Recovery Planning Regulation for Financial Institutions

Federal Decree-Law No. 51 of 2023 (the “New Bankruptcy Law”), which will come into effect on 1 May 2024, will exclude financial institutions and insurance companies regulated by the Central Bank from its scope. Instead, the UAE Central Bank (“CBUAE”) has introduced the Recovery Planning Regulation (“Recovery Regulation”), a dedicated insolvency and rescue framework for financial institutions and insurance companies it regulates. We understand that the Recovery Regulation is part of a broader framework for resolution, rescue and recovery of stressed financial institutions and subject to further statutory oversight. We also expect further regulation to be issued in supplementing this framework and the Recovery Regulation.

The Recovery Regulation requires financial institutions (i.e. local banks, branches of foreign banks, finance companies, insurance companies and other licensed financial institutions) to devise recovery plans covering rescue options, stress scenarios, business continuity arrangements, capital indicators etc… The goal of the recovery plan is to equip financial institutions to navigate periods of severe financial challenge and facilitate their recovery.

Scope

The Recovery Regulation applies to financial institutions which includes banks, finance companies, insurance companies, branches of foreign banks and insurance companies, and any other licensed financial institution designated by CBUAE (“Institutions”).

The Recovery Regulation requires financial institutions to establish a recovery plan, comprising the following:

1. Executive summary of key plan elements and assessment of recovery capacity;
2. Summary of material changes to any existing recovery plans;
3. Description of the institution’s framework;
4. Governance and its integration into the Institutions’ systems;
5. Recovery indicators, thresholds, and governance and escalation procedures;
6. Recovery options and stress scenarios;
7. Recovery capacity applied to various stress test scenarios;
8. Institutions’ CBUAE liquidity facilities utilization overview;
9. Overview of preparatory arrangements for recovery options;
10. Business continuity arrangements;
11. Communication plan;

In light of the above, the recovery plan must be proportionate to the Institution’s complexity, size, group and organisational structure, risk profile and interconnectedness with the financial market. Additionally, the Institutions must assess whether they provide critical services including but not limited to payment, custody, clearing and settlement to the financial market in which they operate.

Specific indicators to be included in every recovery plan for banks and insurance companies, as outlined in the annex of the Recovery Regulation, which include:

1. Capital indicators;
2. Liquidity indicators;
3. Profitability indicators;
4. Asset quality indicators;
5. Market-based indicators; and
6. Macroeconomic indicators.

In relation to large financial institutions with group entities recovery plans is to drawn up for the group that cover all entities within the group, and must consider in their plan the scenarios, recovery options, indicators and thresholds relevant to each group entity. A recovery plan should be submitted at least annually to CBUAE, unless otherwise indicated or requested by CBUAE.

For an Institution that is a UAE subsidiary of an institution whose parent entity is outside the UAE, the recovery plan must cover the UAE subsidiary. For an Institution that is a UAE branch of a foreign institution, the recovery plan must be tailored to its local branch operations.

Shariah compliant Institutions must obtain approval from its Internal Shari’ah Supervisory Committee on the recovery plan’s compliance with the applicable principles of Islamic Shari’ah.

Finally, by issuing the Recovery Regulation, the CBUAE considers recovery planning as an important crisis preparedness and management resource to avoid instances of systemic risk and not merely a compliance requirement. Therefore, under the Recovery Regulation, Institutions must have a recovery plan in place by 30 June 2024.

For queries or further information on the above and if you require assistance in preparing any recovery policies in line with the Recovery Regulation, please contact Mamoon Khan or Sarah El-Serafy.