GCC Quarterly Review - Q3 2020

The third quarter of 2020 saw a number of legal developments in the Gulf Cooperation Council (GCC) region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Our GCC Quarterly Review – Q3 2020 summarises a selection of the major developments in that period, with links to further reading where available.

Download the PDF version (9 pages) or read online below.

UAE

UAE Securities and Commodities Authority to introduce rulebook

The Securities and Commodities Authority (SCA) in the United Arab Emirates (UAE) is set to introduce a Rulebook for the first time, following a consultation which ended in July. Consolidating a range of rules currently existing in a series of regulations issued by the SCA, the new Rulebook signals a more accessible and coherent approach to financial regulation which aligns with international standards and best practice. It should provide a clear and organised regulatory approach for firms and their advisers, facilitating compliance. The Rulebook contains three chapters, covering general provisions dealing with the licensing of financial activities and approved functions, and conduct of business. Rules cover topics such as suitability and appropriateness, financial promotion and introductions, as well as anti-money laundering and terrorism financing. The Rulebook provides welcome clarification on the types of licence and licensed financial activities which entities can be approved: there are five categories of SCA licence, and 21 categories of licensed “Financial Activities”, together with details of generally approved roles and capital requirements for each category. There is also a Glossary and an Appendix of Licensing Categories and Approved Functions for each Financial Activity.

Notable features include:

• a new duty of care, requiring licensed entities to undertake financial activities and/or provide financial services with the care of a diligent person using their expertise and specialisation by performing the tasks accurately and carefully without negligence, and by taking all reasonable actions according to the circumstances, their expertise, and future expectations. Licensed entities should have procedures in place to ensure their employees act in accordance with this duty of care towards all clients;
• licensed entities are now restricted from limiting their liability for carrying out financial activities, and any such provisions included in agreements or terms and conditions with clients will be invalid; and
• non-compliance with the Rulebook by a licensed entity may be waived, if it results from a “state of emergency” which is outside of its control and which cannot be avoided (having taken all reasonable action to avoid it). There are no examples of what constitutes a state of emergency. As with contractual force majeure or material adverse change position, it is likely that it may be a high bar to prove that a state of emergency exists.

The Rulebook does not include an express provision regarding the interplay between the Rulebook and existing regulations issued by the SCA. It would be helpful for the Rulebook, when finalised and published, to include a clarificatory statement on this point. Failing which, it will be important that the Rulebook, and terms used in it, are consistent with the relevant provisions of the existing regulations and is updated as SCA regulations change going forwards.

Consolidation of financial services regulation under a single regulator in the UAE

The SCA and the Insurance Authority in the UAE are set to merge. The supervision of insurance activities and other financial services activities, such as investment management and advisory activities, will be carried out by a single regulator. Further details of the consolidated regulatory framework, licensing and supervision to be overseen by the combined regulator are yet to be announced.

Classification system for listed companies in distress introduced by the SCA

In July, the SCA introduced new listing categories for companies listed on the Dubai Financial Market (DFM) or the Abu Dhabi Securities Exchange (ADX) pursuant to SCA Decision No.13 of 2020 Concerning Procedures for Dealing with Listed Troubled (Suspended) Companies. The purpose of the classification is to highlight to investors those companies which are in financial distress. Companies are classified as either Category One, meaning the listing of a company’s shares has not been suspended for six months or more and the company has not incurred accumulated losses amounting to 50 per cent. or more of its capital, or Category Two, meaning that a company has failed to satisfy either of these two new requirements. Such companies are monitored by the SCA and must develop a plan to rehabilitate the business in order to meet the criteria to be classified as a Category One company with a year (extendable by a further three years). Ultimately, the SCA may decide to delist a company’s shares.

SCA proposes new licensing regime for financial activities

The SCA is proposing to streamline its licensing and regulatory framework for financial services and markets activities. In particular, the changes are designed to implement an integrated financial brokerage institution model. There are to be five new licensing categories:

1. dealing in securities (including the activities carried out by various types of brokers and dealers);
2. dealing in investments (including the activities related to securities portfolios and investment funds);
3. safekeeping, clearing and registration (including the activities related to general clearing, safekeeping, registrars of private joint stock companies, issuers of covered warrants and depository banks and their agents);
4. credit rating; and
5. arrangement and advisory (including introduction and promotion activities and the activities carried out by financial advisors and listing advisors).

The consultation closed in August.

UAE Central Bank enhances support under the TESS

The UAE Central Bank adopted further measures to relax agreed Basel III standards in August as part of its Targeted Economic Support Scheme (TESS). Until 31 December 2021, there is a temporary relaxation by 10 percentage points for two liquidity ratios; the Net Stable Funding Ratio (NSFR) and the Advances to Stable Resources Ratio (ASRR). This should provide greater flexibility to banks and financial institutions in managing their liquidity positions, enabling the provision of support for their customers affected by the Covid-19 pandemic. You can read more about the TESS stimulus package in our previous briefings.

UAE Central Bank overnight facility and base rate

In July, the UAE Central Bank introduced a new overnight deposit facility, enabling UAE-regulated banks to keep their excess funds with the Central Bank overnight at an overnight interest rate. The overnight rate is the interest rate the UAE Central Bank sets to target monetary policy (i.e. the base rate) and is tied to the United States Federal Reserve’s interest rate on excess reserves. It is reported that the UAE Central Bank will make available a Shariah-compliant variant of the overnight facility for Islamic banks.

UAE Dirham announced as settlement currency on regional payments platform

The UAE Dirham has been announced as the first settlement currency to be made available on the new “Buna” payments clearing and settlement system. Launched by the Arab Monetary Fund in 2020, the Buna is a multicurrency platform providing clearing and settlement services to financial institutions, facilitating cross-border payments within the MENA region and internationally with global trading partners.

SCA proposes changes to the rules on issuing and offering Islamic securities

Changes to the SCA’s Decision No. (20/R.M) of 2018 on Issuing and Offering Islamic Securities are proposed to bring the regime in line with international standards set by International Organization of Securities Commissions (IOSCO). Designed to encourage local and foreign investors, the revised regime specifies the proposed requirements for foreign issuers wishing to offer Islamic securities in the UAE, and for local issuers wishing to issue or offer Islamic securities inside or outside the UAE.

UNCITRAL recognises UAE’s arbitration regimes

In a July review of the status of conventions and model laws, UNCITRAL has recognised the arbitration laws in the UAE and in the financial free zones, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) as being based on the UNCITRAL Model Law on International Commercial Arbitration 1985. The UNCITRAL Model Law is designed to assist states in reforming and modernising their laws on arbitral procedures. This recognition follows continuing modernisation of the rules of UAE-based arbitral institutions and national arbitration laws in recent years, including the introduction of the new UAE Arbitration Law in 2018. The DIFC and the ADGM have become an attractive option for users of international arbitration because they offer a predictable legal framework in terms of the courts’ supervisory powers in aid of arbitration and enforcement of awards. This welcome recognition for the arbitration regimes in the UAE should further develop confidence in the UAE as an arbitration-friendly hub.

Foreign-owned PJSCs permitted to act as commercial agents

A recent amendment to the UAE law regulating commercial agencies (Federal Law No.11 of 2020 amending Federal Law No.18 of 1981) allows a wider range of entities to act as commercial agents for the first time, including UAE public joint stock companies and limited liability companies which are partially owned by foreign investors (in accordance with foreign investment limitations). This is a significant change as previously, only a UAE national or a company wholly owned by UAE nationals was able to act as a commercial agent, whether as a traditional agent or as a as agent under a franchise or distribution agreement. UAE family businesses often act as commercial agents and, broadly, the Commercial agency law is protective of their commercial position. This is an important development which will enable such companies to grow their businesses with the help of foreign investment and to list on the local exchanges, which is likely to expand investment opportunities for investors in the event of more local IPOs.

DIFC

DIFC’s Covid-19 Emergency Period ends

Temporary adjustments to laws and regulations to help DIFC companies deal with the effect of the COVID-19 pandemic on their business are no longer available, following the end of the “Emergency Period” on 31 July. DIFC Presidential Directive No.4 of 2020 allowed companies to make changes to employment arrangements and suspended wrongful trading rules during the Emergency Period. The DIFC confirmed that the Emergency Period has not been extended. The DIFC’s Business Stimulus Initiative also ended on 30 June. Read more

Enhanced reporting requirements for DIFC financial institutions

The introduction of amendments to the Common Reporting Standard Law, DIFC Law No.2 of 2018 (enacted by DIFC Law No.6 of 2020) and new DIFC Common Reporting Standard Regulations which came into force in July, enhance reporting and compliance standards for financial institutions in the DIFC. The changes ensure that those financial institutions in the DIFC which are “Reporting Financial Institutions” (within the meaning of such term used in the Common Reporting Standard Regulations) meet the standard issued by the Organisation for Economic Cooperation and Development (OECD). The powers of the DIFC Registrar of Companies, the competent authority which administers the law, are enhanced and new offences and penalties have been introduced, for example for providing false self-certifications or failing to obtain valid self-certifications.

New DIFC Innovation License

Start-ups and entrepreneurs looking to set up in the DIFC can now apply for a new DIFC Innovation License. Designed to attract technology-led businesses aiming to disrupt the technology and financial sectors, the new Innovation Licence offers subsidised commercial licensing options, access to DIFC co-working spaces and access to visas. The new Innovation Licence is to be promoted by the Dubai Future Foundation (DFF) following the signing of a new Memorandum of Understanding (MoU) between the DIFC and the DFF. With the overarching aim of driving the future of finance in the region, the MoU provides that the DFF and DIFC intend to identify and supporting blockchain and Artificial Intelligence (AI) driven start-ups and partner on a combined technology acceleration programme. This development enhances the DIFC’s existing supportive environment for tech start-ups, of which the FinTech Hive, FinTech Fund and the Innovation Testing Licence programme are key features.

Compliance required with DIFC’s Data Protection Law

DIFC companies must comply with the new DIFC Data Protection Law No.5 of 2020 and new Data Protection Regulations by 1 October 2020, the end of the three-month grace period. The new law aligns the DIFC’s data protection regime with international best practice and revises rules on the collection, handling, disclosure and use of personal data in the DIFC. Read more

DIFC Courts consider good faith in commercial contracts

In dismissing an employee’s claim on appeal, the Judge in the case of John Vitalo v Atlas Mara Management Services Limited [2019] DIFC CA 01 made some interesting statements on the concept of good faith in the context of employment contracts. The case involved contractual employment claims relating to payment in lieu of holiday, adjustments to living allowance and entitlements, including a penalty claim.

While UAE law requires contracts to be performed in good faith, there is no such express legal requirement under DIFC law. But, as with English law, the concept of an implied requirement of good faith in contractual terms is evolving in the DIFC. The Court was of the view that, where there is an inbuilt discretion in the decision maker in coming to a determination of the appropriate adjustment to be made, the decision maker is under a duty to make a determination as to any adjustment to be made and that such determination had to be made rationally and in good faith, not arbitrarily, capriciously or perversely. The Judge dismissed the action on the basis that there were no grounds to raise an arguable case that the discretion had been exercised irrationally, and he dismissed the action.

DIFC expands its Prescribed Company Regime

The DIFC has announced that family businesses with a presence in the UAE can now apply to establish a Prescribed Company in the DIFC for the purposes of certain types of business activities, without having a presence in the DIFC. The DIFC Prescribed Company Regulations, enacted in October 2019 under the Companies Law (DIFC Law No.5 of 2019), already permit the regime to be used by FinTech entities, foundations and private trust companies already present in the DIFC, Authorised Firms and Funds (regulated by the DFSA or another financial services regulator) and Government or Government-related entities in the UAE. Read more

New MoU facilitates trade between Dubai and the DIFC

A new Memorandum of Understanding (MoU) between Dubai Customs and the DIFC promises to improve the processes for the trade and transit of goods between the free zone and onshore Dubai. DIFC-licensed companies may complete export and import operations online and through shipping agents and express transportation companies, and benefit from customs duty exemptions.

ADGM

Changes proposed to the ADGM’s rules on Providing Money Services

The ADGM Financial Services Regulatory Authority has consulted on proposed amendments to the regulatory framework for Authorised Persons undertaking the regulated activity of “Providing Money Services”. Designed to bring the regime up to date with evolving technologies and the emergence of new business models and methods for the transfer of funds, the new specified activities of “Money Remittance” and “Payment Services” activities broaden the scope of the regulated activity. The regime also focusses on more appropriately addressing the risks arising from these types of activities (such as the safeguarding of client funds). If enacted, the changes proposed will affect the FSRA’s Financial Services Markets Regulations 2015 (FSMR), Conduct of Business Rules (COBS), the Prudential – Investment, Insurance Intermediation and Banking Rules (PRU), the Anti‐Money Laundering and Sanctions Rules and Guidance (AML).

ADGM updates Insolvency Regulations and Companies Regulations

The amendments to the Companies Regulations (pursuant to the Companies (Amendment No.1) Regulations 2020) grant the ADGM Registrar the discretion to disapply or modify aspects of the law applicable to companies in the ADGM on public policy grounds, such as in relation to filing obligations, including the filing of accounts, reports and annual returns and obligations on small and medium-sized companies. There is no guidance as to in what circumstances the ADGM Registrar may invoke public policy grounds to take such action.

The revised Insolvency Regulations (pursuant to the Insolvency (Amendment No.4) Regulations 2020) contain a range of refinements to the prescribed form, content and timing of notices, applications, information and other procedural matters to be attended to in the context of certain insolvency procedures. Changes to the administration procedure include a new power enabling administrators to access priority financing – which could be a potential lifeline for distressed companies and is likely to be welcomed in the current environment. The Insolvency Regulations also facilitate the electronic delivery of documents to or by the Court, to align with the ADGM Courts eCourts platform.

GCC

Saudi Arabian Capital Market Authority issues regulations on depositary receipts

The Capital Market Authority of Saudi Arabia (CMA) has issued instructions relating to listing of depositary receipts outside of the Kingdom (Instructions). Previously, foreign issuers were allowed to be listed on the Saudi Stock Exchange (Tadawul), but the CMA’s regulations did not expressly permit secondary listings of Saudi issuers abroad. The Instructions provide, for the first time, a mechanism for companies listed on Tadawul to obtain secondary listings outside of the Kingdom. Read more in our recent briefing with Zamakhchary & Co.

Saudi Arabia proposes revisions to the Companies Law regime

Companies in Saudi Arabia may soon be subject to a revised companies’ law regime. The Ministry of Commerce and the CMA consulted in July on a new draft Companies Law, which (if enacted) is set to replace the existing Saudi Arabian Companies Law (Royal Decree No.M/03 dated 28/01/1437H (corresponding to 10 November 2015), - which significantly modernised the regime for Saudi companies at the time - and the Professional Companies Law, which only came into force in March 2020. Read more. Some of the changes proposed in the draft law are described below.

• Companies: the types of company that can be established are changing. The most common types of business vehicles are limited liability companies (LLCs) and joint stock companies (JSCs) remain, and there is a new concept of a simple joint stock company. There will no longer be a concept of a partnership company, and the provisions relating to partnership company limited by shares are restructured. Incorporation procedures are to be simplified.
• Simple JSCs: A simple joint stock company, which can be established by a single shareholder with no minimum capital requirement and managed by either a general manager or a board of managers, will be subject to a lighter regulatory and corporate governance regime than traditional JSCs.
• JSCs: The draft law contemplates several changes for JSCs. For example, it should be easier to establish a single shareholder JSC as the current limitations on incorporating such companies are to be removed. There will be no maximum number of directors, as the current limit of 11 is to be removed. Companies are to be allowed greater flexibility in issuing different classes of shares (including ordinary, preferred and redeemable shares), with varying rights. Squeeze-out and sell-out rights for shareholders are codified in the draft law.
• LLCs: The draft law also contemplates several changes for LLCs, including permitting LLCs to issue transferable debentures/sukuk (currently, only JSCs can issue these types of instruments) and allowing a single shareholder LLC to own another single shareholder LLC.
• Directors’ duties: Directors and managers of Saudi Arabian companies should be aware of a new set of codified duties, including a duty of care and attention, a duty of to act in the company’s interests and in accordance with principles of honesty, integrity and loyalty to the company’s shareholders. These apply to all types of companies, and not just JSCs. The duty to avoid conflicts of interest also now apply widely to all types of companies.
• Shareholder Agreements: the draft law now expressly recognises shareholder agreements. This is a welcome development, recognising that shareholders can set out bespoke provisions as to how the company should be managed and shareholders' rights and obligations, as an overlay to the company’s standard constitutional documents.
• Company term and dissolution: companies may have an indefinite term; removing the current requirement to have a fixed term. The provisions on dissolution of companies are also to be adjusted. In particular, a company will not automatically be dissolved where its debts exceed 50 per cent. of its share capital and provided certain shareholder or management actions are not taken within a specified period – instead, interested parties will be able to seek dissolution in court.
• Professional and non-profit companies: the draft law also regulates companies engaged in certain types of business activities, notably incorporating the regulation of professional companies within it, rather than in a separate law, as is currently the case. There are also detailed provisions on non-profit companies.

The timescale for enactment of the draft Companies Law is not known. Once the law has come into force, companies in the Kingdom will have a one year grace period to ensure they are compliant with the new law. Regulations are expected to supplement certain areas of the draft law, following enactment.

New law regulates Saudi Arabia’s commercial courts

The new Saudi Arabian Commercial Courts Law sets higher standards for efficiency and transparency in commercial litigation – a welcome development for commercial parties investing in Saudi. It enables commercial parties to contractually agree litigation procedures, including pre-claim conciliation and allows the use of electronic procedures. Urgent interim remedies (such as injunctions) may now be applied for, and debt recovery should be faster. For the first time, the law provides for public access to case documents and judgments. Zamakhchary & Co summarise the key changes effected by the new Commercial Courts Law and key actions for commercial parties to take now in a recent briefing.

Saudi Arabia proposed draft law regulating commercial agencies and distribution

The Ministry of Commerce and Investment (MOCI) recently published a draft commercial agencies and distribution law, which is intended to repeal Royal Decree No. M/11 dated 20/02/1382H) (corresponding to 23 July 1962). The draft law will modernise agency and distribution activities across the Kingdom, regulating relationships between the agent, distributor and principal (but will not apply where the distributor or the agent is owned by the principal). The draft law envisages that non-Saudi nationals may act as agents, for the first time. Under the terms of the draft law, the agent or distributor must be registered in the commercial register of Saudi Arabia, have a license and, in the case of non-Saudi agents only, must also have a foreign investment licence. The agreement must be in writing and in Arabic (or, if not in Arabic, accompanied with a certified Arabic translation) and registered with MOCI. Obligations on the parties include a duty to act in good faith, not to harm the business reputation of their counterparties, confidentiality obligations (which continue even after termination of the agreement) and non-compete provisions (which apply in the absence of a non-compete clause in the agreement). The draft law also specifies termination events (unless set out in the agreement itself). These include death of the agent or distributor, the start of legal proceedings for winding-up against any one of them or their inability to perform their duties due to illness. There is a time-bar of three years from the date of the termination of the agreement on any claims for damages to be brought forward by any of the parties. In the case of non-payment by the principal, the agent will be entitled to retain the goods of the principal until it is paid. The parties are free to choose the method of dispute resolution in the agreement. Penalties for breach include a fine of up to SAR500,000. Implementing regulations are to be issued, following the law coming into force.

SAMA revises the Payment Services Provider Licensing Regime

In August, the Saudi Arabian Monetary Authority (SAMA) revised its Payment Services Provider Regulations, which were issued in January. The revised regime applies to banks and other types of Payment Services Providers (PSPs) conducting regulated activities in Saudi Arabia. Imposing a number of stricter requirements, the revised regime draws on aspects of the European Union’s Payment Services Directive (PSD2). This is the latest development of the Fintech ecosystem in the Kingdom, which is an important component of The Financial Sector Development Program (FSDP) and the Vision 2030. Globally, the regulation of payment services is evolving; read more about emerging trends in the EU payments sector.

Arbitral award recognised as final by Bahrain Courts

In a recent case, the Bahrain Supreme Court of Appeal refused an application to set aside a foreign arbitral award (issued in Singapore under the ICC Rules of Arbitration), on the grounds that it was not the appropriate forum in which to challenge the award (as Bahrain was not the arbitral seat) and because it was not permitted for parties to challenge a final and binding arbitral award. The court expressly recognised the ICC arbitral award was final and binding. This decision upholds the UNCITRAL Model Law position, which provides for limited grounds for setting aside an arbitral award, on which the Bahrain Arbitration Law No.9 of 2015 is based.

New Ultimate Beneficial Owner rules in Bahrain

New rules issued by the Bahrain Ministry of Industry, Commerce and Tourism set out who is considered to be an “Ultimate Beneficial Owner” (UBO) of a Bahraini company and branches of foreign companies in Bahrain. Resolution No. 83 of 2020 concerning the Standards, Requirements and Rules to Determine the Ultimate Beneficiaries and accompanying guidance imposes reporting requirements, requiring details of UBOs to be filed with the Ministry and updated annually. Failure to do so may result in license suspension or fines being imposed.

The UAE and Bahrain end Israel boycott

The UAE has removed barriers to trade with Israel, enabling direct trade between the two countries. In August, Federal Decree-Law No.4 of 2020 abolished Federal Law No.15 of 1972, which implemented the boycott of Israel, in line with The Arab League Israeli Boycott which was launched in 1951. This follows the signing of The Abraham Accords Peace Agreement: Treaty of Peace, Diplomatic Relations and Full Normalization Between the United Arab Emirates and the State of Israel in August. Bahrain has also announced that it will enter into an agreement with Israel to establish full diplomatic relations between the two countries, which is the first step towards normalising relations. Since 1994, the UAE and Bahrain, together with the other GCC countries of Kuwait, Oman, Qatar and Saudi Arabia, have not adhered stringently to all aspect of the Arab League Israeli Boycott, typically only enforcing the primary restriction on trade.

Global

GCC Covid-19 Resource Hub

Our global teams have prepared a range of guides offering practical guidance on significant commercial and legal issues, which you can access on our dedicated Covid-19 Resource Hub.

Brexit and financial services: What happens now?

Another critical phase of the Brexit process is around the corner. Our latest note on Brexit and financial services brings you up to speed with the latest developments. In the note we summarise the current state of play for regulatory measures which will start to apply from the end of the transition period in the UK and EU. The note also considers how the UK will amend onshored EU law, what plans there are to diverge from EU rules, and what impact a trade agreement might have on financial services. Please get in touch if you would like to discuss these or any other Brexit-related issues as we near the end of the transition period. Read more

Global money laundering watchdog calls for further action to tackle risks around virtual assets and stablecoins

The Financial Action Task Force has released two reports concerning the digital asset industry. Read more about the highlights in our recent briefing. In June 2019, the FATF amended its global AML/CFT standards to clarify how they should be applied to virtual assets and related service providers. G20 leaders endorsed the amendments and affirmed their commitment to implementing them. 12 months on, the FATF review has found that 35 out of 54 reporting jurisdictions have implemented the revised standards, leaving 19 that have not. The FATF has called on all jurisdictions to fully implement its revised standards and it plans to review progress again in June 2021.

A recent FATF Mutual Evaluation Report on Anti-money laundering and counter-terrorist financing measures (April 2020) notes that over the past several years, the UAE has strengthened relevant laws and regulations, including relating to anti-money laundering and counter-terrorism financing, including measures to improve disclosures to prevent the concealment of beneficial ownership information via complex structures or the use of informal nominees. These measures address the UAE's perceived increased risk of attracting funds with links to crime and terror, given its jurisdictional complexity (consisting of seven Emirates, two financial free zones and many more commercial free zones) and a range of onshore and offshore company registries, which can create challenges in the implementation of beneficial ownership and other AML/CFT requirements.

Collective redress across the globe

Collective redress has never been more important in civil litigation, with the impact of the Covid-19 pandemic likely to result in mass claims across the globe. However, the availability and effect of collective redress procedures differ widely between jurisdictions. Our updated and refreshed comparative review explores the differences in the availability and approach to collective redress in 19 jurisdictions across the global market. You can read the review on our Knowledge Portal.

International data transfers and the impact of the ECJ’s Schrems judgment

Cross-border transfers of personal data by international businesses as part of day to day operations can involve navigating data protection regulations in various jurisdictions. Where data flows would be caught by the EU General Data Protection Regulation (GDPR), companies will need to reassess how they transfer personal data to third countries that are not considered by the European Commission to offer an adequate level of protection for personal data, such as countries in the Middle East. Additional safeguards may be needed. This follows a recent judgment of the European Court of Justice. Read more in our briefing on The Schrems judgment – Transfer Impact Assessments for international data transfers?