New Licensing Regime for Companies

The Financial Regulatory Authority (“FRA”) recently published on its website decision No. 53 of 2018,[1] taken by its Board on 26 April 2018, although not yet published in the Egyptian gazette. The decision re-regulates the issuance of licenses to finance companies other than banks, and the rules for trading their shares. The importance of the decision is that it comprehensively re-organizes the general framework governing the share ownership of finance companies and their licenses and continued operation, as well as introducing new regulations.

Regulating Financial Activities

The regulation of financial institutions, activities and markets in Egypt is divided between the Central Bank of Egypt, which is responsible for regulating banks, the currency market and the national payments system, and the Financial Regulation Authority, which regulates all non-banking financial activities. Law No. 10 of 2009 establishing the Financial Supervisory Authority lays out what is meant by “non-banking financial activities”. The new decision redefines and clarifies what is meant by companies undertaking non-banking financial activities (referred to as "Practicing Companies") as those practicing in: (1) securities and the capital market; (2) insurance and related activities, (3) mortgages and related activities, (4) financial leasing, (5) factoring, and (6) microfinance.

Licensing

With regard to the licensing of new Practicing Companies, the decision set out the following key new, as well as current, rules:

• New licenses are linked to market need, meaning that a new license is not granted to a Practicing Company unless it is established that it is needed in light of market conditions, or that the company will offer new products. The applicant Practicing Company must submit a feasibility study to establish this need.

• At least 50% of the Practicing Company’s capital must be held by corporate persons, and financial institutions must hold at least 25% of capital, with the exception of: financial advisory companies, insurance brokerages, damages experts, insurance consultants, real estate appraisal companies, and real estate brokerages.

• The license application must contain a statement of the ultimate beneficiaries of the company's shareholders, i.e. the real owners of the shares.

It should be noted here that the new decision redefines “financial institutions” to include banks, as well as companies operating in insurance, securities, mortgages, financial leasing, factoring, microfinance, insurance brokerage, foreign banks, and foreign entities operating in non-banking finance provided they are licensed by a foreign regulator, Arab, regional and international financial institutions, and the Egyptian Postal Authority.

Trading Rules for Financial Services Companies

As for the ownership and trading of shares of Practicing Companies, the new decision stipulates the following rules:

• Any person who owns 5% or more of the capital or voting rights of any Practicing Company must notify the FRA of this without requiring their prior consent.

• If share ownership exceeds 10%, or at any 5% increase or its multiples, the prior consent of the FRA is required.

• If share ownership or voting rights exceed 25% of the capital or voting rights, additional documents, including the Practicing Company's objectives and future plans, are required to obtain the FRA's prior consent.

• It is necessary to obtain the prior consent of the FRA when acquiring ownership of any Practicing Company's shares when that company represents 10% or more of the market in its field of activity.

Conclusion

The new decision is very important, as it completely reorganizes the regulatory regime for the establishment and licensing of securities companies operating in the non-banking financial field in full, and for the ownership of their shares. While the decision clarifies and legalizes many of the rules and practices already being applied, and thus helps to clarify the legislation and reduce ambiguity that harms the market, it also reflects the current trend towards strengthening the FRA’s regulatory and discretionary powers regarding owning and establishing companies, which may restrict competition in the market.   [1] FRA Board of Directors Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, 24 April 2018, Available through this link (in Arabic).