Consultation Paper No. 2 of 2025

Review of Prudential Framework for Lower-Risk Firms

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has issued Consultation Paper No. 2 of 2025, proposing key amendments to the prudential framework for firms in Categories 3B, 3C, and 4. These firms are generally considered lower risk, especially those not permitted to hold Client Assets or Insurance Money. The proposed changes aim to simplify capital requirements and reporting obligations while maintaining financial safeguards.

Simplifying Capital Requirements

Currently, Category 4 firms are subject to both a Base Capital Requirement (BCR) and an Expenditure-Based Capital Minimum (EBCM). The FSRA proposes to remove the EBCM requirement for Category 4 firms that do not hold Client Assets or Insurance Money, significantly reducing capital complexity for these low-risk firms. The BCR alone would apply to such entities.

In line with this change, the FSRA also proposes to increase the BCR from USD 10,000 to USD 50,000. Although this is a nominal increase, supervisory data shows it would actually reduce the capital burden for many firms by removing the typically higher EBCM obligation.

For firms engaged in the activity of Providing Custody (except where this involves Public Funds), the FSRA recommends reducing the capital requirement to USD 250,000, compared to the current threshold of USD 4 million for custody of Fund assets.

Reducing Regulatory Burden:

The FSRA seeks to further streamline oversight by removing the Internal Risk Assessment Process (IRAP) reporting requirement for Category 3B and 3C firms. These reports are currently submitted annually or upon significant business changes, and eliminating them would reduce compliance workload.

Another notable proposal is to exempt branches from the requirement to maintain Professional Indemnity Insurance (PII). Since branches rely on the financial resources of their parent entities and are not subject to standalone prudential capital requirements, this exemption aligns with their risk profile.

Enhancing PII Standards:

For firms still required to maintain PII, the FSRA proposes introducing minimum standards to ensure effective coverage. These include requiring insurance from a regulated provider with a credit rating equivalent to Credit Quality Grade 3 or better, and ensuring the policy includes continuous cover, legal defence costs, and liability for acts of employees, directors, and agents.

Instead of submitting a full PII policy annually, firms would submit a confirmation statement approved by their Governing Body, verifying that the coverage meets FSRA's prescribed standards.

Technical Updates and Feedback Areas:

The FSRA also proposes clarifying that a BCR of USD 150,000 or USD 50,000 applies to firms that only manage Collective Investment Funds under Category 3C. Additionally, it plans to update PRU Chapter 10 to confirm that its requirements apply to Domestic Firms only, not branches.

Beyond the immediate proposals, the FSRA invites feedback on potential future reforms, such as adjusting prudential rules for Category 2 and 3A firms, or modifying capital requirements for firms engaged in Dealing in Investments as Matched Principal, as they are not subject to the same degree of prudential risk as firms Dealing in Investments as Principal.

Conclusion

Overall, the FSRA’s proposals reflect a more proportionate and risk-based regulatory approach. By easing capital and reporting obligations for firms with limited risk exposure, the changes support a more efficient business environment while preserving investor protection and market integrity.

The proposals also demonstrate a shift toward a more principles-based framework. For example, while the FSRA is introducing minimum standards for Professional Indemnity Insurance, it has deliberately avoided imposing prescriptive limits on policy coverage or deductibles. This maintains flexibility for firms while ensuring meaningful protection against liability risks.

Taken together, these reforms signal a clear intention by the FSRA to calibrate its prudential rules more closely to actual risk, reduce unnecessary compliance burdens, and foster a regulatory environment that remains robust yet commercially practical.