A single financial services regulator for the UAE

The UAE has announced that the regulation of the financial services sector will be undertaken by one unified regulator, and that the two existing regulators will be merged.

The decision was announced on 5 July 2020, when the UAE Government confirmed the merger of the Insurance Authority (IA) and the Securities and Commodities Authority (SCA) headed by the Minister of Economy was to proceed. In this article, we examine the potential advantages of the new entity and what this means for the financial services industry.

The merger follows a period of review announced by Ministerial Resolution No. 814 on 23 September 2019 by a 10-member committee to investigate the implications of consolidating the two regulators. No date for the merged entity to be formed has been provided as yet.

A significant development for the UAE

While details of the newly formed financial services regulator are not yet known, the announcement of the merger is a welcome development for the UAE financial services industry in an effort to remove regulatory overlap and improve communication between the supervising authorities. Under the current regulatory regime for financial services in the UAE, the IA supervises insurance activities and the SCA supervises funds, investment management and advisory activities. Combining the two regulators will benefit financial services firms who will deal with one single regulator.

A single financial services regulator is in keeping with the modern approach to financial services regulation, and follows the approach taken by other regulators in the region – for example, SAMA in Saudi Arabia, the CBB in Bahrain, and the financial services regulators in the Financial Free Zones of the DIFC and ADGM. We would hope that the new combined regulator will be in a position to have meaningful dialogue and co-operation with the other financial services regulators in the UAE.

What this means for the financial services sector

There are clear advantages to combining the regulation of insurance services alongside other financial services. There is a considerable overlap between 'insurance' regulation and the regulation of other 'investment' services. While both sectors require bespoke rules and regulations dealing with authorisation, solvency and, to some degree, conduct of business issues, the approach adopted by most modern regulatory authorities is to regulate the provision of these services under a unified body. We would hope that the unified regulator will develop a robust and comprehensive framework that brings clarity to the market. The amalgamation of the regulators also has considerable potential to promote innovation in both the development of products and their distribution.

As with any regulatory transformation, there will be a period of uncertainty while we wait to see how the new consolidated entity will function, and how the new regulatory framework will be introduced and enforced. One particular area for consideration is the issue of licensing. Will the new regulator issue combined licenses for firms already licensed by the IA or the SCA or take this opportunity to overhaul the licensing criteria completely? This is an issue particularly relevant for the advisory community who is currently required to have separate entities licensed by the IA and the SCA in order to provide a complete service to their customers. The answer to this question is not clear at this stage, but we suspect the licensing issue will not be as simple as converting existing licenses, but will at the least require a transition period for existing licensees to adapt to the new regime.

Similarly, it is to be hoped that under a single regulator there will be greater consistency of approach on topics which impact both the insurance and the investment management sectors. For example, the remuneration of advisors and brokers where there is currently considerable scope for regulatory arbitrage.

The opportunity also exists for the new regulator to overhaul the existing IA and SCA Rulebooks, and to produce a fit-for-purpose cutting-edge regulatory framework that will encourage the development of the financial services industry in the UAE. This should, in our view, include a root and branch review of the basis on which insurance and investment products are approved by the regulator and distributed, the remuneration of advisors, the role of technology in the sector going forward, and the conduct of business by regulated entities.

Conclusion

The UAE has the opportunity to set the benchmark for financial services regulation in the region. In order to do so, it will need to have staff on board who have a deep understanding of the nature of the industry and the regulation required to promote the market to drive investment and growth, and protect consumers.

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