PROPOSED MONEY SERVICES REGIME IN ADGM
The Financial Services Regulatory Authority (“FSRA”), the financial services regulator in the Abu Dhabi Global Market (“ADGM”), issued the Consultation Paper No. 1 of 2020 on proposed expansion of the regulatory framework applicable to money services business in order to capture the evolution of new business models and methods for fund transfer within payments industry.
The Paper seeks to expand the existing scope of Providing Money Services and details the proposals in relation to:
- applicable rules under the FSRA’s regulatory framework along with proposed changes to the FSRA’s Financial Services Markets Regulations 2015 (“FSMR”), Conduct of Business Rules (“COBS”), the Prudential – Investment, Insurance Intermediation and Banking Rules (“PRU”), the Anti‐Money Laundering and Sanctions Rules and Guidance (“AML”);
- reasoning for the applicability of the proposed rules; and
- restrictions that shall apply.
To whom does it apply?
This Paper is relevant for:
- financial services market players exploring ADGM as a preferred jurisdiction to act as a money services provider; and
- existing market players providing money services.
Public consultation is open until 26 July 2020 for providing any comments on the proposed framework.
What does the existing regulatory framework cover?
The financial service of “Providing Money Services” is restricted to:
- currency exchange; and
- money transmission which includes selling/issuing payment instrument and stored value and receipt of money for transmission.
The existing framework, although suitable for a simple remittance business, does not consider the complexity of technology-driven and evolving money services business models.
What are the proposed changes?
In consideration with the evolution of various business models within money services, the FSRA proposes to introduce a comprehensive framework for money services business.
- An additional sub-division shall be introduced, viz. Payment Services;
- A concept of Payment Account is introduced;
- Existing service regulated under “Money Transmission” shall be moved to “Payment Services” where services involve payment account, payment instrument and stored value;
- “Money Transmission” shall be re-badged as “Money Remittance”; and
- Explaining/defining the terminologies applicable to various business models including Payment Instrument, Stored Value, Payment Account, Payment Transaction, Payment Services, etc.
Notable changes/distinction between the existing framework and proposed framework is depicted below.
Relevant terminologies defined:
What are the key business and compliance rules?
- Client classification rules shall not apply.
- PMS activity in relation to electronic currency only (no physical cash).
- Provisions relating to Client Money shall apply to the funds held by money services provider on behalf of the users.
- Submission of Money Services Auditor’s Report
- Segregation of Client Money in client money bank account
- Specific section in COBS introduced to capture provisions of Payment Services as applicable to PSPs. Some of the key features include:
- Framework Contract – a contract between PSP and user enabling ongoing execution of multiple payment transactions.
- Single Payment Service Contracts – a contract that governs a single transaction and where no payment account is set up by the payer.
- Common features applicable to both Framework Contracts and Single Payment Service Contracts include:
- the information to be provided to the user;
- the safeguarding of payers’ funds;
- operational standards, including those for the execution, authentication, revocation, refusal, timing and amount of payment transactions, limits on the use, the response of a PSP to late, unauthorized or incorrectly executed payment transactions, including complaints handling, dispute resolution measures, liability for unauthorized payment transactions; and
- risk mitigation, including periodic assessments of operational and security risks, and reporting of major operational or security incidents.
- Low Value Payment Instrument – a Framework Contract with reduced regulatory requirements available where there is:
- an upper limit on the amounts of individual transactions (USD 25/its equivalent or less);
- an aggregate spending cap (USD 100 or its equivalent); or
- a maximum stored value (up to USD 500).
- Certain rules (including fees and charges, authentication and execution, refunds and user liability) may not apply where PSPs facilitate B2B transactions
- Systems and control technology audit may be required
- Specific rules shall apply on AML/KYC:
- PMS providers to consider agent’s ability to comply with AML requirements at the time of onboarding
- AML oversight of all agents
- Comply with SAR filing requirements in ADGM and if applicable, in the jurisdiction of any agents operating overseas
- Limit on aggregate funds and transaction volumes for individual customers – to be assessed by PSPs in the light of their business models and risk appetites.
What is the regulatory capital requirement?
The regulatory capital requirement is linked to:
- the risk profile;
- the nature of service offerings;
- the extent of business operations; and
- the regulated services that the business falls into.
The capital requirement is the highest of the following capital:
- Base capital – A fixed amount prescribed under the FSRA’s Prudential rules
- Expenditure based capital – Dependent on the annual operating expenses
- Variable capital – Dependent on other criteria such as transactions and stored value.
Are there any other requirements for regulatory capital?
- The regulatory capital must be injected once the in-principal approval is received and the bank account is opened.
- The capital injection is required to obtain the final license.
- The regulatory capital must be kept at all times in a ring-fenced bank account and cannot be utilized for any capital or operating expenses.
What happens to the existing market players?
A transition period of twelve (12) months shall apply from the implementation date of the revised framework to the following:
- Existing market players currently operating in ADGM; and
- Applicants having received an “in-principle approval” to operate as such in ADGM as of the implementation date
Similarly, it shall apply to Authorized Persons operating in the RegLab when converting that FSP into one to undertake Payment Services or money remittance, but the transitional period shall apply only from the date that the FSP is granted up to a maximum of twelve (12) months after the implementation date.
Regulatory Costs for set-up
* In light of COVID-19 situation
In line with the complex and evolving money services business model and advanced technology implemented, the FSRA’s proposed expansion of the scope of regulated money services activity places ADGM’s importance on developing its overall regime for FinTech solutions in payments market space.
The proposed comprehensive framework is one of the important building blocks in ADGM’s eco-system in promoting the growth of regulated financial services activities and to provide greater protection and choices to users of money services.
The existing money services businesses (including FinTech solution providers) in ADGM and proposed businesses evaluating to set-up in ADGM to provide money services must undertake a thorough analysis of the regulatory framework, including conduct of business, rules, prudential requirement, and financial services activity that it may fall into.
How can we help?
We are a team of highly skilled and qualified professionals, specialized expertise as a certified anti-money laundering specialist including a FATF trained legal expert examiner, experience across financial services industry and multiple related fields from reputable jurisdictions.
- Completed – We have successfully assisted a UK based service provider in obtaining a money services license.
- Completed – We have successfully assisted a FinTech related MSB startup in attaining FSP through RegLab ADGM.
- Ongoing – We are currently working on three applications for seeking money services license both in DIFC and ADGM.
Our approach places significant importance on ensuring that our clients fully understand their options and we work closely with applicant firms to ensure their business control environment is clearly explained throughout the application.
We provide the following services in relation to authorization of a regulated entity:
- Analysis of the business model and providing compliance advice on the applicable regulatory framework and application process
- Preparing application for authorization, Regulatory Business Plan, process flow charts, and financial projections
- Drafting policies and procedures aligned with the relevant regulatory obligations and the business operations
- Liaising with the Regulator and Registrar for financial services permission and company set-up
Value Added Services:
- We also provide mandatory functions of Compliance Officer, Money Laundering Reporting Officer and Finance Officer on an outsourced basis.
- Our team of senior members also act as Non-Executive Board members or Board Committee members assisting in strengthening corporate governance and oversight.
Partner & Head – Regulatory & Compliance Services
Senior Manager – Regulatory & Compliance Services