Legal framework to protect Saudi Arabia’s financial sector

Saudi Arabia approved a legal framework for the establishment of systemically important financial institutions (SIFIs) in the Kingdom.
The system deals with all details governing the operations of such financial institutions in the country within the legal framework set by the Saudi Central Bank (SAMA) and the Capital Market Authority (CMA).

The new regulations clearly define the jurisdictions of SAMA and CMA to ensure seamless operation and supervision of the financial sector of Saudi Arabia.
SIFI can be a bank, insurance firm, or other financial institution whose failure could cause significant disruption to the overall financial system and the economy.

SAMA conducted a study of the regulatory framework for the treatment of SIFIs, to analyze the best practices and relevant international standards, and find the regulatory framework that matches the local environment and national economy.

Considering the importance of SIFIs to the economy, SAMA and CMA seek to ensure the protection of the financial sector in the Kingdom, stability of the economy, and continuity of SIFI operations by taking steps to reduce risks to the minimum.

The new regulations allow the competent authorities to maintain the soundness of the financial sector and protect the deposits and assets of customers as well as of insurance policyholders. The framework also ensures the continuity of the necessary business activities of financial institutions and reduces dependence on government support.

SAMA seeks to set special standards for the institutions under its supervision according to the related laws that take into account the size, complicated nature, and risks of institutions.

The most important aspect the competent authorities take into consideration before allowing any SIFI to start operations in the Kingdom is its recovery plan.

A financial institution must submit a recovery plan, in case of any untoward situation, within 180 days of its request for a license to operate in the Kingdom.

The plan should include detailed steps it would take to restore its financial position in the event of a crisis.

In case this financial institution is a holding company, it must also prepare a recovery plan for the financial group and a recovery plan for each financial institution affiliated with it.

Moreover, the recovery plan should include the following:

• A summary of its main elements and the ability of the financial institution to restore its position.

• A summary of the fundamental changes that have occurred in the financial institution since the last recovery plan submitted to the competent authority.

• A plan for communication and disclosure to deal with any negative reaction expected from the markets as a result of fundamental changes that negatively affect the financial institution, steps to restore capital and liquidity requirements, and to maintain and restore the financial position of the institution.

• An estimate of the expected time frame for the implementation of each of the basic aspects of the plan.

• A detailed description of any potential risks that may hinder its implementation and also determine the necessary activities provided by the financial institution.

In our next article, we will elaborate on other aspects of the new system necessary for the establishment and functioning of SIFIs in the Kingdom.

• Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers. Twitter: @dimah_alsharif