Financial News

UAE brokers face tougher Insurance Authority rules

Legislation presenting tighter and more costly rules for the United Arab Emirates’ (UAE) brokers has been introduced by the Emirates Insurance Authority (IA).

A summary published in early February reveals the price of doing business is set to increase for brokers after a number of new and heightened costs were revealed in the legislation – which draws a distinction between local and foreign firms.

Tougher entry requirements make up the bulk of the changes to the 2006 Regulations, making it more difficult for the UAE’s smaller brokers.

Among these costs is a significant increase in the paid up shared capital required by firms – which has jumped to AED 3 million from AED 1 million for locally incorporated companies, and to AED 10 million for foreign firms.

“Paid up share capital of course is not the same as solvency,” James O’Shea of Clyde & Co notes, “so it is difficult to see these new requirements as anything other than an incentive to get the smaller players out of the market and discourage foreign entrants.”

Capital requirements

According to the document, brokers will also be subject for an increase to the amount they hold as an unconditional on demand bank guarantee – which could be drawn down for customers in the event of a broker running into financial trouble.

Whilst AED 50,000 was the total previously needed, this has jumped to AED 3 million for locally registered firms, and an extra AED 1 million for each additional local branch.

For foreign firms, the new capital adequacy requirement will be set at AED 5 million, and AED 3 million for each extra branch.

Rima Mrad, a Partner at Dubai-based law firm Bin Shabib & Associates, has stated these new requirements should be a positive step for the UAE’s brokerage sector, improving standards and encouraging mergers and acquisitions.

For the first time, the new rules will require broker firms to obtain and hold professional indemnity insurance cover, and with evidence of this cover registered with the IA. Again there is a discrepancy between local and foreign firms, with the former needing cover above AED 2 million and the former of AED 3 million.

Mrad notes that the legislation – which had not been formerly announced at the time – is similar to a draft version released in October last year which tightened and clarified a small number of highly specific points.

Overall, Mrad had stated that the legislation was a significant improvement on the old rules, and much clearer.

Receiving regulated advice

Many brokers have expressly welcomed the change to the legislation, and the clarity they bring to the market.

The increased capital requirements will bring some severe challenges to a lot of the UAE’s smaller firms, effectively ensuring a level playing field of larger and therefore competent brokers.

Whilst this can be seen as a robust step in the right direction, further developments may be needed to create the secure backdrop needed for financial advice market for UAE residents. As Ibrahim Al Zaabi, the director general of the UAE Insurance Authority, noted in September last year, these developments are “continuous. It doesn’t stop.”

Until the laws are finalised, or a regional accreditation body has been created, you may want to follow the following steps when selecting a broker in the UAE:

  1. Select a larger firm with an established presence in the UAE, and;
  2. Ensure the firm is locally regulated.

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