Banking & Finance – Legal Update

In this update we look at legal and regulatory developments in the United Arab Emirates and Kuwait.


Securities & Commodities Authority 

1. The SCA regulation on Suitability has now been gazetted and becomes effective 29 March 2020.

The SCA has issued regulation No. 5/RM of 2020 on Suitability and Appropriateness, which reinforces obligations placed on licensed institutions to ensure that products are recommended and/or instructions are executed for investors in accordance with prescribed suitability and appropriateness tests being conducted, taking into consideration complexities of financial products and knowledge, experience and capabilities of investors. These Regulations were issued on the 2nd February 2020 and have come into force on 29 March 2020 after publication in the Official Gazette on 27 February 2020.

Our previous update on these regulations can be found here.

2. Regulation No 3 RM of 2020, issuing a new version of the amended SCA Corporate Governance Manual has now been gazetted and becomes effective 28 April 2020

This regulation replaces SCA Regulation 7 RM of 2016. The objective of this Regulation is to enhance the regulatory oversight and bring the legislation at par with the best international practices. It is also to improve the governance of public joint-stock companies by developing a legal, organized, clear and effective framework to regulate corporate affairs; ensure the rights of stakeholders; promote SCA’s supervisory role; and determine the responsibilities of the board of directors and the executive management while ensuring sufficient market transparency and neutrality. The new Regulations were published on 27 February 2020 and will come into force after 60 days from publication, being 28 April 2020.

Our previous update on these regulations can be found here.

3. Qualified Investor Update

SCA has issued decision no. 9 of 2020 to amend the definition of the term ‘Qualified Investor’. The purpose of the amendment is to provide more clarity on the criteria on which a corporate person might be determined to be a Qualified Investor. This amendment was issued on 18 March 2020. It is yet to be published in the official gazette and shall come into force in the next day of publication.

SCA Extension

In response to the current Covid-19 situation, SCA has decided to extend the deadlines for submission of financial statements applicable to all listed companies, all companies licensed by SCA and all UAE mutual funds. The decision was to:

1. extend the deadline for the submission of the audited annual financial statements of 2019 for 45 days. The extension will end on 14 May 2020.

2. extend the deadline for the submission of the periodical financial statements that were due on 31 March 2020 to 30 June 2020.

UAE Central Bank – Targeted Economic Support Scheme

In response to the current Covid-19 situation the UAE Central Bank issued standards for its Targeted Economic Support Scheme (TESS). In summary TESS targets three principal aspects set out below, with a focus on private sector companies, SMEs and individuals. TESS does not apply to facilities provided to the government, government related entities or non-resident customers.

Any financial institution who avails assistance under TESS is to comply with the standards in both words and spirit – the aim being to achieve the overarching policy objectives of the scheme.

a. Funding Relief

Financial institutions which are eligible under the scheme will be entitled to access a zero cost facility provided by the UAE Central Bank. The facility will have an aggregate value of AED50bn and be allocated among financial institutions in proportion to their market share.

Funding under the facility will be available from 15 March 2020 until 15 September 2020 and is to be used to allow financial institutions to provide the financial relief discussed below – with evidence of the same to be provided to the UAE Central Bank.

b. Capital Buffer Relief

The UAE Central Bank has relaxed the capital buffers applicable to banks in the UAE for a period of 1 year from 15 March 2020. This includes the ability to tap into the capital conservation buffer up to a maximum of 60%, increasing to 100% for the domestic systematically important banks buffer. There is also the temporary suspension on the maximum distributable amount.

In providing the capital buffer relief the UAE central Bank has been clear that it is to allow for the extension of facilities in the UAE only and is intended as a temporary tool in response to the credit crunch caused by the Covid-19 situation.

c. Financial relief and funding

UAE financial institutions are directed to support their customers affected by Covid-19 by taking the following steps:

-  Offering payment deferral of up to 6 months to private sector companies, SMEs and individuals

-  Permitting the extension of loan periods to accommodate any deferral

-  Not downgrading any customer receiving relief; and

-  Not to charge customers receiving relief any additional penalties, fees or interest.

Financial institutions are also encouraged to provide additional financing at reduced rates to private sector companies, SMEs and individuals.

The access to the Funding Relief has been linked to the provision of financing as recommended by the UAE Central Bank, with financial institutions required to maintain evidence of their funding efforts and provide the same to the UAE Central Bank.

Any relief offered should not include customers who were already in default, customers not affected by the situation, non-resident customers or government related entities. In addition the UAE Central Bank is to be notified of any relief provided to exposures which are more than 10% of the capital of the financial institution.

In support of TESS, the Central Bank, DFSA and FSRA issued joint guidance on practical solutions to deal with expected credit loss but keeping within IFRS standards. This is due to the uncertainties arising from the Covid-19 crisis making the determinations needed under IFRS 9 inherently difficult.

Dormant Accounts

The UAE Central Bank issued a new circular no. 1 of 2020 on dormant accounts. The new Regulation was published in the official gazette on 16 February 2020 and is now effective.

The new Regulation replaces the previous 2018 regulation and sets out a more robust framework for the control and protection of dormant funds held by financial institutions. It also provides more comprehensive procedural details to offer clarity to financial institutions and ensure protection of customers’ funds.

Among other things the Regulation generally reduced the applicable time periods. By way of example, a personal savings account will now be considered dormant if there have been no transactions for three years - previously it was six years.

Electronic contracting

Due to practical constraints on movement within the UAE at present, the ability of customers to physically attend the premises of financial institutions or to deliver original documents has been severely impacted. The result of which being that financial institutions are increasingly needing to consider the on-boarding of customers and conclusion of contracts and transactions by electronic means.

Electronic contracting was addressed in the UAE under the Electronic Transactions Law (Law No 1 of 2006) which provided that transactions and contracts could be concluded through electronic correspondence and electronic signatures would be recognised. Although the law has been positive for the UAE, and as the financial market moves closer to full digitisation, consideration also needs to be given to the approach of the UAE Courts and practical issues which can arise.

There are also transaction specific considerations, with particular actions or transactions giving rise to increased risk when undertaken electronically. This can be the risks arising from the customer in challenging transactions before the Courts, and also in some situations an increased risk of fraud.

What is clear is that the UAE has the framework for electronic contracting allowing financial institutions to consider practical solutions to the current difficulties. However due to the potential risks if challenged in Court, institutions need to carefully consider a comprehensive solution which involves appropriate mitigation measures to evidence transactions and protect against challenges from customers. If done correctly, financial institutions can accept electronic contracting to facilitate normal operations with their customers without exposing themselves to increased risk. However, the solution applied by banks need to be appropriate for the product, transaction and customer.

Bounced Cheques

Since 2017 the criminal offence for certain dishonoured cheques in the Emirate of Dubai was effectively replaced by the imposition of a fine. In 2017 the Attorney General in Dubai directed that cheques under AED200,000 would be subject to a fine, as opposed to criminal sanctions.

This approach has now been followed in the Emirate of Abu Dhabi pursuant to Decision No. 14 of 2020 by the Attorney General Office in Abu Dhabi. As a result, the dishonouring of cheques under AED500,000 will be subject to a fine. The decision was effective from 16 March 2020.


Kuwait’s Regulatory Response

Understanding the economic ramifications of the Covid-19 situation, the government of Kuwait has just as quickly sought to address the effect on institutions due to the decrease in demand by gearing up for appropriate economic intervention. The Central Bank of Kuwait (“CBK”) has taken critical regulatory measures to combat the effects of the coronavirus outbreak. Of particular importance is the Circular of 15 March, 2020 (the “Circular”), under which the CBK has instructed banks, investment companies and regulated financial firms (i) to desist from selling any mortgaged collateral against loans and financing facilities unless such sale is at the request of the borrower obligor, and (ii) to cooperate with and be understanding of a borrower when requesting additional collateral. By instructing financial firms to refrain from selling mortgaged assets, the Circular safeguards against cascades of collateral fire sales whilst concurrently encouraging creditors to renegotiate the terms of at-risk facilities at earlier stages.

The Circular is intended to complement the other precautionary measures employed by the CBK, which include a reduction in its discount rate to 1.5% (a 1.25% cumulative drop within the last month) for maintaining Kuwait’s financial stability. The CBK measures are temporary tools and are designed to alleviate the consequences of prolonged halts in markets and business operations.

Kuwaiti officials and governing bodies continue to assess impacts relating to the coronavirus outbreak, and are likely to take further legislative actions to ameliorate the pandemic’s economic consequences. Said legislative actions are intended to support a holistic, effective and proactive response to the outbreak and are likely to amend a broad range of laws, including the Financial Stability Law, Sukuk Law, Public Debt Law, Rents and Mortgage Law and Bankruptcy and Restructuring Law.

As the coronavirus outbreak unravels, it is essential that private parties to loan agreements proactively facilitate resolutions. It would be prudent for parties to examine binding contractual terms to determine (i) their ability to comply with the covenants therein, and (ii) the likelihood of an event of default forward. Furthermore, due to the lack of information on the scope and magnitude of this pandemic, we advise parties to seek customised waivers, consents, extensions, amendments and/or any other contractual arrangement that may proactively protect a party’s contractual rights and safeguard against costly disputes.

While Kuwaiti policymakers’ tools continue to address macro goals, parties to loan contracts are better able to overcome their unique challenges on a micro level by complementing such macro efforts with tailored resolutions amidst cooperative dynamics.

Kuwait’s Excused Non-Performance Regime

Due to the outbreak’s rapid disruption to commerce, supply chains and business generally, an increased number of borrowers are examining the legal and commercial implications of their non-performance of contractual obligations.

Any affected borrower seeking to assert that it is relieved from performing a contract governed by Kuwait law will need to consider the provisions of the Civil Code of Kuwait, Law No. 67 of 1980 (the “Civil Code”). The Civil Code recognises two frameworks for excusing a party’s non-performance: (1) Force Majeure (terminating the contract and exonerating a party from its contractual obligations due to an exogenous, unanticipated event that has rendered such party’s performance impossible), (2) Emergency Condition (allowing a party to suspend or amend its performance of contractual obligations because an exogenous. unanticipated event has rendered its performance onerous but not impossible). Both frameworks stipulate that the causing event must be unforeseeable, exogenous and beyond the affected party’s control.

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