Central bank to boost risk management, governance

Dubai: The new federal law (Law No 14) of 2018 on the Central Bank & Organisation of Financial Institutions and Activities empowers the Central Bank of UAE to take appropriate measures to mitigate risk and enhance the governance standards in the banking and financial services business.

The law requires all licensed financial institutions to provide the central bank with periodic reports, information, statements and other documents, which it determines as necessary to manage and mitigate potential risks.

Financial institutions, along with their legal representatives, compliance officers, and auditors will be responsible for reporting any violations of central bank laws. The new law requires financial institutions to report their financial position within a period not exceeding three months from end of the financial year, or within such period as the central bank specifies.

Prudential supervision

For the purposes of prudential supervision, the central bank has discretionary powers to issue instructions to a financial institution, or to a number of such institutions within a specific category, relating to compliance to central bank rules. This may range from directives relating to prudential ratios determined by the central bank’s board on capital adequacy and liquidity, compliance with the required provisions, adherence to limits of large exposures, and adherence to limits of exposures to related parties.

Related party transactions are dealt with in the law, with quarterly reports required by the central bank on all credit transactions with related parties. The central bank has wide powers to act on such reports, including requiring provisioning against such facilities or prohibiting further facilities.

“As expected the new law re-confirms the ability of the Central Bank to impose conditions and limits on the activities of financial institutions,” said Jody Waugh, Partner, head of Banking & Finance at Al Tamimi & Company.

“However, it also has an increased focus on the financial stability of such institutions and protection of their customers. This includes the reporting of related-party transactions, the creation of a new risk bureau and expanded examination powers for the central bank.”

While the law comes with wide ranging powers for the central bank to set limits on the operations of financial institutions from a risk management perspective, the apex bank’s board may set limits on activities such as deposit taking, the extending of loans, discount operations, and limits on single- or related-party exposures.

Governance

The new law has vested powers in the central bank to establish a general framework for governance of financial institutions. In a welcome development, an electronic rule book is contemplated, which will include all regulations, instructions and circulars.

The law requires financial institutions to obtain the central bank’s prior approval for the appointment or nomination of any person for membership to their boards of directors or renewal of his/her membership, and the appointment or renewal of employment contracts of any senior staff.

In the interest of safeguarding public interest, the central bank is vested with power to reject any person’s nomination, appointment, or renewal of membership to the board of a financial institution and may also reject the appointment or renewal of the employment contract of any senior staff.

Bank failures

The law has laid out clear provisions for the central bank in dealing with situations where a bank is facing insolvency or a crisis-like situation. Overall, the new law comes with great emphasis on consumer protection, with several sections of the law focusing on the protection of depositors’ interests.

To deal with any crisis-like situations, the law has empowered the central bank to create a framework to protect the interest of depositors. Under such framework, the central bank will have wide discretion to impose conditions, require additional capital, force or permit mergers, freeze assets, liquidate the institution or, effectively take over the running of the institution.

“There is an emphasis on protection of depositors in the law, including any action necessary by the central bank to protect depositors in circumstances where banks face financial difficulties,” Waugh said.

“In this respect the possibility of a deposit guarantee scheme is discussed — something we have not seen since the temporary guarantee which was put in place during the global financial crisis.”

Highlights

■  All licensed financial institutions must provide the central bank with periodic reports on their financial health.

■  All related-party transactions are required to be reported to the central bank on a quarterly basis.

■  The law requires financial institutions to obtain the central bank’s prior approval for key executive appointments and board members.