The need for change
The Dubai Financial Services Authority (DFSA) first introduced a
collective investment funds regime for the Dubai International
Financial Centre (DIFC) in 2006. The funds regime was designed to
provide a high level of investor protection applying international
standards for regulation. At the time of launch, the DFSA aimed to
make its funds regime attractive to fund managers worldwide who
viewed Gulf Co-operation Council (GCC) countries as an important
bridge between the West and Asia, or viewed Dubai as an important
base from which to carry out fund activities in the GCC.
For a number of reasons, the funds regime in the DIFC did not work
as envisaged, to act as a springboard for the DIFC to become a key
player in the global and regional funds industry.
Taking into account the lack of growth of the funds industry in the
DIFC, the DFSA, in June 2009, established a market practitioners
panel comprising expert participants from the funds industry, which
was tasked with reviewing the funds regime in the DIFC and
formulating recommendations to promote the growth of the funds
industry in the DIFC.
In response to the panel's report of 30 September 2009, the
DFSA issued a consultation paper, CP 69 - Proposed Enhancements to
the Collective Investment Funds Regime, which responded to, and
adopted, a substantial number of the recommendations in the
report.
Following this consultation process, in July 2010, the DFSA
introduced a new collective investment law,as well as making a raft
of changes to existing rules which largely took into account the
recommendations made by the panel to make the funds regime more
business friendly, while remaining true to the International
Organisation of Securities Commissions (IOSCO) principles for
regulating collective investment schemes.
The significant changes
The new regulations include the following important changes:
- Public funds framework: Few changes were made to the funds regime for public funds as these are open to retail investors and any changes to the new regulations (for example, disclosure and oversight requirements) ensure these meet international standards for retail protection, including the relevant IOSCO principles.
- Exempt funds and discontinuance of private funds: A new category of exempt funds has been introduced which will only be available to qualified investors, with a faster registration process and fewer regulatory requirements. The new regulations require exempt funds to be privately placed, available only to DFSA-designated professional clients, have no more than 100 unit-holders, and have an initial subscription price of at least US$50,000. The DSFA will require private funds set up under the former funds regime to convert to either exempt or public fund status, or to be wound up, with a transitional period of two years allowed for this. The introduction of exempt funds is a welcome step and an enhancement to the establishment of private funds under the former funds regime.
- Foreign funds: DFSA-licensed fund managers will be able to establish, manage, and market funds domiciled outside the DIFC, provided the fund's host jurisdiction is included in the DFSA's list of recognised jurisdictions or is otherwise acceptable to the DFSA. Fund managers will have more choice in terms of fund domicile, but this is limited to established onshore jurisdictions which are subject to enhanced regulatory supervision and framework.
- Foreign fund managers: Foreign fund managers regulated by recognised financial service regulators will be permitted (subject to certain conditions) to establish and manage funds within the DIFC.
- Distribution of Foreign Funds: DFSA-authorised firms will have more flexibility to market foreign funds which did not previously fit into designated or non-designated foreign fund categories. Under the laws and rules applicable to the former funds regime, authorised firms were only permitted to market units in foreign funds established or domiciled in certain jurisdictions or foreign funds which were structured in a certain way. This meant restricting the number of foreign funds that could potentially be marketed in or from the DIFC.
Under the new regulations, DFSA-authorised firms will be
permitted to market a foreign fund where the authorised firm makes
a suitability recommendation for investment in the units of the
foreign fund by the particular investor, in light of that
investor's investment objectives and circumstances.
This measure is likely to be beneficial to a number of
DFSA-authorised firms in the DIFC, and will enable them to offer a
wide range of funds to clients.
- Umbrella funds and protected cell company structures: Umbrella funds can now use protected cell company (PCC) structures to segregate assets and liabilities between cells by making each sub-fund a separate legal entity. PCC structures are designed to give greater legal certainty to investors of sub-funds in an umbrella structure by insulating them from the risks posed by other sub-funds. PCC structures also benefit from lower regulatory burdens and administrative overheads through the elimination of duplication of costs and reporting requirements among cells and sub-funds, while allowing for compliance and back-office functions to be centralised.
- Flexible Shariah requirements: The new regulations give more flexibility to fund managers in relation to ensuring funds are Shariah compliant. For a public fund this may involve appointing a three-member Shariah Supervisory Board or, alternatively, the use of a widely accepted Shariah screening process such as an Islamic index, sukuk or treasury instruments issued by a suitably regulated Shariah compliant financial services provider. A fund manager may also consolidate the Shariah compliance requirements for the fund manager and the Islamic funds it manages, so the Shariah compliance requirements need not be duplicated at the fund level and the fund manager level. For exempt funds there is a reduction in the compliance burden, including the use of a single Shariah scholar for Shariah compliance purposes. These changes will reduce regulatory overlap related to the appointment of Shariah boards and lower costs and compliance requirements.
- More attractive fee structures: A more competitive fee structure has been applied to fund managers and funds. The changes include a substantial reduction in the upfront and ongoing fees associated with operating, registering and winding up a fund (for example, the application fee for managing a fund has been reduced from US$40,000 to US$10,000). While revisions to the fee structure are welcome, the underlying costs of establishing a fund manager entity in the DIFC remain relatively high compared to other international funds centres. It remains to be seen whether steps taken to revise the fee structure will have gone far enough to attract a meaningful number of new funds industry participants in the DIFC.
A new dawn or a missed opportunity?
The establishment of the panel and the request for the report was
an acknowledgement by the DFSA that changes were necessary to the
funds regime to ensure that the DIFC became a centre of choice for
fund managers. The funds regime was generally considered to be
comprehensive but was criticised for being over-regulated in some
areas and expensive in comparison to similar financial centres. The
DFSA has taken a decisive step in adopting the majority of the
recommendations of the panel and shown its commitment to developing
a funds industry in the DIFC.
The DFSA has sought to maintain the enhanced regulatory safeguards,
credibility and transparency of a world-class onshore funds regime
while at the same time seeking to establish the DIFC as a viable
and attractive option for funds domicile.
The DFSA has also taken a balanced approach by continuing to
require that funds activity in the DIFC is carried out in a
measured regulatory environment. However, funds industry
participants may still need be persuaded to consider the DIFC as
the funds industry jurisdiction of choice.
The changes to the funds regime represent positive steps in the
right direction. Over time, they should assist in the DIFC's
aim of encouraging a meaningful number of funds and fund managers
to be established in the DIFC and for the DIFC to be seen as a
successful and viable international centre for the establishment
and promotion of investment funds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
