The Dubai International Financial Centre (DIFC) is one of the leading financial hubs in the Middle East. Its funds regime – administered and regulated by the Dubai Financial Services Authority (DFSA) – has been updated a number of times in recent years with a view to making it a viable alternative to more traditional funds jurisdictions. The latest changes, which amount to significant cost savings for fund managers, strengthen its case. The most recent changes were announced in January this year, as part of a broader 2024 growth strategy.
2024 Strategy
The DIFC has adopted a 10-year growth strategy with targets for 2024 (2024 Strategy)1 that include:
In light of the 2024 Strategy, both the DFSA and the DIFC Authority3 (Authority) were tasked with investigating and proposing strategies for boosting the number of fund managers and funds established in the DIFC.
DFSA Proposals
In late 2016, the DFSA issued a Consultation Paper4 in order to seek feedback from market participants on proposals to amend (among other things) the Base Capital Requirement5 for fund managers (i.e., DFSA-licensed firms permitted to carry on the financial service of Managing a Collective Investment Fund).
In formulating its proposals for the Consultation Paper, the DFSA benchmarked capital requirements against a number of established funds jurisdictions6. As a result of such benchmarking, it was proposed that the Base Capital Requirement be reduced from US$500,000 to:
Following positive feedback, the proposals were implemented by the Board of the DFSA, effective as of 1 February 201710.
However, as a condition to taking advantage of the reduced Base Capital Requirement, the firm in question may not hold any permission other than Managing a Collective Investment Fund (i.e., it may not perform any financial services other than fund management). While this might not appear to be problematic at first glance, it is worth noting that many existing firms opted to become licensed not only for the financial service of Managing a Collective Investment Fund, but also Managing Assets (so as to provide discretionary management services in respect of non-fund products, such as managed accounts) and Advising on Financial Products or Credit11 (in order to provide investment advisory services alongside their fund management activities).
Incidentally, although perhaps unintentionally, many such firms are now reassessing their regulatory profiles to see whether or not they truly require such additional permissions and (if not) whether they might be able to scale back their respective licences to the single permission of Managing a Collective Investment Fund. It should be noted, however, that the DFSA might ultimately not allow such licence variations.
DIFC Authority Initiative
To complement the DFSA’s efforts, the Authority’s Wealth & Asset Management Team announced the DIFC Fund Managers Initiative: 2017 (Initiative) in January. Pursuant to the Initiative, the Authority has reduced set-up costs for fund management firms looking to establish themselves and one or more of their funds in the DIFC.
Effective 1 February 2017, such firms will not be required to pay the application fee (of US$8,000) otherwise payable to the Registrar of Companies upon incorporation nor, for the first two years, the commercial license fee (of US$12,000 per year). Furthermore, if the firm leases operating space within an Authority-owned building in the DIFC, its rent for the first two years will be reduced by 50%.
Separately, recognising the additional organisational expenses borne by fund managers (e.g., outsourced compliance costs, legal fees and administration costs), the Authority has reached out to leading service providers in the DIFC to request reduced fee proposals for basic services. It is expected that this will not only further minimise initial costs, but also standardise service levels to create operational efficiencies for fund managers new to the DIFC.
Practical Implications
For non-retail fund managers, the above-mentioned changes together represent a reduction of at least US$450,000 in their initial outlay (before factoring in any additional savings available on rent or as part of the Authority’s service provider outreach programme).
The savings could be even higher for firms that would otherwise have established an offshore fund and fund manager coupled with a DIFC-based investment adviser or asset manager (which is a relatively common structure in the DIFC).
In an interesting (but no doubt intended) turn of events, as a result of the above-mentioned changes, it could now be less expensive to establish a fund management firm and fund in the DIFC than in many of the more traditional jurisdictions. However, as always, this will require careful consideration and structuring.
In any event, the changes are very welcome, and should further help the DIFC to become a more competitive jurisdiction than ever before.