New fund regulations in the UAE and Saudi Arabia have caused headaches for some, but Mike Cowley, Deutsche Bankâs head of direct securities services in the region, says the laws are fair and there for a reason.
The past two years have been busy in the Gulf in terms of regulatory change. In July 2012, the Securities and Commodities Authority (SCA) in the United Arab Emirates issued its investment fund regulations, with the regulator taking on responsibility for licensing funds and setting rules for custodians and administrators. This year, the Saudi Arabian regulator, the Capital Market Authority (CMA), produced a draft of new fund rules to assist in the development of the market in the Kingdom of Saudi Arabia.
Both sets of rules threaten to shake up the markets. Some industry participants have complained about possible unintended effects of the regulations, confusion in the wording of the laws, or the seemingly high cost of complying with the rules.
But Mike Cowley, head of direct securities services, Middle East and North Africa, Deutsche Bank, says regulators are right to legislate on the funds market, and says they share the objectives of participants: market growth.
“Change is good,” says Cowley, who has worked in the Gulf for nine years and has been with Deutsche Bank since 2007. “Having spoken to various bodies in the region, we see reasons for these changes. Markets have to evolve and regulations help this.”
The regulators’ principle aim is to protect retail investors at a time of rapid market development. The regional exchanges are young by global standards and are evolving at a quick pace to meet the needs of institutional investors and fund managers.
“Regulators have a responsibility. They want to see market growth – we all do – but this has to be done in the best interests of the local capital markets, while looking at infrastructure, investors and players. Some of the controls are slightly onerous, but they’re there for a reason. If you want to play in these markets, play by the rules, or don’t play at all.”
The draft regulations in Saudi Arabia have attracted a lot of attention because they have come alongside a change of personnel at the CMA and a new, seemingly tougher attitude from that regulator about enforcement. The authority has warned that individuals carrying out securities business in Saudi Arabia without a licence will face penalties. Yet Cowley says market players are wrong to view the Saudi regulator as hostile.
“Both the CMA and the Tadawul [the Saudi stock exchange] are generally supportive of initiatives and changes that go on,” he says. “Both want to see the market grow, and the exchange become more successful. There’s a misconception that people in Saudi won’t listen and won’t work with counterparts, such as local or international banks. They do interact, they do listen.”
Deutsche Bank has been present in Saudi Arabia for several years and, says Cowley, enjoys a close working relationship with the CMA. The company has been licensed by the authority for five years to carry out securities services in the country; and has taken forwards its custody product more aggressively over the past two years, an important fact in light of another aspect of the Saudi draft investment fund rules: a requirement for fund providers to appoint an independent custodian.
“If those rules come through, we will work with participants to facilitate what’s needed. If that means working with Saudi banks, we’d be delighted to do so,” says Cowley.
The rules on independent custodians could cause a shake-up of the Saudi custody market if local banks, many of which have carried out their own custody until now, scramble to find new partners. In this turmoil, there may be interesting business opportunities. However, Cowley is not taking anything for granted. He notes that regulation “has a habit of changing over time” and says the draft rules should not be taken as final until they become law.
However, there is no doubt that events in the Saudi custody market will help shape the region’s capital markets. The country is the largest economy in the Gulf by far and the CMA has the power to transform the funds market in the region should it decide to open up to direct investment from qualified institutional investors outside the Gulf Cooperation Council.
The regulatory developments in Saudi Arabia parallel what has happened in the UAE, where the SCA has recently revised its investment funds regulation after consultation with the industry. Cowley says the regulator is “moving in the right direction”, having taken on board some of the comments made by industry players.
“Were the regulations going to meet everyone’s requirements and needs? No. Every entity is commercial and has slightly different interests. It’s always going to be an ongoing process, but the rules are in a framework now that is palatable.”
Cowley says Deutsche Bank is happy to work within the boundaries set by the SCA and engage on matters of interest to the markets. However, he notes that the regulatory overheads in the UAE, as well as the comparatively small size of the UAE market in global terms, may be a barrier to new entrants to the market. There are already five sub-custodians in the UAE and although the local stock markets have risen a great deal this year, driven partly by MSCI’s decision to upgrade the UAE to an emerging market, fund flows are small compared to global markets.
“The question is, what do new entrants need to look at? They need to be careful because there are some well established players already here.”
As he looks to the future, Cowley remarks that Deutsche Bank is in a “strong position” in the Gulf, seeing as it is able to service local fund managers for admin and custody, and global custodians on a cross-border basis. However, among the biggest changes he hopes for is greater harmonisation.
“We always talk about standards in the post-trade industry. And yet, in the very small region of the Gulf, we don’t have common standards. This means there are additional costs.
“If objectives and standards can be agreed on, that will help the industry as a whole. One thing we always whisper about in the post-trade scenario is, can we have a common CSD [central securities depositary] in the region?
“These things take a while to develop, but we will continue to see change going forward.”
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