Braced for change - Renewed focus on reform of legal and regulatory framework for financial services in the United Arab Emirates (UAE)

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In brief...

Needless to say, this year has been a challenging one for the UAE economy. Not only did the UAE find itself particularly vulnerable to the economic disruption of COVID 19 through its aviation, tourism and hospitality sectors, but the drop in oil prices has added an extra layer of strain. Like many other countries around the world, the UAE government has sought to provide support to the banking and financial services sector in the knowledge that a strong financial system will be key to minimising the impact of any economic downturn, while also ensuring that there is sufficient liquidity available to assist with the post COVID 19 recovery.

From a monetary policy perspective, one of the main initiatives implemented by the UAE authorities in order to strengthen the banking sector was the Targeted Economic Support Scheme implemented by the UAE Central Bank. This scheme saw the UAE Central Bank:

  • establish an AED50 billion zero interest facility that was made available to banks within the UAE for the purpose of allowing such banks to provide temporary payment relief for certain eligible customers; and
  • loosen certain existing capital buffers so as to ensure that banks have adequate lending capacity once the COVID 19 storm has been weathered.

However, efforts to shore up balance sheets and maintain liquidity are only part of the story, with focus in the UAE also switching to the regulatory frameworks for security enforcement and bankruptcy/insolvency proceedings, and whether those frameworks are robust enough for the testing times that potentially lie ahead.

When it comes to secured lending during tougher times, banks will of course want to be able to rely upon a system that adequately protects their security interests over different asset classes and which affords them the right priority against the claims of other creditors. With this very clearly in mind, the UAE government recently issued an update to the federal regulations dealing with taking security over moveable assets, with that update aimed at providing further clarity around certain issues that had previously troubled the market (such as questions around what constitutes a registerable security interest over a moveable asset and how to enforce those security interests against third parties).

The economic effect of COVID 19 has also shed new light on the Bankruptcy Law which was first introduced back in 2016. Before its introduction, companies undergoing financial difficulties and their creditors had very few options to avoid deadlock situations. While the Bankruptcy Law is perceived as an important step forward in the UAE, it is widely acknowledged that comprehensive policies and practical guidance need to be built around it. The Bankruptcy Law has – to date – been relatively untested and would certainly benefit from having insolvency experts from other jurisdictions working closely with the local UAE courts to ensure that it is implemented in a way that benefits the UAE economy as a whole.

Efforts have also been made in the financial services industry through the introduction in 2018 of a completely new banking law. This new banking law was designed to create a more comprehensive regulatory framework for banks and financial institutions and to enhance the power and supervision of the Central Bank over banking and financial activities conducted in the UAE. The new banking law contemplates the publication of a transparent rulebook accessible to the public and administered by the Central Bank which would contain all the relevant implementing regulations and circulars. The long awaited publication of this rulebook would certainly help to ensure that market participants in the financial services sector have the benefit of more readily available guidance on the regulatory and other issues affecting their businesses.

With banks and financial institutions likely to be at the forefront of the post COVID 19 recovery, it is clearer than ever that they will need a greater level of certainty and security in default scenarios. We can expect to see further change in the UAE regulatory landscape to help achieve this outcome.