Dubai’s regulator has been looking to revise its funds regime, establishing a panel of experts to advise on the changes needed to support the growth of the funds industry in the Emirate. In this feature, Ian Johnston, deputy CEO of the Dubai Financial Services Authority outlines the proposed changes.

Proposed changes to the Dubai International Financial Centre’s (DIFC’s) funds regime

The Dubai Financial Services Authority is, subject to final approval from its board and the president of the DIFC and the enactment by the ruler of Dubai of certain changes to the law, about to launch a wide-ranging set of changes to its funds regime.

The DFSA has an established programme of reviews of its Rulebook, to ensure that it remains responsive to developments and risks in financial services markets, and up to date with emerging international standards.  When we launched our planned review of the funds regime, in mid-2009, however, we decided to do it in a new way.

We established a panel of market practitioners (Panel) to review our regime and to advise us as to what measures we needed to take to support the growth of the funds industry without impairing investor protection. 

Specifically, we asked them how we could support the growth of the funds industry in the DIFC by encouraging the establishment of DIFC funds, and promoting the management of funds from the DIFC, in a manner consistent with international best practice, especially the principles established by the International Organisation of Securities Commissions (IOSCO) to which our current funds regime adheres.

The panel identified 10 areas in which changes were needed to ensure the emergence of a robust funds regime in the DIFC. Fortunately, most of the recommendations made by the Panel were both within the DFSA’s powers to implement and consistent with our internal thinking.   We published the Panel’s report for public comment, and earlier this year launched a second round of consultation on the detailed legislative changes we proposed.  As a result of that consultation, we have made further refinements to our proposals.

At the time of publication, the proposed final package of legislative changes is still going through the due process in terms of legislative passage, with the implementation date expected in mid July 2010.   

The changes the DFSA proposes comprise the following:

·               removing the current restrictions that prevent DIFC-based fund managers from being able to manage funds established in jurisdictions other than the DIFC;

·               removing the current restriction that prevents DFSA licensed trustees from being able to act as trustees for trusts established outside the DIFC;

·               allowing a fund manager outside the DIFC (i.e. an external fund manager) to act as a fund manager to a domestic fund (i.e. a fund established and domiciled in the DIFC).  The proposals would require an external fund manager to appoint a DFSA licensed fund administrator or trustee to that fund who will act as the local agent of the external fund manager.  Such an external fund manager does not need to obtain a DFSA licence for managing funds, provided it strictly adheres to the requirements for acting as an external fund manager;

·               allowing fund managers of umbrella funds the flexibility to use the protected cell company structure, so that investors in each sub-fund will be protected against insolvency of another sub-fund within the umbrella;

·               making significant reductions in the DFSA licensing and annual fees; our colleagues in the DIFC Authority have already made reductions in their own fees and charges;

·               allowing greater flexibility in the marketing of foreign funds by authorised firms in the DIFC, in particular where they make a recommendation to a client about the suitability of investing in a particular foreign fund, having taken into account the investment objectives, financial circumstances and the risk appetite of that client;

·               providing greater flexibility in the oversight requirements for public funds.  For example, under the changes proposed, oversight can be provided by a three member committee which can be drawn from within the fund manager or outside, provided those individuals meet the relevant suitability and independence criteria.  It will also be possible, as now, for oversight to be provided by the trustee or custodian of the fund;

·                providing some streamlining of the Shariah governance requirements for Islamic funds.  Instead of separate Shariah supervisory boards for the fund and the fund manager, it will be possible to have a single Shariah supervisory board and a common set of procedures for Shariah compliance and review; and

·               most importantly, creating an exempt funds regime, in keeping with other international financial centres. Exempt funds will have to be managed by a DFSA licensed fund manager, or by an external fund manager (provided the requirements relating to external fund manager are met). Only investors meeting the DFSA’s professional client test (i.e. a net worth test of at least $500,000 excluding the principal place of residence and an expertise test) will be able to invest in exempt funds, each investor must make a minimum subscription of $50,000, and participation must be by way of private placement, and not by public offer.  This will replace the DFSA’s existing private fund regime.

Finally, I would like to note that fund managers are, after all, in the business of managing other people’s money.  The long-term viability and sustainability of the funds industry rests not only on business efficiency, but also on investor trust.  The global financial crisis and some instances of malpractice, have focused greater attention on the funds industry. 

It is thus more important than ever that our funds regime should be in line with both current and emerging international standards, especially the IOSCO principles, and should provide the right the level of protection, especially to retail investors.  We believe our proposals provide the right level of regulation, which will give the funds industry the flexibility and the regulatory substance and flavour it needs to do good business from the DIFC, and to promote investor confidence in the DIFC funds industry.

For more information about Consultation Paper No. 69 - Proposed Enhancements to the Collective Investment Funds Regime, click here.

The Dubai Financial Services Authority (DFSA) is the independent regulator of financial and ancillary services conducted in or from the Dubai International Financial Centre (DIFC), a purpose-built financial free-zone in Dubai. The DFSA’s regulatory mandate covers asset management, banking and credit services, securities, collective investment funds, custody and trust services, commodities futures trading, Islamic finance, insurance, an international equities exchange and an international commodities derivatives exchange.

For more information about the DFSA, click here