ADGM’s new FinTech regulations are credit positive for banking system, Moody’s says
Frameworks for digital banks and robo-advisers were issued this month
Abu Dhabi Global Market's digital banks guidance and robo-advisers regulations are credit positive for the banking system, according to an analysis from Moody’s investors service.
“These frameworks are credit positive for the UAE's (Aa2 stable) banking system because they maintain high regulatory barriers to entry protecting incumbent banks, while safeguarding systemic stability through a well-regulated environment for financial technology firms,” the report said.
ADGM’s Financial Services Regulatory Authority (FSRA) published a guide on the establishment of digital banks on July 10. This was followed by a regulatory framework for digital investment managers, or robo-advisers, on July 15.
Digital banks are those that accept deposits and conduct related financial services primarily online, rather than at physical locations. Digital investment managers are companies that provide investment management services using algorithm-based tools and technology to interact with customers.
The FRSA will require digital banks to have a base capital of at least $10 million (Dh36.7m), robust governance structures, compliance and risk management policies, IT security measures, and certain mandatory senior management appointments.
The requirements for these robo-advisers include human oversight over the design, performance and security of the algorithm model. At least $250,000 base capital is needed to manage assets, while a minimum of $10,000 is needed to advise on investments.
ADGM is accepting applications from traditional banks seeking to establish digital banks or branches of digital banks in the financial free zone. It will also consider applications from “firms with innovative value propositions” and from partnerships between technology companies and financial institutions, its digital bank authorisation guide said.
Moody’s said the ability for incumbent banks to set up digital challengers on their own or in partnership with technology companies will “improve efficiency and support business volumes”.
Digital-only banks in the UAE include the millennial-targeting Liv, which was set up by Emirates NBD in 2017 and had 250,000 customers as of this month. In July 2017, ENBD announced a Dh1 billion planned investment over three years to carry out a digital transformation programme.
“Although new robo-advisers and digital banks will use their low-cost and high-quality service to compete with incumbent banks, the UAE’s largest banks, including First Abu Dhabi Bank and ENBD, are well positioned to defend their market share because of their large and sticky customer bases, large technology budgets and strong profitability,” the Moody’s analysis said.
Updated: July 19, 2019 04:15 PM