DIFC Lowers Cost of Entry for Fund Managers

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: 

• Increasing assets under management in the DIFC from US$10.4 billion (as of 2014) to US$250 billion; 
• More than tripling the number of financial firms in the DIFC²; and 
• Increasing the size of the workforce in the DIFC from approximately 18,000 in 2014 to 50,000. 

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: 

• US$140,000, for managers of Public Funds⁷; and 
• US$70,000, for managers of Exempt Funds⁸ and/or Qualified Investor Funds⁹. 

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. 

Footnotes 

_{1) The 2024 Strategy was announced on 10 June 2015.
2) There were 362 financial firms registered in the DIFC as of the end of 2014.
3) The DIFC Authority is the managing body of the DIFC, responsible for overseeing the DIFC’s strategic development, operational management and administration.
4) Consultation Paper No. 108, 19 September 2016. For further information, please refer to Dechert OnPoint, DIFC Funds: 2016 and Beyond.
5) The capital requirement for fund managers is stated in the Prudential – Investment, Insurance Intermediation and Banking module of the DFSA rulebook (PIB) as the higher of: the Base Capital Requirement (as stated in PIB Rule 3.6); and the Expenditure Based Capital Minimum (as calculated pursuant to PIB Rule 3.7). The Consultation Paper did not make any proposals regarding the Expenditure Based Capital Minimum for fund managers, which often outstrips the Base Capital Requirement.
6) Jurisdictions reviewed included the BVI, the Cayman Islands, Ireland, Luxembourg, Malta, the UK, Guernsey, Hong Kong, Jersey and Singapore.
7) Public Funds are DIFC-domiciled funds that are available to both Professional Clients (the definition of which largely follows the typical standards for qualified purchasers in other jurisdictions) and Retail Clients (i.e., persons not meeting the Professional Client criteria). There is no minimum subscription amount per investor, nor is there a limit on the number of investors.
8) Exempt Funds are DIFC-domiciled funds that are available only to Professional Clients and may be offered only by way of private placement. The minimum subscription amount in respect of an Exempt Fund is US$50,000 per investor and the maximum number of investors is 100.
9) Qualified Investor Funds are DIFC-domiciled funds that are available only to Professional Clients and may be offered only by way of private placement. The minimum subscription amount in respect of a Qualified Investor Fund is US$500,000 per investor and the maximum number of investors is 50.
10) The proposals were implemented by amending the PIB pursuant to Rule Making Instrument No. 188 of 2016.
11) This is a legacy permission, which (as of 1 February 2017) has been divided into two separate financial permissions: Advisory on Financial Products and Advising on Credit.}