Embracing digital transformation: Spotlight on the UAE

Fintech has been under the spotlight in the United Arab Emirates (UAE) during the recent Dubai Fintech Summit which focused on digital transformation in the financial sector. Meanwhile, two significant regulatory developments within the UAE are also promoting innovation and growth for both Fintechs and traditional financial institutions. In this post I cover key takeaways from the summit and outline the impact of new regulations issued by the Central Bank of the UAE (CBUAE): the Sandbox Regulation, which creates a controlled regulatory test environment for fintech innovation, and the Open Finance Regulation, which introduces an open finance framework.

Dubai Fintech Summit 2024 - key takeaways

I was delighted to be involved in a panel discussion hosted by Liv Digital Bank and Emirates NBD on emerging trends in the virtual assets and tokenisation space within the UAE and wider GCC. We discussed the rapid growth of tokenisation within the UAE and the increase in retail investors looking to diversify their investments within this space.  We heard different perspectives from both traditional Banks, digital Banks and technology providers on the opportunities in this area and how to balance growth and innovation whilst protecting retail investors. These were other key themes explored during the summit:

• Embracing digital innovation: It is imperative that traditional financial institutions embrace digital transformation as a means to remain competitive and relevant.  This may include digitising customer experiences, moving towards app-based KYC checks, paperless transactions and adopting cloud-based infrastructure.
   
• Navigating regulatory challenges:  Attendees engaged in discussions on regulatory sandboxes, data privacy regulations and regulatory fragmentation and how institutions can mitigate compliance risks whilst driving innovation and growth.
   
• Leveraging AI and machine learning: We heard of examples where institutions were leveraging machine learning for customer service and fraud detection and prevention which has unlocked new levels of efficiency.  
   
• Encouraging collaboration and partnerships:  A number of MoUs were signed during the Dubai Fintech summit including between Banks and Fintechs and regulators and technology service providers.  We have seen a number of successful partnerships including Emirates NBD with Hub71 and a number of UAE banks partnering with Fintechs to launch carbon credit programmes.

Sandbox regulation - a controlled environment for innovators in fintech

• The vision: The UAE has long been at the forefront of the digital economy and the regulators within the UAE are no exception.  In line with the CBUAE’s vision to create and foster a mature fintech ecosystem, the CBUAE has created a comprehensive regulatory sandbox framework.  The Sandbox Regulation aims to provide a controlled environment for fintech startups and established companies to test new and innovative products, services and business models whilst ensuring compliance with consumer protection and regulatory oversight. 
   
• Not the first sandbox: The UAE is no stranger to regulatory sandboxes with the ADGM launching the first digital regulatory sandbox in 2016 and the DIFC launching the Innovation Testing Licence in 2017, the CBUAE’s sandbox framework will open the doors to UAE homegrown payment service providers and digital banks. 
   
• Application requirements: The Sandbox Regulation is open to UAE-based entities but excludes existing licensed financial institutions and certain activities such as deposit taking and insurance products.  Applicants are required to demonstrate innovation, consumer benefit, readiness to test and compliance with financial soundness.  
   
• Regulatory and porting requirements: Participants in the regulatory sandbox must adhere to strict compliance with the UAE anti-money laundering and counter-terrorist financing and consumer protection laws and regulations and must submit to regular reporting to the CBUAE throughout the 12-month testing period to ensure effective supervision and compliance with the laws.  At the end of the testing period, participants must either exit the sandbox or apply for a licence from the CBUAE. 

Open Finance Regulation - empowering customers whilst facilitating competition

• The vision: The Open Finance Regulation comes as part of the CBUAE’s Open Finance vision.  These regulations seek to use customers’ consented financial data to empower greater customer choice and control over their information whilst facilitating competition amongst financial products and services.  There is a focus by regulators and policy makers globally on creating open finance frameworks to allow consumers and businesses to share their financial data with trusted third parties in a secure and safe manner.  The Open Finance Regulation goes further than existing open banking initiatives in European jurisdictions where the scope was limited to enabling third parties to initiate payments from payment accounts maintained by banks.
   
• Rollout: The Open Finance Regulation will be rolled out in phases, eventually making participation in the Open Finance Framework mandatory for all Licensed Financial Institutions (Licensees). All UAE Banks, branches of foreign banks, and Insurance Companies will be mandated to provide Open Finance access as part of the first phase. The remaining Licensed Financial Institutions will follow at such time as announced by the CBUAE through official channels. 
   
• Authorisation: The Regulation establishes a new category of CBUAE regulatory license for providers of Open Financial Services.  Persons who are seeking to provide Open Finance services in the UAE will require a licence, this will comprise:  (1) Data Sharing which is an online service to provide a person with consolidated data relating to one or more accounts and/or products held with another financial services provider licensed by the CBUAE and (2) Service Initiation which is initiating, by electronic means, a transaction relating to an account or product with a financial services provider.  The Regulation sets out an application process to the CBUAE for those seeking to obtain such a licence. This includes various requirements as to governance and control consistent with existing CBUAE regulatory licensing applications and minimum capital requirements.
   
• The Framework: The Regulations establish an Open Finance Framework which includes a Trust Framework, the API Hub and the Common Infrastructural Services. Licensees who are Data Holders or Service Owners must, once approved by the CBUAE as an Open Finance Provider:

1. register as a Participant under the Trust Framework within fourteen (14) days of approval; and
2. establish and maintain the API Hub to provide secure access by Open Finance Providers.

Licensees will need to keep abreast of updates from the CBUAE given the phased approach of the regulation rollout and ensure their terms and conditions and policies are assessed for compliance with the regulatory requirements.  

Looking ahead

The introduction of these two new regulatory frameworks demonstrates a significant step forward in the UAE’s efforts to foster a Fintech ecosystem and drive growth and innovation in the UAE financial sector. 

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