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Regulation of FinTech products under Saudi law

Constant technological improvements are disrupting most industries, providing new and more innovative products and services to customers. The financial industry is no exception, and technological advancements in this sector, referred to as FinTech, are on the rise.

What is Fintech?

In its early stages, there was no official definition of FinTech. The International Organization of Securities Commissions (IOSCO) has rectified this problem by formally defining eight areas of FinTech development in its 2017 FinTech Report:

  • Payments: Payment processing, money transfer, mobile payments, forex, credit cards, prepaid cards, reward programs
  • Insurance: Broking, underwriting, claims, risk tools
  • Planning: Personal finance, retirement planning, enterprise resource management, tax and budgeting, CRM, compliance and KYC, data storage, infrastructure services
  • Trading and Investments: Investment management, roboadvisory, trade pricing and algorithms, trading IT, trading platforms, brokerage, clearing
  • Blockchain: Digital currency, smart contracts, payments and settlement via blockchain, asset tracking, identity management, blockchain protocol developers
  • Lending/Crowdfunding: Crowdfunding platforms, peer-to-peer lending, mortgages and corporate loans
  • Data and Analytics: Big data solutions, data visualization, predictive analytics, data providers
  • Security: Digital identity, authentication, fraud management, cybersecurity, data encryption

Specifically, innovative FinTech is defined as business models that offer one or more financial products or services in an automated fashion, through use of the internet and emerging technologies. These technologies could include cognitive computing, machine learning, artificial intelligence, or Distributed Ledger Technologies (DLT).

There is no doubt that Fintech has the ability to significantly change the financial services industry – but as with all new technology, it doesn’t come without risk or concern from regulators.

Regulatory Challenges of FinTech

It is often the case that the speed of technology outpaces the speed at which lawmakers and regulators can adapt to address concerns raised by this new technology. This is certainly the case for FinTech, which has seen explosive growth over the last several years. In 2005, there were approximately 1,600 companies involved in FinTech investment with funding at around $5.5 billion. By 2016, the number of companies involved in FinTech had grown to 8,800 with $100.2 billion in funding.

The 2016 numbers, however, are nothing compared to 2018 when FinTech really began to take off. The size of the FinTech nearly doubled in a single year and saw two massive deals: acquisition of WorldPay by Vantiv for $12.9 billion and a $14 billion VC funding round raised by Ant Financial. These significant investments show the maturity of the market.

As the FinTech market grows at a rapid pace, regulators are struggling to deal with a number of pressing regulatory issues, including:

  • Data Protection and Cybersecurity: By their nature, FinTech companies must collect and process large amounts of customer data, often including sensitive data such as account numbers, social security numbers, and other personally identifiable information. Different countries must keep FinTech companies in mind as they develop privacy laws – and FinTech companies must ensure they are able to comply with existing privacy frameworks.
  • Cross-Border Regulation: The cross-border abilities of most FinTech products require an increased focus on regulatory consistency, cross-border supervision and enforcement, and international cooperation and exchange of information between regulators in different jurisdictions.
  • Anti-money Laundering (AML): Regulators must determine how FinTech providers fit into AML regulations.
  • Consumer Lending Laws: FinTech needs to ensure compliance with any consumer lending laws and other consumer protection statutes.
    In some countries, addressing these regulatory concerns can be a bar to launch of FinTech services. Other countries, such as Saudi Arabia, are putting a regulatory framework in place to ensure they can serve as a home to this profitable industry.

FinTech Regulatory Framework in Saudi Arabia

There are two main finance regulators in Saudi Arabia – the Saudi Arabian Monetary Authority (SAMA) and the Capital market Authority (CMA). The Saudi Arabian regulators are taking steps to ensure the FinTech industry can thrive in Saudi Arabia.

Cyber Security Framework

In May 2017, SAMA issued a Cyber Security Framework aimed at building an infrastructure for cyber security governance for regulated entities. This infrastructure was developed specifically with an aim of ensuring that Saudi Arabian banking, insurance, and financing sectors can manage and withstand cyber security threats.

As part of the infrastructure’s development, SAMA contemplated the ways in which the effected entities use technology. The framework provides specific considerations for financial technologies such as electronic banking services and payment systems. The guidelines specifically address the fact that new online services and new developments can introduce new issues with respect to confidentiality.

Development of cybersecurity standards help regulated entities seek guidance for issues that are commonly difficult and uncertain for FinTech companies.

FintechSaudi Initiative

In 2018, SAMA launched the Fintech Saudi initiative, aimed at establishing Saudi Arabia as a FinTech hub. The stated goal of the initiative is to transform “Saudi Arabia into an innovative fintech hub with a thriving and responsible fintech ecosystem.”

The initiative includes establishment of a sandbox regulatory environment in February 2019, following the lead of other regulators in the Arabian Gulf. The goal is for SAMA to better understand and asses the impact of FinTech technologies in the financial services market. The sandbox regulatory environment will allow for relaxed regulatory controls, allowing established financial institutions the opportunity to interact with start-ups in the FinTech space without fear of regulatory backlash.

The regulatory sandbox is intended to provide a variety of benefits to various FinTech stakeholders, including:

  • Consumers: Allows for entry of FinTech products that can meet consumer demands for efficiency and quality of service
  • Innovators: Reduces regulatory uncertainty for FinTech offerings and reduces time-to-market by simplifying legal and licensing requirements
  • SAMA: Allows SAMA to collect understand FinTech products and to collect evidence and information before drafting guidelines and regulations

Because Saudi Arabia is still concerned with protecting consumers, it is only likely to offer flexibility with respect to the following requirements:

  • License fees;
  • Capital and liquidity requirements;
  • Financial soundness and management experience of individuals;
  • Cash balances;
  • Board composition/governance requirements;
  • Credit rating; and
  • SAMA guidelines

There is not likely to be any flexibility on issues of consumer data protection, anti-money laundering, handling of customer’s assets by intermediaries, resolution of disputes process, requirements of consumer disclosures, and requirements on cyber security.

FinTech providers interested in qualifying for the regulatory sandbox are required to apply, and the second batch of companies were selected in June 2019.  It was only available to innovators who are proposing (1) technology that is currently non-regulated under existing SAMA regulations; and (2) new digital business models that are not covered under SAMA regulations.  Currently the FintechSaudi Initiative has 22 members and 54 partners.

Saudi Arabia as an Example of Flexibility

Saudi Arabia’s measured approach to ensuring protection for consumers while still allowing FinTech an opportunity to flourish is a great example of the flexibility needed for FinTech technology. Other countries should watch the FintechSaudi initiative to gauge its success and determine whether a similar model would be beneficial in other tech hubs.

If you are wondering how your FinTech company or technology could benefit from increased presence in Saudi Arabia, contact us today for advice.