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Avoiding legal and regulatory pitfalls in digital transformation projects
This article first appeared in the September 2024 issue of Financier Worldwide.
Middle East | Publication | February 2023
If implemented, the proposed new Banking Law would replace the 1966 Banking Control Law and would be a much-welcomed update to the Kingdom of Saudi Arabia’s (KSA or the Kingdom) banking regulatory framework. It introduces new regulatory and supervisory powers for SAMA and enhances consumer protection and financial stability for the banking system in the KSA.
The proposed new Banking Law would apply to any person engaged in banking activities as well as a bank’s board members, chief executive officer or general manager, senior executives, employees, and auditors.
The new Banking Law’s objectives are to:
It is likely that Implementing Regulations may be published to set out further rules and regulations to achieve the objectives of the Banking Law.
SAMA’s power to determine “banking business” and licensing requirements
The proposed new Banking Law would give SAMA the express power to determine what is considered “banking business” in the Kingdom when it is carried out by foreign persons with KSA residents. While this position is not new, it implies that SAMA may publish regulations or guidance on cross-border activities into the Kingdom.
Article 4 of the new Banking Law contains a proposed scope for what constitutes “banking business” activity, which includes:
The proposed new Banking Law also contains a more detailed set of licensing standards, including a recognition of branches of foreign banks for licensing purposes, as well as clear rules on when SAMA may suspend or cancel a licence.
Exemptions to the licensing requirement
The proposed new Banking Law contains an express prohibition on carrying on banking business without a licence in the KSA. Although this provision already exists in the current law, this general prohibition would now be subject to two new exemptions which apply to a foreign banking institution that deals with clients in the KSA.
The first is an exemption available to foreign banks conducting project finance and commercial lending on a cross-border basis, by lending to clients in the KSA. The second exemption is to the benefit of foreign banks providing banking products and services to the government of the KSA. Clarity on the full scope of these cross-border activities will be welcome.
Other banking regulatory requirements
The draft law also sets out those matters where licensed banks will require approval from SAMA, including changes in control, business transfers, the opening of branches, and limits on banks owning more than 15 per cent of the voting rights in a non-banking business. Under the proposals, SAMA will also be empowered to give instructions to deposit takers on their corporate structure.
There are proposals in relation to the management and governance of banks, and SAMA powers of supervision (including conducting bank inspections). The proposals also include provisions on whistle-blower protections, and on SAMA’s cooperation with foreign regulators for the exchange of data and information about their licensed entities.
The proposals also contain detailed rules on the maintenance deposits with SAMA, which are set at between 10 and 17and a half percent, with the default being 11 per cent of deposits. There is also a proposal for a liquidity reserve for deposit takers set at 15 per cent of deposit liabilities, and potentially up to 20 per cent if SAMA deems it necessary.
There is a proposal for holding personally responsible the chairman and board members, the CEO, branch managers, and executive officers (each within the scope of their competence) for breaches of the law and its implementing regulations. These changes align the Kingdom more closely with other jurisdictions such as the UK and EU, where senior management accountability is a key tool in regulators’ toolbox.
On consumer protection, the draft law contains proposals which would establish a deposit protection fund in the KSA as a separate legal entity, rules on banking confidentiality, and proposals on when customer accounts can be blocked or frozen by banks.
More robust enforcement powers and sanctions
The proposed new Banking Law also contains enforcement powers for SAMA, including the power to cancel licences and provisions dealing with the imposition of civil and criminal sanctions for breaches of the new Banking Law and the regulations issued pursuant to it. Civil sanctions include the power for SAMA to fine companies up to SAR10m, and up to SAR2m for individuals.
Criminal sanctions for breaches of the new Banking law and regulations include up to five years in prison and/or up to SAR5m for individuals and SAR25m for legal persons. Criminal sanctions may be imposed in several situations including the following:
The proposed new Banking Law, if enacted in its current form, would bring a range of welcome enhancements to the KSA banking regulatory framework, which would be well received by foreign banks that do business with clients in the KSA. The new Banking Law is set to provide greater certainty, introduce banking consumer protection, and help to modernise the banking industry in the Kingdom as it continues its rapid economic reforms and development.
Publication
This article first appeared in the September 2024 issue of Financier Worldwide.
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