Strong regulations and diverse stakeholders shape financial investment and innovation in Abu Dhabi

The Abu Dhabi Global Market (ADGM) is one of the world’s younger financial centres, having opened its doors to global commerce in 2015, but its success so far reinforces excitement about what this new option will bring to the global financial services landscape. Situated on 114 ha of land on Abu Dhabi City’s Al Maryah Island, ADGM has been leveraging its hard and soft infrastructure to develop a modern, innovative and dynamic international financial sector with its strengths focused on three segments: private banking, wealth management and asset management.

As an international financial centre ADGM has established multiple niches that will contribute to the goals of the Abu Dhabi Economic Vision 2030 using the emirate’s geographic and comparative advantages, such as aircraft leasing, financial technologies ( fintech), entrepreneurial initiatives, arbitration services and bilateral ties with China, to name a few.

The number of registered licences within ADGM, spanning a range of service providers and financial sector specialists, increased from 95 in July 2016 to 1300 at the end of 2018. As part of this growing pool of ADGM registered licences, there were at least 126 professional services providers, 60 corporate headquarters and over 600 investment structures, 150 family businesses, foundations and asset-holding vehicles, and close to 180 retail establishments. There are currently 97 approved financial services licences, in addition to another 20 local and foreign funds, bringing assets under management to a total of $23bn in 2018 from $4.2bn in 2017.

Growing Roster

As part of this rapid expansion of registered licences, ADGM has attracted important global financial institutions such as BNP Paribas, Citibank, UniCredit and State Street Corporation, along with international investment firms such as SoftBank and McKinley Capital. Abu Dhabi’s sovereign wealth funds have also contributed their weight, with the Abu Dhabi Investment Authority and Mubadala Investment Company both announcing plans to expand their presence and operations in ADGM.

Furthermore, ADGM and its constituent entities have received awards from multiple national bodies and standards organisations. In November 2018 ADGM was voted Financial Centre of the Year (MENA) by Global Investor/ISF for the third consecutive year.

Awards

Other recent awards received in 2018 include recognition as Fintech Regulator of the Year (MENA) by Seamless Middle East and Most Innovative MENA Fintech Regulator of the Year by FinX Awards. Furthermore, global consultancy firm Deloitte ranked Abu Dhabi among the top new fintech hubs in 2017 in a market survey entitled “A Tale of 44 Cities”. Deloitte cited ADGM’s role in promoting innovation as contributing to its success, as well as banks’ willingness to partner with fintech start-ups and to embrace new technologies, such as using blockchain for cross-border payments. Additionally, in January 2018 the UK non-profit organisation Investors in People recognised ADGM as meeting their human resources sustainability standard, which was a first for any financial centre or regulator located in the Middle East.

One reason for the popularity of ADGM is that it offers access to the growing markets of the UAE and the wider GCC region, without the restrictions presented by formal onshore investment. Furthermore, the centre’s status as a designated financial free zone and common law jurisdiction aligned with international best practice provides investors with a clear operating environment, similar to what they might experience in international financial centres.

Oversight Strategy

Three bodies oversee all activities at ADGM. The Registration Authority oversees incorporation, registration and licensing, and takes a “digital-by-default” approach to the task. The Financial Services Regulatory Authority (FSRA) is the overall financial regulator that maintains a regime that is aligned with international standards and best practice. ADGM also has its own judicial framework and court system with a Court of First Instance and a Court of Appeal handling civil and commercial disputes. The courts are presided over by experienced judges from the world’s leading common law jurisdictions. Furthermore, the court system boasts the world’s first digital courtroom and employs e-platforms in the delivery of judicial and dispute resolution services.

ADGM has also sought to emphasise its compliance with international standards, as its FSRA is a member of key global groups such as the International Organisation of Securities Commissions (IOSCO), the International Association of Insurance Supervisors and the Basel Consultative Group, part of the Basel Committee on Banking Supervision. Upholding its global responsibilities, ADGM has launched an Office of Data Protection to improve data protection procedures and maintain individual privacy.

Branching Out

As a young international financial centre, ADGM’s strategy has been to pioneer new regulations and establish innovative solutions. As such, one of ADGM’s priorities is to enhance the local financial services environment and support growth opportunities that bolster the economies of Abu Dhabi, the UAE and the broader MENA region. Retail investors have historically preferred real estate investments to portfolios of stocks and bonds.

There is, however, strong demand from Emirati, foreign and institutional investors for other financial products. ADGM has positioned itself as a place where specialist providers can meet the individual needs of these different groups. Although the offering is designed to be varied, and the overall goal is to add diversity to the emirate’s economy, the ADGM authorities have identified particularly beneficial areas to specialise in, such as fintech, cryptocurrencies, asset management and sustainable finance. Offerings that are the first of their kind in the region have come in areas such as private real estate investment trusts, and regulatory frameworks for venture capital and crypto-asset management.

Fintech Exploration

ADGM has established partnerships with global leaders like reinsurer Munich Re to collaborate on initiatives to apply fintech to the insurance sector, as well as with international peers such as the Monetary Authority of Singapore, the Australian Securities and Investments Commission, Hong Kong Monetary Authority, Hong Kong Securities Commission, the Capital Markets Authority of Kenya and the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. With the latter, ADGM has agreed to a collaboration to promote the emirate as an investment destination to members of the Chinese free zone, with a particular focus on fintech. The fintech bridges established with all of these entities have helped to enhance ADGM’s fintech regime and enabled cross-border partnerships and business opportunities for stakeholders in those locations. ADGM has also received heightened interest from the global media industry. For example CNBC International, the business and financial news network, announced in 2017 that it would locate its Middle East headquarters in the financial centre, adding Abu Dhabi to its roster of host cities alongside New York, Singapore and London. Broadcasting began in April 2018.

Geographic Reach

ADGM’s reach is global, as its authorities have established relationships not only in traditional financial centres such as New York and London, but also in new emerging markets in China and Africa. In an important move for international capital markets, ADGM entered into a memorandum of understanding (MoU) in April 2018 with Shanghai Stock Exchange to develop a “Belt and Road” exchange located in ADGM. The new exchange is set to increase avenues for business and financial investment.

The Belt and Road Initiative (BRI) for which it is named is a modern infrastructure version of the ancient Silk Road, which provided traders a set of routes to move goods between China and Europe. The initiative is largely being carried out through Chinese state sponsorship of infrastructure projects in transit countries, which is to a great extent being financed through Chinese state-owned banks and sovereign debt. A Belt and Road exchange in ADGM would not necessarily be dedicated to any one type of security or fund raising, FSRA CEO Richard Teng explained in early 2018. It would instead be designed as a comprehensive solution to boost the diversity of funding sources for infrastructure projects under the initiative. The details are still in their formative stages – Teng told CNBC that there were not yet specific details on what instruments the new exchange would trade, or when it would open. The move falls into the broader category of enhancing relations with China, as well as promoting infrastructure development and helping Abu Dhabi’s economy to diversify beyond the oil sector.

The Belt and Road exchange is just the latest partnership between the financial authorities in Abu Dhabi and China. In May 2018 ADGM opened its first overseas office in Beijing to support the UAE’s growth strategy and strengthen Abu Dhabi’s ongoing cooperation with the Chinese government and private sector. The new office has been focusing on regulatory collaboration and initiating new projects and joint activities to generate more cross-border connectivity between the two economies. One of the office’s main objectives is to work with the relevant authorities in China and Abu Dhabi to support the establishment of an offshore renminbi centre serving the MENA region via ADGM. In addition, in July 2018 the authorities of Jiangsu province agreed to establish a financial services platform in ADGM, with a commitment of $2bn to support Chinese enterprises. To augment its BRI activities, ADGM has also formed new collaborations with Chinese authorities and institutions, including the China-UAE Industrial Capacity Cooperation Demonstration Zone, Asian Financial Cooperation Association and Guotai Junan Securities. As part of its commitment to BRI, ADGM has also established communications and cooperation with the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the Shanghai Free Trade Zone.

Privacy & Protection

ADGM authorities are prioritising ease and quality of access in their efforts to attract global capital. The user experience features firm commitments to both the privacy of companies’ data, as well as the need for a well-regulated and transparent environment that adheres to global standards. ADGM’s commitment to start-ups has resulted in a light-touch incubation system, and its ACCESSADGM digital portal helps companies to navigate the legal and regulatory framework, offering online use of more than 60 public sector services including processing visas and work permits, and establishing mailing addresses. Ensuring data privacy has been a multi-pronged effort, primarily headed by the FSRA. In February 2018 amendments were made to the Data Protection Regulations that have been in place since 2015. These include updated definitions for related terminology, clear deadlines for notifications to the registrar and data-breach notification rules. The ADGM also became a member of the Global Privacy Enforcement Network in March 2018, joining a group of 60 members from more than 50 countries facilitating privacy protection laws and norms across borders. ADGM is the first member from the GCC region. It held its first Data Protection Forum in January 2018, an event that is planned to be repeated annually.

ADGM was also granted observer status at the Consultative Committee of Convention 108’s plenary meeting in June 2018 in Strasbourg, France, becoming the first Arab jurisdiction in the Middle East to do so. Convention 108, known in full as the Convention for the Protection of Individuals with Regard to Automatic Processing of Personal Data, was first signed by members in 1981. It was the first legally binding, cross-border data-protection mechanism. Signatories to the convention must alter domestic legislation to meet the convention’s principles, to ensure the protection and fair usage of personal data. As of late 2018 there were 50 member countries and 25 observers in total.

International Relationships

To ensure transparency, ADGM has committed to information exchanges with other securities regulators through IOSCO. This was done by signing a multilateral MoU established by IOSCO. ADGM is also pursuing bilateral relationships with relevant international organisations. Its MoU with the Malta Financial Services Authority is a broad one, addressing cooperation opportunities that include information exchanges as a way to monitor cross-border establishments. In addition, ADGM is also collaborating with the Jersey Financial Services Commission to research trends in areas such as registries, services and operations.

Numerous other MoUs have been signed to enhance specific activities, segments or geographic relationships. For example, the agreement made with Luxembourg for Finance aims to enhance cooperation between ADGM and Luxembourg’s capital markets. Additionally, an MoU with the Companies and Intellectual Property Commission of South Africa establishes a partnership to enable collaboration on areas of mutual interest in the field of registries.

Aircraft Leasing

ADGM aims to join existing international centres for aviation finance such as Ireland, Hong Kong and Singapore. The UAE has emerged as a leader in aviation, thanks to domestic airlines Emirates and Etihad Airways. In 2009 GE Capital, the financial services unit of the US conglomerate General Electric, announced a joint venture with Mubadala Investment Company, an arm of Abu Dhabi’s investment activity central to the emirate’s sustainable development and economic diversification, to collaborate on aviation ventures. In 2013 Emirates placed the largest aircraft order in history, valued at $99bn.

There are also finance-specific advantages to handling aircraft leasing in the ADGM. It has a more comprehensive list of double-taxation treaties (DTTs) compared with other centres for aircraft leasing. As of September 2017 it was a signatory to 83 bilateral DTTs, with another 32 at various stages of negotiation. By comparison, Hong Kong and Ireland have 34 and 72 DTTs in force, respectively, and Singapore has 81.

ADGM is set to further cement its advantage when the treaties that are currently pending become fully ratified. Private sector capital in the aviation finance industry has also begun to migrate to ADGM, which announced three new participants in January 2018, namely Airborne Capital, Stellwagen Group and the International Airfinance Corporation.

Advancing Start-Ups

One of ADGM’s priorities is building a sustainable entrepreneurship ecosystem for start-ups that supports the country’s economic development strategy. To achieve this goal the financial centre has established a regulatory framework that follows international standards, implemented cost-effective licensing structures and introduced corporate and legal vehicles to enable investors to protect key assets and secure capital. In November 2016 ADGM became the first jurisdiction in MENA to start licensing fintech firms, establishing the region’s first regulatory sandbox, the regulatory laboratory (RegLab), which has since become the second most active regulatory sandbox globally. Furthermore, in an effort to accelerate financial services innovation and financial inclusion in the MENA, ADGM launched the region’s first fintech digital sandbox in September 2018. Following this, in November 2018, ADGM completed the world’s first cross-border testing of fintech digital sandbox connectivity with ASEAN Financial Innovation Network (AFIN) between Abu Dhabi and Singapore. Additionally, ADGM announced a partnership with AFIN to build a digital marketplace –the API Exchange – to support financial inclusion.

Regulatory Approach

As part of an effort to boost the small and medium-sized enterprises (SMEs) ecosystem ADGM launched a new framework to regulate private financing platforms serving equity investment, debt financing, trade receivables and the overall funding needs for start-ups, private enterprises and SMEs. The framework, which was launched in September 2018, complements the ADGM’s revamped venture capital framework. In addition, ADGM established a number of additional regulatory frameworks during 2018 covering areas such as data protection.

According to a report published by ADGM in April 2018, there are now more than 200 trading venues for around 1500 crypto-assets worldwide. The Basel-based Financial Stability Board has determined that crypto-assets pose no risks to financial stability because their value is small compared with the rest of the global economy, at below 1% of the total market share. For now, most regulatory oversight has been focused on preventing money laundering and combatting the financing of terrorism.

Regulators have banned the spot trading of crypto-assets in some jurisdictions, and do not license service providers. Only a small number of jurisdictions have considered a more comprehensive regulatory framework, but this is changing. The G20 required its members to develop regulatory proposals by July 2018, which should encourage a move toward a set of global standards. In June 2018, the FSRA launched a regulatory regime for crypto-asset activities which provides for the licensing of exchanges, custodians and other intermediaries. The new regulatory regime – which is the first of its kind worldwide – not only covers anti-money laundering and counter-terrorism objectives, but also addresses a range of additional risks associated with crypto-asset activities, including consumer protection, technology governance, custody and exchange operations. By taking a leading role in the proper governance and oversight of digital assets, ADGM is positioning itself as an international centre for players in the emergent market.

Fintech Ecosystem

In addition to its work establishing a regulatory environment for cryptocurrencies, the FSRA has entered into a variety of agreements and collaborations, while also establishing other regulatory frameworks for the advanced services and offerings it hopes will help preserve ADGM’s attractiveness to outsiders and ensure its steady growth rate continues. For example, ADGM announced it was forming a partnership with Plug and Play Tech Centre, a global innovation platform that includes investment, accelerator programmes and business plan consulting. In September 2018 the two organisations launched a fintech innovation programme focused on Plug and Play’s existing competencies, with the aim of having a positive impact on the broader MENA region. The first five corporate partners to join the programme included BNP Paribas and First Abu Dhabi Bank.

Another venture in which ADGM is playing a key role is Fikra Labs, an acceleration programme for entrepreneurs backed by ADGM, multiple departments of Abu Dhabi’s government and government-related entities such as Etihad Aviation Group. Start-ups in the travel and tourism sector are eligible for a potential investment fund of $100,000, mentorship and the ability to establish themselves within ADGM. There are 34 of these ventures in place in which large-scale companies and institutions work with small start-ups and entrepreneurs. In February 2018 the FSRA introduced an electronic know-your-customer utility with a consortium of financial institutions in the UAE. The group includes First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank and UAE Exchange Group. As of late 2018 the utility was still in progress, with ADGM announcing that blockchain technology is being considered as a tool for performing the checks as it will increase efficiency and cost-effectiveness.

A remote membership programme offers access to ADGM exchanges and clearing houses to brokers located off-premises. It simplifies transaction reporting requirements for firms, and makes amendments to naming conventions to preserve the distinction between exchanges and clearing houses located in ADGM and those operating remotely. The FSRA has also participated in the bilateral MoU promotional strategy ADGM uses. The agreement made with the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, for example, involves promoting Abu Dhabi as an investment destination, with an emphasis on fintech.

Legal Environment

ADGM offers an enclave legal and regulatory environment based on English common law. This seeks to provide a familiar environment in which investors can have confidence that they are receiving a service comparable to well-established global financial centres. In April 2018 ADGM launched the eCourts platform, which provides the capability to adjudicate cases remotely via video link.

The ADGM court system has established strategic relationships for local and international judicial cooperation to uphold international best practice. On a local level these include collaborations with the Abu Dhabi Judicial Department, UAE Ministry of Justice, Ras Al Khaimah Courts Department, Ras Al Khaimah International Corporate Centre and the English-language Abu Dhabi Commercial Courts. On an international level they include the UK Queen’s Bench Division, the High Court of Hong Kong, the Singapore Supreme Court and the Federal Court of Australia, along with the Supreme Court of New South Wales, Australia.

Arbitration

The ADGM Arbitration Centre, which opened in October 2018, is a hearing facility that utilises digital technologies and is located in the Al Maqam Tower. The centre is intended to accommodate arbitration as a form of dispute resolution for commercial or civil disputes. It provides hearing facilities for both local and global parties to resolve disputes through arbitration or mediation irrespective of their geographic location and regardless of the arbitral institution administering the dispute.

The centre is set to further advance the UAE’s dispute resolution landscape, fostering new business potentialities and boosting investment opportunities in the capital. Its regulations are based on UNCITRAL Model Law, with tailored modifications including enhanced confidentiality provisions, the ability to contract out the right to apply to set aside an award and consolidation, and joinder provisions. ADGM arbitral awards are enforceable under the New York Convention in more than 150 countries.

Furthermore, the International Court of Arbitration of the International Chamber of Commerce (ICC Court) established its first representative office in ADGM in the first quarter of 2018. The new office facilitates ICC Court arbitration proceedings in the region.

“Our new representative office in Abu Dhabi is an affirmation of the increasing relevance of international arbitration in the MENA region,” Alexis Mourre, ICC Court president, said in a statement. In 2017 the ICC Court registered 46 cases involving parties from the UAE, a drop from 57 in 2016. Nevertheless, there are no restrictions on parties choosing another institution to administer their arbitration within ADGM.

ADGM Academy

ADGM has also established a training academy, which was inaugurated in May 2018. The academy was set up with a wider vision for Abu Dhabi as a global financial centre, based on the notion that an educated population is more likely to prosper. Through joint ventures with professional bodies and educational institutions, the academy has established an offering in six areas: banking and finance, entrepreneurship, fintech, national development, personal development and professional development. Learners can book courses in these areas as well as request customised classes. The academy has a range of global partners including INSEAD, the France-based business school; ADGM Academy is INSEAD’s third teaching location, with the second in Singapore. The London Institute of Banking and Finance is ADGM Academy’s partner for instruction on those topics, and the CFA Institute and the Chartered Institute for Securities & Investment have been enlisted for investment management. Other partners include global human resources firm Bradfield Group, the angel network Fintech Circle and the financial professionals training institute Kaplan Genesis, all of which are UK-based.