Sponsored Q&A: Morgan Lewis

1. What are the key regulatory changes that have impacted the banking and finance legal market in the UAE in the past year?

In 2023, the United Arab Emirates (UAE) banking and finance legal market has witnessed significant regulatory changes that now effectively require that banks secure loans with tangible assets (in addition to, or even rather than, personal guarantees). This has implications for existing transactions, as personal guarantees alone may no longer suffice, potentially resulting in borrowers and guarantors attempting to challenge existing deals that are not secured by other assets. Banks must now adapt their lending practices to ensure compliance with these new regulations, considering a more focused approach to selecting suitable securities that facilitate enforcement, but at the same time avoiding over-collateralisation (which, as recent court practice suggests, may also be an issue).

Significant amendments have also been introduced to the UAE’s anti-money laundering (AML) regulations (see question 8 below for more detail) and in the ESG space (see question 9 below).

2. How does the UAE’s legal framework for banking and finance differ from other countries in the Middle East region?

The UAE is among the largest financial centres in the Middle East, and it is considered one of the most dynamic in the region – ranking third (after Qatar and Saudi Arabia) as per rankings in the Global Competitive Report issued by the World Economic Forum.

The UAE’s banking and finance legal framework stands out in the Middle East due to its unique offshore jurisdictions, such as the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM). These hubs establish their own civil and commercial laws, use English in court proceedings, and operate on a basis of common law principles that are tailored to the region’s needs through the laws of the respective free zones, offering a competitive edge. Additionally, the UAE actively collaborates with global legal practitioners and frequently hosts international legal events, distinguishing it from other Middle Eastern nations in fostering a diverse and vibrant legal landscape.

3. What are the primary challenges and opportunities for international law firms seeking to establish a presence in the UAE’s banking and finance legal market?

A primary challenge for an international law firm seeking to establish a presence in the UAE would be the entrenched relationships that existing law firms already have with the region’s premier institutional clients. Also, it may be difficult for an international firm intending to enter the UAE market to swiftly obtain sufficient regional expertise to be able to advise on local law matters. Many international law firms have had a presence in the UAE for multiple decades, and a proliferation in the number of firms operating in the UAE over a period of time has caused significant competition among firms to keep fees competitive in order to win the work from clients.

Despite these challenges, the UAE remains an exciting jurisdiction, particularly as a focus on ESG grows globally and in the region. The annual sustainability report of the Central Bank of the UAE (CBUAE) indicates that ESG financing has gained traction in the UAE, with ESG financing debt issuances accounting for 18.2% of total bond issuances during 2022. Furthermore, the UAE hosted COP28 in 2023, which will place a greater emphasis on ESG financing and potentially lead to more ESG financing opportunities.

4. Can you explain the recent trends in Islamic finance and how they affect the legal landscape in the UAE?

The general trend in the Islamic finance market in the UAE is that Shariah standards become stricter and market participants are forced to adapt. A recent example of this is the adoption of Shariah standard No. 59 regarding the sale of debt (Standard 59) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions by the UAE. Prior to the issuance of Standard 59, it was market standard for parties to ‘roll over’ a murabaha agreement, meaning that if one murabaha agreement was due to expire on a particular date, a new murabaha agreement would be entered into on that date to replace it.

Since the issuance of Standard 59, a murabaha agreement cannot be directly refinanced by another murabaha agreement, and stakeholders have had to invent ways to ensure that the murabaha arrangements remain Shariah-compliant. One way has been based on a literal interpretation of Standard 59, which suggests that a new murabaha agreement can be used to repay existing debt one business day after the borrower has received funds from the new murabaha agreement. It has become increasingly common that, instead of entering into a new murabaha agreement on the day that the existing one would be due to expire, the parties would enter into a new murabaha agreement one day before the proposed expiry of the existing murabaha agreement.

5. What are the key legal considerations for foreign investors looking to enter the UAE’s banking and finance sector?

Foreign investors should be aware that Federal Decree Law No. 14 of 2018 requires that financial institutions that provide lending services obtain a licence from the CBUAE before engaging in lending activities. It should also be noted that Cabinet Resolution 55 of 2021 (Resolution 55) lists the banking sector as one that requires the approval of the CBUAE in relation to the shareholding of a financial institution that is incorporated onshore in the UAE. However, if foreign investors intend that the activities of the financial institution they wish to incorporate would be limited to operations within a financial free zone (such as the DIFC or the ADGM), such investors may choose to incorporate the financial institution in such financial free zone (which allows 100% foreign ownership without the specific permission from the CBUAE pursuant to Resolution 55). However, it should be noted that operating a financial institution in a free zone will require compliance with the regulations issued by the Dubai Financial Services Authority (DFSA) in the case of the DIFC and the Financial Services Regulation Authority (FSRA) in the case of the ADGM, including potential licensing requirements if the company conducts lending activities.

6. How has the introduction of new fintech regulations influenced the legal services demand in the UAE’s financial sector?

The introduction of new fintech regulations in the UAE has significantly elevated the demand for legal services in the financial sector. Open banking, digital currency, and cryptocurrency licensing are in focus. For instance, the UAE’s Securities and Commodities Authority is now accepting licensing applications for crypto services, which has spurred the need for legal expertise in compliance and regulatory matters. This change reflects the broader shift towards digitalisation and the government’s commitment to fostering innovation. As fintech continues to evolve in the UAE, legal services play a vital role in helping financial institutions navigate these intricate regulatory landscapes.

7. What are the most common dispute resolution mechanisms used in banking and finance cases in the UAE, and how have they evolved over the years?

Historically, banks and financial institutions in the UAE had a tendency to prefer litigation for resolving disputes. However, following the introduction of independent arbitral frameworks in the DIFC (introduced in 2008 and amended in 2013) and the ADGM (introduced in 2015 and amended in 2020), as well as a standalone federal arbitration law in the mainland UAE (introduced in 2018 and amended in 2023), there has been an increasing trend towards arbitration. These changes have brought the UAE, both mainland and offshore, in line with international arbitration standards by harmonising the legislation with the UNCITRAL Model Law on International Commercial Arbitration.

In terms of arbitral institutions, following the Dubai Government’s Decree 34 of 2021, the DIFC-LCIA Arbitration Centre was consolidated under the Dubai International Arbitration Centre (DIAC). Other notable arbitral institutions in the UAE include the International Chamber of Commerce (ICC), which has a case management office in the ADGM, and the Saudi Center for Commercial Arbitration (SCCA), which has recently opened a regional office in the DIFC. Additionally, many parties also choose the London Court of International Arbitration (LCIA). It is also worth noting that the UAE hosts the International Islamic Centre for Reconciliation and Arbitration (IICRA), a specialised institution for the Islamic banking, financial, and commercial disputes.

Other mechanisms banks and financial institutions have considered, especially in project financing, include the use of expert determination. Additionally, where Islamic financing is concerned, the use of arbitration may provide a mechanism for issues pertaining to Islamic principles to be referred to a Shariah body, board, or council.

8. What are the current anti-money laundering and anti-corruption compliance requirements that financial institutions must adhere to in the UAE?

The CBUAE has intensified its focus on its AML and counter-terrorism financing (CTF) efforts since a critical 2020 evaluation report, imposing sanctions on non-compliant entities. Recent developments include the CBUAE’s guidance endorsing digital identification systems for AML/CTF compliance. The UAE is modernising its AML/CTF framework, emphasising digital solutions and effective AML screening software.

In June 2023, new AML guidelines for crypto businesses were introduced, applicable to licensed financial institutions. Future changes target the Financial Action Task Force’s 2024 review, aiming to enhance AML and CTF efforts to exit the grey list. Key AML compliance obligations encompass risk assessment, customer due diligence, compliance officer appointment, risk-based policies, suspicious transaction monitoring, and record-keeping requirements.

9. How does the UAE’s legal framework support sustainable finance initiatives, and what opportunities does this create for law firms specialising in environmental, social, and governance (ESG) matters?

The UAE’s legal framework fosters sustainable finance through the introduction of designations like ‘Green’, ‘Climate Transition’, and ‘Sustainability Linked’. These designations, issued by the FSRA, outline the criteria for environmental sustainability, allowing financial products to opt in voluntarily. The FSRA aims to establish a standard for green-labelled financial products, offering transparency to investors. Mandatory ESG disclosures and alignment with international taxonomies further promote sustainable finance. Law firms specialising in ESG matters can seize opportunities in assisting clients with compliance, attestation, and navigating this evolving landscape, ensuring alignment with the UAE’s minimum standards and boosting financing towards a net-zero future.

10. Can you provide insights into the legal implications and challenges surrounding cross-border transactions in the UAE’s banking and finance sector, particularly in the context of international sanctions and trade restrictions?

Cross-border transactions in the UAE’s banking and finance sector pose complex legal implications and challenges, especially concerning international sanctions and trade restrictions. The UAE adheres to United Nations sanctions on an ad-hoc basis, implemented through internal directives, affecting nations like Iran, North Korea, and Somalia. Recent international sanctions on UAE-registered entities for supporting Russia underscore the increasing pressure that the UAE faces from the United States, United Kingdom, and European Union to curtail trade with Russia. Despite these challenges, trade between the UAE and Russia has surged, indicating the intricate balancing act that banks and financial institutions must navigate, ensuring compliance with sanctions while engaging in profitable cross-border transactions.