Finance Companies Regulation Update Regulating BNPL Entities
Financial Services Focus
Ali Awad Senior Counsel,Banking & Finance
Husain DawaniTrainee Solicitor,Banking & Finance
The Central Bank of the UAE (“CBUAE”) recently issued the new Finance Companies Regulation in its Circular No. 3 of 2023 (the “New Regulation”) that came into force on 29 September 2023. The New Regulation replaces the preceding Finance Companies Regulation introduced by Circular No. 112 of 2018.
The New Regulation aims to improve the development, organisation, and regulation of Finance Companies and has introduced a new licensed activity called Restricted Licence Finance Companies (“RLFC”) in the United Arab Emirates (“UAE”). It is focused on encouraging transparent operational structures, management practices and introduces a framework for the oversight and regulation of entities solely conducting the licensed financial activity of granting Short-Term Credit (i.e. the RLFCs). It further defines and regulates the role of an ‘agent’ in the context of RLFCs and short-term credit.
This will have a direct impact on entities that are engaged in the business of providing Buy Now Pay Later (“BNPL”) products and services to customers in the UAE.
This article explores the changes introduced in the New Regulation and the impact of such changes on the financial sector.
Under the New Regulation, a RLFC is a juridical person licensed by the CBUAE to solely conduct the licensed financial activity of granting Short-Term Credit defined as:
“any credit which is granted to a Borrower for a period not exceeding twelve (12) months, for the express purpose of purchasing specified, identifiable goods or services, without interest being charged nor a lien being placed against collateral nor a security deposit being required from the borrower”.
Accordingly, to operate as a RLFC offering Short-Term Credit in the UAE, the company must obtain a License from the CBUAE. The RLFC should take one of the forms stipulated in the Commercial Companies Law and is obligated to maintain a physical presence in the UAE.
To obtain a license, RLFCs must be meticulous and submit all the required information and documents required by the New Regulation in either Arabic or English (or provide translations), disclose funding sources for their activities and immediately notify the CBUAE of any material changes to the same. The application must include a three-year business plan, and third-party assessments of the business model or systems may be requested. Any intention to amend or cease services requires a six-month advance application.
RLFCs approved by the CBUAE must start Short-Term Credit provision within twelve months of being Licensed and must maintain a minimum level of capital on an ongoing basis. The minimum level as stipulated in the New Regulation is Aggregate Capital Funds of AED 20 million or an amount equivalent to 5% of the outstanding lending volume, whichever is higher.
Moreover, RLFCs must comply with certain restrictions that include but are not limited to the following:
Strictly adhere to credit reporting requirements of providing borrower credit information to Al Etihad Credit Bureau (“ECB”) and obtaining and assessing the same (with the borrower’s express consent) from the ECB before extending credit exceeding AED 5,000.
Prohibited from accessing funds through Crowdfunding to finance its activities.
Restricted from accepting deposits of any type.
The maximum total Short-Term Credit a RLFC or Agent can extend to a Borrower is an amount up to AED 20,000 or three (3) months’ verified net income of the Borrower, whichever is lower (subject to other restrictions in UAE laws).
RLFCs or Agents are prohibited from charging interest on Short-Term Credit extended to Borrowers.
The repayment term of Short-Term Credit offered by a RLFC or Agent must not exceed twelve (12) months from the date of the original lending agreement to even if there are any modifications to or deviations from the original lending agreement (i.e. restructuring, rescheduling or roll-over).
Notwithstanding the foregoing, the New Regulation does not affect the following forms of short-term credit:
The Short-Term Credit activities conducted directly between juridical persons and not conducted by way of business.
Any credit activity, whereby the payment to the vendor directly by the purchaser of a good or service is completed on an instalment basis and not conducted by way of business.
Factoring and/or Finance Lease activities.
The issuance of the New Regulation is directly applicable to the business of BNPL product and service providers as their activities fall squarely under the scope of RLFC providing Short-Term Credit as defined above, highlighting significant implications for BNPL businesses in the UAE. Adherence to guidelines, credit information analysis, affordability assessments and data protection measures set by the CBUAE add layers of compliance for providers that fall under the scope of being an RLFC.
Role of an Agent
In addition to the new license of RLFS, the New Regulation creates a regulatory landscape by allowing for the existence of Agents. The New Regulation defines an Agent as follows:
“a Juridical Person who is contracted to offer, grant, market, sell, intermediate and/or process a Short-Term Credit with a Borrower on behalf of a Finance Company or a Bank”.
Notably, an Agent has the unprecedented ability to offer credit (i.e. Short-Term Credit) without requiring a license from the CBUAE for its operations. However, a key condition is that the Agent must establish a partnership with a Finance Company or Bank before engaging in this activity.
To formalise this partnership, a Finance Company must seek a non-objection from the CBUAE to contract with an Agent. The CBUAE will set out the requirements for Finance Companies to obtain this non-objection, and each application will be reviewed on a case-by-case basis by the CBUAE. The Finance Company’s partnership may involve the following:
the Agent offering the of Short-Term Credit products and services of the Finance Company, with funding directly provided by the Finance Company to Borrowers; and/or
the Agent granting Short-Term Credit products to Borrowers, which are fully funded by the Agent.
Furthermore, the Finance Company holds the responsibility, at a minimum, to ensure the Agent’s full compliance with the regulations set out in Part II of the New Regulation. Notably, this responsibility excludes ensuring adherence to Articles 21 (Licensing), 22 (License Restrictions) and 25 (Minimum Capital Requirements). However, it is important to note that Agents must comply with the provisions within those articles that are directly applicable to them.
Agents must adhere to the similar rules as RLFCs except as highlighted in the previous paragraph. Firstly, Agents are obligated to provide the credit information of borrowers to the Credit Information Agency and request credit information of Borrowers from the same before extending credit to borrowers in amounts equal to or exceeding AED 5,000. Secondly, Agents must conduct an affordability assessment of borrowers seeking Short-Term Credit equal to or exceeding AED 5,000. Thirdly, Agents must comply with strict data protection requirements and ensure that they do not share the borrower’s data with any third party without the borrower’s express consent.
Similar to RLFCs, Agents face limitations on the Short-Term Credit they can provide to a borrower, with the maximum amount that may be extended to borrowers being capped at AED 20,000 with the repayment term not exceeding twelve (12) months. Additionally, the total fees, including late payment fees, imposed by an RLFC or Agent on any Short-Term Credit, must not surpass 30% of the initial credit amount. Consequently, the maximum recoverable amount is capped at 130%.
In conclusion, the New Regulation for the first time, allows for the providers of BNPL services to apply for and obtain a RLFC license and permitted the Agents to provide Short-Term Credit without a direct license from CBUAE.
Any business or person engaged in financing activities stipulated in the New Regulation and are not licensed to do so must apply to the Central Bank within 90 days or cease undertaking all Financing activity. As some BNPL businesses operating in the UAE would fall under the scope of “RLFC”, they now face heightened compliance requirements from the New Regulation and are required to be appropriately licensed by the CBUAE’s deadline of 27 December 2023 to avoid facing fines or penalties from the CBUAE.
For further information,please contact Divya Abrol Gambhir and Ali Awad.
Published in February 2024
