The issuance of the new banking law by virtue of Law No. 194 of 2020 reflects the Egyptian regulator’s understanding of the importance of utilizing technology, particularly financial technology, in order to bolster the government’s financial inclusion strategies. However, the most recent example of the Egyptian legislator’s move towards integrating financial technology into the Egyptian financial market is the issuance of an updated draft law on the regulation and development of the use of financial technology in non-banking financial activities. The draft law was initially approved by the Egyptian Parliament but is yet to be published in the Official Gazette in order to have the force of a law (the “Law”). The Law is aimed at, amongst other things, achieving financial inclusion and economic integration, granting a broader segment of the population access to non-banking financial services, as well as increasing the efficiency of and decreasing the costs associated with non-banking financial services.
Below is a Q&A aimed at setting the most significant changes introduced by the Law and how these changes affect the entirety of the non-banking financial sector in Egypt.
- What you need to know about the Law?
The Law introduces the regulatory framework governing the use of financial technology in the non-banking financial sector. The Law sets out, amongst other things, the following:
- the powers granted to the Egyptian Financial Regulatory Authority (FRA) in relation to regulating the use of financial technology in the non-banking financial sector;
- the licensing procedures for entities wishing to set up companies for the purpose of providing non-banking financial services through the use of financial technology;
- the approvals to be obtained by entities duly licensed by the FRA to provide non-banking financial services and wishing to utilize financial technology to render the relevant services;
- the newly introduced fintech startup license;
- the technology platforms which may be used for the purpose of rendering non-banking financial services; and
- the guidelines and rules governing the provision of non-banking financial services through utilizing financial technology.
- Which entities does the Law address?
The Law addresses entities engaged in non-banking financial activities, thus falling under the regulatory umbrella of the FRA, which use financial technology to render their services. The entities falling under the supervision of the Central Bank of Egypt are, accordingly, excluded from the provisions of the Law.
The Law distinguishes between four different types of entities:
- entities already licensed by the FRA to undertake non-banking financial activities and that wish to render their services using financial technology. We discuss the relevant requirements briefly in our response to Question (8) of this note;
- entities under incorporation or entities that will be incorporated after the promulgation of the Law for the purpose of rendering non-banking financial services utilizing financial technology. We discuss the relevant requirements briefly in our response to Question (9) of this note; and
- entities engaged in financial technology outsourcing services; and
- new start-ups in the fintech space using innovative new products that are not otherwise licensed by the FRA. We discuss the relevant requirements briefly in our response to Question (12) of this note.
- Does the new Law have any extraterritorial application?
The provisions of the Law prohibit both entities operating in Egypt as well as entities operating outside of Egypt and rendering services to individuals residing in Egypt from engaging in non-banking financial activities without having first obtained the requisite FRA license. The actual adoption by the FRA of such extraterritorial application would define the practice going forward.
- What is the grace period for achieving compliance with the provisions of the Law?
To achieve compliance, the Law grants entities addressed by its provisions a grace period of 6 months (calculated from the date of issuance of the FRA decisions implementing its provisions). At the FRA’s discretion, the abovementioned grace period is extendable for one or more similar terms and with a maximum term of two years.
- Is the Law expected to have executive regulations?
No – the Law will not be supplemented by executive regulations. However, the FRA is authorized to issue decisions implementing the provisions of the Law within six months from its date of issuance.
- Which authority is tasked with implementing the Law?
According to the Chapter (1) of the Law, the FRA is the competent authority tasked with implementing the provisions of the Law as well as adopting the necessary measures required for the purpose of promoting and expanding the use of financial technology in the non-banking financial sector.
Amongst other aspects, the FRA is tasked with the following:
- undertaking the procedures for the setting up of companies addressed by the provisions of the Law;
- granting of licenses and approvals, as the case may be, required for the purpose of undertaking non-banking financial activities through the use of financial technology;
- using financial technology for the purpose of (a) ensuring compliance with the provisions of the relevant applicable laws, decisions and decrees, and (b) compiling, verifying and analyzing digital data;
- creating a supervised testing environment for financial technology platforms;
- supervising and monitoring entities addressed by the provisions of the Law; and
- raising awareness with respect to non-banking financial services which are rendered using financial technology.
- How does the Law define financial technology?
The Law defines the term “financial technology” as any mechanism that utilizes modern and innovative technology in the non-banking financial sector to support and facilitate financial, financing and insurance activities and services using applications, software, digital platforms, artificial intelligence, or electronic records.
The Law also defines a number of terms including, but not limited to, “digital contracts” which include smart contracts (i.e., contracts which are self-executing), “digital identity”, “insurance technology”, “digital register” and “robo-advisors.”
- What does this mean for entities already licensed by the FRA to provide non-banking financial services?
The Law stipulates that entities already licensed by the FRA to undertake non-banking financial activities are required to obtain an approval from the FRA should they wish to use using financial technology in rendering their duly licensed non-banking financial services. Additionally, the Law requires that FRA licensed companies meet the following criteria:
- that the company have in place the systems, technological infrastructure, information systems and security procedures necessary to undertake the relevant non-banking financial activity and which are compliant with the requirements to be issued by the FRA in this respect; and
- that the company is not in breach of any of the laws, regulations, or decisions governing its licensed non-banking financial activity.
- What does this mean for entities in the process of setting up a company under the regulatory umbrella of the FRA for the purpose of engaging in non-banking financial activities?
The Law stipulates that entities wishing to engage in the provision of non-banking financial services through the use of financial technology, regardless of the nature of the non-banking financial service in question, are required to be set up and licensed by the FRA. The Law sets out the documents required to be presented by said entities for the purpose of applying for the relevant FRA license. Additionally, the Law requires that the following criteria be met by said entities:
- that the company’s sole purpose is to undertake the relevant licensed non-banking financial activity;
- that the company’s direct and indirect ownership structure be defined; and
- that the company have in place the systems, technological infrastructure, information systems and security procedures necessary to undertake the relevant non-banking financial activity and which are compliant with the requirements to be issued by the FRA in this respect.
- What are the platforms used to render non-banking financial services under the new Law?
The Law stipulates that entities wishing to engage in the provision of the non-banking financial services utilizing financial technology may do so through any of the following:
- platforms for nano-finance services;
- platforms for insurance services; and
- platforms for consumer finance services.
- What are the guidelines and rules governing the provision of non-banking financial services through financial technology?
The Law stipulates that entities which have obtained the FRA’s license or approval, as the case may be, are required to adhere to the decisions to be issued by the FRA in respect of each of the following:
- the criteria to be adhered to in relation to (a) the company’s organizational structure, and (b) the practical experience and professional competence requirements for those engaged in the company’s management;
- the standards and capabilities of the technological platforms used in rendering the relevant non-banking financial service;
- the systems, technological infrastructure, information systems and security procedures necessary to undertake the relevant non-banking financial activity;
- the corporate governance requirements;
- the anti-money laundering and anti-terrorist financing standards and procedures; and
- the procedures and methods necessary to maintain market stability and protect customers.
- What is the Fintech Startup License?
The Law grants the FRA the authority to issue temporary fintech startup licenses to newly established and innovative startups operating in the field of non-banking financial activities through financial technology. The Law stipulates that the term of fintech startup licenses granted in accordance with its provisions shall not exceed two years. In addition, the Law provides licensing fee exemption incentive for fintech startups that would involve creative models for financing.
- What are the pros and cons of the new Law?
- The Law introduces an essential and much needed foundation for future directives around the enforceability of e-contracts and identity confirmation in the space of financial technology in Egypt.
- Paving the path for future directives by the FRA for fintech technology infrastructure security and systems integrity requirements for a safer fintech environment.
- Heavy new licenses and approvals requirements. Fintech is based mainly on innovative and new disruptive models of business. It might seem less appealing to new market entrants to have to go through the process of licensing for a fintech startup even if the intended product is not particularly organized under Egyptian law.
- The Law was ambiguous on criteria for certain licensing and approvals. To name the least, the following also represents questions that we hope FRA would clarify in future directives:
- it is not clear whether a company established as a fintech service provider may also provide physical non-banking financial services;
- the nature of fintech service providers; and
- the nature of approved collaterals. This point has sparked several industry concerns over the previous year.
- Extraterritorial application. The practice of the FRA shall define the practical application of such requirements in the future.
- Is the new Law expected to undermine the “disruptive nature” of the fintech industry?
It is early to tell. While the new FRA’s fintech startup licenses and incubators can be seen in the context of encouraging new disruptive ideas in the fintech space, it can also be seen as an attempt for early regulatory intervention to dismantle “disruptive” business models. The adoption of the FRA will define the way forward for disruptive projects. One thing for sure, no entity is allowed to venture into the fintech space with new unregulated tools/ideas without obtaining a license first. This is a departure of the market practice over the previous 3 years which have seen investors venturing into the fintech space with new ideas and it is then up to the regulator to catch up.
- What to expect next?
The FRA is expected to issue decisions implementing the provisions of the Law. These decisions are expected to cover, amongst other things:
- the technical criteria (including security systems/procedures, information systems, and technological infrastructure) against which the relevant financial technology-based platforms shall be tested by the FRA;
- directives relevant to e-contracts and electronic identification confirmation;
- template agreements for offering non-banking financial services using financial technology;
- licensing requirements for entities engaged in the provision of outsourcing services;
- additional requirements to be met by entities wishing to obtain the requisite license from the FRA in order to undertake the provision of non-banking financial services through using financial technology;
- additional requirements to be met by entities wishing to obtain the FRA’s approval in order to undertake the provision of non-banking financial services through using financial technology; and
- the licensing requirements, criteria and procedures governing the granting of the fintech startup licenses.
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