A PARADIM SHIFT FOR REGULATORS – FINTECH AND TECH STARTUPS IN THE UAE & ISRAEL
In recent years, the UAE and Israel have become leading hubs for innovation and technology – both actively championing the development of financial technology (fintech) and disruptive technological innovations within each of its regions. The UAE has established itself as the largest fintech hub for start-ups in the Middle East region, which is in line with its National Innovation Strategy 2004.[i] Israel to has become renowned for being a ‘start-up nation’, so much so that it has been named ‘Silicon Wadi’ (the Silicon Valley of the Middle East).[ii]
The UAE has played a vital role in the development of fintech and tech start-ups. New fintech activity home to the region include blockchain-enabled financial services and cryptocurrencies, Robo advisory, crowdfunding and digital banking products. The UAE’s success seems to derive from its commitment to becoming a global leader in the fintech industry, which has been supported by regulators and the UAE government.
Similar to the UAE, there has been a lot of government support around the development of tech companies including fintech start-ups in Israel, which has meant that the country has established itself as a global fintech ecosystem.[iii] Tech start-ups include data analytics, artificial intelligence and blockchain companies. A vast number of financial firms have then leveraged these technologies to help supply and produce financial products and services. Israeli regulators have stated that technological advancements are crucial and its regulatory regime needs to evolve to keep abreast of changes.[iv]
This article provides an overview of similarities and differences in the way UAE and Israel have done this.
How can a fintech or tech start-up become licensed in the UAE?
In the UAE, a fintech or tech company can apply for licensing in UAE Mainland or in one of the financial free zones, namely the Dubai International Financial Centre (DIFC) in Dubai or the Abu Dhabi Global Market (ADGM) in Abu Dhabi depending on whether it falls under the financial services regulatory framework. In UAE Mainland there is no specific regulator that oversees fintech companies. As such, an applicant would have to apply to the UAE Central Bank, the Securities and Commodities Authority (SCA) or the Insurance Services Authority (ISA) depending on the fintech product or service being offered (please note that the SCA & ISA are soon to merge). Here foreigners are limited to owning up to 49% of the company, and a UAE national will own the remaining 51% of shares.
Alternatively, Fintech companies may choose to set itself up in a free zone which allows 100% foreign ownership. Applicants interested in setting up a fintech company in ADGM or DIFC are required to apply to the relevant independent regulatory body, that being the Dubai Financial Services Authority (DFSA) in Dubai or the Financial Services Regulatory Authority (FSRA) in ADGM. The applicant will choose the appropriate category of license depending on the fintech product or service. There is also a separate category in both free zones for tech start-ups which is not regulated. Applicants also have the option of launching their tech start-ups in one of the commercial-free zones such as Dubai Internet City.
Is there any difference in Israel?
Similar to UAE Mainland, there is no specific government authority in Israel that regulates the provision of fintech products and services. This then means licensing would need to be issued by the relevant financial services regulator applicable to the fintech company.[v] The various financial services regulators include:
- The Israeli Securities Authority (ISA)
- The Bank of Israel (BOI)
- The Capital Markets, Insurance and Savings Authority (CMISA)
REGULATOR PARTICIPATION IN FINTECH AND TECH START-UPS
Financial regulators in both the UAE and Israel have set up various regulatory initiatives aimed at encouraging fintech and tech start-ups to grow and develop in more of a lax regulatory environment. The lessons learned from these test environments will help shape regulations accordingly.
DFSA’s Innovation Testing License and Tech License
In May 2017, DFSA launched an Innovation Testing License for fintech start-ups in DIFC. Firms are allowed to apply for a restrictive class of financial services license to test new products, services and business models, whilst only complying with rules appropriate for testing. To meet the eligibility criteria, firms need to show the regulator that they have an innovative concept which involves the use of fintech. The testing period will be for a fixed period – usually within six to twelve months after which the firm will either be upgraded to a full license or required to exit the testing license. DFSA has also recently launched a new license (non-regulated) for tech start-ups providing the necessary resources to establish and grow innovative business ideas.[vi]
ADGM’s Reglab Sandbox & Digital Fintech Lab
Similarly, the FSRA in ADGM launched a RegLab Sandbox, which is a licensing framework for start-ups and existing regulatory fintech companies to test innovative technological solutions in a specially-tailored regulatory environment. The program lasts for two years after which the firm will either be upgraded to a full license or required to exit the RegLab. This particular free zone has also launched a Digital Fintech Lab, which is a virtual environment that allows fintech firms, financial businesses and the FSRA to develop new fintech products. ADGM also offers tech start-up licenses (non-regulated), which is sector agnostic to set up and scale the tech business for up to 5 years of initial operations.[vii]
Launching of Regulatory Sandbox
The Israel government has established an intergovernmental team comprised of the ISA, BOI, CMISA and the Israeli Money Laundering and Terror Financing prohibition Authority to develop a Regulatory Sandbox.[viii] Similar to the initiative programs in the UAE, this will create a test environment where fintech companies can experiment under regulatory supervision. This will help regulators see how legislation and regulations will need to change to adapt to emerging financial technologies. There will be a licensing track designed for fintech companies that need a license to operate in Israel.[ix]
ISA & IIA
Earlier this year, the ISA and the Israel Innovation Authority (IIA) launched a program called “Data Sandbox”, which will help fintech companies work with regulators, licensed entities and other financial services providers to meet real-world requirements of the sector. The selected start-ups would receive access to the ISA’s database.[x] The IIA also offers several Incubator Incentive Programs for tech start-ups where participants get access to funding, policy support and government backing.[xi]
Examples of Fintech companies that have been taken into sandboxes [xii] [xiii]
NEW FINTECH REGULATIONS
More recently, the DFSA and FSRA have developed a specific regulatory framework in the quest to help strike a balance between driving forward innovation in the fintech space and protecting the integrity of the financial system and its consumers – some examples include:
INCORPORATING FINTECH PRODUCTS TO COMBAT FINANCIAL CRIME
In the UAE, there have been several initiatives to demonstrate that the region has not only used fintech to help combat financial crime, but it has also incorporated fintech products into AML laws. For example, the Federal Law No. 20 of 2018 on Anti-Money Laundering Law specifically includes electronic or digital assets when defining funds, demonstrating the UAE’s commitment to combatting financial crime.
AML in UAE: Earlier this year, the UAE regulators urged financial businesses and designated non-financial companies and professions to use reliable technology and fintech tools to counter money laundering and terrorist financing activities.[xiv] It’s also important to highlight that in December 2018, ADGM launched an electronic KYC plan to help financial institutions use innovative technologies to meet regulatory requirements. The plan utilized vital technologies such as blockchain – adopting technology to create solutions in the regulatory technology space.[xv]
AML in Israel: Israel, on the other hand, does not seem to have evolved as much in this area. There are no specific AML laws in respect of fintech companies, as such the same AML rules apply across the board when it comes to financial businesses in Israel. With that said, it appears that the new draft Orders published in 2019 may apply to fintech as it applies to credit intermediation systems (including peer to peer lending) and other financial asset service providers which include virtual currencies. It has also been said that the Israeli Money Laundering and Terror Financing Prohibition Authority (Israeli’s financial intelligence unit) holds roundtables with fintech and virtual companies.
This is undoubtedly a step in the right direction. However, regulators will still have to develop its AML regimes even further to help combat financial crime, mainly because as technology companies evolve criminals will leverage fintech capabilities to commit a financial crime in new and different ways. [xvi]
There is a clear mandate of regulatory support for fintech and tech start-ups in both the UAE and Israel due to the various initiatives and the changes in each region’s regulatory framework. But upon reviewing both jurisdictions, it appears that the UAE is slightly more ahead of Israel in terms of what they have done so far to contribute from a regulatory perspective. But one cannot deny that it remains an ongoing challenge and more needs to be done in both regions.
Partner & Head – Regulatory & Compliance Services
Senior Manager – Regulatory & Compliance Services