The tightening of banking rules and regulations has been an ongoing pattern worldwide, particularly following the global financial crisis of 2008-09.
The effect of this has certainly been observed in Bahrain, especially when examining the current regulations applicable to the marketing and provision of discretionary investment management services (investment services), and the marketing and distribution of financial instruments, such as securities (products), to institutional investors.
REGULATION: The Central Bank of Bahrain (CBB) regulates the banking industry and financial securities market in Bahrain. The CBB operates pursuant to the CBB and Financial Institutions Law (CBB Law). The CBB Law is further supplemented by the CBB Rulebook. While the offering of investment services and products, including marketing thereof, constitute the provision of regulated services which can only be carried out by financial institutions that are appropriately licensed, authorised or exempted by the CBB, some foreign financial institutions have approached potential investors in Bahrain without obtaining the relevant licence or authorisation from the CBB.
To combat this, the CBB issued Regulation No. 16 of 2012 (the Regulation), with respect to the prevention of marketing financial services in Bahrain. The Regulation imposes financial penalties for non-compliance with its provisions. The Regulation has now been incorporated into the Rulebook. The Regulation defines the marketing of financial services as an offer, promotion, statement, advertisement or any other means of communication made for the purpose of stimulating the receiver to purchase or request access to such services, against an amount of money or other form of compensation. Therefore, unless an appropriate licence, authorisation or exemption has been obtained from the CBB, marketing of financial services is not permitted in accordance with the Regulation, and penalties may be imposed for any breach thereof.
REGULATED INVESTMENT SERVICES: The offering of investment services, including marketing thereof, would constitute the provision of a regulated service that can only be carried out by financial institutions which have been appropriately licensed, authorised or exempted by the CBB. According to Article 40 of the CBB Law, no person may carry out regulated services without being licensed by the CBB.
Furthermore, the Rulebook, Volume 4: Investment Business provides that no person may:
• Undertake (or hold themselves out to undertake) regulated investment services, by way of business, within or from Bahrain unless duly licensed by the CBB;
• Hold themselves out to be licensed by the CBB unless they have been so licensed; or
• Market any financial services (which includes investment management services) in Bahrain unless: i. He or she are allowed to do so by the terms of a licence issued by the CBB; ii. The activities come within the terms of an exemption granted by the CBB; or iii. He or she have obtained the written permission of the CBB to offer financial services. The restriction set out above applies irrespective of whether the investment services are provided to institutional investors or any other clients, and regardless of the net worth of the potential investors in Bahrain. Therefore, the marketing and provision of investment services would constitute carrying out a regulated investment service by way of business in Bahrain, which can only be carried out by entities with Category-1 or Category-2 investment firm licences under Volume 4: Investment Business, or a conventional banking licence under Volume 1: Conventional Banks of the Rulebook.
PRODUCT OFFERINGS: The offering of products, including marketing thereof, would also constitute the provision of a regulated service, thus can only be carried out by financial institutions that are appropriately licensed, authorised or exempted by the CBB. The Offering of Securities (OFS) Module contained in Volume 6: Capital Markets of the Rulebook formulates the regulatory framework governing the issuing and offering of securities in and from Bahrain, whether offered publicly or privately.
In accordance with the OFS Module, the offer of securities shall be deemed to be by way of private placement provided that:
• It is only made to accredited investors;
• It is for a minimum investment of $100,000; and
• It is limited to a take up by less than 100 accredited investors. The OFS Module defines private placement as an offer to accredited investors selected or accepted by the issuer or the appointed lead manager for obtaining subscriptions for securities of an issue, or for obtaining subscription for sale of securities by an underwriter or lead manager. Accredited investors are defined in the Rulebook as:
• Individuals who have a minimum net worth (or joint net worth with his or her spouse) of $1m, excluding that person’s principal place of residence;
• Companies, partnerships, trusts or other commercial undertakings which have financial assets available for investment of not less than $1m; or
• Governments, supranational organisations, central banks or other national monetary authorities and state organisations whose main activity is to invest in financial instruments (such as state pension funds). The offer of securities will be regarded as a public offer if the above conditions for the private placement are not satisfied. In such a case, the offer will have to comply with the requirements of the public offering in Bahrain.
REGISTRATION REQUIREMENT: In accordance with Article 81 of the CBB Law, no person shall issue any securities in Bahrain unless permitted by the CBB. Therefore, CBB approval will be required, irrespective of whether the offer of products is regarded as a public or private offer. This also applies irrespective of whether the products are offered to institutional investors or any other clients, regardless of the net worth of the potential investors in Bahrain.
PRODUCT MARKETING REQUIREMENTS: In accordance with Article 40 of the CBB Law, the offer and sale of products will be deemed regulated services and can, therefore, only be carried out by an entity duly licensed by the CBB. Taking into account the Regulation, the offer of products may only be made through a person acting as a lead manager or placement agent who is licensed by the CBB and eligible to undertake such activity in Bahrain regardless of the type of investor or net worth of potential investors, and who will also be responsible for registering the products with the CBB as set out above.
It is clear from the issuance of the Regulation that, while certain practices by unlicensed financial institutions may have been tolerated in the past, the CBB will no longer continue to turn a blind eye to such actions. In order to avoid strictly enforced penalties, the stringent rules and requirements of the CBB will now have to be adhered to, bringing more certainty and transparency to Bahrain’s financial landscape.
LABOUR LAW DEVELOPMENTS: The recent publication of Law No. 36 of 2012 promulgating the Labour Law for the Private Sector (the Labour Law), replacing the previous employment law enacted in 1976, demonstrates the ever-expanding and constantly changing landscape of employment-related laws. The Labour Law and supplemental ministerial orders brought with them the implementation of new regulations in many areas including, but not limited to, termination, settlements, disciplinary actions, working hours and collective labour disputes.
A key area of interest to employers and employees alike is a recent amendment to the Labour Law through Law No. 38 of 2015, amending Article 110 of the Labour Law (the Amendment). Article 110 governs employment termination that is situational to the scaling down or total closure of a company. The Amendment inserted a proviso regarding the partial closure or material restructuring of a company, offering protection to a Bahraini worker who is as competent and experienced as his or her foreign counterpart.
Consequently, Bahraini employees will take priority over expatriate employees when termination is carried out under Article 110, thereby obliging employers to terminate expatriates’ contracts first.
With the ongoing oil crisis and the recession of the economy, the Amendment will largely contribute in shaping the labour market’s demographics, where companies in the private sector looking to downsize their operations will have to first dismiss foreign rather than Bahraini employees whenever the employees are equally competent. The Amendment will also ensure that the unemployment rate will not drastically change while the country is going through economic recession.
BAHRAINISATION: An element of Bahrain employment law that ties in to the Amendment is the Bahrainisation policy, first introduced by Ministerial Resolution No. 7 of 1996, determining Bahrainisation rates in private sector institutions and companies (the Resolution). Under the policy, a company is required to hire a certain percentage of Bahraini employees in order to be eligible for applications for foreign visas. Foreign visas are issued by the Labour Market Regulatory Authority (LMRA). Bahrainisation requirements apply in cases where companies have hired 10 or more expatriate employees. The LMRA has made available a table of Bahrainisation target rates, and minimum and maximum foreign workers by economic activity and size of economic unit, as well as a Bahrainisation calculator which enables employers to easily check whether they meet the minimum requirements.
The table lists activity descriptions of companies sorted by activity codes from the Ministry of Industry, Commerce and Tourism, along with the corresponding Bahrainisation target percentages based on categories of numbers of employees and the maximum number of foreign visas allowed for each activity code. In accordance with this table, the recently updated Bahrainisation target rates range from 0% for some activities to 90% for others. The Bahrainisation policy has been an important factor in reducing unemployment rates for Bahrainis in the past 20 years, as well as controlling the inflow of expatriate labour. However, there has been an increasingly apparent focus on encouraging foreign investment in Bahrain, and this includes investment in foreign labour. On May 2, 2016 the LMRA started implementation of a new policy that allows companies in Bahrain to obtain foreign visas over and above the previously stringent quota, for an additional fee of BD300 ($796) for every additional expatriate worker. Apart from the additional fees, employers will still be required to pay the regular two-year BD200 ($531) levy for visa fees and medical fees of BD72 ($191) annually for each foreign worker, which is paid two years in advance. This new scheme will run parallel to the mandatory Bahrainisation policy.
In response to the argument that this new policy may cause a reduction in the number of Bahrainis employed in favour of additional expatriate employees, the LMRA has announced that a review of the new additional fee will take place every three months to assess its impact on the level of Bahrainisation, with a warning that the additional fee will be increased further in case the rate of Bahrainisation drops below the agreed quota. An additional way the Bahrainisation policy is safeguarded is that companies which fail to adhere to quotas will be fined BD300 ($796) for each violating foreign worker or have work permits cancelled. The LMRA issued a one-year warning that as of April 2017 it will also stop renewing permits if the Bahrainisation quota is not adhered to. As this policy has been implemented recently, it remains to be seen whether the balance between allowing extra foreign visas and enforcing the Bahrainisation policy has been struck. In any case, the new developments in the Labour Law, the Amendment and the Bahrainisation policy have shown the importance of both foreign investment and systematic focus on promotion of the employment of locals. A total of 42,019 expatriate workers took advantage of the amnesty period granted by the LMRA from June 2015 to December 2015. Some 31,894 workers wished to stay in Bahrain, highlighting the kingdom’s reputation among expatriates as one of the more favourable GCC countries to work in.
Further confirmation of this is the number of foreign workers, which increased to reach 582,407 workers by the end of the first quarter of 2016. The number grew at an annual rate of 8.2%, up from 538,480 workers in the same quarter a year before.
RESTRICTIONS: The historical background of Islamic societies revolves around many customs and traditions, some of which separate the responsibilities of men from women and vice versa. Laws in Islamic societies are also reflective of such customs and traditions. An example of such a law may be found in the Guardianship of Minor’s Funds Law (No. 7 of 1986) of Bahrain (the Guardianship Law), which provides that the father (or the paternal grandfather) of a minor child, who is under the age of majority, shall be his primary natural guardian and, accordingly, all funds belonging to a minor are legally entrusted into the custody of the minor’s father (or the paternal grandfather) as his legal guardian. In essence this means that a father (or the paternal grandfather) of a minor child alone is by default deemed to be the caretaker and custodian of the minor’s funds. The practical effect of the Guardianship Law from a banking perspective was that while a father of a minor child would be allowed to open a bank account in the name of the minor, mothers of minor children were denied such a right.
However, women’s rights in Bahrain have been recognised progressively and brought on an equal footing with men. In 2014 the CBB in its circular (the CBB circular) informed all the CBB licensees that they shall provide equal opportunity and access to financial services to all customers regardless of their gender, and made specific reference to women’s right to open bank accounts for their children.
CIVIL CODE: Subsequently, we were approached by numerous financial institutions to advise on the legal mechanism to comply with the CBB circular without infringing on the legal rights of guardianship entrusted upon fathers (or the paternal grandfathers) of minors under the Guardianship Law. After much deliberation on the matter, we found the solution in the law of contract entrenched in the Bahrain Civil Code No. 19 of 2001 (the Civil Code). In our view, the CBB circular made the consideration of natural guardianship under the Guardianship Law redundant for the purpose of a mother opening a bank account for her minor child, and instead based such arrangement purely on the law of contract. When analysed as a contractual arrangement, the mother would merely enter into a contract with the bank, wherein the mother will deposit certain funds in the bank account and oblige the bank to hold that amount for the benefit of her minor child for when he or she reaches the age of majority.
In accordance with the Bahrain Law of Commerce No. 7 of 1987, a person reaches the age of majority when he or she turns 18 years old, whereupon he or she is deemed capable of entering into commercial transactions. Therefore, although the bank account will be established in the name of her child, the mother will be solely entitled to operate it until the minor becomes legally capable at 18 years of age. In addition, the relevant provisions of the Civil Code clearly indicate the legality of entering into contracts on behalf of a third party without referring to the gender of the representative. In particular, a person (mother) may, in contracting in her own name, stipulate certain obligations for the contracting parties (bank) to perform in favour of a third party (minor child) if the stipulator (mother) has a personal interest, material or moral, in performance of such obligations. A stipulator (mother) may also demand that the debtor (bank) pays the right stipulated in favour of the beneficiary (minor child), unless it appears from the contract that performance may only be demanded by the beneficiary (minor child – upon attaining the age of majority).
In view of the above, a mother can enter into a contract with a bank to open a bank account in the name of her minor child for his or her benefit. It is clarified that the minor child will not be a party to the contract and will only be a third party beneficiary. Unless the contract provides otherwise, both the mother and her minor child, upon attaining the age of majority (as a third-party beneficiary), may enforce such a contract.
OPENING ACCOUNTS: It is also worth mentioning that the CBB Rulebook does not create any distinction between fathers and mothers as applicants for opening bank accounts in favour of their children. Nor does the CBB Rulebook prohibit CBB licensees from opening bank accounts upon request of mothers in the name of their minor children. More specifically, Rule FC-1.1.8 of the CBB Rulebook (Volume 1) provides that where financial services are provided to a minor or other person lacking full legal capacity, the normal identification procedures must be followed. In the case of minors, the licensees must additionally verify the identity of the parent(s) or legal guardian(s). Note that the term “parent(s)” is used instead of the father alone as the natural guardian.
Therefore, we are of the view that provided that the mother is not claiming natural guardianship under the Guardianship Law, there is nothing in the law that could prohibit a mother from opening a bank account for the benefit of her minor child. Neither would this infringe upon the provisions of Islamic law, nor can it be construed contrary to the Guardianship Law.
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