UAE Financial Regulators agree on passporting regime for domestic funds

On 27 November 2018, the federal capital markets sector regulator in the United Arab Emirate (UAE), the Securities and Commodities Authority (the SCA), along with the financial services regulators in the UAE’s two financial free zones – the Dubai Financial Services Authority (the DFSA) of the Dubai International Financial Centre (the DIFC), and the Financial Services Regulatory Authority (the FSRA) of the Abu Dhabi Global Market (the ADGM) - announced that they had reached an agreement to facilitate the licensing of funds domiciled in each other’s respective jurisdictions.

Whilst the agreement does not create a passporting regime across all products and services between the DIFC, the ADGM and the rest of the UAE, the much welcomed move implements a passporting regime for the promotion such domestic funds across the relevant jurisdictions. The move helps to join the various respective efforts of each regulator in the area of mutual funds and is expected to stimulate the development of the domestic funds markets across the wider UAE. The announcement can be found here.

It should be highlighted that whilst the agreement is a much welcomed development and represents greater co-ordination amongst the relevant financial services regulators across the various jurisdictions within the UAE, the agreement is not relevant to the cross-border marketing of public or private funds domiciled in jurisdictions outside the UAE.

As a result of the decision, the DFSA issued Consultation Paper No. 123 on ‘Fund Protocol Rules’ on 27 November 2018, outlining the relevant regulatory amendments to enable the agreement from a DIFC regulatory perspective (the DFSA Consultation Paper). Under the DFSA Consultation Paper, the DFSA has proposed the introduction of a new module to its Rulebook - the Funds Protocol Rules (FPR) Module. Under the proposed new regulations, DIFC Authorised Firms which currently use an SCA-authorised distribution agent to distribute units of DIFC-domiciled funds in the UAE outside the DIFC, may decide instead to opt-in to the proposed passporting regime and market and distribute the units themselves. A fund manager of a DIFC-domiciled fund can opt-in to the passporting regime under the FPR Module and, provided it meets the relevant requirements, the fund would then be registered by the DFSA, which will notify the other regulators - ie the FSRA and/or the SCA. The FSRA and/or the SCA will then include the fund on their own respective register of funds.

Other notable features of the proposed regulatory changes to the DFSA Rulebook include:

• custodians - if a domestic DIFC fund is a public fund, prior to passporting into the UAE outside the DIFC and into territory covered by the SCA, it would need to appoint an SCA-regulated custodian (unless the public fund is a property fund)
• funds that utilise the passporting mechanism would be required to have a new mandatory proscribed standard form of disclaimer
• all funds utilising this mechanism would be required to provide a key investor information document (KIID) in both English and Arabic
• once registered under the proposed mechanism provided for in the FPR Module, financial services, including advising, arranging and dealing, may be conducted or continue to be conducted in respect of the fund’s units, with or for investors and clients in the territory covered by the SCA and/or the ADGM, by any appropriately licensed DFSA Authorised Firm, and
• a notification fee of USD 9,500 is payable, in addition to the standard fund registration fees in the DIFC, when a fund manager notifies the home regulator (ie the DFSA) of its intention that a domestic DIFC fund be a registered fund under the passporting regime. Then, an annual fee of USD 2,000 is payable each year in respect of such registered fund. For an umbrella fund or a segregated portfolio company or cell company, the fee is calculated per sub-fund, segregated portfolio or cell (as the case may be).

Consequently, the ‘UAE’ is to be added to the DFSA’s list of ‘Recognised Jurisdictions’ under the proposed Recognised Jurisdiction Notice (No. 4). Under the draft FPR Module, rules have been outlined for both private and public DIFC-domiciled funds to utilise the passporting regime. The DFSA will also establish and maintain a new Register of Passported Funds, to include the details of all funds passported both into and out of the DIFC under the new regime. It should be noted however, that the passporting regime does not cover the marketing of foreign funds (ie funds domiciled outside the UAE, the DIFC or the ADGM) which are currently marketed by DFSA Authorised Firms. There are also a number of ongoing reporting requirements outlined in the draft FPR Module, as well as mutual assistance and inspection powers between the DFSA, the FSRA and the SCA relating to the such funds.

The proposed changes to the DFSA’s regulatory framework under the DFSA Consultation Paper are subject to changes and the deadline for providing comments to the DFSA on the proposed amendments is 03 January 2019.

Similarly, the FSRA issued Consultation Paper No. 7 of 2018 on Proposed Fund Passporting Rules on 29 November 2018 outlining its proposed changes to the ADGM’s Financial Services and Markets Regulations 2015 (as amended) and the FSRA Rulebook. As with this DSFA’s proposed changes, the FSRA’s proposed amendments enable both public and private ADGM-domiciled funds (Public Funds, Exempt Funds and Qualified Investor Funds) to be registered for passporting through the same Register of Passported Funds mentioned above and to be marketed by an FSRA Authorised Person in either the DIFC and/or territory regulated by the SCA without obtaining an additional licence. The proposed FSRA changes match the ones for the DFSA outlined above. In addition to making certain amendments to its existing regulations and rules, the FSRA has proposed issuing a new module to its Rulebook - the Fund Passporting Rules (FP) - which matches the proposed changes outlined in the proposed DFSA Rulebook’s Funds Protocol Rules (FPR) Module. As with the DIFC, the deadline for providing comments to the FSRA on the proposed amendments is 03 January 2019.

It has also yet to be seen whether the SCA will issue a separate decision to implement the agreement between the regulators, or whether it will amend it’s existing regulations in relation to funds, such as the SCA Board of Directors’ Chairman Decision No. (9/R.M) of 2016 Concerning the Regulations as to Mutual Funds, and/or the SCA Board of Directors’ Chairman Decision No. (3/R.M) of 2017 Concerning the Organisation of Promotion and Introduction.