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ADGM launches ‘RegBot’ initiative for venture capital licence applications

Out-Law News | 28 Apr 2020 | 11:36 am | 2 min. read

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) is launching a pilot scheme utilising artificial intelligence to review licence applications for venture capital (VC) firms.

The ‘RegBot’ uses natural language processing and machine learning to identify information and risk gaps in the application process, and ask clarifying questions of applicants. The FSRA said if applicants failed to provide adequate information on risk management systems and processes, for example, the RegBot would prompt a relevant response – thereby also enhancing the firm’s understanding of and compliance with FSRA rules and regulations.

The RegBot will be able to complete draft assessment forms for FSRA review, helping to improve efficiency and reduce the time needed for the regulator to review an application.

The FSRA has teamed up with regulatory technology company Nexus FrontierTech to develop the RegBot.

Financial services regulation expert Marie Chowdhry of Pinsent Masons, the law firm behind Out-Law, said the development was an interesting one.

“It remains to be seen whether automating this process will speed up the FSRA’s assessment of an applicant’s readiness – a gripe which is often levied by new entrants in the market,” Chowdhry said.

“The RegBot is tipped to be able to extract certain data from documents uploaded by the applicant, and use this information to draft an assessment report for the FSRA’s review. We assume an applicant ‘rejected’ by the RegBot will be able to resubmit its application, with the missing information, but we query whether this approach will indeed increase business efficiency and reduce overall turnaround time for the application process,” Chowdhry said.

The regulator has chosen to pilot the scheme with VC firms due to the increasing pipeline of applications from the sector. It introduced the first tailored regulatory framework for VC managers in the region in May 2017 and has since seen a pickup in the number of managers operating from the ADGM, with nine applications approved in the last year.

In 2019 a number of funding and incentive schemes were launched within the ADGM to support start-ups and scale-ups at different stages of the funding cycle.

The RegBot pilot is one of several projects launched by the FSRA to digitise the regulatory process. It is also introducing application programme interfaces (APIs) to monitor client money held by licensed firms with custodian banks, on a real time basis. The solution means that a licensed firm’s client money balance held by its custodian bank will be reconciled against the firm’s internal client money records, in compliance with regulatory requirements, at all times. The system will alert the firm and the FSRA immediately with any discrepancies.

The FSRA has additionally launched a pilot scheme to digitise its regulations, with the aim of enabling firms and fintech companies to interact with them dynamically. The regulator said the pilot was the first step towards achieving its concept of creating “regulations in a box”, where firms can use the FSRA’s digital regulations to test and deploy innovations that are compliant by design.