DFSA proposes sweeping overhaul of DIFC funds regime

The regulator's consultation proposes a series of reforms affecting funds structures, fund managers and private credit vehicles. It also seeks industry feedback on future initiatives including long-term investment funds and tokenisation. 

Marie Chowdhry, a UAE-based financial regulation and fintech expert at Pinsent Masons, said: “The DFSA’s consultation represents one of the most important developments in the DIFC investment funds landscape in recent years. The proposals signal a clear shift towards a more principles-based, risk-focused framework that seeks to accommodate increasingly sophisticated investment strategies while maintaining appropriate investor protections.”

Amongst the most significant proposals is a move away from the current specialist fund classifications applicable to qualified investor funds (QIFs) and exempt funds. The DFSA instead intends to introduce a more risk-based and disclosure-focused framework.

Chowdhry said: “The proposal to move away from rigid specialist fund classifications for QIFs and exempt funds is particularly noteworthy. This reflects the reality that many modern fund strategies no longer fit neatly within traditional categories and should provide managers with greater flexibility in structuring products for professional investors.”

The consultation also proposes applying certain risk management requirements across all fund managers, broadening the availability of ‘master-feeder’ structures, clarifying the scope of the regulated activity of “managing assets” and removing the external fund manager (EFM) regime.

David Young, international asset management and investment funds expert at Pinsent Masons, said: “While the removal of the EFM regime may increase regulatory certainty and supervisory effectiveness, it could have material practical and cost implications for overseas managers currently considering DIFC fund structures without establishing a local authorised presence.”

In addition, the regulator is proposing to permit certain employees directly involved in the investment management process to invest in private funds managed by their employer, subject to specified conditions and disclosure requirements.

The proposals further include a substantial review of the DIFC’s credit fund regime, “reflecting the growing importance of private credit strategies in global markets and increased international regulatory focus”, said Chowdhry.

The DFSA has proposed removing the requirement that credit funds invest at least 90% of their fund property into providing credit, while retaining protections for investors through restrictions on lending activities and requirements relating to credit risk management. There are also plans to reduce the higher base capital requirements currently applicable to credit fund managers and remove dedicated application and annual fees for credit funds.

According to the DFSA, the changes are intended to place credit fund managers on a more equal footing with other fund structures while preserving appropriate investor safeguards.

Chowdhry said: “More broadly, the consultation demonstrates the DFSA’s intention to ensure that the DIFC remains competitive with leading international fund domiciles while positioning the jurisdiction to respond to emerging developments such as tokenisation and private market investment strategies.”

Beyond the proposed rule changes, the consultation seeks market feedback on potential future policy initiatives. Notably, the DFSA is considering whether to introduce a long-term investment fund (LTIF) regime that could provide retail investors with access to traditionally illiquid asset classes, such as infrastructure, real estate, energy transition assets and investment in private companies. The consultation highlights investor eligibility, redemption mechanics and investor awareness as key areas for consideration and notes that the DFSA is examining approaches adopted in other jurisdictions when assessing the viability of such a regime. Accordingly, any resulting regime could be informed by the most effective features of, and lessons learned from, the EU’s European long-term investment funds (ELTIF) and the UK’s long-term asset funds (LTAF) regimes.

The consultation also seeks feedback on tokenisation, including tokenised fund units, tokenised money market funds and the broader use of distributed ledger technology in fund structures and operations. “These are areas where Pinsent Masons is seeing increasing client interest in the UAE and indeed other key fund jurisdictions, including the UK, Ireland and Luxembourg where tokenisation regulation is also gathering pace,” said Chowdhry. 

The proposals are relevant to fund managers, asset managers, fund administrators, custodians, investors and professional advisers operating in or considering establishing investment fund structures in the DIFC.

“Firms should assess the potential impact of the proposals on their existing or planned fund structures, licensing arrangements, governance frameworks and operating models alongside their wider regulatory and distribution strategy, and consider responding before the consultation closes on 7 September,” said Young.