Does the expansion of Gulf financial centres truly demonstrate the solidity of the region’s legal systems?
The latter-day gold rush in the Gulf has attracted thousands of foreign businesses, and financial centres have sprung up that are symbols of national pride and sophistication. Rapid development has, however, thrown into sharp relief the nature of the legal and regulatory regimes governing these financial centres.
The mantra often heard in the region is that robust legal and regulatory regimes are essential for an aspiring financial centre, because financial services are a global regulated industry. Firms and clients have to be satisfied that a particular jurisdiction is reputable and meets international standards. In practice, however, the Gulf’s main financial centres are far from homogenous and face special difficulties.
The Dubai International Financial Centre (DIFC), the Qatar Financial Centre (QFC) and the new Abu Dhabi Global Market (ADGM) have legal systems based on English common law. They are adorned with courts of first instance and appeal courts to hear cases involving firms licensed by those centres. They also have international courts designed to attract world parties seeking a high-quality court in which their dispute can be heard.
Many of the best-known law firms versed in common law are licensed to operate and advise clients in these jurisdictions. Prominent English lawyers practise in the international courts and sit on the benches.
A crucial feature shared by these centres is that they are legally defined environments supposedly separate from the laws and regulations prevailing in the rest of the country. The DIFC and ADGM are physically delineated special economic zones – or offshore centres. Firms licensed by the DIFC or ADGM have to operate from within the zone. The QFC is unusual in that it is a legal environment without a physically delineated zone within which QFC-licensed firms must be located. It is therefore an onshore centre.
Bahrain is different. The island was the regional centre of commercial activity in the Gulf for a long time under British control. Its legal and regulatory system grew up piecemeal and today no single law such as those defining the DIFC, QFC and ADGM exists. English common law is not dominant and the main regulator is the Central Bank of Bahrain rather than separate (billed as independent) regulators as in the financial centres in Abu Dhabi, Dubai and Qatar.
This mish-mash is held to be one reason why Bahrain lost its lead as a financial centre to its younger Gulf rivals. But the legal and regulatory systems in the DIFC, QFC and ADGM are not always as clear as they may seem and could cause firms licensed in those centres more difficulties than they expect.
A critical issue is whether legal decisions taken in these centres are truly ring-fenced from the national jurisdiction. In Qatar, for instance, the emir signs QFC laws in the same way as he signs laws in the Qatari code. Supporters of this arrangement describe it as ‘one country, two systems’. But experience in China and Hong Kong demonstrates the difficulties of maintaining such an arrangement. Early legal manoeuvres in Dubai and Qatar leave open the possibility that the legal boundary between a financial centre and the rest of the country may be more porous than imagined. In some circumstances, an appeal from the financial centre legal system to
the national legal system may become possible, especially if the dispute involves a national of the country in question. This in turn raises the issue of enforceability, as some foreigners have already found in Dubai.
Uncertainty about where final legal decisions rest and the enforceability of decisions do not appear to have deterred firms from joining the Gulf gold rush. But claims that expansion of the region’s financial centres demonstrates the solidity of their legal and regulatory systems could be exaggerated. This expansion has been, partly at least, in spite of rather than because of the quality of law and regulation.
Michael Prest is a financial journalist and Middle East expert