In this overview of the Middle East region, International Investment Editor Mark Battersby looks at how the region's push to professionalism is now beginning to bear fruit and show how the regulatory gaps to other global financial hubs, such as the UK and US has been plugged by ongoing reforms.
This feature is part of the in-depth coverage covering adviser viewpoints, interviews and market insights in International Investment's latest Special Report on the Middle East 2021.
The Middle East is coming of age in regulatory terms as great swathes of new rules are driving the direction of travel towards a level of professionalism in the financial services industry across the region not seen before.
A client-centric rulebook with a one-year deadline set by the Securities and Commodities Authority (SCA) for the 36 registered financial consultancy firms to comply by is one of the latest moves, alongside a tough freeze on any applications in the pipeline.
The activation of these new rules comes against the backdrop of the merger announced last year between the Insurance Authority (IA) and Central Bank of the UAE, despite expectations in the market that that it would be the SCA combining with the IA. Advisers therefore still need two licences for fully holistic financial planning in the UAE because the IA licence only covers the protection products needed to sell to clients and the investment products are covered by the SCA.
Over at the Dubai Financial Services Authority a new face has come on board with a different sort of background as chief executive, Christopher Calabia (pictured below), who will be taking over from Bryan Stirewalt on 1 October.
A former executive at the Federal Reserve Bank of New York, he was most recently an executive with the Bill and Melinda Gates Foundation where he promoted regulations around inclusion of digital financial technology.
The chairman of the DFSA, Fadel Al Ali, said; "The DFSA plays a crucial role as the independent financial regulator of the DIFC. Chris's experience, driving innovation in complex environments
while maintaining the stability and integrity of financial systems, will further strengthen the DIFC's standing as a global financial hub."
Evidence from those on the ground is that the pace of change is beginning to accelerate with the UAE clearly identifying itself as a top tier regulatory market.
One clear motivation for this was when the UAE's economics minister said in a recent speech to the SCA that they had to get used to "waving goodbye to the last barrel of oil" which meant a clear change in direction for the economy.
The good news is that the UAE's wealth management segment remained resilient and recorded growth in the face of the pandemic-induced economic slowdown, according to Boston Consulting Group's latest report, ‘Global Wealth 2021: When Clients Take the Lead'.
Its financial wealth has grown by a compound annual growth rate of 3% from 2015 and about 70% of this financial wealth is investable wealth. Half of country's wealth is owned by individuals whose net worth exceeds $5m.
The UAE, which represented 26% of the GCC's financial wealth in 2020, is expected to witness strong growth of 4% CAGR to reach $700bn by 2025, a $100bn increase from 2020.
Mustafa Bosca, managing director and partner at BCG said in the report: "The UAE's individual financial wealth reached $600bn in 2020 despite the pandemic impacting the local economy. Although the pandemic posed many challenges, the UAE's wealth segment has proven to be resilient in the face of adversity, hence the growth it has recorded."
The GCC's financial wealth is forecast to reach $2.7trn in 2025 from $2.2trn in 2020.
Saudi Arabia and the UAE had approaching three-quarters (71%)
of the financial wealth within the GCC, with Saudi accounting for 45%, the UAE at 26% and 11% each by Qatar and Kuwait.
These statistics do illustrate how the UAE is now competing commercially with Saudi in a way that it never used to, in the days when Saudi took two-thirds of the entire Gulf's GDP.
As for how the UAE's financial advisers and wealth managers are faring right now and into the future have a read of the adviser views in this ezine, and reflect on some of the insights by consultancy Insight Discovery which this year surveyed 42 advisers in the Middle East, 26 advisory firm chief executives and 16 bank executives, for its 11th annual Middle East Investment Panorama.
It found that 74% of advisers see a prolonged global recession as the main challenge for their business over the next 12 months. This was followed by an expat exodus from the GCC (66%), regulatory landscape (51%), market volatility (37%) and competition from firms which are not regulated (34%). On the other side of the coin, 80% of advisers saw new technology and data analysis tools as the main opportunity for their business over the next year.
In second place was expanding their business/attracting new customers (71%), with clients' willingness to invest (63%) in third.
Other opportunities included optimising their business/outsourcing investments (46%) and retaining existing clients (43%).
The Insurance Authority's BOD49 rules which capped commissions has deeply impacted both providers, which have had to design new products, and advisers in terms of how they navigate the changes in remuneration.
The Insight Discovery research revealed here that 61% of advisers' total revenue was made up of recurring fees and commissions, while 39% comprised initial fees and commissions.
The survey also asked how advisers measure effectiveness in their job and 38% said annual commission, followed by number of referrals per year (24%), amount of renewal commission (19%), percentage annual change in transaction volume (10%) and awards and peer recognition (10%).
This suggests there is still plenty of work to do to shift advisers across to a more sustainable remuneration model which builds long term value into the business through repeat income flows.
Insight Discovery highlighted six main areas that can be opportunities for the Middle East advice market in the next 12 months:
• Assets under management gathering from poorly managed advisory firms.
• Continued growth on a similar trajectory based upon a differentiated proposition.
• Market consolidation of IFAs.
• New regulations opening up a new set of customers.
• Promoting being an ethical business.
• Retaining existing client relationships.
As for the challenges, the consultancy pointed to such concerns as cashflow problems from distressed clients, technology-based advisory models at a fraction of the cost and end-of-service benefits.
Pulling back to the wider landscape, the economy of Abu Dhabi is earning good money from the high oil price and Dubai is receiving money through VAT payments it never had before.
And unconnected to the economy is a current pent-up exodus of expats after Covid-related travel restrictions over the past two years and possibly the hottest summer ever with record highs recorded of 51.8 degrees celsius.
To view this feature in the Middle East Special Report 2021, click here.
