ADGM's new digital investment frameworks

07 August 2019

Abu Dhabi Global Market (ADGM) Financial Services Regulatory Authority (FSRA) recently issued guidance on digital investment. It first published a regulatory framework for the establishment of digital banks, which was then followed a week later by a framework for digital investment managers (Frameworks). The Frameworks seek to encourage incumbent banks to engage in new digital challenges, either on their own or in partnership with technology companies. This, the ADGM expects, will improve efficiency and support business volumes.

Digital banks are those that accept deposits and conduct related financial services primarily online, rather than at physical locations. Digital investment managers are companies that provide investment management services using algorithm-based tools and technology to interact with customers.

The Frameworks require digital banks to have base capital of at least $10 million, robust governance structures, compliance and risk management policies, and certain mandatory senior management appointments. The Frameworks recognise that digital banking poses its own risks - separate from those in traditional banking - and so the Frameworks require digital investment manager technology to be created with accountability as the foundation. Such accountability measures to be taken include the necessity for human oversight, base capital requirements and the need to ensure that the outcomes produced by the algorithm model are explainable, traceable and repeatable. At least $250,000 base capital is needed to manage assets, while a minimum of $10,000 is needed to advise on investments. The Frameworks also state that FSRA will permit digital investment managers to hold a lesser amount of prudential capital should they meet the stipulated criteria and requirements.

The Frameworks also include a nod to the importance of data protection, with extensive requirements imposed on digital investment managers when conducting risk questionnaires as part of the digital investment process. The concept of "privacy by design" is implicit in the Frameworks, with the additional requirements of proportionality and accuracy of customers' personal data collected by digital investment managers outlined as integral to the build of the technologies.

The Frameworks are an embrace by the ADGM of FinTech and all its related components. They are a demonstration of the acknowledgement by the ADGM of the crucial role of financial inclusion, by providing a wider range of options for retail client investors in the Middle East and Africa region.

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