Compliance Alert: THE NEW PROPOSED COMPANY SERVICE PROVIDERS NETWORK REGIME IN ADGM
On 27th October 2020, the Registration Authority (RA), the body responsible for the registration, incorporation and licensing of legal entities in the Abu Dhabi Global Market (ADGM), issued a Consultation Paper on the proposed Company Service Providers (CSP) Network.
The Paper proposes to introduce a framework for the regulation of CSPs in ADGM. The regulations aim to:
- Introduce a proportionate and balanced CSP Framework that addresses the success and increasing demand for ADGM’s Special Purpose Vehicles (SPVs) and foundations;
- Ensure that the Registrar has a locally-based contact in respect of certain ‘non-exempt’ SPVs and foundations; and
- Follow international best practice in establishing a robust framework for CSPs in ADGM which includes imposing specific obligations on CSPs in ADGM.
The Consultation period closes on 24 November 2020.
ADGM Consultation Paper No. 5 of 2020
What are the specific proposed requirements for SPVs and Foundations?
The mandatory appointment of an ADGM-based CSP, to facilitate the Register’s access to corporate registers and to simplify the process of serving documents by authorising CSPs to accept service on their behalf.
Are there penalties for breaching these requirements?
Yes, the Registrar will be authorised to impose sanctions, including power to strike companies off.
Exempt SPVs and foundations
Some exemption to the CSP framework are provided for.
For SPVs, it is proposed that exemptions include
- SPVs that are incorporated in ADGM and form part of a corporate group that has a well-established presence in the UAE, as well as
- SPVs that are wholly owned subsidiaries of any of the following:
- Entities that are exempt from obtaining a commercial license under the Commercial Licensing Regulations 2015;
- Operational parent companies that are incorporated and physically present in ADGM;
- Persons who are authorised to provide financial services in the UAE; and
- Companies that have sufficient resources and adequate governance policies and procedures.
For Foundations, it is proposed that exemptions include those foundations that can demonstrate that they have:
- sufficient resources and
- adequate governance policies and procedures.
New regime, new licensed activity!
A new controlled activity of “Providing Company Services” (PCS) is proposed where PCS services are carried out by way of business. This includes acting as an incorporation agent e.g. providing directors, company secretaries, councillors to any entity in ADGM.
The new regime will trigger additional regulatory requirements, namely:
- Specific licensing requirements to fulfil the fit and proper test, adhere to compliance arrangements, conduct business in a prudent manner and the obligation to have adequate resources to conduct its affairs.
- Cooperation obligations where a CSP departs and is replaced by a new CPS for a particular entity.
CSPs that hold or control client money will also be subject to additional obligations under the proposed Commercial Licensing Regulations 2015 (Client Money) Rules 2020.
The proposed client money rules are similar to other common law jurisdictions and have been set out to safeguard money belonging to clients against potential misuse, misappropriation or fraud.
CSPs that hold or control client money must comply with client money provisions and have in place adequate policies, systems and controls in respect of the handling, identifying, segregating and depositing of client money.
CSPs at a crossroad?
The current Corporate Services Provider activity will be phased out by the end of the transitional period.
Companies licensed under the current regime will have the option to
- either transition to the new framework and apply to conduct one or more CPS activities or
- limit their activities to being a ‘Registered Office Provider’ only;
Current Registered Office Providers or persons who currently provide incorporation and registration advice to entities within ADGM must transition to the new framework should they wish to be eligible for the appointment as a CSP under the new regime.
Proposed Transition Periods
Two transition periods are proposed – one for current CSPs and the other for non-exempt SPVs and foundations:
- There is a 6 months transition period for CSPs who intend to operate under the new regime; and
- For non-exempt SPVs and foundations, there is a transition period of:
– 12 months for existing SPVs and foundations and
– 8 months for new SPVs and foundations.
The new proposed framework appears to address several gaps with the current outdated CSP regime. The new stringent approach will mean CSPs will have more obligations to comply with which is more in line with international best practice, which eventually will benefit clients serious about best practice!
Partner & Head – Regulatory & Compliance Services