The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market has been embracing innovation, growth and FinTech, but remains alert and cautious of potential technology risks according to CEO Richard Teng.
Despite being ‘relatively young’ with less than two and half years of operations, Abu Dhabi Global Market (ADGM) has embraced the FinTech journey from quite early on.
ADGM launched the first FinTech RegLab and Licensing Framework for FinTech participants in the MENA region. It is the first in the region to create a licensing regime, to license FinTech players. As a new IFC, ADGM is also the first to create a regulatory sandbox in the region, which has been running for around a year, and has close to 20 local and international Fintech companies, making it the second most active in the world, behind the London FCA sandbox.
As result, ADGM now has close to 900 registered entities across a spectrum of sectors offering various commercial and financial activities and with global banks and global financial institutions setting up in the region according to Teng. It boosts the likes of BNP Paribas, Standard Life Aberdeen Asset Management, UniCredit, Abu Dhabi Financial Group, Abu Dhabi Securities, supporting a mix of international, region and local players in their international growth.
“We realise the importance and full potential of FinTech in the early stage of setting up an International Financial Centre and began looking at the broader region, which is ripe for financial transformation,” Teng said. “We have some of the fastest growing demographics in the world, this region will account for more than 50% of the world’s population growth by 2050.
“However, 86% of the adult population is unbanked or under banked, so financial exclusion is a big problem. If you look at the SME, lending by regional banks to SMEs is 50% below that of global median. The IFC has estimated that the funding gap in this region, in SME space stands to $250bn. So, there is a gap there to be filled.”
ADGM goes beyond the traditional functions of a regulator and looks to appropriately help the startup or company be a success and support their growth by connecting them with the ‘right players in the market’ for fundraising.
“A lot of SMEs and startups are looking to scale their financial solutions for proper adoption and this is where we introduce them to the financial institutions who are looking at some of the solutions and applications that these FinTech offer. We look beyond just regulatory compliance.”
New financial technologies continuing to increase in popularity globally, offering new opportunities but also creating new risks. FinTech promises innovation and economic growth through the disruption of the traditional financial services business, embracing start-ups, established technology and e-commerce companies. However, it also poses major challenges to the post-crisis regulatory paradigm. As a result, financial regulators have to balance the traditional regulatory objectives of financial stability and consumer protection with the objectives of growth and innovation.
ADGM’s close cooperation with FinTech players and fellow regulators, combined with its understanding of the market and its risks, is a winning formula according to Teng.
“The value that ADGM brings to the market is understanding the risk in the market and the type of risk which could be potentially transmitted through financial services,” he added. “We want to embrace, innovation, growth and FinTech, at the same time, we have to be aware of the possible risk.”
While some of these risks can be addressed early, which will result in much better growth for the entire financial services market, if left unaddressed it could have huge implications.
“The cause of the last financial crisis was down to a lack of understanding for the exposure and impact of risks. We may differ from other regulators which don’t engage the FinTech players that closely and not able to understand nor appreciate that risk.
“By working very closely with the FinTech players, we learn as regulators the business model, their valuation proposition, and what they are bringing to the market, along with understanding the potential risk and helping them avoid the risk.”
As part of its collaboration push, ADGM has established more than 10 ‘FinTech bridges’ globally, in countries such as Singapore, Japan, France, Australia. The aim of the bridges is to allow the FinTech innovators greater access to capital, the market place and regulatory recognition. They act as the regulator’s way of support, as a lack of market participation will always be one of the biggest challenges in the FinTech space, according to Teng.
Since the global financial crisis, the number of regulations introduced and enforced has been on the rise. The increasing level of regulations has caused questions about whether this will hinder innovation and slow down processes.
However, there has now been a greater focus on developing technological solutions to new/greater regulatory requirements, causing the emergence of RegTech.
Earlier this year, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) started the development of an electronic know your customer (e-KYC) utility with financial institutions in the UAE.
The consortium, comprising Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Al Ansari Exchange, Al Fardan Exchange, First Abu Dhabi Bank, UAE Exchange and ADGM, will develop a proof of concept to decide the governance framework and the functional requirements of the e-KYC utility. Distributed ledger technologies (DLT) are being considered to underpin core functionality within the platform.
“The ability to share expertise and critical data across financial institutions, with proper governance and permission of the customers, will be very important in lowering the costs,” Teng said.
“From the customer stand appoint, it makes their experience better with improved efficiency and rationality as they no longer have to fill out multiple complicated but similar forms and documents etc. So, if one bank captures the details on the onboarding process, that information can be shared across other participating banks and financial institutions.