UAE Central Bank's Corporate Governance Regulations for Banks

17 Mar 2022

“Corporate governance is not a matter of right or wrong -‘ it is more nuanced than that.” – Advocate Johan Myburgh Commercial banks are essential contributors to the United Arab Emirates (UAE) economic growth, and they are expected to lead the way in terms of corporate governance and management practices. Good governance is critical to a bank’s long-term sustainability, and it is primarily dependent on the directors’ expertise, experience, and understanding. Directors are the guardians of financial stability, and if a bank fails, it impacts the whole economy. Banks in the UAE are also aware of the need to improve on these lines, and a number of them have begun the process.

The Organization for Economic Co-operation and Development, which is an intergovernmental economic organization, defines corporate governance as “a set of relationships between a company’s management, its board, its shareholders and other stakeholders.” At the most, corporate governance refers to how companies are controlled and directed. The emphasis is on the board of directors that should ensure the interests of the organization’s management that do not conflict with those of the shareholders. Good governance should incentivize the board of directors and management to follow objectives that are in the bank’s best interests, as well as facilitate effective monitoring of the management. This in turn has implications for the board’s role and composition, the possible contribution of outside independent directors, the creation of board committees, especially audits. Several multinational corporate controversies and scandals have brought scrutiny to the way companies are managed and regulated. Never before has there been a greater prominence on the efficiency of corporate leadership and internal controls. The fact that there is not a single agreed-upon system of good governance and that all governments and businesses have their own cultures, customs, and priorities, the impact of foreign financial markets is prompting some convergence of practices.

Corporate Governance Regulations for Banks

 Previously, UAE banks had complied with Central Bank of the UAE (CBUAE) notifications and circulars, which primarily dealt with board member and senior management appointments. The CBUAE has revoked the previous circulars, and the CB Regulations have taken their effect. While there was no specific mandate to enforce the guidance, the CBUAE had issued draft guidelines for CBUAE licensed banks to follow for best practice guidance. Furthermore, CBUAE licensed banks that are joint-stock companies are subject to the Corporate Governance Regulation which is primarily issued by the Securities and Commodities Authority (“SCA Regulations”), which are also a source for best practice guidance of non-listed companies. The UAE Central Bank (the “CBUAE”) has released the Corporate Governance Regulation (the “CGR”) after years of deliberation. The proposed corporate governance guidelines (the “Guidelines”) were last revised in 2006. The GCR went into effect on August 15, 2019, after being published in the Official Gazette. The CGR mandates that UAE banks meet with the CGR within three years. The CGR consists of corporate governance regulations and accompanying standards for the purpose of putting the CGR (the “Standards”) into effect. UAE banks have previously made independent efforts to follow appropriate corporate governance guidelines in some matters, including the terms of the Securities and Commodities Authority’s (“SCA”) corporate governance regulations that extend to public companies in general, as well as international best practices. The CGR and the Standards apply to all banks which are established in the UAE. Banks that operate as part of a group must ensure compliance with the CGR and Standards on a group level particularly. Foreign bank branches which are licensed by the CBUAE must either follow the CGR and Standards or make equivalent arrangements.In terms of board composition and qualifications, foreign bank branches are excluded from the provisions of Article (3) of the CGR. The CGR stresses that each bank’s board of directors is responsible for demonstrating to the CBUAE that the bank has complied with the respective corporate governance guidelines.

Key Highlights

The following is the crux of the requirements outlined in the CGR for banks mentioned Below:

  1. The board must be well-balanced in terms of skills, experience, and diversity. A minimum of 20% of the candidates should be female.
  2. The board must make up a minimum of seven (7) and a maximum of eleven (11) members.
  3. Committees for audit, nomination, risk, and compensation must be included in the board structure. No other board committees should be merged with the audit and risk committee.
  4. There is a strong emphasis on maintaining a strong internal controls framework and ensuring that all problems, including monitoring of outsourced activities, are communicated to the board.
  5. An external third party should undertake an assessment of compensation at least every five (5) years.
  6. The board must have a strict delegation of authority that specifically describes the positions of the board and senior management in decision-making.

Non-Compliance of Corporate Governance Regulations The CBUAE may take supervisory measures and impose penalties for violations of the CGR and the Standards, which may include withdrawing, replacing, or limiting the powers of senior management or board members, barring persons from the UAE banking sector. In this situation, it seems that the CBUAE did not follow the traditional ‘comply or explain’ strategy, which usually helps banks assess which corporate governance policies and procedures are suitable for their activities. In fact, the CBUAE has stated explicitly in the CGR that banks must adhere within the three-year timeframe as prescribed by the CBUAE. If you need any guidelines related to the banking sector you can approach the baking and finance legal experts.