Can Abu Dhabi’s new financial free zone compete?
Abu Dhabi’s new financial centre has been up and running for six months and the immaculate corridors of its headquarters on Al Maryah Island still feel eerily quiet.
Almost 200 people have been hired to work for Abu Dhabi Global Market (ADGM) since its inception in 2013 but they are nowhere to be seen as we are escorted through the pristine glass building to interview Richard Teng, CEO of ADGM’s governance body, the Financial Services Regulatory Authority.
Instead of a meeting room, we are taken to a table positioned in a corner of a large open landing, with floor to ceiling windows facing across the water to Abu Dhabi. In ADGM Square below there are signs of the emerging hustle and bustle you might expect from an international financial district, as employees of the 50-odd occupiers that have moved into the free zone head out to lunch or meetings, and there is healthy footfall to and from the nearby La Galleria shopping mall. However, it is clear that the free zone has a way to go before it can rival more established financial centres in the region and elsewhere.
In his first full length interview since ADGM declared itself “open for business” on October 21, Teng, who spent 13 years working for Singapore’s business district the Monetary Authority of Singapore (MAS), and then seven years as chief regulatory officer for the Singapore Stock Exchange (SGX), appears as calm and still as his surroundings and says only: “It’s pretty early days, we’ve only been going for six months and this is a long-term project.”
The free zone was established by royal decree in 2013 but started functioning in earnest in 2015, when Teng and other senior executives were appointed along with a string of international consultants including Sir Hector Sants, former CEO of what was then the UK’s Financial Services Authority, now the Financial Conduct Authority. Most of these consultants were on short-term contracts and have since departed.
The team set about drawing up commercial regulations for financial and non-financial firms. The first set of regulations, aimed at governing companies in the retail, food and beverage and office services sectors, came into force in June. The rules governing financial services firms were more complicated and took longer to devise. Following a consultation, the regulations were approved last summer and the free zone began accepting applications from prospective financial members in autumn.
Afkar Capital, an incubator for asset management start-ups, was the first financial firm to be awarded a licence in January, while Australian investment bank Macquarie Capital’s Middle East division has signed an in principle agreement and the UK’s Aberdeen Asset Management is said to be close.
The free zone has also finalised cooperation agreements with national regulators such as the UAE Central Bank, Emirates Securities and Commodities Authority and the Insurance Authority. Last month, it signed an agreement with the Abu Dhabi judiciary to enable cooperation between the two legal jurisdictions – key to giving firms confidence that issues will be resolved in line with international common law.
While such important groundwork has been taking place over the past 12 months, commentators have warned that ADGM’s established neighbour the Dubai International Financial Centre (DIFC) could prevent it from flourishing, and argued it is unwise to locate two financial centres in such close proximity. Swiss private bank Falcon Capital CEO Eduardo Leemann supported this argument when last month he explained why his firm set up in DIFC rather than in the capital: “The DIFC is where the action is in the market. It is more advanced [than ADGM] as a financial centre.”
Nigel Sillitoe, CEO of research consultancy Insight Discovery, adds: “The ADGM should flourish. However, other [existing] GCC international financial centres in the region include Bahrain, the Qatar Financial Centre, King Abdullah Financial District in Riyadh and, potentially, Sharjah; [ADGM] will need to differentiate itself from other international financial centres and market itself effectively.
“It will be very interesting to see what ADGM and other centres do to replicate the tremendous achievements of the DIFC.”
ADGM’s building is attractive but businesses are still deciding on its free zone credentials.
But Teng does not believe rivalry is an issue. “I think financial centres complement rather than compete with one another. Look at Asia, there are many financial centres – Shanghai, Hong Kong, Shenzhen – and when Singapore first started to develop into a hub for private banking people feared it would take businesses away from Hong Kong. But that was not the case, both centres continued to grow exponentially. If you look at Europe you have London, Zurich, Frankfurt. None of them have suffered as a result [of proximity].”
For Teng, financial centres will grow regardless of nearby rivals, provided there are valid underlying drivers for their existence. When it unveiled the initial plan for ADGM in 2013, the Abu Dhabi government said the centre would fill a gap in the global trading day between Tokyo, Singapore and London. Teng says its raison d’être goes deeper than this. “ADGM was created to support Abu Dhabi’s ambitions to become an international financial centre. The emirate has natural advantages that can be built on and this is the next logical step.
“It has political stability, foresight and planning and has built up one of the largest sovereign wealth funds in the world. It is also diversifying its economy and, as it does so, is increasing the need for financial services to support growing sectors.”
At present, the UAE is a key user of global financial services but few of these activities are anchored in Abu Dhabi. “People have historically gone overseas to do a fund structure, special purpose vehicle (SPV), listing, insurance, yet there is a growing desire among banks and other financial institutions to do more of those transactions here.”
So, ADGM has been devised with the intention of creating an environment that encourages firms to anchor activities in Abu Dhabi. “Our regulatory framework is one of the most unique in the region,” Teng says. “It is an integrated one that cuts across banking, insurance and capital markets and we have worked with the International Swaps and Derivatives Association and other bodies to ensure that an effective capital netting jurisdiction is in place and that occupiers comply with Basel III and other international regulations that have come into force since the global financial crisis.
“There is also the application of international common Law in the Middle East for the first time, which provides legal clarity and certainty.”
The regulations set out to facilitate the increasingly complex transactions that are a feature of the modern investment landscape. For example, there are provisions to meet the needs of family offices (restricted scope companies), open- and closed-ended fund managers, segregated portfolio companies (also known as ‘protected cell’ companies, which segregate the assets and liabilities of different classes of shares) and ‘incorporated cell’ companies where each division is a distinct legal entity, as well as private banks and other institutions. There are also streamlined tax provisions and a three-day company registration process.
“Based on feedback from stakeholders, we understand our setting up process is one of the fastest in the region but we want to make it even better,” Teng says, adding that free zones in general can help local economies by supporting international institutions whose needs may not be fully addressed under the mainstream regulatory regime. “[ADGM] is benefiting from ‘Abu Dhabi Inc.’ pulling behind us to help us become a global financial centre.”
Although only one financial firm had received a licence to operate at ADGM at the time of going to press, Teng says between 50 and 60 have registered their presence and he is happy with the progress made. “There are challenges in the market at this point in time. Global economic conditions are not the most conducive for investment – there is market volatility, depressed commodities prices and many financial institutions are resizing their global operations and withdrawing from emerging markets.
“Despite these macroeconomic headwinds, our offering has proven attractive to international and local players and we are gaining traction. When times are good, and the rising tide lifts all boats, companies are not forced to think as long term as they should.
“Because times are challenging, the firms with whom we are in discussions are thinking long term. They are going through our offer and gaining a strong picture that Abu Dhabi is a place they should commit themselves to over the next decade in order to service the region.”
Looking for a competitive edge, ADGM says it will aim to become the ‘Fintech’ capital of the GCC.
Over the coming year, ADGM aims to continue marketing to prospective members and “pushing its international agenda”, particularly in the Far East. This week, Teng was scheduled to visit China to sign what he describes as a “very significant agreement” with unnamed Chinese partners. He refuses to disclose further information, saying only: “We are seeing significant interest from China, one of the largest markets in the world.”
The DIFC, too, is targeting China to help it drive future growth. However, DIFC Authority chairman Essa Kazim told Arabian Business last year that ADGM presented no rival to the DIFC and that, in any case, “the market is big enough for two”.
Another task for Teng is to boost the emirate’s nascent financial technology (fintech) sector. “We have not yet seen a deeply established fintech ecosystem in the GCC,” ADGM’s chairman Ahmed Al Sayegh told the Global Financial Markets Forum in Abu Dhabi in March. “Our intention is to promote Abu Dhabi as the GCC’s fintech hub, in partnership with key stakeholders.”
Teng will not comment at length on this piece of work, claiming it is in the very early stages. “We are speaking with partners in the US, London, Singapore and the GCC, and gathering robust interest. We have a game plan in terms of announcements, so watch this space.”
The next company set to register is an asset management firm, the name of which Teng will not disclose. He claims not to have seen a negative impact on asset managers from regional SWFs liquidating assets as the low oil price bites, and insists they are “only rebalancing their portfolios and asset managers are doing the same”.
Meanwhile, ADGM is in talks with partners to establish a stock exchange at the centre. Given that Abu Dhabi already has an exchange, another based at ADGM could potentially be similar to London Stock Exchange’s off-shoot AIM, which caters to smaller, growing companies, but Teng will not be drawn on the details. “We are working to establish [an exchange] in the free zone and talking with banks, market regulators, everyone, really. We want to do it well so we are not rushing.
“If you look across the region, I think we can be very different from the offerings here already. But exchanges serve a different purpose from [regulators and platform providers] so when you go into that exchange space the language can be quite different. There is no point rushing if you do not know the landscape well.”
As the centre develops, building trust and confidence within the international financial community is key for ADGM’s leaders. So given that in 2012 British MPs accused Sir Hector Sants of falling “asleep at the wheel” while heading up the Financial Services Authority before the collapse of Northern Rock in 2007, was it wise to appoint him as one of ADGM’s first consultants? Teng is circumspect.
“I think post-financial crisis it was not only him [who faced public criticism]. At the end of the day, Hector is a respected regulator, he’s vice-chairman of management consultancy Oliver Wyman and well regarded in the industry. You can’t please everyone.”
Teng intends to draw on his time at the Singapore Monetary Authority to help ADGM become a thriving new financial centre. “We are all creatures of our past experience,” he concludes. “I was fortunate enough to be part of the taskforce appointed to build Singapore as a private banking hub and we launched just after the Asian financial crisis so it was not an easy time.
“Less than 20 years later, Singapore is one of the most important financial centres in the world. When we started the journey, nobody thought we would end up here.
“Abu Dhabi is a similarly long-term endeavour; we are gaining good traction and we will continue to push ahead with our targets to make it a success.”