Abu Dhabi sets foundations for a flourishing market

With its regulations in place, the ADGM is set to establish its aim of becoming a global financial powerhouse. Its tenants will be a key factor.

The history of Abu Dhabi, when viewed in a global context, is one of dramatic economic and social change over a very short period of time. But the emirate’s latest global ambition, to create a world-class financial centre, is from an economic perspective one of its most audacious yet, and will not be achieved overnight.

The “market” in Abu Dhabi Global Market is, in the original Arabic version of the name, “souq”. In the same way as the old souq was the physical and economic heart of the old city, ADGM occupies a prime position on Al Maryah Island, a purpose-built new central business district at the core of the expanded urban area. ADGM seeks to attract the financial intermediaries and investors of today’s global financial marketplace. In doing so, it must compete against more established – and more liquid – financial centres in the Arabian Gulf (notably the DIFC), Asia (such as Singapore) and farther afield.

Will it succeed? Only time will tell, and this is a long-term project, but initial signs are positive.

ADGM was established as a financial free zone in 2013. Since then it has been building the regulatory infrastructure that will govern the free zone, principally an independent regulator, registrar and courts. This month, ADGM published the core regulations, rules and guidelines that will apply to companies operating within the free zone. The basic legal framework is therefore now in place and companies operating in the free zone area are now subject to a different legal system from the one that applied two weeks ago. Importantly, ADGM has consulted widely on the concepts and details of the regulations, both privately with its expert panel of 26 financial institutions and publicly through its open market consultation.

If the development of ADGM is the most significant recent step in Abu Dhabi’s economic development, it also marks the most important geographic advance of English law in the past decade. ADGM has adopted the English common law wholesale and key regulations, such as the Companies Regulations and Insolvency Regulations, have effectively been copied from the equivalent UK legislation, with some amendments designed either to address criticisms of the UK law or to make ADGM a desirable location for the types of institutions that Abu Dhabi hopes to attract to the new free zone (in the initial stages of ADGM’s development, these are private banking, wealth and asset management firms and investment funds).

The adoption of English law makes sense: there is a long history of English law being chosen for commercial transactions in the region and thus English and UK legal concepts are widely understood by practitioners in the UAE.

Enhancements to the UK system that have been tailored to the needs of ADGM include two new types of company: “cell companies”, intended to attract investment funds; and “restricted scope companies”, designed to offer family offices and financial institutions a degree of confidentiality while requiring them to adhere to standards that allow the UAE to comply with its international obligations.

Others represent refinements to the rules governing mergers, acquisitions and directors’ duties. In the field of insolvency, the rules adopt the main features of the UK’s “rescue culture” approach (including the “administration” procedure), while introducing an Australian concept for compromises between companies and their creditors. Together, these are designed to facilitate the restructuring of an insolvent company where agreed by a majority of its creditors and so allow it to continue operating as a going concern. The ADGM employment regulations closely follow those of the DIFC while extending the categories of prohibited discrimination to include age and introducing the concept of paternity leave for the first time in the UAE.

The result is a robust legal framework that manages to be both tried and tested and innovative at the same time.

With the core regulations now in force, the processing of licence applications has begun. However, one aspect of the licensing regime that remains to be determined is the question of how an entity located in ADGM will be able to operate “onshore” in the rest of the emirate of Abu Dhabi and in the UAE generally. Two separate licences may be needed and it is hoped that this question will be answered within the next few months.

The next stage of ADGM’s development will be a consultation on financial services regulations. It is clearly vital to the success of the free zone that these take into account the interests of the kinds of financial institutions that ADGM hopes to attract (or retain, as some are already here). Even so, the best market rules may not be enough to persuade an exchange to move in or counter the low liquidity that has hindered capital markets development elsewhere in the UAE (10 years on, Nasdaq Dubai still only has nine equity listings).

The challenge facing ADGM is perhaps accentuated by the recent announcement that the DIFC plans to triple in size by 2024. However, assuming ADGM continues the inclusive, consultative process it has followed to date, there is reason to be hopeful that its financial services regulatory regime will be a key feature in attracting the types of tenants the “global market” needs if it is to transform itself into an attractive and truly world-class financial marketplace.

Chris Macbeth is counsel at Cleary Gottlieb, Abu Dhabi.

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