A Mutable Landscape

Change is the only constant.  This statement can describe some of the most dynamic recent times for Gulf and wider Middle Eastern financial institutions now. The substantial pace and depth of legal reforms in the sector has required ongoing learning by banks and the law firms that serve them. The landscape is changing in three key areas, namely:

• legal and regulatory,
• banking operations due to modernisation; and
• market infrastructure as a result of rationalisation and consolidation. 

There has been increasing regulatory oversight in the Middle East region as the financial regulators seem focused on a common goal to ensure the industry is at an international standard.

In the UAE, this has resulted in the introduction of a new banking law, netting law, AML law and bankruptcy law.  We are also seeing common themes in the region as several countries (i.e. UAE, Jordan, KSA and Egypt) have introduced laws relating to security creation.

Another common theme is the increasing focus on the regulation of securities and in particular the promotion and offering of securities. The regulators in the region are also considering or have passed data protection and consumer protection laws, which will have far reaching implications. 

Given the ever-changing regulatory landscape spanning from AML to bankruptcy, it is imperative that financial institutions operating in the region stay abreast of these changes. While the introduction of new legislation typically seeks to fill gaps and introduce certainty, the reality is that in the short term there can be uncertainty as the industry adapts.

Navigating these grey waters will require operational learning and transformation as financial institutions need to simultaneously understand the requirements of the new legislation, update processes and documentation and provide appropriate training to its employees.

Financial institutions are also under pressure to drive innovation in the delivery of services and user experience and employ fintech tools to serve their operational needs. Financial institutions now have virtual employees, blockchain platforms are being considered for bonds and mortgage registration and an artificial intelligence bank of the future is a work in progress.

Financial institutions are looking to digitise operations to allow for a seamless and improved user experience. It is now possible in the UAE to open a retail bank account without physically visiting a branch, meeting a relationship manager or signing anything in wet ink (a significant departure from the paperheavy practices of old). 

While these efforts to modernise banking operations are a welcome sign of the times we live in, they are not without risk.  Given how new these methods are, the big challenge for banks will be to anticipate the potential issues and hurdles.

Financial institutions will need to consider legal precedent (if any) and the view of the relevant courts prior to implementing any changes in their operations to ensure the courts will be able to comprehend new technology focused operations.

A particular model may be untested before the courts and while analogies could be found, modernisation brings with it uncertainty and exposes financial institutions to a new form of risk.

In particular, changing the way contracts are concluded will require that safeguards are put in place both from a documentation and processes perspective to protect the bank and provide a valid defence in the event of a customer challenge.

Financial institutions will need to work closely with their advisers to ensure the right framework is implemented to modernise in a way that does not put its operations at risk (or, more likely, to ensure such risk is minimised to an acceptable level).

Moving operations into the digital space also increases vulnerability to cyberattacks.  While these are currently not common in the region, it is an area that should not be overlooked.

There has also been a move towards consolidation and rationalisation. Banks in the region have been rationalising their operations and closing nonperforming branches in a move to streamline and be more selective in an overbanked region. 

The industry has seen a large number of mergers in the last two years across the GCC and there are predictions that a new cycle of acquisitions is likely. The most recent M&A activity in the UAE resulted in the merger of Abu Dhabi Commercial Bank with Union National Bank, which then acquired Al Hilal Bank.

This kind of activity results in the creation of financial behemoths which should help improve the performance and stability of the financial sector generally.  At the same time, the Kingdom of Saudi Arabia is experiencing its highest volume of applications from financial institutions looking to start or expand operations.

This suggests that while consolidation in certain markets is prevalent, there is still opportunity and room for growth in the region.  We will likely continue to see more of the same in the near future as several new laws are in the pipeline across the region and new technologies are constantly introduced.

Financial institutions will need to remain vigilant to keep up with the changing regulatory climate and to ensure any innovation that is introduced is compliant with applicable laws. The transformation will remain an important theme and players in the market will need to both embrace and drive this process to remain relevant.