On 30 March 2023, the Financial Services Regulatory Authority (the “FSRA”) of Abu Dhabi Global Market (the “ADGM”) published Consultation Paper No.2 of 2023 on its proposed amendments to the Conduct of Business Rulebook, the General Rulebook and the Glossary Rulebook (the “Old Rules”), concerning client classification, client assets and conduct requirements that eventually came into effect on 15 August 2023 (“Enhanced Rules”).
This publication will specifically focus on the enhancements made to the Old Rules in relation to client classification.
ENHANCEMENTS
Status of Single-Family Offices
Under the Old Rules, Single Family Offices (the “SFOs”) were classified under the “Deemed” Professional Client category. To allow SFOs of a certain size and level of sophistication to be classified as Professional Client rather than strictly requiring them to fulfil the “Deemed” Professional Client criteria, the Enhanced Rules have now re-classified SFOs under the “Assessed” Professional Client category.
It must be noted that SFOs which meet other “Deemed” Professional Client criteria, such as having a balance sheet of more than USD20,000,000 in assets, will continue to qualify as “Deemed” Professional Clients without the need for assessment.
Status of Regulated Financial Institutions
Under the Old Rules, firms located outside ADGM and authorised to carry on financial services activities by foreign financial services regulators (the “Regulated Financial Institutions”), were not identified as “Deemed” Professional Clients. With the introduction of the Enhanced Rules, Regulated Financial Institutions are now included and classified as “Deemed” Professional Clients.
Status of Verifiable Net Assets Threshold
The Old Rules required a Professional Client to demonstrate verifiable net assets exceeding USD 500,000 for both individuals and undertakings. Given that the existing fund passporting rules in the United Arab Emirates place a minimum threshold of USD 1,000,000 which is already applied by the FSRA and the fact that peer regulators like the Dubai Financial Services Authority have also set the threshold at USD 1,000,000, accordingly, in order to align with the current practice of fund passporting rules and peer regulators, the Enhanced Rules now require a Professional Client to demonstrate verifiable net assets exceeding USD 1,000,000 for both individuals and undertakings.
Status of Service-Based Professional Clients
Under the Old Rules, “Service-Based” Professional Clients were undertakings considered to be Professional Clients despite not qualifying otherwise as a “Deemed” or “Assessed” Professional Client. Under the Enhanced Rules the “Service-Based” Professional Client has now been eliminated. In its place the FSRA has amended those rules governing lending and arranging related regulated activities undertaken for the purposes of corporate finance business, by deeming undertakings seeking such services as Professional Clients, but only for those regulated activities which are within the scope of corporate finance business.
Additional Obligation on Authorised Firms
Under the Enhanced Rules, the FSRA has introduced an additional obligation on an Authorised Person to inform each “Assessed” Professional Client of the need to keep the Authorised Person informed of any changes which may affect such client’s classification, e.g., where a client may fall below the net assets threshold.
Status of Market Counterparties
Under the Old Rules, a Market Counterparty existed as an alternative to being a Professional Client. With the introduction of the Enhanced Rules, Market Counterparties have now been removed as an alternative to being a Professional Client and included as a sub-set of Professional Client. It must be noted however, that the Enhanced Rules do not alter the qualifications required of a Market Counterparty or affect the classification of any existing Market Counterparty.
IMPACT AND WAY FORWARD
The Enhanced Rules have been welcomed positively by players in the market. In relation to the way forward specifically regarding the increase in the net assets’ threshold, the introduction of the Enhanced Rules have no impact on existing clients who are being offered no new financial services and products. However, for new clients and for any new financial service or product being offered to an existing client the Enhanced Rules will apply.
