14 Nov 2018

New UAE Central Bank Law

Authored by: James Farn and Sundus Khan

In brief:

  • The UAE has issued Federal Law No. 14 of 2018 governing the UAE Central Bank and the organisation of financial institutions and activities.
  • This new law reinforces the role of the Central Bank to direct monetary credit and banking policy within the UAE.
  • In this article, we summarise the main provisions of this new law which came into effect on 1 October 2018.

The UAE has issued Federal Law No. 14 of 2018 (the new Law) governing the UAE Central Bank (Central Bank) and the organisation of financial institutions and activities which came into effect on 1 October 2018.

The new Law reinforces the role of the Central Bank to direct monetary credit and banking policy within the UAE. Under the new Law, the Central Bank is broadly tasked with:

  1. the exercise of exclusive control over currency issue in accordance with the provisions of the new Law;
  1. supporting the UAE currency and maintaining its stability internally and externally to ensure that it freely convertible into foreign currency;
  1. directing credit policy in a way which achieves steady growth of the UAE economy,
  1. supervising the effectiveness of the banking system in the UAE;
  1. advising the UAE government on financial and monetary issues; and
  1. maintaining the UAE government’s reserves of gold and foreign currency.

To achieve these broad objectives, the Central Bank:

  • will act as the licensing authority for a range of designated licensed financial activities (LFAs) carried out in or from the UAE by Licensed Financial Institutions (LFIs) which now expressly include marketing of stored values services, electronic retail payments, digital money services and virtual banking services;
  • will oversee the compilation, exchange and processing of credit information received from reporting LFIs or any other party;
  • will impose requirements on LFIs in relation to their activities as deposit takers to protect the interest of the depositors;
  • may exercise discretionary powers to establish policies and issue regulations relating to the prudential supervision of LFIs;
  • may make provision for the liquidation of LFIs in financial difficulty;
  • will act in conjunction with any other regulatory authority in the UAE to ensure payment and settlement finality for fund and other money transfer systems; and
  • may exercise a range of administrative and financial sanctions and penalties on non-conforming LFIs.

Applicability

Both Federal Law No. 10of 1980 Regarding the Central Bank, The Monetary System & Organisation of Banking and Federal Law No. 6 of 1985, Regarding Islamic Banks, Financial Institutions and Investment companies are repealed.

All current Central Bank regulations, decisions and circulars remain in force until replacement regulations, decisions and circulars are issued within a period of three years from date of the new Law.

These new regulations, decisions, and circulars will have no retroactive effect and will not prevent the implementation of agreements between LFIs and their customers that have been concluded prior to their issuance. The Central Bank will determine the transitional period within which all LFIs will be required to reconcile their position with the new Law.

The new Law does not apply to the financial free zones and the financial institutions regulated by the authorities of those zones. The Central Bank may however, in accordance with Article 28 (2) of the new Law exercise its powers over financial institutions outside the UAE or in financial free zones, in consultation and coordination with the concerned regulatory authorities.

Minimum Capital Requirement for LFIs

In contrast with the old law, the new Law does not expressly specify the minimum capital requirement for LFIs - however, it states that the Board of Directors of the Central Bank are empowered to establish regulations on the minimum capital requirement, increase or decrease these capital requirements, determine risk-based capital requirements and the necessary actions to be taken in case of capital shortfall.

Licensing

Licensing and supervisory functions for LFIs are now consolidated under the control of the Central Bank. These new provisions appear to simplify the previous position under which both the Central Bank and Securities and Commodities Authority (SCA) have exercised powers and responsibilities for the licensing of day-to–day activities of financial institutions within the UAE, based on the type of financial activity. To the extent that a LFI intends to carry on activities other than LFAs, licensed by other regulatory authorities in the UAE or in other jurisdictions, such LFIs are required to obtain approval of the Central Bank prior to obtaining licensing from the concerned regulatory authority which appears to signify concurrent jurisdiction.

Article 64 of the new Law reconfirms that no financial activities may be carried out by a LFI in or from the UAE without a license issued by the Central Bank. Article 65 of the new Law lists out all LFAs. This list includes new activities of providing and marketing stored values services, electronic retail payments, digital money services and virtual banking services.

The new Law grants the Central Bank wide discretionary powers to issue licenses, impose conditions and restrictions on licenses and suspend, withdraw or revoke licenses.

Additionally, the promotion of any LFA or financial product can only be carried out in accordance with the new Law and related rules and regulations. For the purposes of this new Law, promotion includes any form of communication by any means, aimed at inviting or offering to enter into any transaction or offering to conclude any agreement related to an LFA.

The Central Bank has discretionary powers to exempt any activities or practices, or exempt the prohibition to carry on or promote LFAs.

Any financial activity not expressly listed in Article 65 of the new Law is to be determined by a technical committee named the “Financial Activities Committee” (Committee). The Committee is intended to be established by the Ministry of Finance through a Cabinet resolution, chaired by the Ministry and include in its membership a representative of each of the regulatory authorities in the UAE.

The approval of any concerned regulatory authority is required to be obtained in the event the Committee suggests adding a specific financial activity not currently mentioned in the new Law.

Higher Shariah Authority

In relation to Islamic financial institutions, the new Law decrees the establishment of “The Higher Shariah Authority” which will, among other authorities, determine rules and principles applicable to Shariah-compliant financial institutions, and undertake the supervision and oversight of the internal Shariah supervisory committees of all Islamic financial institutions. The new Law appears to formalise and expand on the mandate of the already existing Higher Sharia Authority which has been active since early 2018.

The Higher Shariah Authority’s Fatwas will be binding on internal Shariah supervision committees of all LFIs that conduct the whole or part of their business in accordance with the provisions of the Islamic Shariah.

Compound Interest

Article 121 of the new Law expressly prohibits LFI’s from charging interest on accrued interest (compounding) on any credit or funding facilities granted to customers. It is unclear whether capitalisation of interest would still be permitted.

Regulatory Framework for Deposit Taking Financial Institutions

The Board of Directors of the Central Bank is empowered to establish a resolution framework for deposit taking LFIs in order to minimise the effect that a deficiency in their financial position may have on the UAE’s financial system.

In order to protect concerned institutions and their respective depositors, the Central Bank may, among other measures, undertake direct management of a financial institution and form an interim committee to manage the concerned institution which may impose a moratorium on or all some of the activities of the financial institutions.

Grievances & Appeals Committee

The new Law also introduces a Grievances & Appeals Committee to be established under the chairmanship of a Court of Appeal Judge, two judges from the same court, and two experts nominated by the Board of Directors of the Central Bank of UAE.

The Committee has the sole and exclusive jurisdiction to decide on all grievances and appeals against any decisions of the Central Bank related to licensing, authorisations of individuals and licensing and designation of Financial Infrastructure Systems.

A decision of the Committee will be final and can only be challenged before the competent court within a period of twenty (20) business days from date of its notification.

Penalties

The new Law also specifies the Central Bank’s enforcement powers to impose a broad range of administrative and financial sanctions and penalties on LFAs that are in violation of the provisions of the new Law. These range from issuance of a caution, to requiring the financial institution to take corrective measures to imposing fines and suspending or revoking the licenses of the concerned financial institution.

The new Law contains provisions aimed to ensure consumer protection, including the confidentiality, and protection of customer financial information. The new Law specifically imposes a duty on LFIs to maintain confidentiality of all customer information. Any breach of confidentiality may be penalised by imprisonment and/or a fine.

The new Law also includes a number of new provisions related to good governance, financial infrastructure oversight and the enforcement of consumer protection.

Hadef & Partners’ Banking & Finance team is able to advise on this important new Federal law.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.