The DFSA has recently issued a Key Policy Review in the form of Consultation Paper No. 52 (on 4th December 2007).

DFSA has considered it appropriate to review its regulatory regime in the light of recent regulatory developments in other advanced jurisdictions, like the adoption of Markets in Financial Instruments Directive (MiFID) in the Europe. The recent trend towards principles-based regulation, focusing on outcomes rather than in the ways which they are to be achieved, is also a major reason for the policy review.

The policy proposals look at three broad areas

• Client classification
• Operation of Collective Investment Funds (CIF) and
• Convergence with international regulatory requirements

The proposals are currently in consultation stage, following which they will be refined and the changes will then be enacted in the DFSA rulebooks.
 

Summary of major changes
A. Client classification
DIFC has been viewed as a “wholesale” regime, owing to the restrictions on the type of customers that an Authorized Firm could deal with. At present, Authorized Firms can do business only with ‘Qualified Investors’
i.e. individuals with at least USD 1 million in liquid assets and undertakings with at least USD 5 million in net assets.

This is proposed to be modified to include the following classes of clients:

1. Professional Clients: Individual clients must have USD 500,000 in net assets, excluding principal place of residence, and shall satisfy a sophistication test.
2. Retail Clients: Individual clients who are not professional clients.
3. Undertakings: must have USD 5 million in net assets or share capital.

Implications
 

1. The above proposal reduces restrictions on the clientele that the Authorized Firms can cater to, and so an Authorized Firm can now cater to larger segment of clients.
2. All Clients shall by default, be considered Retail unless they opt to be Professional Clients. The same client can be both Professional and Retail. [For example, a Professional Client who currently has an equities portfolio may opt to be considered as a Retail Client when he/she starts a portfolio in derivatives]
3. An exception to the above is the business of providing credit. Retail clients for the purpose of providing credit will only include Retail Undertakings.
4. The Authorized Firm can opt to do business with Professional Clients only, in which case the regulatory requirements shall be less stringent than a Firm that chooses to cater to the Retail segment of clients.
5. Retail Clients can however, subscribe only to public funds, but not private funds.

B.Providing Credit
Currently, an Authorized Firm which carries on the banking business is not allowed to

1. accept deposits from the State’s markets,
2. accept deposits, or provide credit, in the UAE dirham.

The DFSA recognizes that in the normal course of business, credit may be extended by financial institutions which are not banks. It is therefore proposed to delete the definition of Banking Business and to amend the
Definition of a Bank to capture only the Financial Service of Accepting Deposits.

It is proposed to allow credit for commercial purposes to be extended to Retail Clients who are Undertakings (not individuals)

Implications

Authorized Firms, which are not Banks, will be allowed to provide credit subject to restrictions specified in the Conduct of Business Module.

C. Operation of Collective Investment Funds (CIF)
Currently, the DFSA mandates that Fund administration shall be performed from within the DIFC, either in-house or by DFSA authorized Fund Administrators. This rule is now proposed to be relaxed and Fund Administration will be permitted from recognized Zone 1 jurisdictions.
 

Implications
Greater flexibility in delegating Fund administration duties.

There are several other changes that have been proposed which are described in Consultation No. 52, Key Policy Review. This document is available for review at the DFSA website.

The deadline for providing comments on the proposals is by close of business on 1st November 2008.