The DFSA proposes changes to overhaul its Collective Investment Funds Framework
1. Background
On 7 July 2026, the Dubai Financial Services Authority (the “DFSA”) published Consultation Paper No. 173 (“CP173”), setting out comprehensive proposals to modernise its collective investment fund framework. The proposals come shortly after the ADGM Financial Services Regulatory Authority’s consultation in November on its fund’s framework (here). The consultation closes on 7 September 2026.
The DFSA’s funds regime was established in 2006 and has not been comprehensively reviewed since 2010. CP173 represents a significant overhaul and modernisation of its funds regimes, aimed at aligning the regime with international standards and best practices, increasing flexibility for fund managers, reducing unnecessary regulatory burden and, where appropriate, strengthening investor protection proportionately, all without altering the underlying policy intent of the existing regime. The proposals reflect the tremendous growth of the asset management sector within the DIFC and the sophistication of fund strategies being deployed by managers there.
CP173 is structured in two parts. Part I contains formal consultation proposals with respect to topics such as the removal of specialist classes, external fund managers and employee investment schemes. Part II invites discussion on what it sees as ‘discrete’ topics, including on tokenisation and long-term investment funds (“LTIFs”) which are at an earlier stage of policy development and do not yet have any formal proposals put forward.
We set out within this Article some of the key changes being proposed under CP173.
2. Key changes proposed
Removal of specialist fund classifications
One of the more significant reforms proposed is the move away from the DFSA’s current prescriptive classification of Exempt Funds and Qualified Investor Funds (“QIFs”) to give fund managers more flexibility to deploy hybrid and multi-strategy investment strategies. Currently, specific regulatory overlays apply to categories such as Money Market Funds, Private Equity Funds, and Credit Funds that are overly prescriptive. CP173 would replace this prescriptive specialist class of funds approach with a regime instead focused on the activities a fund undertakes, the associated risks, and appropriate safeguards. In particular:
- Removal of the requirements applicable to a Money Market Fund and Private Equity Fund where such funds are Exempt Funds.
- Removal of Credit Fund as a specialist class of Funds.
To further effect the above, risk management standards would apply horizontally across all fund managers, including managers of Public Funds. Borrowing limitations for Exempt Funds and QIFs would shift to require calculation on a “reasonable and prudent” basis with more detailed disclosure requirements on the expected maximum level of borrowing. Any Exempt Funds or QIFs that authorise a prime broker to pool, re-hypothecate, or use Fund assets will inherit the existing specialist class requirements in place.
Relaxation of Credit Fund requirements
As set out above, the DFSA is proposing to remove “Credit Funds” as a specialist class of Funds. The DFSA is proposing to impose requirements applicable to all Exempt Funds and QIFs providing credit and therefore, credit specific requirements will apply to a broader group of funds rather than a specific class of Credit Funds.
The DFSA is also proposing to remove or significantly relax some of the restrictions applicable to funds providing credit, including (a) removal of the 90% Fund Property Threshold, (b) removal of the prohibitions on cross-border trade finance activities; (c) reducing the capital requirements for managers of Credit Funds (aligning it with the same applicable to fund managers of other types of Funds which is $40,000) and (d) refining the restrictions applicable to Credit Funds, such as lending to natural persons.
Venture Capital Fund regime
The existing framework was developed in support of the DIFC’s “Future of Finance” strategy, which provides relief to fund managers who invest in venture capital. This relief will be retained and is proposed to extend to fund managers who manage funds dedicated to venture capital in its entirety. The exclusion from needing authorisation to Dealing in Investments as Principal, which is currently limited to Private Equity Funds, will also be broadened to cover initial subscriptions in Venture Capital Funds.
Managing Assets activity
CP173 clarifies the authorisation to Manage Assets captures delegated fund management activities, including the regulated activities of both Dealing in Investments as Agent and Arranging Deals in Investments. It is proposed that managers would no longer be required to obtain a licence which captures these activities, provided that such activities are “necessary” for the investment management of the Fund’s assets.
Whilst this was often the case in practice, it is a welcomed clarification within the DFSA rules to give greater clarity and regulatory certainty to fund managers.
Moderninising Master-Feeder arrangements
Owing to its perceived impracticality, the requirement of a fund manager of a public Feeder Fund in having to assess the respective Master Fund’s eligibility criterion in ensuring sufficient liquidity to meet redemption requests is to be removed. The 20% concentration cap on Feeder Fund holdings in a Master Fund is also proposed to be removed for the same reasons and the requirement for regular offerings by at least three market makers. The definition of a Master Fund is proposed to be expanded to now permit direct investment by institutional and professional investors alongside Feeder Fund subscriptions.
Removal of the External Fund Manager regime
Another significant proposed change in CP173 is the abolition of the External Fund Manager (“EFM”) regime. The current EFM regime allows non-DIFC fund managers to manage Domestic Funds without a physical presence in the DIFC which the DFSA is now proposing to remove. The rationale provided by the DFSA is twofold: there is a growing market demand for full DFSA authorisation of the fund manager, and the DFSA’s limited supervisory reach over entities outside the DIFC.
This change does not affect those DIFC-based fund managers managing External Funds.
Employee Investments
The DFSA is proposing a new framework which will permit certain employees of fund managers (or delegated investment managers), to invest directly or indirectly in private Funds managed by their employer, without the Fund losing its QIF or Exempt Fund status. The DFSA proposes to remove the minimum subscription amounts ($50,000 for Exempt Funds and $500,000 for QIFs) and the requirements to meet the minimum net asset requirements. For an employee to qualify under this regime, they will either need to be directly involved in the investment decisions or be providing investments advice to the fund manager. Indirect investment through special purpose vehicles (excluded from the definition of Collective Investment Funds) would also be permitted. To manage the risks with employee investment, including conflicts of interest, additional disclosure requirements are proposed.
Other miscellaneous changes
The definition of Fund Manager would be amended to remove the concept of “legal accountability to Unitholders,” which has proved problematic for being interpreted too narrowly, although it has retained the obligation for managers to act in the best interests of unitholders when exercising its powers and duties. A new power is proposed for the DFSA to waive or modify provisions of the CIL itself (not merely Rules). The first annual report accounting period would be extended from 12 to 18 months. Various streamlining amendments to remove duplication between the CIL and CIR are also proposed.
Discussion items (Part II)
Part II seeks early-stage views on two topics: tokenisation and LTIFs.
With respect to tokenisation, the DFSA invites feedback on whether market participants consider any regulatory barriers or challenges to tokenise fund units in the DIFC. Further, whether there are any advantages, opportunities and challenges presented by tokenised Money Market Funds (“tMMFs”); and whether any changes to CIR would be necessary or helpful to facilitate investment by funds in tokenised Units, notwithstanding that the current rules do not prevent such investments. Currently, fund managers wishing to tokenise Units within the DIFC are required to make regulatory licence applications through the DFSA sandbox.
For LTIFs, the DFSA is exploring whether to introduce a regime accessible to retail investors, or to a restricted segment of the retail market, which is reminiscent of the recent EU ELTIF and UK LTAF models. It is seeking views on the appropriateness of such a regime, potential redemption mechanisms and the investor awareness requirements that should apply.
3. Commentary and Impact
The removal of the EFM regime is a significant step. Internationally, the trend has been towards requiring fund managers to maintain a local regulatory presence in the jurisdiction where their funds are domiciled. This is consistent with the direction of travel under the EU’s AIFMD, which imposes strict substance requirements on non-EU managers seeking to market or manage funds within the EU, and the UK FCA’s expectations around substance and governance for UK-authorised fund managers.
Overall, the proposed reforms should be a welcome development for fund managers. The DFSA has taken a pragmatic approach to modernising a framework that has remained largely unchanged for more than a decade. Many of the proposals simplify existing requirements, remove prescriptive classifications and restrictions, and provide managers with greater flexibility and assurance to structure and operate funds in a manner that reflects current market practice. Together, the proposed changes are likely to enhance the DIFC's attractiveness as a fund domicile and make it easier for fund managers to establish their presence and launch and manage a wider range of investment strategies.
Firms should review their fund structures, authorisations, and compliance arrangements in light of these proposals and consider submitting responses promptly.
The consultation closes on 7 September 2026.
