The United Arab Emirates (UAE) is a haven for expatriates from all over the world. Indeed, with an estimated 7.8 million expats in the country, the question arises as to how it will improve the levels of financial advice on offer.
As originally featured in the May edition of International Investment magazine, Gary Robinson takes a look at the challenges faced as the UAE bids to gain parity with more developed financial centres across the world.
With their tall buildings, opulent hotels and retail outlets, Dubai and Abu Dhabi, the two largest of the seven Emirate’s cities, are certainly easy on the eye with a range of glistening steel-and-glass skyscrapers, perfectly framed by blue skies, silver structures and endless hours of sunshine.
However, in respect of the adage “all the glistens is not gold”, this could perhaps be the perfect analogy for the UAE financial services centres, particularly those in Dubai and Abu Dhabi, where investments into infrastructure and buildings is clearly visible, but the financial frameworks imposed by its regulators are struggling to keep up.
So are things getting better? And what exactly do you do if you are an expat looking for financial advice in the region?
Sarah Lord, head of financial planning at Killik & Co, a Mayfair, London-based firm that is regulated by the UK’s Financial Conduct Authority but which operates an international office in Dubai is particularly damning of the company’s competitors in the region.
The operation of offshore advisers, in the main, is “totally unscrupulous,” warns Lord on the company’s website. In many offshore jurisdictions, such as Dubai and the United Arab Emirates, she points that there is very little requirement for disclosure of remuneration, with “up to 15% of assets being advised upon being taken in hidden commissions”.
“The requirement to demonstrate suitability is negligible,” she says.
Lord’s colleague, wealth planner Julian Vydelingum, spoke to International Investment from the company’s Dubai base and explained the situation further.
Vydelingum points that the UAE’s regulatory bodies, whilst some way behind the likes of the UK and the US, are trying to catch up (see box).
‘Unqualified sales companies’
However, it is not a straightforward story as regulatory bodies face an increasingly difficult task of curbing any ‘wrongdoings’ due to the complex way that investments can be hidden inside insurance related products, Vydelingum believes.
“There are a lot of unqualified sales companies,” he says.
“The regulators are starting to develop here but it is so difficult for them to see the extra charges, particularly if it is inside an insurance product.
“The investment can be inside an insurance product and there are different licenses for different types of advice. The extra charges that are levied in these types of products are explained in documentation. But who is to say whether the client even gets these documents?”
The UAE is made of 7 ‘emirs’: Abu Dhabi, Ajman, Fujairah, Sharjah, Dubai, Ras al Khaimah and Umm al-Qaiwan. Abu Dhabi and Dubai are clearly the largest, together accounting for close to 70% of the country’s total population. Sharjah is the third largest of the Emirates, with an estimated 15% population share.
And the number of expats in the country is set to increase with developments ongoing – the census data suggest that the UAE’s population including expats roughly doubled in the decade since 2005. The population is currently estimated at around 9.2 million.
Indeed, Dubai’s ruler, Sheikh Mohammed bin Rashid Al Maktoum, earlier this year unveiled plans to construct a US$8.16bn ‘Wholesale City’, which observers say is likely to bring in a flood of new expatriate workers over the next 10 years.
The announcement of the new project came just after the United Arab Emirates government and the five other members of the Gulf Cooperation Council revealed that they planned to introduce a 5% value-added tax in 2018.
‘Array of challenges’
Jessica Cook, private client adviser at global advisory firm AES International, has also covered the region for some time. “There is an array of challenges that face expats, especially here in the Middle East,” she says.
“Probably the most obvious is a lack of transparency. Many of the solutions offered to clients will have hidden costs. These costs are often high and so the consumer often never achieves the result they set out to. There is often a lack of objectivity and independence, which is very much born out of the lack of regulation.
“Many advisers here in the Middle East are inappropriately qualified to give financial advice. There is little provision in place from the regulators to ensure that advisers hold qualifications to a set standard”.
Such stories suggest that there is a challenge ahead as the number of expats requiring advice grows rapidly. One solution may be for more fully regulated firms like Killik & Co to offer advice to UK rather than local standards.
“We are the first financial advisers in the region dealing with the retail market that follow the same regulatory process as the UK,” adds Vydelingum.
“But it is changing and there will be others following, but people really do need to be careful.”
Cook agrees, adding that regulation is “nowhere near as stringent” as in the UK, where advisers are regulated by the Financial Conduct Authority.
“The FCA has many rules and mechanisms in place to protect clients. In the UAE there is little recourse. There are many different regional regulators, which have vastly different standards. Some of the regulators do not necessarily have the understanding or even interest in international business and so the parameters they have in place are often very lax.”
|SHARIAH WEALTH PLANNING
A key area of business development for financial advisers to consider in the UAE is the emergence of the need for Shariah wealth and financial planning.
The Islamic finance sector has seen double-digit annual growth over the past decade, and was estimated to be worth around US$2 trillion globally, according to Standard & Poor’s, towards the end of 2015.
Companies operating in the sector avoid investing in companies exposed to what Shariah law considers unethical, such as pornography, gambling, alcohol and tobacco production, as well as pork production.
As was reported, earlier this year, Dubai-based wealth management firm Holborn Assets signed a deal with Salama Islamic Arab Insurance Co. to provide what it called a “bespoke Shariah wealth and financial planning service”.
Holborn, an expat-focused wealth management firm founded 16 years ago in Dubai and which focuses on the Middle East and African markets, said the new service was developed in response to growing adviser demand for this type of offering.
Salama claims to be the world’s largest Takaful (Islamic life assurance) provider and avoids investing in companies exposed to what Shariah law considers unethical. It also follows strict rules against charging fixed interest on loans – still known in the Islamic finance world as “usury”Two of the main regulators in the UAE region: the Dubai Financial Services Authority (DFSA), which regulates businesses exclusively based in the Dubai International Finance Centre, and the Emirates Securities and Commodities Authority, which covers the wider region, have both moved to quell widespread concerns that expatriate investors in Dubai and the UAE are being “ripped off” by financial advisers.
The ESCA published a new code of conduct aimed at improving standards among financial services providers. And, earlier this year, the DFSA changed the rules governing certain types of collective investments, including property funds.
Many observers have been highly critical of the high fees payable on international bonds by investors in the UAE. These can often include initial charges of up to 8%, annual “establishment” charges of 1.5% for the first five to 10 years, and opaque annual “investment” charges of up to 3%.
Announcing the rules governing certain types of collective investments, including property funds, the DFSA board said they would “simplify the current regime” and align it better with international standards.
It said the key amendments included changes to the valuation and ‘related person’ transaction requirements; amendments to borrowing limits; investment restrictions, and custody requirements.