Apex bank to boost risk management
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.
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.
Prudential ratios
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.
“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 creation of a new risk bureau and expanded examination powers for the central bank.”
The new law has vested powers in the central bank to establish a general framework for governance of financial institutions. An electronic rule book is contemplated, which will include all regulations, instructions and circulars.
Board appointments
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.
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.
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 crisis-like situations, the law has empowered the central bank to create a framework to protect the interest of depositors.
■ This article is the last in a five-part series on the new UAE Banking Law.