ADGM’s new regulations will bring positive outcomes for the banking sector, says Moody’s
Abu Dhabi Global Market’s guidance for digital banks and robo-advisers regulations are positive for the banking industry, said an analysis from Moody’s investment 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.
The Financial Services Regulatory Authority (FSRA) of ADGM published a guide on the establishment of digital banks on July 10, which was then followed by a regulatory framework for digital investment managers, or robo-advisers, on July 15.
Digital banks accept deposits and conduct financial service online instead of physical locations. Investment management services are provided by digital investment managers, using technology and algorithm-based tools.
According to the regulations, FSRA would require banks to have a minimum base capital of $10 million (Dh36.7m), along with compliance and risk management policies, IT security measures, robust governance structures and mandatory senior management appointments.
Human oversight on the design, performance and security is also mandatory for the robo-advisers. For managing assets, at least $250,000 base capital is needed while $10,000 is required to advise on investment.
ADGM is open to receive applications from traditional banks that are willing to digital banks or branches of digital banks in the financial free zone. Firms with innovative value propositions can also submit their applications.
Moody’s said the incumbent banks’ ability to set up digital challengers on their own or in partnership with tech companies will “improve efficiency and support business volumes”.
“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.