The UAE has enhanced the authority of the Central Bank over the licensing and regulation of all financial institutions and their activities in the UAE, with the issuance by Decree of Federal Law No. (14) of 2018 (the Central Bank Law). This effectively repeals and replaces the Central Bank Law of 1980 (the 1980 Law), which has become out of date and no longer adequately caters to the needs of the highly complex financial industry, which has developed tremendously over the last 40 years.

In line with international best practices and standards including those set by the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS), the Central Bank Law introduces some key enhancements and entrusts broad authority to the UAE Central Bank to carry out:

  • Licensing and regulation of all financial institutions based on activity, including a general prohibition on carrying out or promoting unlicensed financial activities;
  • Prudential supervision and implementing regulations for licensed financial institutions and activities;
  • Imposing administrative and financial sanctions and reporting obligations for financial institutions;
  • Establishing the Higher Shari'a Board, including determining its powers and functions as well as the appointment of its members by the Board of Directors of the UAE Central Bank; and
  • Implementing the UAE's monetary policy to protect the local financial system and maintain the stability of the national currency.

Licensing and regulation

Under the 1980 Law, the licensing of financial institutions was based on an outdated classification system that was related more to the entity type (such as commercial and investment banks, financial and monetary intermediaries, etc.) as opposed to the activities undertaken. Similar to the United Kingdom's Financial Services and Markets Act (FSMA), the Central Bank Law adopts a system of classification based on a list of licensed financial service activities, which include accepting deposits, providing credit, currency exchange, payment services, virtual banking and promoting financial activities. This is also in line with the regulations set by the Dubai Financial Services Authority (DFSA), as well as the Abu Dhabi Global Market's Financial Services Regulatory Authority (FSRA).

The Central Bank Law also expands on the 1980 Law and introduces a general prohibition to carry out or promote financial activities without a license from the UAE Central Bank. It gives discretionary powers to the UAE Central Bank in relation to licensing matters, including issuance, suspension or renewal.

Prudential supervision

The Central Bank Law has mandated the UAE Central Bank to exercise prudential supervision over the financial industry specifically to: (i) issue policies to achieve the objectives of the Central Bank; (ii) set standards for licensed financial institutions and activities; (iii) issue implementing regulations and rules; and (iv) issue directives as may be required for financial institutions to comply with both its instructions and the law.

Sanctions and reporting obligations

The Central Bank Law also strengthens the UAE Central Bank's enforcement powers to impose a broad range of administrative, financial, civil and criminal sanctions on licensed financial institutions that are in violation of the law. It also lays out detailed reporting obligations that financial institutions must comply with, which is something that the 1980 Law lacked.

Establishment of the Higher Shari'a Board

The Higher Shari'a Board, which is the supervisory body tasked with the oversight of Islamic financial institutions and activities in the UAE, was previously established within the Ministry of Justice and Islamic Affairs under Federal Law No. (6) of 1985 on Islamic Banks. The Central Bank Law provides clarity, and will have the potential to standardize and harmonize all Islamic finance activities under the authority of the UAE Central Bank. This is similar to the case and approach taken by the Central Bank of Malaysia (Bank Negara Malaysia).

Implementation of the UAE's monetary policy

The Central Bank Law ultimately entrusts the UAE Central Bank with responsibility to implement the UAE's monetary policy and the necessary tools and measures as may be required for implementation. It sets the major objectives for the UAE Central Bank, which includes protecting the UAE's financial system and maintaining and managing the stability of its national currency.

What's next with the Central Bank Law?

This change comes in the context of a flurry of new laws including, the new Anti-money Laundering Law and Netting Law, which aim to strengthen and protect the UAE's local financial system, giving financial institutions greater clarity and certainty in doing business in the country.

On a larger scale, the UAE government continues to make strides to align with international standards on financial supervision and regulation, promoting the UAE as a dynamic financial jurisdiction, set to be at par with the most advanced financial centers.

We will keep you updated on any further developments to the constantly-evolving legal and regulatory framework of the UAE financial services industry, including the compliance period to be set by the UAE Central Bank's Board of Directors in relation to the Central Bank Law, as well as the issuance of the UAE Central Bank rulebook.

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