DIFC report highlights AI regulatory challenges for UAE financial markets

The DIFC’s latest Future of Finance report, published earlier this month, puts a spotlight on the radical structural shifts the global banking sector is experiencing through a combination of digital native challenger banks, client expectation changes and rapid advancements in AI.

The report highlights that AI is already delivering measurable productivity gains across functions such as customer service, lending and software development. The findings also point to strong growth in emerging markets, where rising incomes and expanding middle classes are driving increased demand for banking services.

Marie Chowdhry, a financial technology expert with Pinsent Masons in the Middle East, said the DIFC’s findings underlined how AI had already become a core part of the infrastructure for financial institutions – creating certain regulatory challenges.

“As banks embed AI across lending, onboarding and customer engagement functions, this introduces a more complex regulatory and risk landscape, particularly around data governance, model accountability, and cross-border compliance,” she said.

“For clients, the key challenge will be balancing rapid digital transformation with robust governance frameworks. Regulators in jurisdictions such as the UAE including the DFSA in the DIFC are responding pragmatically, using sandbox environments and incremental rulemaking to enable innovation while maintaining financial stability.

“This creates opportunities for early movers but also increases expectations on firms to adopt ‘compliance by design’ principles when deploying AI solutions.”

The new report highlights the UAE’s potential future role in helping bridge the gap between traditional and digital-first financial services, due to its innovation-supporting framework and sandbox regimes, and its positioning between markets in the east and west.

With the continued growth of challenger banks driven by cloud-native platforms and AI infrastructure providing alternative and efficient financial offerings compared to their traditional rivals, the report warns that productivity challenges and the impact of disruptors could see established banks face a profits decline by up to $170 billion by the end of the decade if business models do not adapt.

“The convergence of AI, digital assets and embedded finance will require organisations to reassess legal structures, contractual arrangements - particularly around outsourcing and technology providers - and regulatory perimeter risks,” said Chowdhry.

“Institutions that proactively align their digital strategies with regulatory developments, particularly in hubs such as Dubai, will be best positioned to capture emerging growth opportunities while mitigating downside risk.”

Seya Rahnema, a banking and finance expert with Pinsent Masons in the Middle East, said banking in the region was entering a phase where resilience is no longer about scale alone, but about continuously adapting operating models in response to AI, data and client expectations.

“What we are seeing is not simply digitisation, but a structural re‑platforming of the industry where real-time, personalised services and embedded finance become the baseline,” he explained.

“Institutions that invest early in their systems, data architecture and governance will be best placed to manage regulatory complexity while unlocking new revenue pools, particularly in high-growth markets like the Gulf, Asia and Africa.”