Up until the new Investment Funds Regulation came into force, responsibility for approving domestic funds and foreign funds available to investors in the UAE lay with the Central Bank. Under the new system, regulatory responsibility for the licensing and marketing of investment funds, and for a number of related activities, shifted to the SCA. Prior to this, there were no formal regulations in place.
Although the UAE Central Bank prohibited the promotion of funds in the UAE unless they were approved in advance, in practice foreign funds were marketed cross-border on an informal private placement basis, according to law firm Linklaters. However, the new system brought formal regulations to govern this practice and end what was seen as a fairly relaxed regime.
Under the new regulations, local and foreign mutual funds cannot be established or promoted in the UAE without the approval of the SCA. However, there are exceptions. The provisions of the regulations do not apply to an accumulation of funds to be invested in a joint bank account or in forming a company. The regulations also don’t apply to structured/compound products; mutual funds linked with insurance or security contracts; investment portfolios managed by their owners; SCA-licensed companies; or private investment portfolios managed by investment banks and companies.
Foreign mutual funds targeting financial portfolios owned by federal or local governmental agencies are also exempt, as are foreign mutual funds targeting companies that invest in securities, as long as it is for their own financial portfolios and not the portfolios of their customers. Foreign mutual funds targeting investment managers, provided that the authority to make and execute the investment decision is vested with the investment manager, also enjoy immunity.
Although there were concerns that the extra layer of bureaucracy could damage capital raising in the UAE, the new system aims to protect investors, many of whom claimed to feel let down by the funds that they were sold. According to the SCA, the new regulations are vital to ensuring confidence in the market.
“The Investment Funds Regulation issued in August 2012, and the Investment Management Regulation which is still in the pipeline, are two essential legislations prepared to fill the gaps in the regulatory framework in the UAE’s financial markets,” said Ryan Lemand, Senior Economic Advisor and Head of Risk Management for the SCA. “In fact, these regulations are the corner stone for establishing an institutional investor base and promoting long-term investment in the capital market, leading to a wide investment horizon and more stable and sustainable growth in equities prices. This in turn would help transform the UAE’s financial markets to becoming more effective in order to provide capital to the local companies and potentially foreign companies seeking non-banking financing and listing in the UAE’s financial markets.”
The SCA has worked hard to clear up the initial confusion the new regulations caused. “The funds regulation has been put on to a long period of consultation and several rounds of review and awareness sessions dedicated to market stakeholders,” said Lemand. “Furthermore, following the official issuing of the regulation, the SCA has organised several awareness sessions to clarify the implementation mechanisms for the regulation. Additionally, the SCA has organised meetings with the top law firms in the country to explain the new regulation for them to obtain their advice and to qualify them as facilitators to their clients interested in establishing Funds in the UAE. Indeed, the SCA has been proactive in clarifying any pros and cons have been arisen concerning the funds regulation.”
THE NEW IFR REGULATION HAS CREATED MORE COMFORT FOR UAE’S BANKS AND INVESTMENT COMPANIES, AS WELL AS INVESTORS. IN FACT, HAVING A ROBUST LEGAL FRAMEWORK TO ESTABLISH FUNDS IS ESSENTIAL FOR ANY INSTITUTION WISHING TO ENTER THIS SECTOR
Concerns that the new regulations will take away the “offshore” quality of the Dubai International Financial Centre, which has attracted International and regional asset managers, have also been addressed by the SCA. “The SCA and the DIFC as offshore regulator are working together in harmony and cooperating with each other to boost the UAE economy, therefore, the SCA sees that introducing a new funds regulation will help to bridge the regulatory gap in the UAE, which is to the benefit of the DIFC based companies that would like to operate locally,” said Lemand. “Indeed, this new regulation created a level playing field for all stakeholders, and helped protect UAE based firms, onshore and offshore from suitcase banking.”
Lemand says that the new regulations have been assuring for investors and institutions, which can now rely on good governance. “The new IFR regulation has created more comfort for UAE’s banks and investment companies, as well as investors. In fact, having a robust legal framework to establish funds is essential for any institution wishing to enter this sector,” he said. “Also, for investors seeking protection or for those who are risk averse towards investment funds, this legislation will satisfy their needs and clarifies their rights and obligations. In fact, recent research has proven that the absence of funds regulation hindered the development of a collective investment scheme in the UAE, and now this gap is bridged, and as a result the SCA sees growing activity and momentum created around the collective investment schemes.”
So far, explained Lemand, this has had a very positive impact on the market. “The SCA has received great attention and interest from the domestic and global funds industry, and this has translated into an increased number of applications the SCA has received to establish new funds in the UAE, as well as promoting foreign funds in the country, which leads the SCA to believe that this regulation has helped answer the needs of stakeholders on the funds front.”
MINIMUM SUBSCRIPTION PER SINGLE INVESTORS
The regulations set out provisions for minimum subscriptions as follows:
The minimum subscription per a single investor in the units of foreign mutual fund approved by SCA to be promoted in a private offering shall be the limit set out in the Offer Document, provided that it may not be less than AED 500,000 for a foreign mutual fund and AED 1,000,000 for a mutual fund established in a free zone outside the UAE.