A Comprehensive Insight
Abu Dhabi Global Market (“ADGM”) is one of the two financial free zones in the country where financial licenses can be obtained[1]. Similar to the Dubai International Financial Center (“DIFC”), ADGM operates autonomously under its own regulatory regime and provides solid infrastructures for conducting financial activities and setting up financial businesses in the UAE.
Any company desiring to provide financial services from a permanent establishment in ADGM must be regulated by the free zone’s own financial services regulator, the Financial Services Regulatory Authority (“FSRA” or “Regulator”). The powers, functions, and objectives of the FSRA are detailed throughout the Financial Services and Markets Regulations (“FSMR”) which establishes the rules and regulations governing all financial activities allowed in ADGM.
The FSRA grants licenses and regulates the activities of all financial institutions by classifying financial services into various categories: 1, 2, 3A, 3B, 3C, 4, and 5. Each category has its own capital requirement and obligations that must be met in order to obtain a Financial Services Permission (“FSP”) covering the respective regulated activity and enabling licensees (“Authorised Person”) to operate in ADGM. Authorised Persons are assigned to the abovementioned categories according to the criteria set out in the Prudential – Investment, Insurance Intermediation, and Banking Rules (“PRU”):
- Category 1: This category allows banks to accept deposits and manage a Profit Sharing Investment Accounts (“PSIA”)[2] without restrictions from the investment account holder. The base capital requirement for this category is US$ 10 million.
- Category 2: Category 2 allows financial businesses to deal in investments as principal[3] and to provide credits. It is the absence of authorisation for the activities specified in Category 1 that are determinative of its belonging to Category 2. The base capital requirement is US$ 2 million.
- Category 3A: In this category, Authorised Persons are licensed to deal in investments as agents with a base capital requirement of US$ 500,000. It is the absence of authorisation for the activities specified in Category 1 and Category 2 that are determinative of the belonging of the Authorised Person to Category 3A. An Authorised Person carrying out the Regulated Activity of Dealing in Investments as an Agent in a manner that is wholly incidental to the activity of Managing an Investment Fund or Managing Assets, shall be regarded as falling within Category 3C.
- Category 3B: This category allows businesses to provide custody (but only for a fund) and act as a trustee for an investment trust, and has a base capital requirement of US$ 4 million. It is the absence of authorisation for the activities specified in Categories 1, 2, and 3A that places the Authorised Persons in Category 3B.
- Category 3C: This category gathers the activities of (i) managing assets, (ii) providing custody (where it does so other than for a fund), (iii) managing a PSIA (received on a restricted basis), (iv) providing trust services (where it is acting as trustee in respect of a least one express trust), (v) managing a collective investment fund, (vi) providing money services and it does not meet the criteria of Categories 1, 2, 3A, 3B, and 5. The base capital requirement is US$ 250,000 except for the activity of managing a collective investment fund, in which case the base capital requirement is:
- US$ 150,000 for a public fund or any other type of fund that is available to individual investors; or
- US$ 50,000 for Exempt Funds (“EF”) and Qualified Investor Funds (“QIF”)[4].
- Category 4: Category 4 allows businesses to arrange credit, arrange deals in investments, advise on investments or credit, arrange custody, insurance intermediation, provide trust services (where it is not acting as trustee in respect of an express trust), manage insurance, act as the administrator of a collective investment fund, operate a multilateral trading facility or organised trading facility, operate a private financing platform, or provide third party services, and does not meet the criteria of Categories 1, 2, 3A, 3B, 3C, or 5. Category 4 has a base capital requirement of US$ 10,000.
- Category 5: This category regulates Islamic Financial business activities which cover the scope of Islamic funds, Islamic securities, and PSIA (unrestricted). The base capital required for the activity is US$ 10 million.
Among these categories, one stands out for further exploration and development within the context of the present article: Category 3C. Businesses falling under this category may include banks, asset managers, investment firms, and other financial institutions whose activities include, among others, managing investment portfolios or engaging in specialised financial activities.
In particular, Category 3C becomes instrumental in activities such as asset management. Asset management refers to pooling and managing high-net-worth clients’ portfolios under a client mandate for the purposes of maximizing their value while maintaining a reasonable level of risk. The assets include equities, real estate, bonds, and other classes of assets depending on the type of the asset management company. Investment bankers and financial advisors working with prominent asset management companies often resort to obtaining the Category 3C Asset Manager License when seeking to set up on their own and continue offering their services as external asset managers. Similarly, companies contemplating to conduct investment research and sharing it with professional clients commonly seek to acquire such a license.
Moreover, fund manager licenses also fall within the scope of Category 3C. ADGM-authorised fund managers may choose to establish and manage funds domiciled in ADGM (“Domestic Funds”) or non-ADGM established funds (“Foreign Funds”).
Likewise, any foreign fund manager, with the appropriate FSRA permission, may manage, promote, and distribute both Domestic and Foreign Funds.
It is worth mentioning that Authorised Persons should be adequately staffed depending on the scale, scope, and nature of the concerned portfolio and that ADGM does not impose any remuneration restrictions on fund managers.
Category 3C also includes Money Services Businesses (“MSB”) that conclude money-related activities such as money remittances, payment processor services, operating payment accounts, and issuing payment instruments and stored value. Authorised Persons aiming to provide such services are subject to strict Know Your Customer (“KYC”), Anti-Money Laundering (“AML”), and Counter Terrorism Finance (“CTF”) requirements in line with international treaties and regulations.
In addition to the rigorous regulatory scrutiny in AML matters, FSRA focuses on providing investors with an adequate level of protection and assurance. Entities operating under Category 3C licenses must adhere to strict client money segregation and disclosure requirements to safeguard the interests of the investors. Consequently, Authorised Persons are required to (i) clearly separate the clients’ funds from their operational funds to avoid any risk of misappropriation or misuse and (ii) inform investors about their financial activities, investment strategies, and any associated risks.
It is through these solid regulations and requirements that ADGM has placed itself as a prominent financial hub in the Middle East particularly in the UAE, gathering both local and international financial institutions and becoming a renowned domicile for funds and financial activities in the region. The various incentives offered by ADGM are attracting businesses seeking to establish a presence in the area and are consequently leading to the growth of Company Service Providers (“CSPs”) within the relevant free zone. CSPs, such as ASSISS, are providing the different stakeholders of the financial sector with professional support and safe foundations to set up in Abu Dhabi and expand on an international level, and are therefore active contributors to the development of the Emirate’s financial institutions.
Nour Souaiby
CSP Associate
04/1/2024
For personalized guidance regarding ADGM Regulated Financial Activities, please do not hesitate to contact our team by sending an email to: assiss@assiss.com.
DISCLAIMER: This blog post does not constitute professional advice. Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.
[1] Financial licenses can be obtained on the mainland through the Securities and Commodities Authority “SCA”.
[2] As defined in the PRU, a PSIA is an account or portfolio managed: (a) in relation to property of any kind, including the currency of any country or territory, held for or within the account or portfolio; (b) in accordance with Shariaa and held out as such; and (c) under the term of an agreement whereby (i) the investor agrees to share any profit with the manager of the account or portfolio in accordance with a predetermined specified percentage or ratio; and (ii) the investor agrees that he alone will bear any losses in the absence of negligence or breach of contract.
[3] Dealing in investments as principal means buying, selling, subscribing for, or underwriting any investment as principal where firms use their own capital for transactions or asset acquisitions and have direct control over their investments.
[4] It is worth noting that unlike Public Funds, EF and QIF (i) are only available to professional investors, (ii) have a minimum investment threshold of US$ 50,000 and US$ 500,000 respectively (whereas Public Funds do not have any minimum subscription amount), and (iii) are open to offers by way of private placements only. Therefore, EF and QIF attract lower levels of scrutiny and are subject to lower regulations from the FSRA when compared to Public Funds.