Promotion of foreign funds to UAE retail investors

End of temporary grace period for the promotion of foreign funds to UAE retail investors - What's next?

As the temporary grace period for the promotion of foreign funds to UAE retail investors has come to an end, we set out below a summary of the options to continue to access the UAE retail market, as well as the latest developments.

Background

Last year, the Securities and Commodities Authority (the "SCA"), the financial services regulator of onshore UAE*, issued its Decision No. 4/RM/2023 prohibiting the promotion of foreign funds to retail investors. The SCA allowed a temporary grace period for foreign funds already registered for public offering. The grace period, initially set to end on 30 June 2023, was extended until 31 March 2024. The promotion of foreign funds to certain defined "Professional Investors" remains unaffected.

The SCA's decision was aimed at boosting the onshore UAE local funds market. A very large part of the funds being promoted in the onshore UAE were foreign funds, as incentives to establish local funds were limited. Over the last year, the impacted asset managers have been considering how best to retain access to the onshore UAE retail market, and a few main options have emerged.  

*onshore UAE refers to the United Arab Emirates, excluding the ADGM (Abu Dhabi Global Market) and DIFC (Dubai International Financial Centre) financial free zones, each having their separate financial services related laws, regulations and regulators.

Marketing of Foreign Funds in the UAE - A New Paradigm

In light of the developments over the past year, we have summarised below the main options to access the onshore UAE retail market going forward.

Retail Investors

Starting from 1 April 2024, foreign funds can no longer be promoted to onshore UAE retail investors. Foreign funds duly registered with SCA will be converted from public promotion to private placement, only allowed to raise capital from certain defined 'Professional Investors'. However, there are currently a few routes open to foreign asset managers to continue their fundraising from onshore UAE retail investors:

Option 1 - Establishment of an onshore UAE Public Fund

A public fund under the supervision of the SCA may be established, whether with its own specific investment strategy, or as a feeder fund into a foreign master fund (e.g. a UCITS fund). The public fund may be distributed to UAE retail investors.

The public fund will require an SCA-licensed management company. Foreign asset managers may either establish a presence in onshore UAE and seek a management company license from the SCA or, for example as a first step, appoint a third party SCA-licensed management company.

In order to facilitate establishment in onshore UAE, the SCA has notably reduced the capital requirements for management companies, eased individual accreditation requirements, allowed the outsourcing of accredited positions, and reduced approval times both for management companies and funds.

The SCA has recently indicated the following timeframes, subject to receiving complete applications:

• 2 months for the approval of a management company;

• 10 working days for the approval of a public (retail) fund; and

• 5 working days for the approval of a private (professional) fund.

Option 2 - Establishment of a DIFC/ADGM Public Fund to be Passported

A public fund under the supervision of the DFSA (Dubai Financial Services Authority) or the FSRA (Financial Services Regulatory Authority), the financial services regulators of the DIFC and ADGM respectively, may be established and passported to onshore UAE.

Similarly as for onshore UAE public funds, a DIFC or ADGM public fund may have a direct investment strategy or act as a feeder fund.

A duly DFSA or FSRA licensed fund manager is required for the establishment of the public fund in the DIFC or ADGM respectively. A few third party fund managers in the DIFC and ADGM have established Fund Platforms to facilitate access to the UAE market by foreign asset managers. These Fund Platforms are similar to umbrella funds in their concept, but provide for greater flexibility and segregation of assets and liabilities.

Incorporated Cell Companies

In the DIFC in particular, a Fund Platform is established under the form of an Incorporated Cell Company ("ICC") with underlying Incorporated Cells ("IC"). Each IC is effectively a separate fund and legal entity, ensuring the segregation of assets and liabilities.

Considering it is a separate fund, each IC will have its own prospectus, investment strategy, and specific terms as permitted under the DFSA collective investment funds regime. This ensures the greatest flexibility in structuring the fund.

Protected Cell Companies

The DFSA and FSRA funds regimes allow licensed fund managers to establish umbrella funds under the form of Protected Cell Companies ("PCC"). Contrary to ICCs, PCCs are one single legal entity with separate cells (sub-funds), each with its own investment objective.

The PCC as a whole is considered as a Fund. Consequently, the PCC will have a single prospectus with supplements for each cell, similarly to Luxembourg and Irish umbrella funds.

The segregation of assets and liabilities between the cells is ensured by the regulatory regime. However, contrary to the DIFC ICC, a PCC must allow its investors to switch from one cell to another.

Passporting

Funds established in the DIFC or ADGM, including PCCs or Incorporated Cells of an ICC, may be passported to onshore UAE. However, public funds in either jurisdiction are required to appoint an SCA-licensed custodian in order to be passported.

Professional Investors

In relation to professional investors, the same solutions as for retail investors exist for asset managers.

In addition, it is still possible to promote foreign funds to professional investors in the UAE, subject to compliance with the relevant regulatory regime depending on the jurisdiction.

Onshore UAE

Foreign funds may be promoted to professional investors in onshore UAE, subject to (i) registration of the foreign fund with the SCA, and (ii) appointment of an SCA-licensed promoter.

Specific requirements exist depending on the type and home jurisdiction of the foreign fund.

ADGM/DIFC

Foreign funds may be promoted to professional investors in ADGM and the DIFC via Authorised Firms, with the appropriate financial services license. Different exemption regimes in each jurisdiction may apply.

Passporting Regime

Funds established in either jurisdiction of the UAE (onshore UAE, DIFC or ADGM) may be passported to the other jurisdictions, allowing wider access to investors. The SCA has recently confirmed that the passporting regime with the financial free zones (DIFC and ADGM) remains fully applicable.

In light of the end of the temporary grace period, the SCA has confirmed that it will continue to honour the UAE funds passporting regime. However, the SCA has at the same time indicated that it is monitoring the use of the passporting regime by funds domiciled in the DIFC and ADGM and that passporting must not be abused to prevent the development of a healthy onshore UAE funds ecosystem. 

What to expect in the future?

During a recent market event, the SCA shared its vision on the future of the UAE asset management industry and confirmed its dedication to promoting the UAE funds market. It is worth noting in particular the following:

GCC Funds Marketing Passport

The SCA, in cooperation with the financial services regulators of the Gulf Cooperation Council ("GCC") countries (excluding the DFSA and FSRA), has approved a GCC Fund Marketing Passport. The final draft of the GCC Funds Marketing Passport is subject to the approval of the Council of the GCC.

The GCC Funds Marketing Passport is expected to be similar, in its core principles, to the EU UCITS/AIFMD Passport: funds established in one of the GCC jurisdictions (excluding the financial free zones) may be distributed to the other GCC jurisdictions. However, a duly licensed promoter in each target jurisdiction will still be required.

Dual-licensing regime

The SCA has inititiated discussions with the DFSA and FSRA around the development of a framework to allow the dual licensing of fund managers. At this stage, the regime is still in early discussions around feasibility and certain key considerations (e.g. the avoidance of dual-hatting, and access to premises and records by each regulator, etc.).

End-of-Service Benefits Schemes

The SCA has confirmed that End-of-Services Gratuity Savings Funds schemes (the "Savings Scheme") will only be allowed to be established in onshore UAE, under the supervision of SCA. These may not be established in the DIFC or ADGM financial free zones.

The Savings Scheme is an alternative and optional scheme to the existing end of service benefits system. Under the Savings Scheme, the idea is that employers make certain contributions (a percentage of salary), to the benefit of their employees, to various approved investments funds. 

Increased monitoring of unlicensed activities

The SCA has indicated that a particular focus will be made on monitoring the use of digital platforms and letter-box management companies to prevent any back door use of the previous regime, in relation to marketing of foreign funds to retail investors.

To conclude 

It remains to be seen how the international funds and asset management industry will continue to access the UAE retail market. If it becomes too difficult or costly, some asset managers may shift their focus away from the onshore UAE retail market altogether. However, we are hopeful that various solutions will continue to emerge, including feeder fund platforms, which can provide an efficient and cost-effective solution for retail investors to retain a diversity of fund choice and avoid concentration risk. 

Any questions?

For further information on any of the above topics, please contact Muneer Khan or Sami Ben Dechiche.