The UAE's Securities and Commodities Authority has issued a swathe of new decisions and regulations on domestic funds while also substantially changing the public distribution of foreign funds in the UAE.
The industry is only just starting to comment on the decisions which were published in Arabic meaning verified translations must be digested by international players.
The direction of travel for the SCA is to push for global asset managers to set up an onshore presence and establish onshore domestic public or private funds to target investors in the UAE in accordance with the new requirements and processes that were issued on 16 January 2023 under the SCA Chairman of the Board of Directors Decision No. 1/RM of 2023 on the Regulation of Investment Funds.
The New Fund Regulations will be effective the day after publication in the Official Gazette.
According to one industry update now circulating it is expected that the SCA will issue a separate decision on the regulation of joint investment plans and investment funds linked to insurance products established by UAE licensed insurance companies.
In early reaction, Tom Bicknell, partner at Pinsent Masons said: "SCA's recently introduced restriction on the promotion of foreign funds to retail investors comes in parallel to their overhaul of the domestic funds regime.
"Widely seen as a move to foster growth of the domestic funds industry, foreign funds can now only be promoted to professional investors and market counterparties. Promoters have a maximum six month grace period to cease the promotion of foreign funds to their retail clients.
"SCA's new funds regime has been released with the intent of doubling the amount of investments managed by funds locally. Indeed, shortened timelines, expanded fund categories and reduction in minimum capital requirements are all directed at aligning SCA's regime with international best practice."
Nigel Sillitoe CEO of consultancy Insight Discovery said: "The main regulator of funds - in this case, the Securities and Commodities Authority (SCA) - and other policymakers, face an important decision: what sort of funds industry do they want for the UAE?
"On one hand, the industry could be one where most of the funds - in terms of numbers and assets under management (AUM) - are UCITS or other products that are domiciled elsewhere and that are distributed across national borders.
"On the other hand, the industry could be one where most of the funds are domiciled locally.
He continued: "UCITS and other foreign-domiciled funds have a number of attractions. There is no one model of a market for investment funds that is the best for all countries. Nevertheless, and in two landmark decisions made in mid-January, the SCA has made it absolutely clear that it wants the latter - an industry that is dominated by locally based funds.
He further said: "There will be many opportunities here for international asset management companies that develop UAE-domiciled funds."
The size of the opportunity would depend on several issues, he added, such as:
"Firstly, Are growth forecasts from firms like the Boston Company Consulting (BCG) for the overall market realistic, optimistic or overly-conservative? Their recent report, published in the middle of last year, indicated that financial assets in the UAE will grow from around US$700 billion in 2021 to around $1,000 billion in 2026. That equates to an annual increase of 6.7 percent.
"Secondly, how fast will distributors and retail investors move from foreign-domiciled products to locally-domiciled funds?
"The most important thing is that SCA talks to the investment management sector so that the funds industry can flourish and have a role in the future growth of the UAE."
Law firm Al Tamini & Co also set more details out in a note on the new fund regime:
Substantial developments include, inter alia, expedited processing periods for the approval of public/private funds, reduction of regulatory requirements and additional types of funds recognized by SCA, which are set out below.
The New Fund Regulations have expanded the exemptions of arrangements that would not be considered as a fund to cover joint bank accounts, insurance and pension contracts, joint investments between the parent, holding, subsidiary and sister companies, timeshare properties and other sharing property use, employees share options schemes managed by the issuer or group company and government funds.
New categories of fund structures have been introduced such as:
• Family Funds - as local fund where the ownership of its units is restricted to one or more persons from one family; and
• Self-managed Funds - where a local fund is established by two or more individuals or corporates.
In addition, the New Fund Regulations establishes new categories of specialized funds such as real estate development funds, precious metal funds, direct financing funds, ESG funds, capital protection funds, protected-cell funds, charity investment funds and commodities investment funds.
An important measure is the reduction in capital requirements of fund management companies from AED 50 million to 1 million and fund administration companies from AED 5 million to AED 1 million. The New Fund Regulations removes foreign ownership restrictions, allowing 100% foreign ownership of such companies.
Furthermore, the application process timelines have been reduced to 5 working days for private funds and 10 working days for public funds for the approval of establishment of the respective fund. The SCA's final decision on applications for new types of funds will be issued within 20 working days from the date of submission. This is a welcomed amendment that will streamline the application and establishment process for investment funds aiming to enter the UAE market.
