* Financial regulator proposes new fund class
* Aims to attract private equity and hedge funds
* Less stringent regulation, higher minimum investment
* Cost and 'human infrastructure' issues persist
By Andrew Torchia
DUBAI, March 16 Dubai is considering regulatory
reforms to persuade more funds to base themselves in its
financial centre, though industry experts believe that other
parts of its investment environment may also need to change for
the emirate to compete globally.
The proposed rules would create a new class of funds in the
Dubai International Financial Centre (DIFC) in an effort to
attract asset managers, such as hedge funds and private equity
funds, serving the richest and most risk-tolerant investors.
The DIFC has boomed since it was set up as a financial free
zone in 2004, becoming the Middle East's top banking hub. The
number of registered firms operating in the DIFC jumped 14
percent to 1,039 last year, but it has not come close to
competing with the likes of Luxembourg, Dublin and the Cayman
Islands as a top domicile for funds.
Only nine funds have been domiciled in the DIFC since its
current funds regime was introduced in 2010, compared with
hundreds established in the leading centres, industry sources
said. The DIFC declined to comment.
The Dubai Financial Services Authority (DFSA), the
regulatory body for the DIFC, is now moving to narrow that gap
with its new fund class, which would impose less stringent
regulation - and therefore lower costs - on asset managers.
Rapidly expanding financial markets and rising incomes in
the Gulf suggest there is room for a fund management hub to
develop in the region.
"You need an option now for a Middle East domicile," said
Chris Harran, a national partner at law firm Dechert LLP, which
has worked extensively on setting up funds in Dubai.
But he added that elements outside the DFSA's control - such
as the way in which investment funds are incorporated and
registered - would also need to be considered to maximise
Anthony Mallis, chief executive of asset management firm
Securities & Investment Co in Bahrain, said the DIFC would
succeed in the long run if it could accommodate investors such
as family offices from around the Gulf.
A growing number of these offices, which help the region's
wealthy families and business dynasties to manage their money,
have been establishing a presence in Dubai, he noted.
For now, however, Dubai needs to develop its "human
infrastructure" of financial lawyers, custodians and other
professionals to sustain growth as a fund centre, Mallis said.
"The volumes of money flowing through must be large enough
to sustain the infrastructure. They haven't got that yet."
At present, DFSA rules permit two types of funds: public
funds and exempt funds.
Public funds serve the mass of retail investors, who can
afford relatively little risk, with extensive regulation in line
with International Organization of Securities Commissions
Exempt funds, meanwhile, serve professional, experienced
clients more able to cope with risk. Regulation is less
stringent but subscriptions to exempt funds start at $50,000.
The DFSA's proposal would create a third category: qualified
investor exempt funds (QIEFs). Rules would be relaxed further -
for example, fund managers would have more flexibility in the
appointment of custodians and the filing of reports on funds.
The minimum subscription would be much higher at $1 million.
The proposal was made after a review of other fund
jurisdictions, including Bahrain, Luxembourg, Dublin, the Cayman
Islands and Singapore, the DFSA said. A public consultation
ended last month and the rules could be introduced this year.
Dubai has strengths as a fund centre. Tax and investment
treaties between the United Arab Emirates and other countries,
as well as the legal treatment of land ownership, can make it
advantageous for foreign investors in Gulf assets - or
Gulf-based investors in overseas assets - to have their funds
domiciled in the DIFC. In effect, Dubai can act as a contact
point for the Gulf and Western financial systems.
Dubai's move comes after the European Union introduced its
Alternative Investment Fund Managers Directive, tightening the
EU's regulation of hedge funds and private equity funds in the
wake of the global financial crisis.
While the DFSA emphasises that it is not sacrificing
responsible regulation with its proposal, it has a chance to
appear attractively lenient to European fund managers saddled
with heavier regulation at home.
It is not yet clear, however, whether the DFSA's efforts
will bear fruit. Harran said the proposed $1 million minimum
subscription could be considered too high by some fund managers.
Regulations in Ireland and Luxembourg suggest that a figure of
$500,000 might be more appropriate for QIEF, he said.
Some other QIEF requirements look potentially problematic,
depending on how they are applied, he said. For example, while
private equity funds do not have to appoint custodians for
assets in certain circumstances, they do need to have
independent oversight committees, which could prove burdensome.
And though the QIEF proposal aims to streamline registration
for funds, DIFC companies law and its requirements would still
apply. Standalone investment fund incorporation rules may be
needed to resolve this issue, Harran said.
Other obstacles to the QIEF regime involve wider aspects of
Dubai's investment environment.
John Sfakianakis, chief investment strategist at Saudi
Arabian investment firm MASIC, said that the decade-old DIFC
would initially find it hard to compete with more established
"Others are more attractive in terms of experience, legacy
and cost," he said. "The last point is very crucial as fund
competitiveness is partly due to the set-up cost."
Jacques Visser, another national partner at law firm
Dechert, argues that more policy changes at local and federal
government levels might be necessary to give the DIFC a unique
selling point for funds.
For example, a Dubai government decree allows one fund,
Emirates REIT, to buy property anywhere in the emirate, not only
in designated zones for foreigners. Extending that right to all
DIFC funds, provided that most investors were from Gulf
Cooperation Council countries, could ignite interest in DIFC
funds as a way into Dubai's booming property market.
Similarly, there are ceilings or bans on foreign investment
in individual UAE stocks such as telecoms giant Etisalat
, and Visser says that federal rules could be eased to
make the DIFC a channel for such investment.
"The moment one takes steps like that, DIFC-based funds may
be able to reach critical mass to fuel further, exponential
growth," he said.
"But one needs that spark from a policy-related perspective
rather than just focusing on pure regulatory change."