What does the current Fintech Regulatory Framework in the UAE
The UAE has been stimulating growth and innovation since His Highness Sheikh Mohammed bin Rashid Al Maktoum, the Vice-President and Prime Minister of the UAE and Ruler of Dubai, announced the National Innovation Strategy in October 2014. This announcement set in motion plans that would bring about making the UAE one of the most innovative nations in the world.
Among others, the Fintech industry has seen the most growth in the past few years. The UAE has cultivated an environment to facilitate growth and create an influx for the Fintech industry. As a result, several regulatory frameworks emerged, providing supervision to an otherwise promising yet volatile industry.
Fintech is ever-evolving thanks to the innovations and changes within the technology itself. The Fintech industry has seen exponential growth since 2015 by bringing in almost $237 Million in investments within the Middle East. To cope with the influx of investments, there have been various attempts to facilitate healthy growth through the implementation of regulatory frameworks. However, as with anything growing as rapidly, any fixed framework will lag behind technological innovation. Regulators have kept a keen eye on Fintech developments as they need to accurately and swiftly assess and address any issues that may have regulatory consequences or legal implications.
What are some of the issues faced by Larger Fintech firms?
Despite the progress made, the Fintech industry has seen issues that disproportionately affect firms in different stages of their life cycles. The regulatory framework set in place is confined to specific jurisdictions such as the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). In order to avail the benefits of these frameworks, a firm must establish or set up their companies within these jurisdictions. For a newer start-up firm, this would pose no problem as the frameworks are specifically designed to help firms starting out to gain funding and test their technology.
In addition to this, a large-scale firm faces the problem of expansion. To expand across the various jurisdictions, the firm must adhere to the compliance requirements of each local regulator. The issue here is that each framework has specific regulatory requirements increasing the time and compliance costs of implementation, and the development of group-level policies becomes a challenge.
While Regulators may not be at the stage where the entirety of the fintech industry can be under one umbrella regulatory framework, they have, on the other hand, progressed far in making the regulations more accessible to newer start-up firms.
How does the current regulatory framework help a start-up Fintech firm?
A start-up Fintech company faces various challenges in its set up process. Once established it also requires the right environment that allows natural growth within the industry rather than stifling the firm from day one. To this effect, both DIFC and ADGM have established regulatory regimes (FinTech Hive in DIFC and RegLab in ADGM) that facilitate start-ups by allowing set up without renting an (often expensive) office, reduced registration charges, simplified regulatory requirements which are tailored to each applicant depending on the connected risks.
In addition, the firms in these dedicated regimes have direct access to a fintech network of other firms and investors, allowing easy establishment of several necessary business connections. Through these initiatives, the Regulators increase accessibility for fintech start-ups while doing so in a controlled manner.
The UAE Central Bank has also established a Fintech office to increase and develop regulation of financial technology innovations throughout the country while also building a safe ecosystem to allow Fintech to thrive. The Central Bank wisely saw the potential that Fintech could bring to the financial sector and has taken steps in the right direction in order to facilitate its growth and inclusion.
How have Regulators adapted to the Fintech industry?
Crypto Assets Business: The Financial Services Regulatory Authority (FSRA) in ADGM has established a regulatory framework for Crypto assets known as OCAB i.e. Operating a Crypto Asset Business. These regulations cover activities conducted by Crypto Asset Exchanges, Custodians and Intermediaries. A feature of the FSRA is its approach towards Crypto assets. It uses a case by case approach to decide whether a crypto asset is deemed to be a coin token or a commodity. This approach may seem time-consuming, but it shows the FSRA is willing to guide the Crypto industry with the risk-based approach to establish the UAE as the foremost Crypto Asset and Fintech Hub in the Middle East.
Crowdfunding: The Dubai Financial Services Authority (DFSA), the Financial services regulator within the DIFC, had tested through its fintech regime and then rolled out the regulatory framework for loan- and equity-crowdfunding, expanding access to raise funds for small and medium businesses. The Property crowdfunding regime has recently been added, broadening investment options to retail investors.
Private financing platforms: In the meantime, FSRA in ADGM created private financing platforms regime, also allowing easier private lending in a regulated environment.
Robo-advisory: A good example of Regulators keeping up with the ever-changing trends is the introduction of the Robo-advisory regime in ADGM. The regime created a gateway for Robo-advisory firms using artificial intelligence algorithms to provide investment advice and discretionary asset management to clients as well as automatization of the interaction channel between the client and the advisory firm. The regime recognizes the potential to reduce the needs in human and financial resources and, therefore, allows flexibility in the minimum prudential capital of such companies.
Where are we now?
The fintech regime allows start-ups as well as established firms, to test new technology in a cost-effective environment of like-minded professionals with easy access to investors. As a result of testing, some companies move to the conventional regulatory environment, while others motivate the Regulators to create dedicated frameworks addressing specific risks and requirements of the new activity (such as DIFC crowdfunding, ADGM Robo-advisory, and private financing platforms, etc.). Regulations keep evolving at pace with technology, allowing the industry to develop in harmony with the law.
The UAE has proven itself to become a central hub for innovation.