The UAE is an elected monarchy federation of seven sovereign states: Dubai, Abu Dhabi, Fujairah, Ras Al-Khaimah, Ajman, Umm al-Qaiwain, and Sharjah. Each federation is ruled by a hereditary leader known as emir. These emirs collectively constitute the Federal Supreme Council, which is the UAE’s highest constitutional authority. Federal laws apply to all seven emirates, whereas each emirate can implement civil laws if they do not contradict the federal regulations.

The legal system of the UAE is a binary system combining Sharia (Islamic Law) and civil law. Civil law covers commercial, financial, civil, and labor cases. On the other hand, Sharia law (following Islamic principles) applies to family law, inheritance, finance, and certain criminal acts. It requires brokers and exchanges registered in UAE to offer swap-free accounts without any hidden fees.

Additionally to the federal level, the UAE has independent jurisdictions and court systems in areas of economic free zones. Those include the Dubai International Financial Centre (DIFC), regulated by the DFSA, Abu Dhabi Global Market (ADGM), regulated by the FSRA; and the Ras Al Khaimah Economic Zone (RAKEZ). These areas use English common law and have independent civil and commercial courts, separate from the UAE federal judicial system.

The legal framework of the UAE is based on four central regulatory authorities that aim to enforce regulatory requirements and ensure transparency in their areas of jurisdiction. These bodies include The Central Bank of The UAE (CBUAE) and the Securities and Commodities Authority (SCA) on the federal level and the Dubai Financial Services Authority (DFSA), the Financial Services Regulatory Authority (FSRA), and the Ras Al Khaimah Economic Zone Authority (RAKEZA) on the economic free zone level.

Overall, the UAE’s legal system has a forward-looking legal infrastructure that aims to ensure stability and transparency of its financial markets, making it more attractive to global traders and investors. It also has straightforward laws that regulate innovative financial areas such as fintech, banks, and cryptocurrencies, demonstrating its progressive approach to financial regulation. Traders and investors in the UAE are protected through various mechanisms overseen by the listed financial authorities but not through an Investor Protection Fund (IPF).

How Is The Legal System Of The UAE?

The legal system of the UAE is a combination of Federal Civil Law (No. 5 of 1985) and Sharia law. The UAE legal system’s primary act is the UAE’s Constitution, established on December 2, 1971. It provides the framework for the federation constitution and defines the main governing institutions including their functions. Although it authorizes each emirate to create its own legal framework, emirates are limited by the Federal Council’s power to autonomously regulate certain areas, such as foreign affairs policy, currency policies, defense, security, public health, and education.

The legal system of the UAE has four major authorities: the Federal Supreme Council, Cabinet of Ministers, Federal National Council, and the Judicial Systems.

The Federal Supreme Council, known as Supreme Council, is the highest layer of authority in the UAE and is responsible for examining, approving, and signing all federal laws before going into enactment and implementation. The Cabinet of Ministers (cabinet) is responsible for implementing the policies approved by the federal council.

The Federal National Council (legislative) advises the cabinet of ministers (cabinet) regarding policy implementations. Finally, the judicial system ensures rule of law, and protection of individuals rights. The judicial system has three main courts: the supreme court, the first instance court, and courts of Appeal.

What Are the Main Legislation Areas of Regulation in the UAE?

The UAE legal system has three major legislation areas of regulation:

Abu Dhabi, Dubai, and Ras Al Khaimah
Dubai International Financial Centre (DIFC), Abu Dhabi Global Market (ADGM), and Ras Al Khaimah Economic Zone (RAKEZ)
The rest of the UAE

1. Abu Dhabi, Dubai and Ras Al-Khaimah

The emirates of Abu Dhabi, Dubai, and Ras Al Khaimah (RAK) have their own judicial systems with civil and commercial courts independent from the federal system. Their structure is similar to the federal court system, consisting of the supreme court, the first instance court, and the courts of appeal. The first instance court addresses civil, commercial, labor, administrative, criminal, personal status disputes, and real estate issues. For more specific cases, the judicial council can recommend the establishment of specialized courts to decide on personal disputes.

2. Dubai International Financial Centre (DIFC), Abu Dhabi Global Market (ADGM), and Ras Al Khaimah Economic Zone (RAKEZ)

The DIFC, ADGM, and RAKEZ economic free zones have their own judicial system and courts independent from the local emirates and the federal system. Economic free zones are not authorized to regulate criminal, personal, and family matters but only focus on commercial and civil cases. All free zones apply English common law and the common law court system. These consist of a First Instance court and a Court of Appeal.

3. The rest of the UAE (Federal level)

The rest of the UAE (Sharjah, Umm Al-Quwain, Ajman, and Fujairah) uses the UAE’s federal judicial and court system. Tthe Federal Supreme Court (the highest judicial authority in the UAE) has full jurisdiction over issuing local matters in Sharjah, Umm Al-Quwain, Ajman, and Fujairah.

What Are the Main Regulatory Authorities in the UAE?

There are four main regulatory authorities in the UAE overseeing, supervising, licensing, and regulating all financial activities in the market. The four regulatory authorities of the UAE legal system are listed below.

1. The Central Bank of the UAE (CBUAE)

The Central Bank of the United Arab Emirates (CBUAE) is an independent financial institution governing the UAE’s monetary strategy and banking supervision. It was established in 1980.

The CBU’s main responsibility is establishing and implementing UAE’s monetary policy, including its policy rate, determining the level of money supply in the economy, maintaining its currency, and managing reserves. The CBU licenses, regulates, supervises, and imposes sanctions on regional banks.

2. Securities Commodities Authority (SCA)

The Securities and Commodities Authority (SCA) is a government regulatory body that is responsible for overseeing and supervising the UAE’s non-banking financial institutions and financial markets, including the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX). The SCA was established by a federal decree in 2000.

The main responsibilities of the SCA include insurance of the efficiency of the UAE stock market through the elimination of deceptive and manipulative practices and supervision of other financial products such as bitcoin and cryptocurrency. However, the SCA is not responsible for regulating financial activities in the UAE’s free zones, such as the DIFC and the ADGM.

3. Dubai Financial Services Authority (DFSA)

The Dubai Financial Services Authority (DFSA) is an independent regulatory body established in 2004. It oversees all financial activities in the Dubai International Financial Centre (DIFC ), including forex trading, licensing, and market monitoring. The DFSA is also responsible for maintaining transparency and fairness between investors and consumers in the DIFC.

The legal system of DFSA is independent and separated from the UAE’s federal legal system, known as the common law system.

4. The Financial Services Regulatory Authority (FSRA)

The Financial Services Regulatory Authority (FSRA) is an independent financial regulatory authority in the Abu Dhabi Global Market (ADGM) financial free zone. The FSRA creates and oversees the legal and regulatory framework for non-banking financial and ancillary services in the ADGM. Its responsibilities include asset management, private banking, capital markets, and innovative areas like fintech and crypto assets. The ADGM has its own judicial system separated from the federal and Abu Dhabi judicial systems.

How Is Online Trading Regulated in the UAE?

Online trading in the UAE is regulated on two levels: the federal level and the economic free zone level. Federal laws regarding online trading apply to all seven emirates, whereas each economic free zone can implement its own laws and court systems independent from the federal regulation.

1. Online trading regulation on the federal level

Online trading in UAE is on the federal level regulated by the Central Bank Of The UAE (CBUAE) and the Securities and Commodities Authority (SCA). The Central Bank Of The UAE is the primary financial regulatory authority responsible for issuing licenses, conducting supervision, ensuring compliance with regulatory requirements, and taking action against non-compliant brokers and exchanges.

The SCA, on the other hand, is a federal government agency primarily responsible for regulating the security and commodity markets. However, it also has jurisdiction over certain other aspects of online trading, especially when it comes to brokerage firms that deal in forex, crypto, bonds, and other related products. The SCA also issues licenses to online brokers in UAE that comply with regulatory standards including capitalization limits, dispute resolution requirements, account segregation and information disclosure. Broker authorization can be verified by contacting SCA support.

2. Online trading regulation on the financial-free zone level

Online trading in UAE’s financial-free zones is independently regulated by their financial authorities. Each economic free zone has its own judicial framework and authorities that regulate online trading and other financial activities independent from the federal jurisdiction. These bodies have full authority to issue licenses, conduct inspections (audits), monitor compliance with regulations, and act against licensed companies in their jurisdiction.

Regulatory authorities in the financial free zones include the Dubai Financial Services Authority (DFSA) in the Dubai International Financial Centre (DIFC), the Financial Services Regulatory Authority (FSRA) in the Abu Dhabi Global Market (ADGM), and the Ras Al Khaimah Economic Zone Authority (RAKEZA) in the Ras Al Khaimah Economic Zone.

Do Brokers Need A Licence To Offer Online Trading Services in the UAE?

Online brokers that want to offer online trading and investment services in the UAE must obtain a license from one of the regulatory authorities, such as the SCA, DFSA, or FSRA. Thus, to obtain a license, brokers must fulfil all requirements and procedures established by these regulatory authorities.

The main requirements for a broker to obtain a license in the UAE include a locally registered company with representative offices in the UAE, a sufficient level of technical infrastructure, and connection with other regional markets. Other broker requirements are listed below.

The potential brokerage company must be owned by UAE resident(s) or citizen(s) of at least 51%.
All documents and applications need to be submitted in the Arab language.
The potential brokerage company must have a minimum of $8 million of operating capital and at least $6 million of bank deposit, where all the funds are held within the UAE area and not abroad.
The potential broker must comply with Sharia law (not charge interest) and offer Sharia-compliant accounts as part of their product portfolio. The Sharia compliance requirement is excluded for brokers that obtain a license in the financial-free zones.
Brokers registered in the DIFC must also hold their users funds in segregated accounts.

How To Obtain A Forex Trading Licence in UAE?

Forex brokers looking to offer their services in the UAE legally must obtain a trading license from one of the local regulatory authorities: SCA, DFSA, or FSRA. The three different ways to obtain a license in the UAE are listed and explained below.

1. Obtaining a license on the UAE mainland

Companies looking to provide forex trading services in the UAE mainland must have a valid license from the local emirate’s Department of Economic Development (DED). Furthermore, the entity must obtain subsequent approval from the SCA. However, foreign companies with a valid license on the UAE mainland can only hold a maximum of 49% of the broker firm’s shares. In other words, the mainland’s authorities require UAE national shareholders to hold at least 51% of brokerage company shares. Despite its limited shareholding policy, the main benefit of a mainland license includes maximum access to local markets across the UAE. The cost of obtaining a forex license in the UAE mainland is AED 32,000. Entities must provide a copy of their passport, visa, and trade name document to the authority for eligibility checks.

2. Economic Free Zone Company

Obtaining a forex trading license as a free zone company is suitable for investors who are looking for 100% of foreign ownership and 0% taxation. However, the free zone company license does not allow direct access to the local market despite its full ownership benefit.

Financial regulatory authorities that are allowed to hand out forex trading licenses to free zone companies include the DFSA in the Dubai International Financial Centre, the FSRA in the Abu Dhabi Global Market, and the RAKEZA in the Ras Al Khaimah Economic Zone.

3. Representative Offices

Established forex companies that want to expand their services to UAE commonly use a representative office to obtain a license in the United Arab Emirates. In this case, the company does not need to obtain a Forex license from the UAE authority because they exclusively intend to promote their services without providing platforms or trading with local customers. This allows them to avoid the unnecessary costs of opening new companies and their approval. The most commonly used region in UAE to open a representative office for a forex trading company is the DMCC.

How is trading with cryptocurrencies regulated in the UAE?

Cryptocurrency trading in the UAE is regulated on the federal and economic free zone levels (DIFC and ADGM).

The SCA regulates all aspects of cryptocurrencies on the federal level, including initial coin offering, operations of crypto trading platforms, development of custodial services, and all crypto-related financial services. The main act that regulates cryptocurrencies on the federal level is the SCA Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation (CAAR). Cryptocurrencies are on the federal level additionally regulated through resolution No. 111 of 2022 (the VA resolution), which aims to regulate all virtual asset activities and service providers (VASPs) in consideration of the anti-money laundering legislation. Based on the resolutions classification of companies as Virtual Asset Service Providers (VASPs), they are required to secure a license from either the SCA (the primary licensing body on the government level) or a local regulatory entity like the Dubai Virtual Asset Regulatory Authority (VARA) (on the economic free zone level) to offer their services in the UAE legally.

The Emirate of Dubai has additional laws that regulate cryptocurrency transactions inside the Dubai International Financial Centre (DIFC) in compliance with the VA resolution. By establishing the Virtual Asset Regulatory Authority (VARA) in 2022, Dubai expanded the definition of virtual assets and related activities to digital tokens and virtual financial assets, including any transactions related to the assets, such as issuance, trading, transfer, and custody. The VARA also regulates virtual assets’ tax implications, stating that cryptocurrencies are like any other type of property, excluding investors’ obligation to pay taxes on crypto profits.

How Does The Regulation Of Online Trading in UAE Protect Investors?

Investor protection refers to the insurance of investors to receive their money back in case of the broker’s insolvency, bankruptcy, or scam. Instruments of the regulation system that protect investors in the UAE are listed and explained below.

Regulatory Requirements. Regulatory authorities impose requirements to prevent investors from scams, manipulative tactics, and deceitful practices, including insider trading. To protect investors, regulatory authorities monitor all financial activities of licensed exchanges, brokers, and accredited individuals.

Preventive mechanisms. The Dubai Financial Market (DFM) offers a preventive mechanism to protect investors based on extensive brokerage (company) losses. The mechanism requires financial companies with annual losses above or equal to 20% of their capital to disclose and explain their financial situations. Furthermore, companies with losses equal to or higher than 50% must submit plans to address the firm’s poor performance.

Disputes and Complaints to the SCA. The SCA allows financial market participants to issue complaints concerning financial market-related transactions under its jurisdiction. The SCA provides this protection across different financial sectors, including online trading and investing. However, the SCA is not responsible for resolving complaints of market participants against non-licensed brokers.

Civil (Insolvency) Law. The civil law of the UAE allows investors to issue lawsuits against brokerage companies to recover their losses in case of brokers’ bankruptcy or the use of fraudulent practices. Traders and investors are additionally protected through a special insolvency law which provides a clear process for handling situations in case of broker bankruptcy.

Segregated Account Requirement. Online brokers licensed in the UAE must keep investors’ funds in segregated accounts. This gives investors full control over their funds at any time and prevents brokers from investing their client’s money.

Regular Reviews. Regulated brokers must submit their financial books to the regulatory authorities for external review. This allows investors to avoid trading with brokers with bad financial standing and could become insolvent. Furthermore, brokers must have a minimum capital reserve to protect users’ funds in the case of bankruptcy.

Transparent complaint protocols. The UAE has a strict legal framework that requires online brokers to provide a transparent and effective dispute resolution process. The UAE judicial system also implemented commercial courts and arbitration centers across all emirates for effective dispute resolution.

AML and KYC practices. Brokers are required to follow Anti-Money Laundering (AML) and know your client (KYC) practices.

How Are Investors in The UAE Protected Against Fraud?

The SCA is the main authority that aims to protect traders and investors in the UAE against fraudulent tactics, including deceptive, manipulative, and speculative activities. The main mechanisms adopted by the SCA to protect investors against fraud are listed below.

Regular reviews of licensed brokers’ compliance with regulatory standards.
The SCA requires regulated brokers to keep users’ funds in segregated accounts within the UAE territory.
The SCA requires regulated brokers to maintain sufficient capital and regularly submit their financial statements (including trading practices and processes) to the authority.
The SCA requires regulated brokers to provide transparent and effective customer service to resolve disputes quickly.
The SCA requires regulated brokers to follow Anti-Money Laundering (AML) and know-your-client (KYC) practices.
The SCA allows all financial market participants to report any practices violating their regulations (Decision No. (13/Chairman) of 2021 concerning the Financial Activities Rulebook and Status Regularization Mechanisms), including financial fraud or insider trading.

In addition to SCA, banking and online trading services are supervised by the Central Bank of the UAE, the Dubai Financial Services Authority, and the Financial Services Regulatory Authority.

Are Investors in the UAE Protected Against Brokers Bankruptcy Through an Investors Protection Fund (IPF)?

Traders and investors in the UAE are not protected through an investor protection fund (IPF) in case of broker bankruptcy. Although the Abu Dhabi Securities Market (ADSM) announced the initiation of protection funds for investors financed by deducting a certain percentage of commission paid by investors, it is unclear whether the SCA approved this plan. However, investors are protected through UAE insolvency law that allows them to file a civil lawsuit to recover their losses.

Investment and Balance protection in the UAE

The regulatory framework in the UAE has various mechanisms to ensure the investment protection of retail account holders against brokers’ bankruptcy. These mechanisms include regulatory requirements, effective dispute resolution requirements, Anti-Money Laundering (AML) and know-your-client (KYC) practice requirements, civil laws (insolvency laws), complaints to the SCA, and annual reviews. Investment protection in the UAE is safeguarded by the primary regulatory authorities, including the Central Bank of the UAE, the Dubai Financial Services Authority, and the Financial Services Regulatory Authority. However, investments in the UAE are not protected through an investor protection fund (IPF) or Investor Compensation Scheme by the Central Bank of the UAE in case of broker bankruptcy, insolvency, or fraud.

Balance Protection

Balance protection refers to the protection of the funds on a brokerage account that is not invested. Balance protection is offered by some online brokers in UAE separately from investment protection. However, balance protection is not part of the regulatory framework nor a legal requirement for brokers offering their services in the UAE.

Negative Balance Protection

Negative balance protection is a type of balance protection that protects traders and investors from losses that exceed their initial account funding amount. This feature is especially beneficial for less experienced traders and those trading with leverage in times of market volatility. Negative balance protection is not legally required for brokers offering services in the UAE.

Conclusion

Online trading and investing regulation in the UAE is robust, dynamic, and adapted to the evolving nature of the financial industry. Its innovative laws are designed to ensure stability and transparency of the financial markets to attract international capital investments. Furthermore, the legal infrastructure protects investors against brokers’ insolvency, bankruptcy, or fraud through various mechanisms, including Bankruptcy Law, Commercial Transaction Law, dispute resolution requirements, regulatory requirements, and other preventive measures. However, as with any legal system, it is subject to the continuous adoption of new laws and reforms following the development of the financial markets.