ADGM’s FSRA to reduce regulatory burden on lower-risk firms

An FSRA consultation paper (12-page/ 223KB PDF) sets out proposed amendments to the prudential framework for three categories of firms under the FSRA’s Prudential - Investment, Insurance Intermediation and Banking Rulebook (PRU) and is seeking feedback on those proposals.

The three categories of firms under discussion are: Category 3B firms, such as custodians and trustees of funds; Category 3C firms, such as asset and fund managers; and Category 4 firms, such as intermediary firms, that are licenced to offer investment advising advisory services, but do not hold client assets. The consultation period ends on 21 May.

The proposed amendments include revisions to the capital requirements applicable to Category 4 firms, changes to the reporting requirements applicable to Category 3B and 3C firms and changes to the professional indemnity insurance requirements under the PRU Module.

Financial regulation expert Marie Chowdhry of Pinsent Masons said the FSRA’s proposals promised to bring “a more proportionate and risk-based regulatory approach” to the ADGM’s financial services sector. “By easing capital and reporting obligations for firms with limited risk exposure, the changes support a more efficient business environment while preserving investor protection and market integrity,” she said.

Under the proposals, the FSRA will remove the expenditure-based capital requirement (EBCM) for Category 4 firms that do not hold client assets or insurance money. The consultation paper highlights that given the low-risk nature of these firms and the limited potential for market disruption, any effects from winding down the business would have a negligible impact on the broader market, given that these Category 4 firms do not typically have liabilities in relation to their clients.

For Category 3B and 3C firms, the requirement to submit an internal risk assessment process (IRAP) report to the FSRA is proposed to be removed, given the low prudential risk of these firms. “This will reduce the regulatory burden on Category 3B and 3C firms and grant them the autonomy to manage their own risk management framework internally,” said Chowdhry.

Branch companies which hold of Category 3B, 3C, and 4 firm licences will also no longer need to maintain standalone professional indemnity insurance (PII), and will instead be able to rely on the coverage of their head offices.

For firms that are still required to hold their own PII, new minimum standards for coverage and insurer creditworthiness will apply. Instead of submitting the policy itself, firms will submit an annual board-approved attestation.

Chowdhry said the amendments would significantly reduce the reporting and compliance burden currently facing many lower risk firms. “The FSRA is looking to streamline oversight by removing the IRAP reporting requirement for Category 3B and 3C firms,” she said. “These reports are currently submitted annually, and eliminating them would reduce compliance workload. Similarly, the proposal to submit confirmation of a PII policy’s adequacy to verify that the coverage meets the FSRA's prescribed standards, rather than submitting the full PII policy, will also reduce compliance and reporting workloads of the company.”

The consultation paper also proposes a number of changes to some categories’ base capital requirements (BCR). The BCR for most Category 4 firms are proposed to increase from $10,000 to $50,000, establishing a straightforward and effective capital floor for Category 4 firms and their operations in the ADGM. The FSRA also proposes a lower BCR for entities providing custody of non-public funds, with the proposed BCR dropping from U$4 million to U$250,000.

Commenting on the FSRA’s proposals, Lana Akkad, an expert in financial regulation, said: “These proposed reforms signal a clear intention by the FSRA to calibrate its prudential rules more closely to actual risk, reduce unnecessary compliance burdens, and foster a regulatory environment that remains robust yet commercially practical.”