The introduction of a regime for Credit Funds: a summary of the recent DFSA Consultation Paper

The Dubai Financial Services Authority (DFSA) is looking to update its regulations regarding Credit Funds and has released a consultation paper. Following feedback from the paper, the DFSA expects to proceed with making the necessary changes to its Rulebook, which will be amended to reflect the points raised in the consultation.

On 20 December 2021, the DFSA released a Consultation Paper (CP) seeking comments on the DFSA’s proposal to introduce a regime for Credit Funds.

Under the existing Funds regime, DFSA regulated Fund Managers are allowed to carry out a range of investment activities using investors’ money but the direct origination of loans or the purchase of loan portfolios is not permitted. Loan related activities bring a new element to Fund Management requiring different conduct and prudential requirements for which the proposals have been set out in the CP.

What are Credit Funds?

Credit Funds are collective investment funds that use investors’ money either to originate, or to purchase loans, or both. The DFSA states that there has been increased activity in this market, partly due to banks halting or reducing traditional lending in certain markets (for example SME lending). Fund Managers have seen this as an opportunity to provide private credit, and as an attractive investment due to the lower financial interest rates in many jurisdictions.

Fund managers have also gained access to lending transactions with banks (co-lending and syndication) as well as purchasing loan portfolios from banks and other loan originators. The DFSA recognises that there are benefits to increasing the pool of potential credit providers and are therefore looking to introduce appropriate regulations for Credit Funds.

In the CP the DFSA addresses key points, including that all funds should be able to lend and this in turn will introduce a new specialist class of funds named ‘Credit Funds’, which is proposed to fall into either an Exempt Fund or a Qualified Investor Fund category.

The DFSA also differentiates between standard bank lending activities and what credit activities will be allowed by a Credit Fund. For example, the CP proposes that Credit Funds should not be allowed to issue financial guarantees or Letters of Credit, and requests feedback as to whether trade finance activities should be allowed, due to their more complex nature.

There are also restrictions listed in relation to permissible borrowers as well as additional licensing requirements for Fund Managers of Credit Funds, such as

• credit granting
• monitoring and management
• stress testing requirements
• diversification and eligible investments
• proposals for redemptions and lifespan of a Credit Fund
• a leverage restriction of no more than 10% of the Fund’s Net Asset Value
• specific risk disclosures and warnings required in the prospectus and any marketing material used
• additional information to be provided on loan performance in periodic reporting to unit holders and the DFSA.

The CP also proposes Fund Manager prudential requirements such as a minimum base capital requirement of USD 100,000 as well as periodic reporting of credit portfolio information to the DFSA. Due to the complexity of a Credit Fund the authorisation fee of USD 10,000 is to be applied.

Overall, the proposed regulations are built on the existing funds regime and introduce further tailored requirements to address the specific risks of a Credit Fund. The deadline for providing feedback is 19 January 2022.

Equiom has a wealth of knowledge and experience in setting up Collective Investment Funds in the DIFC and obtaining and managing a collective investment fund or broader managing assets financial services license from the DFSA. We would be happy to answer any questions you might have and assist you with setting up your business in the DIFC.  Please get in touch with Gita Butzlaff for further information.