. The Investment Funds Regulation issued by the SCA in July 2013 transferred regulatory responsibility for the licensing and marketing of investment funds, and for a number of related activities, from the Central Bank to the SCA. The sale, marketing and promotion of foreign securities and funds in the UAE and the establishment of domestic funds require the approval of the SCA. This requirement has been further clarified and established under SCA Board of Directors Decision No. 3 of 2017 on the Regulation of Promotion and Arranging Activities.iii Dubai International Financial Centre
The Dubai Financial Services Authority (DFSA) has adopted a regulatory approach modelled, at least in part, on the former Financial Services Authority in the United Kingdom. The DFSA does not grant banking licences per se; rather, it authorises financial service providers to undertake specific financial services. The relevant financial services in respect of banks include providing credit and accepting deposits. There are about 450 financial services firms with a presence in the Dubai International Financial Centre (DIFC). Of these, a substantial number of institutions do not have authority to accept deposits. This reluctance on the part of various institutions to be a 'true' bank can be traced back to two causes:
- DIFC entities were historically not able to deal with retail customers. This restriction was lifted several years ago, but the business model of the vast majority of institutions within the DIFC has been to focus on corporate clients or high-net-worth individuals; and
- banks have been reluctant to apply for authorisation to accept deposits because they remain unable to deal in dirhams or accept deposits from the UAE markets.
Most of the banks that have set up in the DIFC have done so as branches of overseas companies; this has been done for capital adequacy reasons. Recently, however, it has been the policy of the DFSA to encourage banks to incorporate new subsidiaries within the DIFC and capitalise those subsidiaries to an acceptable level.iv Abu Dhabi Global Market
Following the success of the DIFC, a new financial free zone, the Abu Dhabi Global Market (ADGM), was set up in Abu Dhabi and became operational in the second half of 2015. The financial services regulatory framework for the ADGM aims to reflect current international best practices by assimilating the key aspects of other regulatory regimes across the world. The ADGM has its own regulator, the Financial Services Regulatory Authority (FSRA). Like the DFSA, the FSRA does not grant banking licences per se. Banks licensed in the ADGM are prohibited from accepting deposits from the UAE market, and may not accept deposits or undertake foreign exchange transactions involving UAE dirhams.v US Foreign Account Tax Compliance Act
The UAE and the United States reached an agreement in substance in May 2014 to include the UAE on the list of jurisdictions to be treated as having an intergovernmental agreement in effect in relation to the US Foreign Account Tax Compliance Act (FATCA). The UAE has adopted Model 1. Banks and financial institutions now routinely comply with FATCA requirements.vi Common Reporting Standard
The UAE Cabinet has approved the agreement on mutual administrative assistance in tax matters and the multilateral competent authority agreement by way of Cabinet Resolution No. 9 of 2016. Thus, the Common Reporting Standard (CRS) of the Organisation for Economic Co-operation and Development (OECD) has been effective in the UAE since 1 January 2017 to implement the automatic exchange of information about financial accounts. The International Financial Reporting Standard 9 is required to be complied with by banks and financial institutions in the UAE. As of 1 January 2019, the new International Financial Reporting Standard 16 (which applies to leases and replaces the IAS17 standard) has also become effective.vii OECD
The UAE has implemented the standards of joint disclosures and the exchange of information for tax purposes set out by the G20 and the OECD. This follows the UAE Cabinet's decision requiring the Ministry of Finance to coordinate with various government authorities to collect financial information to implement information exchanges for tax purposes. The CRS calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions annually. Banks and financial institutions started collecting the required financial data as of 1 January 2017.