ADGM proposes FinTech regulatory framework

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) has launched a consultation on the introduction of a regulatory framework to support participants using innovative technology within the financial services sector (FinTech). This follows an announcement earlier this year by the ADGM chairman that Abu Dhabi is aiming to become the capital of financial technology in the Arabian Gulf.

In its consultation document the FRSA acknowledges the potential of FinTech to improve efficiency within the financial markets and systems. The FRSA’s stated aim is to build a conducive FinTech environment in Abu Dhabi and the ADGM, and to position the ADGM as the FinTech innovation hub in the GCC region.

The consultation document proposes a “Regulatory Framework” (RegLab), a tailored framework that provides a safe environment, within controlled boundaries, for businesses to test, develop and provide innovative FinTech products and services without being immediately subject to all the normal regulatory requirements. The RegLab aims to address perceived high authorisation entry barriers and to provide assistance to start-up FinTech firms in navigating the ADGM regulatory requirements.

The ADGM’s proposal has parallels with initiatives recently announced by financial services regulators in the UK, Singapore and Australia to open “regulatory sandboxes”. However, the ADGM’s announcement gives it an important first mover advantage in the GCC region.

The key feature of the proposed RegLab is a regulatory “blank-sheet” approach. FinTech participants authorised by the FSRA to carry on a regulated activity within the RegLab will not be subject to the standard regulations and rules that are applicable to those regulated activities under the Financial Services and Markets Regulations 2015 (FSMR). Instead, a customised set of rules may be selectively applied based on the risks identified for the FinTech business model.

It is envisaged that the RegLab would be applicable to FinTech start-ups or existing financial institutions which have a FinTech product or service that is untested, but would like to live-test it in a clearly demarcated environment with controlled scope and scale. More specifically, the proposed authorisation criteria are as follows:

• the FinTech project should promote novel innovation
• the FinTech project should have the potential to:
  • (i) promote significant growth, efficiency, or competition in the financial sector
  • (ii) promote better risk management solutions and regulatory outcomes for the financial industry, or
  • (iii) improve the choices and welfare of consumers, and
• the FinTech project should be in a sufficiently advanced stage of development to mount a live test.

Authorisations regulated under the RegLab will have a validity period of two years. At the end of the two year validity period, or earlier if the size, scale or progress of the business warrants, the FinTech participant will have to migrate to the full authorisation and supervisory regime under the FSMR.

The two key areas on which views are being sought are:

• the proposed RegLab framework, and whether there are other aspects that should be included within this, and
• the proposed authorisation criteria for authorisation under the RegLab, and whether there are alternative or additional criteria that should be included.

For the FSRA’s full consultation document “Policy Consultation on a Regulatory Framework to Support Participants Deploying Innovative Technology within the Financial Services Sector” see here.