DFSA proposes overhaul of the DIFC investment fund framework

The DFSA is consulting on wide-ranging changes to the DIFC funds regime, including moving away from fixed fund classifications

On 7 July 2026, the Dubai Financial Services Authority (“DFSA”) published Consultation Paper No. 173 proposing significant reforms to the Dubai International Financial Centre's (“DIFC”) Collective Investment Fund framework.

The consultation period will run until 7 September 2026. If ultimately approved, the DFSA will finalise amendments to the Collective Investment Law No. 2 of 2010 (the “CIL”), the Investment Trust Law No. 5 of 2006 and the Regulatory Law 2004, and update the DFSA Rulebook, including the Collective Investment Rules (the “CIR”).

What does the Consultation Paper cover?

In the Consultation Paper, the DFSA consults on the following areas:

Part I

1. Specialist classes of Domestic Funds

Moving away from fixed classifications

The Consultation Paper looks at the DFSA's current use of fixed specialist class classifications (e.g. Hedge Fund, Private Equity Fund, Money Market Fund, Credit Fund) for QIFs and Exempt Funds, noting that these can be overly restrictive for hybrid or multi-strategy funds. This approach is also out of step with most international fund jurisdictions, which do not typically apply this type of rigid classification, and sits uneasily with broader market trends where evolving investment strategies increasingly overlap and blend into one another.

The DFSA proposes to:

• move away from specialist classes for QIFs and Exempt Funds, focusing instead on the activities undertaken, associated risks and appropriate safeguards;
• apply new risk management requirements to all fund managers, and introduce borrowing limitation requirements to QIFs and Exempt Funds (requiring a reasonable and prudent calculation of limits and prospectus disclosure of the expected maximum level of borrowing and the basis for its determination);
• extend prime broker safeguards (previously limited to Hedge Funds) to QIFs and Exempt Funds, bringing the DFSA’s approach in line with that of the Abu Dhabi Global Market; and
• shift the overall regulatory approach for QIFs and Exempt Funds towards disclosure.

Importantly, this is not a wholesale removal of specialist requirements. While the “specialist class” labels disappear, some of the underlying requirements are reorganised into two distinct categories: investment strategies (covering, for example, Funds Providing Credit (formerly the ‘Credit Fund’ specialist class), Property Funds and ETFs) and fund structures (e.g. Feeder Funds, Umbrella Funds and Fund Platforms). This reflects an evolution towards greater flexibility, rather than a revolution that strips away all existing safeguards.

Risk management

In exchange for removing specialist classes, the DFSA proposes a new risk management regime applicable to all fund managers. This comprises four key elements: (i) documented risk management systems, including a due diligence process and ongoing identification, measurement and monitoring of investment risks; (ii) functional separation between fund valuation and the investment management process – a requirement that until now applied only to Hedge Funds; (iii) a requirement that the fund’s risk profile corresponds to its size, portfolio structure and investment strategy as set out in its constitutional documents; and (iv) for QIFs and Exempt Funds (but not Public Funds), a requirement to set a maximum level of leverage, which must be disclosed in the prospectus together with an explanation of how it was determined. While the DFSA considers the impact non-material for most fund managers, firms will nonetheless have to review their internal policies and procedures to confirm alignment with these new requirements.

Funds Providing Credit

The DFSA is moving away from treating ‘Credit Funds’ as a fixed specialist class, and is proposing rules that apply by reference to the activity of “Providing Credit”, rather than requiring a fund to satisfy the existing 90% Fund Property threshold. These changes follow the DFSA’s 2024 Call for Evidence on Credit Funds, which informed its conclusion that the current regime warranted reform. The removal of the 90% threshold is also broadly in line with recent derogations granted to individual fund managers in the DIFC, which suggests the DFSA is, to some extent, formalising a position already taken through individual waivers.

As a result, more funds with a credit component to their strategy are likely to be captured by these requirements, while the requirements themselves would be lighter-touch than the current regime. Certain core safeguards would remain, including prohibitions on Providing Credit to natural persons and on providing letters of credit or financial guarantees.

In parallel, the base capital requirement for fund managers of Funds Providing Credit would be reduced from USD140,000 to USD40,000, and the associated USD10,000 application and annual fees would be removed.

Venture Capital Funds

The existing Venture Capital Fund regime offers relief on capital, audit and reporting requirements to fund managers of funds that invest at least 90% of their committed capital in unlisted companies established for no longer than ten years. The Consultation Paper proposes extending this relief to fund managers of funds dedicated to investing in other Venture Capital Funds.

2. Managing Assets and delegated portfolio management

The DFSA proposes to clarify that a Managing Assets authorisation also covers Dealing in Investments as Agent and Arranging Deals in Investments, where such activities are needed for the investment management of a specific fund's property under a delegation from that fund's manager. As such, any DFSA-authorised managers whose activities are limited solely to delegated fund mandates may need (once the changes come into effect and subject to any further changes (to apply to remove additional activities that they hold. However, we would note that as drafted, this proposal doesn’t appear to extend any more broadly, for example where a DFSA-regulated manager is acting for a client directly under a separately managed account – as drafted, it would only apply to the specific fund for which the delegation was given.

The DFSA also proposes to extend to Venture Capital Funds the existing exclusion from the requirement for an investment manager to be authorised for ‘Dealing in Investments as Principal’ when investing in a fund it manages. Currently, this exclusion is available for initial investments in Private Equity Funds that are held for more than 12 months. The Consultation Paper proposes to apply the same treatment to equivalent investments in Venture Capital Funds.

3. Fund structures

Two changes are proposed to ease master-feeder structuring for Public Feeder Funds:

• removing the requirement that a master fund's units be offered by at least three market makers – a liquidity safeguard originally introduced in 2010 that does not reflect how the fund industry operates, is difficult to satisfy in practice, and is now considered duplicative of existing fund-level liquidity rules; and
• removing the 20% cap on how much of a master fund a feeder fund can hold – introduced to address concentration risk but no longer considered necessary or proportionate given that a feeder fund’s sole objective is to invest in its master fund.

Beyond these two changes, the remaining master-feeder requirements stay in place, simply relocated to the new ‘Fund Structures’ section of the CIR rather than sitting under the old “specialist class” heading.

Notably, these changes can be seen, at least in part, as codifying a position the DFSA has already been adopting on a case-by-case basis through individual waivers. Firms holding an existing waiver or modification of any rule proposed for deletion or amendment should assess how the Consultation Paper proposals affect that waiver and, if necessary, engage with the DFSA’s supervision team.

Separately, the definition of Master Fund is being broadened to allow direct subscriptions from institutional and professional investors alongside subscriptions from feeder funds. Under the current narrow definition, a fund only qualifies as a Master Fund if it issues units exclusively to dedicated feeder funds – a restriction that prevents the type of direct institutional or professional investment that is common in international master-feeder structures.

4. External Fund Managers (“EFM”)

The DFSA proposes to remove the EFM regime, under which non-DIFC fund managers have been able to manage Domestic Funds without establishing a DIFC presence. The DFSA cites limited supervisory reach over non-DIFC entities and increased demand for full DFSA authorisation as the rationale. DIFC-based fund managers would remain free to manage External (non-DIFC) Funds.

This could be highly disruptive for existing EFMs. Beyond the general three-month transition period proposed for all changes under the Consultation Paper, no EFM-specific transitional arrangements are set out. Given the potential impact on existing EFMs, this general period may prove insufficient, and further consideration and clarity will be needed in due course. Existing EFMs may therefore need to consider their options at an early stage, which could include establishing their own licensed entity in the DIFC or transferring fund management responsibilities to a locally licensed third-party fund manager.

5. Employee investment in funds

The Consultation Paper proposes a new framework under which eligible employees, being those involved in a fund’s investment decisions or advice, would be permitted to invest in private funds managed by their employer without triggering the QIF/Exempt Fund investor eligibility requirements (such as minimum subscription amounts or net asset thresholds). Employees would instead need to meet relevant experience criteria set out in the Conduct of Business module. Investment may be made directly or indirectly through a special-purpose vehicle established for this purpose, which would be excluded from the definition of a ‘Collective Investment Fund’.

Given the potential for conflicts of interest, the Consultation Paper proposes enhanced disclosure requirements. This includes making investors aware that fund manager employees hold an interest in the fund (directly or indirectly), and ensuring investors receive sufficient information on how any resulting conflicts will be managed.

While certain aspects still require clarification, overall this is a welcome development. In certain other jurisdictions, such as the Cayman Islands, exemptions already exist for employee investment vehicles, and the absence of an equivalent exemption in the DIFC has historically meant that such structures needed to be established abroad. The prospect of establishing them within the DIFC itself is therefore a positive step.

6. Reporting and technical/legislative changes

The Consultation Paper also proposes:

• extending a fund's first accounting period from 12 to 18 months, so the first annual report better reflects activity where launch is delayed;
• clarifying the definition of “Fund Manager” to make clear that a person may fall within the definition even where that person is not legally accountable directly to Unitholders. The concept of ‘legal accountability to Unitholders’ embedded in the current definition has proven problematic: it is out of step with other jurisdictions, which generally do not tie the definition to this concept, and has, in practice, created difficulties for global fund structures, particularly where Foreign Funds are managed in and from the DIFC. The DFSA confirms that the proposed amendments are not intended to reduce investor protection standards;
• granting the DFSA power to waive or modify the CIL itself, consistent with the analogous power it already holds in respect of other laws and its existing Rulebook powers under the Regulatory Law; and
• streamlining overlapping provisions across the CIL and CIR.

Part II: areas for discussion

The DFSA is also seeking early, non-binding feedback on:

• Tokenisation: with distributed ledger technology gaining traction for its speed and efficiency, the DFSA is asking whether its current rules on tokenised fund units, tokenised money market funds, and crypto-holding funds remain fit for purpose, including any gaps, ambiguity, or over-prescriptive requirements holding back adoption. This reflects growing market interest in tokenisation, which we are also seeing more of in the market; and
• Long-term investment funds: the DFSA is exploring a retail-accessible LTIF regime, similar to frameworks in the EU, UK and Singapore. This reflects the DIFC's broader ambition to develop as a leading global financial centre. LTIFs channel long-term financing into the real economy, for example real assets or loans to unlisted companies, and are currently only open to professional investors in the DIFC. Feedback is sought on investor access, redemptions, and disclosure, mirroring the key safeguards seen elsewhere.

Background to the Consultation Paper

The DFSA's funds regime was established in 2006 and hasn't been comprehensively reviewed since 2010. The review reflects developments in the DIFC funds and asset management industry, alongside evolving international standards, and aims to align the framework more closely with international best practice while minimising unnecessary regulatory burden.

The DFSA notes in the Consultation Paper that market participants should not act on the proposals until the relevant legislative changes have been finalised. The DFSA will publish a notice on its website once all amendments to the laws and Rulebook have been made, following which a three-month transition period will take effect.