Proposed Enhancements to the Regulatory Framework of the FSRA

On 29th October 2024, the Abu Dhabi Global Market (ADGM) Financial Services Regulatory Authority (FSRA) released a Consultation Paper on “Proposed Enhancements to the Regulatory Framework of the FSRA” (CP).

The CP marks the first phase of the FSRA’s review of its regulatory framework against current best international practices. It focuses on the Core Principles for effective banking supervision issued by the Basel Committee on Banking Supervision (BCBS Principles), which were revised in April 2024. Further consultations are expected as the FSRA announced that it will later assess the need for additional framework enhancements in light of other international standards, namely: the Objectives and Principles of Securities Regulation, issued by the International Organization of Securities Commissions; and the Insurance Core Principles, issued by the International Association of Insurance Supervisors.

In this alert, we highlight some key changes proposed by the FSRA in the CP.

The consultation is open for comment until 28 November 2024.

Key takeaways

• Application: Although the focus of the CP is to review the FSRA’s framework against the BCBS Principles, some of the contemplated amendments apply to all Authorised Persons.
  

• Proportional Approach: A number of requirements will apply with regard to the size, risk profile and complexity of the relevant Authorised Person.
  

• Corporate Governance and Risk Management: While the proposed changes are wide-ranging, recurring themes in the CP are the need for Authorised Persons to have a robust corporate governance framework and adequate risk management processes which are embedded in the firms’ decision-making processes.
  

• Guidance: A number of clarifications and additional guidance on the FSRA’s expectations will be added by way of changes to the FSRA rules.
  

• FSRA Powers: The proposed amendments will empower the FSRA to impose additional obligations and conditions on firms (e.g. on the composition of its Governing Body), where it deems it appropriate. The FSRA will also have the ability to reject and/or impose conditions on certain acquisitions, investments or the establishment of new subsidiary by Category 1, 2 and 5 firms.

Who will be affected by the proposed changes?

Some proposed amendments are relevant to all FSRA-Authorised Persons and applicants while others only apply to specific categories of Authorised Persons.

What are the changes proposed by the FSRA?

Corporate Governance

Applicable to all Authorised Persons

In its CP, the FSRA proposes to provide additional guidance in Appendix 1 to the General Rulebook (GEN) on corporate governance best practices. In particular, it contemplates:

1. requiring Authorised Persons to undertake periodic reviews of their corporate governance arrangements. Such reviews should be documented as the FSRA may request a copy of the findings;
   

2. establishing a list of circumstances in which a non-executive director (NED) will not be regarded as being independent; and
   

3. providing additional guidance on the FSRA’s expectations regarding the formation of specific Governing Body committees.

Applicable to Banks and Insurers[1]

The FSRA wishes to make the following enhancements to its corporate governance framework applicable to Banks and Insurers:

1. require that their Governing Body has a majority of NEDs and at least one independent non-executive director (INED);
   

2. mandate that the Senior Manager be an individual other than the Senior Executive Officer to advise the Governing Body and senior management of relevant risks;
   

3. enable the FSRA to impose one or more of the following additional requirements on Banks/Insurers:
   

   • to increase in the proportion or number of NEDs and INEDs on their Governing Body; and
     

   • to establish an audit, nomination, risk and/or remuneration committee or a committee overseeing such committee(s). The FSRA also proposes to be empowered to require that a certain number or proportion of NEDs/INEDs be appointed on such committees and that their chair be a NED/INED and/or not the chair of the Governing Body or another committee.
     

   The FSRA will have regard to the size, risk profile, complexity, stages of operations and whether the Bank is a Branch or Subsidiary when determining whether to impose such additional obligations; and
   

4. to enable the FSRA (where it considers it appropriate) to require Banks and Insurers operating as a Branch to establish a committee carrying out the Governing Body’s corporate governance responsibilities in relation to their ADGM activities.

Major Acquisitions/Investors and Establishment of Subsidiaries

Applicable to Category 1, 2 and 5 Authorised Persons

GEN 8.10.6(6) currently requires all Authorised Persons to notify the FSRA “immediately” of any proposed restructuring, merger, acquisition, reorganisation, or business expansion which could have a significant impact on the Authorised Person’s risk profile or resources. Further, Authorised Persons are required to give “reasonable advance” notice of changes to their legal structure (GEN 8.10.2(5)).

The CP proposes to impose on Category 1, 2 and 5 Authorised Persons additional filing requirements in respect of the following events:

1. the establishment or acquisition of a subsidiary (irrespective of its activities) other than an SPV used solely to provide finance to the Authorised Person;
   

2. committing to any proposal to acquire or invest (directly or indirectly), in an entity, where the value of that acquisition is equal to or greater than 10% of the Authorised Person’s Capital Resources; or
   

3. committing to any proposal to acquire (directly or indirectly) 20% or more of the equity interest in an entity.
   

The proposed filing obligations will differ depending on whether the relevant Authorised Person is a Domestic Firm or a Branch. Branches will only be required to notify the FSRA “in advance” of the above events. Domestic Firms will, however, be required to provide “at least 45-days” prior notice to the FSRA. While these new requirements are described in the CP as new “notification” requirements, they are, in essence, akin to prior approval requirements as the FSRA will be empowered to reject or impose conditions on the relevant transactions.

Domestic Systematically Important Banks – D-SIBs

Applicable to Authorised Persons Accepting Deposits or Managing an unrestricted PSIA

The FSRA is proposing to update its Prudential – Investment, Insurance Intermediation and Banking Rules (PRU) to empower it to designate certain Authorised Persons undertaking the regulated activities of Accepting Deposits or Managing an unrestricted PSIA as D-SIBs, and to impose more stringent prudential requirements on such D-SIBs (including additional capital buffer, higher minimum Leverage Ratio, etc.).

Country risk and transfer risk

Applicable to Category 1, 2, 3A and 5 Authorised Persons

The FSRA is proposing to bolster its requirements pertaining to the elements to be included in an Authorised Person’s country risk and transfer risk policy and the factors and data to be taken into account when setting country or regional limits. The regulator also takes this opportunity to emphasize the roles and responsibilities of a Governing Body and senior management in managing these risks. Again, the FSRA’s expectation is that such new provisions be implemented in a manner which is proportionate to the nature, size, complexity of operations and resources outside the jurisdiction.

Stress testing

All Authorised Persons

The FSRA is of the view that additional guidance on stress testing and scenario analysis should be provided in Appendix 3 to PRU in light of the BCBS Principles. In particular, it wishes to clarify that stress testing frameworks should be:

1. commensurate with the risk profile and systemic importance of the Authorised Person;
   

2. subject to appropriate governance;
   

3. appropriately integrated with decision-making and risk management processes;
   

4. capture all material and relevant risks;
   

5. provide sufficient data and IT capabilities to support the analysis;
   

6. be appropriately documented, maintained and updated; and
   

7. address how the results are communicated within the firm and to relevant authorities in the ADGM and overseas.

   
   

“Connected Counterparties” and “Closely Related Counterparties” 

Applicable to Category 1, 2, 3A and 5 Authorised Persons

The FSRA proposes to provide additional criteria for determining whether there is control or economic interdependence for the purposes of determining whether the definition of “Connected Counterparties” or “Closely Related Counterparties” are met.

Problem exposures

Applicable to Category 1, 2, 3A and 5 Authorised Persons

The CP contemplates the addition of criteria and guidance for classifying bank exposures as “non-performing” and any reclassification of exposures as “performing” and “forborne”.

What is the deadline for providing comments?

28 November 2024.

How we can help

We have extensive experience in assisting clients with regulatory change projects and would be delighted to assist you with working through the new FSRA proposals or assisting you in preparing a response to the CP.

For further information and assistance, please contact Eugénie Levy.

This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.

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[1] Banks and Insurers” means for the purposes of this CP: Banks; Insurers other than Captive Insurers or Authorised ISPVs; Authorised Persons authorised to carry on the Regulated Activity of Managing an unrestricted Profit Sharing Investment Account; and any other Authorised Person or Recognised Body who by written notice from the FSRA are deemed subject to these requirements.

ADGM FSRA – Consultation Paper – Proposed Enhancements to the Regulatory Framework of the FSRA