Getting regulation ready
In an exclusive interview, Banker Middle East sits down with Patrick Gearon, Partner at Charles Russel Speechlys, to discuss the regulatory environment surrounding financial institutions in the UAE and wider GCC.
What are your views on the regulatory landscape banks in the region currently operate in?
Financial institutions in the GCC are continuing to face a number of challenges with respect to regulation. Since the financial crisis, regulations have reflected a higher degree of stringency and compliance to address capital and liquidity requirements, counter the serious threats posed by cybercrime and to manage the risks of lending.
One direct example is the growing scrutiny that central banks in the region are taking with respect to anti-money laundering and anti-corruption policies to develop and issue new regulations for better security, regulation and protection to provide stability to the financial system and instil greater confidence.
A further example is the establishment and introduction of new compliance and regulatory departments within the financial institutions themselves.
The costs of regulatory compliance are also increasing for financial institutions. For example, the Central Bank of Bahrain recently introduced a requirement that all Islamic financial institutions must be externally audited.
From a legal point of view, what challenges do banks face in adapting to international standards?
The role that financial institutions and banks in the region play is growing and thus there are more and greater challenges.
One of these challenges is related to background checks, Know Your Client (KYC) documents, Source of Funds and general enhanced compliance requirements. A further challenge is the difficulty in recovering debts and defaulted loans.
As a result, regional financial frameworks in the region have been developed and adapted to meet international standards.
The UAE and Bahrain have been regional leaders in adapting new financial frameworks such as establishing the Al Etihad Credit Bureau (2010) under the UAE Central Bank’s supervision to collect credit information from financial and non-financial institutions in the UAE.
What major regulatory changes should financial institutions in UAE anticipate going into 2018?
One of the regulatory changes that UAE financial institutions should anticipate is an increase in insurance regulation. In addition, they will be required to close the gap between their assets and liabilities which will require more mature lending frameworks.
Greater cybersecurity and online transactions regulations must also be adapted and the creation of more digital technologies for use by financial institutions, will also require close regulatory supervision and oversight.
In your opinion, what legislative measures should authorities take in raising the profiles of their respective financial jurisdictions?
The two great drivers in the financial sector at present are: the development and adoption of fintech and the growth of Islamic finance. Both Bahrain and the UAE have credible claims to be market leaders with these two drivers. The key in the context of fintech will be for legislation and regulation to be flexible and nimble enough to cater for the extremely fast pace of development of fintech products. In relation to Islamic finance the key is ensuring that regulation keeps pace with the ever-developing products which Islamic financial institutions are creating for their customers.
What is your outlook on the industry moving forward?
The outlook for the financial sector in UAE is a promising and stable one owing to the stability of the economy and its continued growth which will be boosted by large-scale projects, including Expo 2020, the new airport and expansion of the metro infrastructure.
New construction projects in Abu Dhabi, Dubai and Ras Al Khaimah are increasing the flow of money and financial transactions.
In addition, a continuing investment focus on tourism, services and the hospitality sectors in UAE will further aid the growth of the financial sector.