GCC Quarterly Review Q2 2021
The second quarter of 2021 saw a number of legal developments in the Gulf Cooperation Council (GCC) region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Our GCC Quarterly Review – Q2 2021 summarises a selection of the major developments in that period, with links to further reading where available.
Download the PDF version (6 pages) or read online below.
New regime for FinTech firms providing third party services
The Financial Services Regulatory Authority (“FSRA”) of the Abu Dhabi Global Market (“ADGM”) has introduced a new regulatory framework for the authorisation and supervision of financial technology (FinTech) firms providing third party services to customers of financial institutions. Providing third party services, which involves the accessing, processing and transfer of specific types of customer data, is now a Regulated Activity for the purposes of the ADGM Financial Services and Markets Regulations 2015 (Financial Services and Markets (Amendment No.2) Regulations 2021. Firms providing such third-party services act as intermediaries between customers and the financial institutions in order to help customers manage and use their own data more effectively when undertaking financial transactions. Specific regulatory requirements apply in the areas of data protection and privacy of information, conduct of business, technology risk, anti-money laundering and countering terrorist financing.
New law redefines the DIFC’s objectives and the scope of DIFC entities’ activities
A new law issued by the Dubai Government redefines the objectives of the Dubai International Financial Centre (“DIFC”), refines the duties and responsibilities of the DIFC bodies and enhances the scope of the activities of DIFC establishments. Issued in April 2021, the new Dubai Law No.5 of 2021 concerning the DIFC replaces Law No.9 of 2004 on Dubai International Financial Centre, which was the original founding law of DIFC.
The objectives of the DIFC now more ambitious. These objectives include promoting Dubai as a leading international financial centre, developing and diversifying Dubai’s economy through financial services activities, increasing the contribution of the financial services sector to Dubai’s GDP, attracting investment to Dubai and encouraging investors
to conduct their business through the DIFC, promoting Dubai as an international centre for dispute resolution and advancing sustainable economic growth for Dubai. The law also provides greater clarity on governance and accountability principles for DIFC bodies. One of the DIFC bodies, the Dispute Resolution Authority, has now become two separate bodies: the DIFC Courts and the Arbitration Institute.
The scope of activities that DIFC companies (and other entities) can carry out are clarified and expanded. DIFC entities (including financial services entities licensed and regulated by the Dubai Financial Services Authority (“DFSA”) can:
- provide their services through the DIFC to clients located outside of the DIFC (i.e., clients “onshore” in the UAE), provided that such services are primarily provided from their premises within the DIFC (subject to exceptions); and
- offer their services and promote their products outside of the DIFC, provided that they comply with the DIFC laws and regulations, as well as the law applicable to the non-DIFC entity with whom they are doing business.
Unless otherwise stated, such contractual arrangements are to be governed by DIFC law. The DIFC President also now has the power to exempt Federal and Emirate government authorities, companies and other entities from the application of any DIFC laws or regulations.
DIFC consults on security tokens regulations
The DFSA plans to establish a regulatory regime for “Security Tokens” in the DIFC, following a consultation in March 2021 (DFSA Consultation Paper No.138 of 2021). The term Security Tokens encompasses cryptoassets or tokens using distributed ledger technology (DLT) or similar technology and includes not just securities but also derivatives.
Under the proposals, the DFSA would regulate Security Tokens which are considered to be the same as, or sufficiently similar to a type of “Investment” which is regulated by the DFSA. Such Security Tokens would be regulated within the scope of the DFSA’s existing regulatory regime, together with those platforms that trade and/or clear Security Tokens. The DFSA proposes to make its own assessment of whether a proposed token is a Security Token is considered to be the same or substantially similar to an Investment or not, based on a self-assessment submitted by an applicant. The proposal recognises that a case-by-case analysis is likely to be needed. Detailed guidance relating to IT-related requirements for operators of facilities that trade and/or clear Security Token are expected to be issued.
The timing of enactment of the new regime is not yet known. Further consultation on the proposed regime for other types of tokens that are not Security Tokens, such as exchange tokens and utility tokens, is expected later in 2021.
New Recovery and Resolution regime for DIFC banks
A new recovery and resolution regime for DIFC banks and certain other authorised financial institutions which experience financial difficulty came into force in April 2021. The new regime is set out in the Regulatory Law (DIFC Law No.1 of 2004) (as amended by Regulatory Law Amendment Law, DIFC Law No. 1 of 2021) and a new Recovery and Resolution (RAR) Module of the DFSA Rulebook. The regime is based on international best practice and draws on the Financial Stability Board’s “Key Attributes on Effective Resolution Regimes for Financial Institutions” and the Basel Committee on Banking Supervision’s Guidelines for identifying and dealing with weak banks.
The RAR Module sets out new requirements for DIFC banks and certain other authorised financial institutions to prepare a recovery plan setting out the measures to be taken to restore its financial position (or entities in its group) in the event of a serious deterioration of its financial position. The plan must comply with the scope and content requirements set out in the RAR Module, and it must be submitted to the DFSA. The DFSA, which is designated as the resolution authority for the DFSA, has new powers to prepare resolution plans for DIFC banks and certain other authorised financial institutions (based on information provided by such bank or institution) in order to achieve an orderly resolution where the bank or institution is likely to fail. In exercising its powers, the DFSA must aim to ensure the continuity of systemically important financial services and aim to avoid unnecessary destruction of value and losses to creditors. The Regulatory Law also grants the DFSA early intervention powers allowing the DFSA to direct the bank or institution to take certain actions (such as drawing up a corrective plan and/or call a shareholders’ meeting), where its liquidity or solvency is impaired, or may soon be impaired unless action is taken.
DIFC revises the intellectual property regime
The DIFC has introduced Intellectual Property Regulations to facilitate the administration and enforcement of the Intellectual Property Law No.4 of 2019. The new regulations came into force on 5 July 2021, following a consultation in April 2021. The new regulations set out provisions concerning the process and requirements for making infringement complaints to the DIFC Commissioner of Intellectual Property (IP), the establishment of a Register of Experts to which the IP Commissioner can refer when investigating complaints, and cooperation between the DIFC IP Commissioner with Federal and Emirate authorities in the UAE.
DFSA proposes leverage ratio adjustments in line with Basel III
The DFSA proposes to introduce updated prudential rules for banks regulated in the DIFC in line with recent revisions to the rules outlined by the Basel Committee on Banking Supervision in Basel III (Consultation Paper No.139 – Updating the Leverage Ratio). The key reform would see the introduction of a minimum level for the Leverage Ratio (“LVR”) of 3 per cent. and require breaches reported to the DFSA, under revised provisions of the Prudential Investment Business (PIB) Module of the DFSA Rulebook. This follows the introduction of a minimum LVR of 3 per cent. set by the Basel Committee on Banking Supervision, with effect from 1 January 2023.
Foreign investment opportunities expand in the United Arab Emirates
Shares in companies incorporated in the United Arab Emirates (“UAE”) may now be owned by foreign investors with no limit on the percentage of a company’s share capital that they may hold, subject to Federal restrictions protecting strategic sectors and applicable Emirate-level requirements.
The long-standing foreign ownership restriction which required a UAE company to have not less than 51% of its share capital owned by UAE nationals, set out in the Commercial Companies Law (Federal Law No.2 of 2015) has been repealed by Federal Decree-Law No.26 of 2020 (the “Companies Law Amendment”). The Companies Law Amendment also repealed Federal Law No.19 of 2018 regarding foreign direct investment (the “FDI Law”), which had allowed foreign investors to own up to 100% of the share capital in UAE companies operating in certain sectors, subject to licensing requirements. The new foreign investment regime came into force on 1 June 2021, as per an announcement of the UAE Minister of Economy, following the enactment of the Companies Law Amendment in September 2020.
The Cabinet has recently issued a resolution listing the activities which have a “strategic impact” (UAE Cabinet Resolution No. 55 of 2021). Foreign ownership in companies which are engaged in such activities is restricted and additional licensing requirements apply. The Cabinet Resolution designates a Federal authority for each category of strategic activities, which is to be responsible for setting out the required percentage of local ownership and any other applicable requirements, such as board representation.
The Dubai Government and the Abu Dhabi Government have each published a list of more than 1,000 activities which may be conducted by a company incorporated in the relevant Emirate, which is wholly, or majority owned by foreign investors. Please click here to view our note, in which we look at what we know so far about the new foreign investment rules in the UAE.
Security over moveable assets regime: implementing regulations issued
In March 2021, new implementing regulations setting out further requirements for taking security over moveable assets in the UAE were enacted pursuant to Federal Law No.4 of 2020 on Securing Rights over Moveable Assets. The regulations, set out in Cabinet Decision No.29 of 2021, repealed all regulations made under the now repealed Federal Law No.20 of 2016 on the Mortgage of Moveable Assets, including Cabinet Decree No.5 of 2018 and Cabinet Decree No.6 of 2018.
The new regime for taking security over moveable assets is broadly similar to the previous regime. Key points to note in the new regulations include:
- the online registry for the registration of security interests over movable assets is now renamed as the Emirates Integrated Registries Company (EIRC) (instead of the Emirates Movables Collateral Registry). Existing security holders do not need to re-register their security interests;
- registrations of security interests made under the previous regime shall remain valid against third parties until they expire;
- in relation to bank account security, if the bank holding the account is not the secured party, then a “control agreement” between the secured party, the security provider and the account bank should set out that the financial institution will follow the security provider’s instructions with respect to the balance of the account without obtaining any further consent from the security provider. Market practice is still developing as to whether the notice to and acknowledgement from the account bank is sufficient to constitute a control agreement, or if a separate control agreement is advisable; and
- where a secured party is to enforce using a self-help remedy, it must give notice to the security provider of its intention to take possession of specified secured assets and enforce against those assets, the method, time and place of enforcement.
New SCA Rulebook issued
The new SCA Rulebook was issued in May 2021, pursuant to SCA Decision No.13/R.M of 2021. The Rulebook consolidates the SCA’s rules and repeals certain regulations issued by the SCA. The rules set out the types of licence and categories of licensed financial activities and sets out provisions as to the licensing of financial activities (including financial promotion) and approved functions, and the conduct of business.
SCA regulates cryptoassets
Cryptoasset activities are regulated by the Securities and Commodities Authority (“SCA”), following the adoption of a new regulatory regime pursuant to SCA Board of Directors’ Decision No.23 of 2020 concerning Crypto Assets Activities Regulation (“Crypto Asset Regulation”) (which as far as we are aware is yet to be published in the Official Gazette). In March 2021, the SCA issued an Explanatory Guide to the Crypto Assets Activities Regulation (Administrative Decision No.11 of 2021 concerning Guidance for Crypto Asset Regulations). The regime applies to “Financial Activities” in respect of cryptoassets:
- which are a type of “Security” regulated by the SCA. Cryptoassets which are treated as a Security will also be subject the additional SCA regulations applicable to that Security, in addition to the Crypto Asset Regulation. The Crypto Asset Regulation overlays additional protections specific to the nature of cryptoasset Securities as compared to traditional equivalents and it also sets out how existing regulations of the SCA may be applied differently in certain circumstances, such as investor disclosure; and
- which are not considered a Security, in specific circumstances, including where the cryptoasset is available for exchange on an organised market and promoted or the subject of financial activities in the UAE, and is not otherwise regulated by the UAE Central Bank. Limited disclosure-based requirements will apply in these circumstances. If a person has sought approval of the SCA for such cryptoassets to be listed on an exchange, the SCA’s approval would be needed other than for listing cryptoassets on exchanges permitted to operate only for Qualified Investors.
This will affect entities engaged in cryptoasset activities, including initial coin offerings (ICOs) or token offerings in onshore UAE.
UAE Central Bank issues SME market conduct regulations
A new Small to Medium Sized Enterprises (“SME”) Market Conduct Regulation issued by the UAE Central Bank in April 2021 is intended to promote best practices among licensed banks and financial institutions operating in the UAE when engaging with SMEs. Enabling SME’s access to financial products and services in accordance with improved consumer protection standards is intended to support the development of the SME ecosystem in the UAE. SMEs can benefit from quicker account opening procedures, improved governance standards around the promotion and sale of financial products and services and disclosure of risks, improved complaints procedures and debt counselling. Banks and financial institutions will need to ensure appropriate policies and procedures are in place to comply with the new framework.
UAE Central Bank issues new risk management rules
The UAE Central Bank has issued two new regulations as to capital requirements. UAE Central Bank Circular No.12 of 2021 sets out minimum levels of paid-up capital and defined the quality of capital eligible to meet the capital requirements for licensed banks and financial institutions operating in the UAE, including foreign banks. Existing Banks which did not meet the requirements at the time it came into force in April 2021, must meet the requirements by 31 December 2023. These rules are separate and independent from risk-based capital requirements. Separate, lower capital requirements apply for specialised banks to operate according to a low credit risk model (such as those providing lending services to UAE nationals and residents); these are set out in UAE Central Bank Circular No.13 of 2021.
In a new Outsourcing Regulation and accompanying Standards, the UAE Central Bank requires banks and financial institutions to improve the management of risks when outsourcing certain functions, for example through mandatory board-approved policies and procedures for outsourcing activity and enhanced data protection for consumers’ confidential data.
Two new guidelines published by the UAE Central Bank on anti-money laundering and combatting the financing of terrorism (AML/CFT) are designed to improve awareness of, and compliance with, the regime applicable to financial crime (primarily set out in Federal Decree-Law No. 20 of 2018), including as to suspicious transaction reporting and legal persons/arrangements.
Consolidation of regulation of financial services and insurance
The supervision of insurance activities and financial services activities are now carried out by a single regulator, the UAE Central Bank. Following an amendment to the main law regulating financial services in the UAE and the operations of the UAE Central Bank law, all the competencies of the Insurance Authority have been transferred to the UAE Central Bank (Federal Law No.2 of 2021 Amending Certain Provisions of Federal Decree Law No.14 of 2018).
Female board representation for UAE listed companies
The SCA has now made it mandatory for UAE public joint stock companies (“PJSCs”) listed on either the Abu Dhabi Securities Exchange (ADX) or the Dubai Financial Market (DFM) to appoint at least one female board member. The SCA Board Chairman’s Decision No.3 of 2020 Approving the Governance Guide for Public Joint-Stock Companies has been updated, as announced in March 2021. The previous requirement for a minimum of 20% female representation on the board of directors of a PJSC on a comply or explain basis no longer applies.
Subordination arrangements upheld in the Dubai Courts
It has been reported that a subordination agreement has been recognised and upheld by the Dubai Court of Cassation in a recent case. This is a positive development for creditors, as the validity or enforceability of subordination arrangements is largely untested in the UAE. We understand that the Dubai Court of Cassation held that the obligation to show that the senior debt has been repaid lies on the subordinated debtor.
UAE Central Bank consults on enabling technology guidelines
UAE regulators are working together to establish guidelines for the banks and financial institutions which they regulate in relation to the use of new technologies to offer innovative products and services. The UAE Central Bank, the SCA, the DFSA in the DIFC and the FSRA in the ADGM launched a consultation in June 2021. The guidelines are expected to be issued in late 2021. The aim of the joint initiative is to proactively manage the risks associated with using enabling technologies, such as application programming interfaces (APIs), artificial intelligence and distributed ledger technology (DLT), in line with international standards and industry best practices.
Covid-19 economic support scheme extended
The UAE Central Bank has announced that the Targeted Economic Support Scheme (“TESS”), which is designed to support UAE businesses affected by the Covid-19 pandemic, has been extended. UAE Central Bank financing provided for loan deferrals under the TESS scheme is extended until the end of 2021, while the zero-cost liquidity facility available to banks is extended until June 2022. The scheme was due to end in June 2021.
Private Sector Participation Law enacted
Saudi Arabia has approved a new legislative framework to facilitate public-private partnerships (“PPPs”), in a new Public Private Partnerships Law (“PPP Law”). The PPP Law, provides a comprehensive framework for the regulation of arrangements between the Saudi Government and private sector entities in relation to the provision of infrastructure and other public services projects. Government approval is required for PPP projects, which are subject to a minimum term of 5 years and a maximum term of 30 years. The PPP Law addresses key issues such as the acquisition of land for projects, the provision of credit support by the Ministry of Finance to support projects where needed and other types of support (such as tax breaks), assignment and subcontracting by the private sector party, breach of obligations by the private sector party and Government step-in rights, compliance with the competition regime and dispute resolution (which must be by arbitration). The National Centre for Privatisation and PPP (“NCP”) consulted in June 2021 on draft implementing regulations to enhance the PPP Law.
The PPP Law and the implementing regulations are expected to come into force once the implementing regulations are approved and following publication in the Official Gazette.
Privatisation, either through PPPs or the sale and lease of state-owned asset, is one of the cornerstone policies of Vision 2030. The new law is expected to further encourage the development of the private sector in Saudi Arabia and lead to greater foreign investment.
Foreign investment: deadline for compliance with anti-concealment law
Saudi Arabian companies will face penalties if their business arrangements do not comply with the Anti-Commercial Concealment Law (Cabinet Decision No.785/1441 On the Approval of the Anti-Cover Law) by 23 August 2021. Breaches may arise for example, due to failure to obtain a foreign investment licence or the use of non-compliant nominee or other side agreements. Read more…
Saudi Arabia’s new environmental law
A new Environmental Law, which came into force in January 2021, significantly expands on the previous General Environmental Law in scope of obligations and scale of potential liabilities. Royal Decree No. M34/1422 Related to the Approval of the General Environment Law (Saudi Arabia Cabinet Decision No. 193/1422 Approving the General Environment Law) sets out a wider range of rules and licensing/permit requirements for the protection of environmental mediums, water resources and lands with vegetative cover. It also sets additional licensing/permit requirements on the conservation of wildlife, marine and coastal environments, together with controls for dealing with environmental disasters. Violations are subject to penalties.
A guide for company directors in Saudi Arabia
Directors usually have wide powers to manage the affairs of their company and act as its agent and a duty to do so with due care, skill and diligence. In our new guide, we give an introduction to the role, powers, duties and liabilities of directors of limited liability companies in the Kingdom of Saudi Arabia. Read more…
Qatar proposes regime to secure moveable assets
Qatar’s proposed law to introduce a new regime for taking security over moveable assets has been approved by the Shura Council and referred to the Qatari Cabinet for consideration. Similar to the modernised regimes in the UAE and Saudi Arabia, the proposed regime would facilitate the grant and registration of security interests of a wide range of present and future moveable assets, including bank accounts, receivables, equipment and goods.
Bahrain’s data protection regime: implementing regulations consultation
Enhancements to Bahrain’s data protection regime are expected, following a consultation on three implementing regulations under the Personal Data Protection Law (Law No.30 of 2018). The regulations, if enacted, will strengthen the rights of data subjects in relation to their personal data and subject data controllers to greater governance requirements to ensure the secure and safe processing of personal data.
Global banking regulator outlines proposals for the prudential classification and treatment of cryptoassets
The Basel Committee on Banking Supervision has published a formal consultation paper on the prudential regulatory treatment of cryptoassets. How will different kinds of cryptoassets be treated for the purposes of prudential regulation? Read more in our latest publication.