David Howell, joint chief executive of Guardian Wealth Management, and Sam Instone, chief executive of AES International, both separately told International Adviser that the Insurance Authority’s new rules requiring licensed brokers to have AED3m capital paid into regulator accounts, plus, what lawyers believe will be another AED3m of working capital, will be too much for smaller firms to bear.
They will be forced to close, or merge with, or be acquired by, larger firms in the UAE, they said.
Another consequence of the new rules could be many advisers leaving the UAE for more loosely regulated countries and jurisdictions, said Instone.
Larger, better capitalised firms
Howell and Instone both said it was the likely to be the deliberate intention of the regulator to reduce the number of licensed brokers through the enhanced capital requirements because it would leave only larger, better capitalised firms operating, making the job of the regulator easier.
Instone said there were some 130 licensed brokers in the UAE currently, but he had heard, unofficially, though from a well-placed source, that it was believed that number could fall to between 50 and 70 firms.
“A period of consolidation is expected. Many smaller firms, those with four or so advisers, are going to find it difficult to come up with AED3m, plus the same again in working capital, and pay annual 5% re-registration fees on top of that,” said Instone.
Howell described the move as a “cull” to weed out some of the lower quality brokers, similar to one undertake by UAE IA some five or so years ago, which was followed by an embargo on new licences being granted.
Commission disclosure
Another strand of the new regulations – which are expected to come into effect before the end of the year, possibly as soon as September – will require brokers to tell the regulator how much commission they receive from different insurance companies and the premiums that are paid to the insurers.
Howell said this may lead to brokers moving to enhance and augment their services with ‘value-adds’ such as tax advice and other extras, to help to justify the commissions they receive. He said insurance companies also have big changes ahead because they will be required to demonstrate in more detail the effect of fees and commissions on product performance, with, for example, new illustrations for reductions in yield, being made mandatory.
“This will require a major overhaul of their systems but ultimately it is a good thing for consumers and, for the insurance companies too, because it will lead to better quality business and help to tackle poor practices and mis-selling.”
Howell and Instone likened the changes, and others being introduced by the UAE IA, to elements of the UK RDR, which was introduced in 2012 and sought to create more transparency in costs and charges for financial advice and products.
One consequence of the RDR was many advisers who were resistant to the changes left the UK to work in overseas jurisdictions where they were not subject to the same level of regulations, such as the UAE.
Instone, whose firm is fee-based and which he says rebates insurance company commissions to clients, believes the UAE’s moves to tighten regulations may have the same effect.
“It’s going to be a challenging period for firms and individual advisers. I think you will see lots of advisers moving on to other places where they can continue to operate in the same ways they have always done, under less regulatory scrutiny.”
