ADGM Digital Investment Management (Robo Advisory) License
The ADGM is an upcoming financial centre in the MENA region for business and fintech. The quality of ADGM’s independent regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in Abu Dhabi and the greater MENA region.
Why setup a financial services firm in the ADGM?
The ADGM is one of two onshore financial centres in the UAE. Established in 2015, it quickly rose through the rankings and is now counted as one of the top 25 financial centres in the world. ADGM’s innovative SPV regime, its initiatives in the fintech space and its issuance of the region’s first cryto-asset regulatory framework, have all contributed to its success.
Here are some specific advantages of establishing in the Abu Dhabi Global Market.
LEGAL AND REGULATORY FRAMEWORK
- Legal framework supports cross-border activities
- 100% foreign ownership permitted
- No restriction on foreign talent or employees
- No restrictions on capital repatriation
- Zero tax for 50 years on profits, capital or assets from 2004
- Zero tax on employee income
- Well regarded, independent regulator
- Independent, English-speaking, common law judicial system
- Distinct from the UAE legal system
- Risk-based regulatory approach
- Central to regional deal making
- High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions
- World-class regional and international law and auditing firms, and other professional services
- A growing fund domicile in the region
- Management offices, holding companies and family offices are located closer to the assets they own or manage
- The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy
- The UAE plays a central role in the growing South-South trade, principally between Asia and Africa
- Well-positioned to harness the potential of emerging markets.
ADGM Digital Investment Management (Robo Advisory) License
The ADGM recently announced its detailed guidance on Digital Investment Managers or Robo Advisory solutions.
Robo-advisors are a class of financial adviser that provide financial advice or Investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms, and use technology to interact with more tech-savvy clients, as opposed to the traditional method of relationship-based advisory. This technology allows investment managers to provide tailored investment management services to clients in a cost-effective and scalable manner.
Why Use a Robo-Advisor?
There are many reasons why investors may choose to use robo-advisors as opposed to a traditional portfolio manager or financial advisor including:
Low fees and no conflict of interest: Many Digital Investment Managers charge significantly lower fees compared to traditional financial advisors. Conflicts of interest are minimized, since there is no bias or pressure to push a certain set of products or solutions.
Low minimum requirements: Most financial advisory firms have higher requirements of initial commitments – usually a minimum in excess of US$ 100,000. Robo advisors have much lower entry requirements (some as low as US$ 1,000) and work on volumes.
Availability: Digital Investment Managers are automated and hence available 24/7.
The Financial Services Regulatory Authority, or FSRA, reviews applications from firms who wish to carry out financial services from the ADGM. Their guidance for Digital Investment Managers includes those operating on fully-digital models, and hybrid models. Firms that sell white-labeled technology solutions to wealth managers are not covered since they do not require financial services permissions.
ADGM Applicable Activities
The following regulated activities will be applicable:
- Advising on Investments or Credit – firms issuing recommendations on portfolios of financial instruments
- Arranging Deals in Investments – firms issuing recommendations and passing instructions to brokers (with client consent)
- Managing Assets – firms engaging in discretionary management of client portfolios, including discretionary portfolio rebalancing
ADGM Capital requirements
The category of license determines the amount of base capital required. Firms that engage in activities of Advising on Investments or Credit or Arranging Deals in Investments will fall under the Category 4 license requirements, with a Base Capital of US$ 10,000.
Firms that engage in activity of Managing Assets will fall under the Category 3C license requirements, with a Base Capital of US$ 250,000.
The FSRA will consider reduction of the base capital for a Category 3C Digital Investment Manager whose business model meets the following conditions:
Product offering limited to passive investment products such as ETFs or Index trackers
Discretionary asset management activities are limited to portfolio rebalancing (not involving the purchase of new investment products that were not included in the portfolio agreed to by the client)
Client assets are held with independent third-party financial institutions under a direct contract with the client.
In these cases, the base capital requirement will be US$ 10,000.
ADGM Authorisation Process
Applications for Robo Advisors in the ADGM will go through a rigorous process of authorisation. Applicants will have to demonstrate a credible, comprehensive and sustainable business plan, adequate control mechanisms and robust compliance processes.
The following are mandatory appointments:
Licensed Directors – the FSRA will review the composition of the Board
Senior Executive Officer – Must be UAE resident
Compliance Officer – Must be UAE resident
Money Laundering Reporting Officer – Must be UAE resident
Senior management positions – Business Heads, Chief Risk Officer, Chief Technology Officer
Key Controls for Digital Investment Managers
Due to the nature of this business, the FSRA will review in detail the algorithm and technology governance policies and processes, and also the assessments that are in place to determine client suitability. Digital Investment Managers will also have to demonstrate robust data security policies and systems to ensure compliance with all relevant data protection regulations.
In determining algorithmic governance, the FSRA will consider the qualifications and competence of the staff involved, the development, testing and deployment of the model and the ongoing monitoring and review of the same. An emphasis will be placed on client suitability requirements and adequate disclosure mechanisms. These controls will have to be enhanced in case the robo-advisor intends to cater to retail clients.
Setting up an AGDM Robo Advisory License involves the following interactions:
Financial Services Regulatory Authority (FSRA)
Application fee – from US$ 10,000
Annual fee – from US$ 10,000
Registration Authority (RA)
The RA helps to set up the legal structure of the ADGM Firm. In most cases, this would be a Private Company Limited by Shares. Shareholders can be individual, or corporate. The costs for setting up such a company are:
Application for reserving a name: US$ 200
Application for Incorporation of a Private Company Limited by Shares: US$ 1,500
Commercial License on Incorporation: US$ 4,000 (annual fee)
Business Activity fees: US$ 9,000 (annual fee)
The data protection notification is part of the process of registering a new entity in the ADGM. The costs involved are as follows:
Registration - US$ 300
Annual renewal – US$ 100
Every entity registered in the ADGM is required to lease a physical office. You can choose from business center options, or physical spaces within the ADGM.
Here is an indication of the prevailing rates:
Business Centre – from a one-desk office at US$ 19,000.
Fitted Offices – from US$ 55 per square foot.
Establishment Card Application – US$ 273
E-channel – US$ 1,100 (one-time)
E-channel deposit – US$ 1,360
Visas (per visa) – from US$ 1,500