DFSA proposes scrapping rigid fund classifications in DIFC's biggest funds overhaul since 2010

DFSA wants DIFC’s funds regime to be less box-ticky: The Dubai Financial Services Authority (DFSA) has launched a consultation (pdf) on the biggest overhaul of DIFC’s Collective Investment Fund framework since 2010 — scrapping rigid fund classifications, killing off the External Fund Manager regime, and loosening rules on everything from credit funds to employee co-investment, according to a statement. The paper is open for consultation until 7 September.

The short version: Fewer labels, more guardrails. DFSA wants to remove specialist-class requirements for Exempt Funds structured as money market funds, or private equity funds, as well as credit funds (though it will retain requirements for credit strategies). In their place would be requirements tied to what a fund actually does and the risk it actually carries.

Why it matters: DFSA benchmarked its specialist-fund rules against comparable jurisdictions and concluded its own regime is more prescriptive than it needs to be for funds sold only to professional investors. That's a competitiveness signal as much as a housekeeping one — DIFC is trying to remove friction from the domicile decision for hybrid and multi-strategy managers who might otherwise set up in ADGM, the Cayman Islands, or Luxembourg.

What would go: DFSA is proposing to remove specialist-class requirements for Exempt Funds structured as money market funds or private equity funds, and for Exempt Funds and QIFs structured as credit funds. Industry feedback showed fixed classifications don't accommodate funds that blend traditional and alternative strategies, Charlotte Robins, managing director for policy and legal at the DFSA, tells EnterpriseAM. The goal, Robins said, is to shift the regime toward “the activities undertaken and the associated risks” rather than the classification itself.

Credit funds get the biggest breather. DFSA wants to scrap the rule requiring 90% of a credit fund's property to go toward providing credit. It would also cut the base capital requirement for managers running credit strategies to USD 40k from USD 140k — bringing them in line with every other fund manager — and remove the separate USD 10k application fee and USD 10k annual fee credit funds currently pay. Robins said the changes are designed to give managers “greater flexibility” while keeping “proportionate safeguards,” and to make it easier for a hybrid fund to run a credit strategy alongside others.

Another big thing: One regime is on the way out. DFSA is proposing to eliminate the External Fund Manager regime, which lets non-DIFC managers run domestic DIFC funds without setting up a place of business in the center. The regime dates to 2010, when DIFC was, in Robins’ words, “an emerging financial center.” Sixteen years on, she said, “DIFC is in a different place” — pointing to growth in the DFSA-licensed manager population and continued applicant interest.

The consultation paper’s reasoning goes further than demand: DFSA says its supervisory reach over managers based outside the DIFC is inherently limited since those firms sit outside the oversight it has over DIFC-based managers. DFSA did not disclose how many active EFMs would be affected, and the paper commits only to discussing whether existing EFMs can keep managing funds that already existed when the consultation launched.

What replaces the old buckets? Broader, horizontal controls. Risk-management requirements would apply to all fund managers, including public fund managers, not just specialist classes. Exempt Funds and QIFs would also need to calculate borrowing limits in a “reasonable and prudent" way — the CP sets no hard cap, but funds would need to disclose their expected maximum borrowing level and explain how they got there. Credit-risk policies stay mandatory, and risk warnings would move from marketing materials into prospectus disclosure rules.

How will DFSA police the judgment calls? Robins said the regulator would continue supervising fund managers and their internal controls in a “risk-based and proportionate manner,” adding that it would “request further data as needed” to monitor compliance and risk.

Prime brokers are also in the net: Existing specialist rules on prime brokers would apply more broadly to Exempt Funds and QIFs that allow prime brokers to pool, rehypothecate, or use fund assets as collateral for financing or securities lending. In plain English: If a fund lets a prime broker to reuse its assets, the manager would face clearer safeguards around that risk.

Other noteworthy changes:

• Delegated investment managers would no longer need separate agent/dealing permissions;
• Public feeder funds would lose the three-market-maker test and the 20% ownership cap on master fund units;
• Master funds would take subscriptions directly from institutional or professional investors, not just from feeder funds;
• Employees involved in managing a fund could invest in it directly or through a dedicated vehicle without the fund losing its QIF or Exempt status — with mandatory disclosure of the investment and how any conflicts will be managed;
• Extend the DFSA's lighter compliance track for venture capital fund managers — which currently only covers funds that invest directly in startups — to funds that invest in other VC funds instead;
• And for DFSA to have the power to waive or modify the underlying Collective Investment Law itself, not just its rulebook — a discretion it doesn't currently have.

Watch this space

Coming later, maybe: Tokenized funds and retail access to illiquid assets. The CP asks for early feedback on tokenized fund units, tokenized money market funds, fully digital registers, and a possible long-term investment fund regime that could give retail investors access to real assets, unlisted companies, and private credit-style exposure.

DFSA is not proposing rules on those areas yet. Robins said the feedback is meant to help the regulator see whether changes are needed to avoid unnecessary barriers, maintain risk-management and investor-protection standards, and ensure regulatory clarity as tokenization technology evolves. Formal proposals on tokenization and retail access to long-term illiquid assets may follow the consultation and further stakeholder engagement, she added.