The UAE has a complicated financial regulatory system.
There are two financial free zones; the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), each with its own regulator.
Depending on the nature of their activities, persons and companies conducting financial services either onshore or in one of the (roughly 30) non-financial free zones, are regulated either by:
- The UAE Central Bank;
- The Securities and Commodities Authority (SCA); or
- The Insurance Authority (IA).
Merger talks
However, the UAE government is exploring the possibility of a merger between the IA and the SCA in a bid to improve communication between the regulatory authorities.
The Ministry of Justice has established a 10-member committee; which includes members of the SCA, the IA, and other bodies such as the Ministry of Finance, to prepare the necessary legislation.
The committee is also tasked with examining the implications of the proposed merger.
It has until the end of March 2020 to complete its work.
Removing the overlap
So, would this be a good move for the financial advice sector in the UAE?
Stuart McCulloch, market head of the Fry Group Middle East, told International Adviser that the regimes need to be “streamlined”.
“There are too many regulatory bodies and licence frameworks; which makes it very confusing and difficult for a client to understand the protections, regulations and supervision that a firm or adviser are under,” he said.
If approved, McCulloch said there will also need to be an appropriate transition period to give firms time to adapt to the new requirements.
Hannah Greenwood, managing director of Finsbury Associates, said: “There is currently a lot of overlap between the two regulators and their various functions.
“In order to provide the best holistic financial planning advice, you need to offer solutions across both regulators.
“The merger of these two bodies will ensure that the clients always receive the best solutions, as advisers will not be limited in what they can advise under their specific regulator and, therefore, the client will benefit.”
Cost-benefit analysis
Greenwood also believes that the merger is a “great decision” and she “can only see positives” in it.
“Merging regulators brings simplification, if done well,” said McCulloch. “There will be a more consistent approach to regulations across all firms affected, and an ability to influence the market more, if there are more firms under that umbrella.”
Tom Bicknell, partner at law firm Pinsent Masons, told International Adviser it will give the regulators the ability “to share resources in a more efficient way”, as well as cut costs by being housed within the same offices.
Also, he believes the two areas of most benefit are the “removal of regulatory overlaps and lacunas” and firms only having to deal with one regulator.
Market starting to settle down
But carrying out such an “ambitious exercise” does come with teething issues, Bicknell added.
“Industry participants would no doubt be faced with quite a bit of uncertainty in the short term.
“There is also a feeling that the respective frameworks are now beginning to settle down and be better understood by the market.
“Any merger would no doubt lead to a regulatory shake-up and firms would no doubt have to change or replace their current licenses, which would come at a cost.”
The practicality and timing of this merger is questionable, especially as the IA has only recently introduced the commission-capping regulation BOD49.
Licence issues
Another grey area for the merger is licensing.
The big questions that need to be answered are:
- How will licensing work?
- Will firms with SCA licences immediately get IA licences, and vice versa?
Bicknell said: “At the moment, there is no indication of how this will work.”
But some in the industry have a theory of what may happen and how complicated it could be.
“I don’t believe it will be as easy as just providing the new combined licence to all companies,” said Finsbury Associates’ Greenwood.
“Each company would need to be viewed in line with the new regulator to ensure they have the necessary advice functions in place to advise on all the new solutions the merger would provide.”
The Fry Group’s McCulloch added: “In my opinion, rather than just handing a firm an additional licence, it would be better to actually re-design the new licences to be fit for purpose and take the opportunity to modernise, in line with tier 1 regulatory approaches.”
Clean up
As with every other region, the Middle East financial advice sector has had its fair share of regulatory troubles, from firms working without a licence to clients being defrauded.
Some in the sector have tried to improve standards in the UAE, such as Nigel Sillitoe’s consumer champion website, whichfinancialadviser.com.
“The changes will go some way to clean things up in the sector but will not, in isolation, be a panacea to all the current issues,” McCulloch said.
Greenwood added: “I believe the merger will make it easier for advisers to provide the best advice to clients, as they won’t be as restricted by the solutions they are allowed to advise on under their regulator.
“Licensed, qualified advisers will definitely benefit from this, as will our clients.”
Light the spark
If this merger goes ahead, a lot of work will need to be done.
But, if successful, will this be the catalyst for more regulatory alignment across the UAE?
“We hope to see more regulator merging in the future, as there is still a complex and non-consistent approach across the UAE,” said McCulloch.
“There is a real opportunity to simplify the whole thing and bring greater confidence in the financial markets.”
