The United Arab Emirates (UAE) continues to position itself as a base for businesses involved in cutting-edge technology, ranging from artificial intelligence and robotics, to blockchain integration and driverless vehicles. The UAE does this by being pioneers in using these technologies in the public sector and by creating accommodating structures and regulations for new up-and-coming industries. The finance sector in particular has seen a substantial increase in the use of technology over the course of the last decade. The fintech sector continues to draw a lot of attention from various regional and institutional investors as well as traditional financial players.
This article will provide insight into the current state of the fintech sector in the UAE and what legal issues may arise in the future as the popularity of fintech continues to grow.
When financial technology becomes fintech
The merger of financial tools and technology is not a recent event. Technology has been used to help financial services companies since computers became a regular part of the workplace. The advent of a separate industry known as fintech is thought to have started when the line between technology companies and financial companies began to be blurred.
Fintech companies are seen as disruptors of traditional finance companies such as banks, payment gateways and investment banks. While these traditional companies are bound to comply with onerous regulatory and monetary requirements, a number of fintech entities have created business models which are able to bypass these high barriers to entry.
Recently, long-standing financial institutions have started to invest in existing fintech entities and have transformed their products and services to integrate the new technology. This has led to an explosion of new fintech start-ups especially encouraged by the use of incubators, which provide a suitable ecosystem to try out new ideas in shortened sale's cycles ranging from three to six months.
Incubators and accelerators
The fintech industry in the UAE has greatly benefited from the use of incubators, also known as accelerators or sandboxes.
The Dubai International Financial Center (DIFC) launched an accelerator program in January 2017 in collaboration with Accenture, named the FinTech Hive. The Hive offered 12-week programmes to allow fintech start-ups to experiment with their platforms while having access to senior industry leaders to advise and collaborate on their projects.
The Abu Dhabi Global Market (ADGM), along with the International Financial Centre in Abu Dhabi, launched its own accelerator program in November 2016, dubbed the Regulatory Lab or RegLab. Participants are allowed to develop and test their business models for longer periods of up to two years, while also having access to local and global industry experts.
More recently, the Securities and Commodities Association (SCA) signed an agreement with PwC to develop a fintech accelerator program in on-shore UAE. The SCA, along with the Central Bank, are the two on-shore regulators for all banking and financial activities and work in tandem to provide oversight for the financial industry. The SCA's goal with this venture is to develop new regulation for fintech entities as well as to provide a platform for start-ups to develop their ideas and obtain support in a closed environment.
The availability of these accelerator programs has helped put the UAE's fintech industry on the map, which has given start-ups a chance to suggest their fintech projects, and implement what they offer through mentorship opportunities with partners and with large financial institutions. The willingness of primary actors of the financial sector to get involved in fintech projects should not be overlooked. By establishing accelerated programmes with the support of these primary actors, fintech authorities have the chance to uncover hidden talent in the emerging financial technology industry and address the needs of the region's evolving financial services scene.
Balancing innovation and risk
While these examples represent a positive start, many believe that fintech's potential is yet to be fully tapped in the UAE. Disclosed investments in the fintech industry in the Middle East reached $35 million in October 2017, a figure which is projected to double by 2020.
Traditionally, regulation has lagged behind technological breakthroughs as the pace of innovation is too fast to be adequately addressed by a legislative framework. As technology is every-changing, laws must adapt and react to new legal issues that arise and adequately address these in a clear and unambiguous way.
This technology/regulatory lag has, in the past, been the cause of systemic risk in the financial industry, as well as negatively affecting on-going operations. It is crucial that the regulatory framework in the UAE keeps up with the pace of fintech and adapts by providing creative and new ways to oversee this industry. Regulation should balance the promotion of innovation in the financial sector while also limiting risks to consumers. This would involve cooperation between experts in the field of technology and financial regulation, as well as local regulators, to best create a regulatory framework that is applicable and relevant.
Another suggested method to reduce risk in the fintech industry is to encourage self-regulation among fintech entities. The accelerator culture allows for founders and co-founders of start-up entities to meet each other at the inception stage of their ideas and continue to rub shoulders as their businesses scale and develop. These stakeholders realise that having a legal framework promotes both business activity and consumer safety and is in their best interests. It would therefore be reasonable to encourage the industry to be actively involved in both the development and the observance of proposed regulation
As the fintech industry continues to grow in the UAE, regulators, accelerators and businesses should work together to encourage innovation, while highlighting necessary areas of regulatory oversight. The fast-paced nature of fintech requires greater cooperation between all relevant stakeholders.
About the author |
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Nadim Bardawil Senior associate, BSA Ahmad Bin Hezeem & Associates UAE, Dubai T: +971 4 368 5555 Nadim Bardawil is a senior associate in BSA Ahmad Bin Hezeem & Associates, a Dubai-headquartered Middle Eastern law firm, in the corporate and M&A and intellectual property practices. He is based in the DIFC office in Dubai. Bardawil specialises in transactional corporate work across various industries including in media, technology and oil & gas. Bardawil advises on a range of local and international corporate and commercial matters including joint-ventures, commercial agency, private equity, employment and regulatory. He has assisted clients with implementing mergers and acquisitions as well as represented clients in the negotiation of IP transfer and licensing provisions. |