|26 June, 2016

Seeing off the competition

Ambitions to become biggest player in region

An investor looks at stock information in front of an electronic display board at the Dubai International Financial Market March 21, 2010.

An investor looks at stock information in front of an electronic display board at the Dubai International Financial Market March 21, 2010.

REUTERS/Ahmed Jadallah
As financial centres around the region vie for supremacy, Mena Fund Manager looks at the latest developments for the Dubai market and asset management sector

Dubai remains one of the most important financial centres - not just for the region, but on a global level. Ambitions for the DIFC to become the biggest player in the region were underlined last year by the publication of its 10-year plan, which included an objective of increasing AuM to $250bn by 2024.

The launch of Abu Dhabi Global Market towards the end of last year, provided a rival wealth and investment management centre for the DIFC in the UAE. However, many international firms are already familiar with the DIFC's regulatory and legal regime and attracted by incentives for setting up in the financial free zone.

New initiatives such as the launch of the DIFC's Qualified Investor Fund have helped increase the attractiveness for alternative asset managers keen to target wealthy investors from the region.

The DIFC regulatory body, DFSA, also announced further changes to the regulatory regime earlier this year. Amendments to its property fund rules were made to align the regime with international standards. More changes were made to its oversight of the money market fund sector, reflecting recent work done by the International Monetary Fund and International Organisation of Securities Commissions.

Ian Johnston, chief executive of the DFSA, said at the time: "The DFSA continues to work with stakeholders to improve the regulatory environment. These new rules provide clarity and certainty to fund managers and give greater flexibility to those operating property funds."

Diversified economy

On an economic level, Dubai has a more diversified economy with just a fraction of the oil reserves available to its richer sister emirate Abu Dhabi. With smaller reserves than other emirates, Dubai has established itself as centre for commerce.

Most recent data available from the Dubai Statistics Centre reveals a gross 12.7% contribution to GDP from the financial corporations sector during the first half of 2015.

The Dubai Financial Market has continued to attract investor interest and for the first quarter of the year reported a net profit of AED86m ($23.4m), a 27% YoY increase from AED67.7m ($18.4m) for Q1 2015.

The market saw total revenue rise by 11% YoY to AED127m ($34.6m), incorporating operating income and investment returns, while trading revenue has also increased.

Essa Kazim, chairman of Dubai Financial Market, said first-quarter results were positive, particularly given the wider market backdrop, adding: "From our point of view, the market has handled such unfavourable circumstances with a high level of resiliency and has successfully managed to maintain a good level of activity supported by investors' confidence in the lucrative investment opportunities DFM provides."

Having emerged as one of the most popular financial centres in the region for asset managers, Dubai has established itself as an important destination for international firms. While competition may increase among the region's financial centres, Dubai remains well-positioned to consolidate.

UAE REGULATORY UPDATE

Tom Bicknell, senior associate at international law firm Clyde & Co, talks about the latest developments in the UAE asset and wealth management space

"Generally speaking, the promotion of a foreign fund in the UAE requires registration of the fund and payment of the applicable registration fee. Registration fees can add up to a reasonable sum when you look at the number of funds some firms will be promoting in the UAE. Under current regulation, where an insurer offers, as part of its wealth management/unit-linked life product, a list of funds which policyholders could invest their money into, these funds were excluded from the requirement to be registered. The regulatory basis being that the financial product being promoted was deemed to be the life insurance product, not the units in the fund.

"Earlier this year, ESCA (Emirates Securities and Commodities Authority) released a new set of funds regulations in draft form. The new regulations represent a move to a more robust and sophisticated regime that includes rules specific to cash, real estate, private equity and traded index funds as well as an authorisation regime for fund administrators.

"Industry feedback to date on the new regime is that ESCA may be seeking to apply the foreign funds registration fee to the offering of mutual funds as part of insurance products; which represents a pretty material reversal of its previous position. If you are a fund manager offering funds through an insurer, you didn't previously have any registration bill. Now if you have 200-300 funds that you offer through the insurer you will potentially have to pay the registration fee for each and every one which may prove prohibitive from both an economic as well as a practical perspective. The result may be that instead of dealing with the added cost and paperwork involved in registering all of their funds, managers may simply choose to significantly reduce their offering in the UAE market. One of the key benefits of most life insurance products on offer in the UAE is the comprehensive range of funds offered to policyholders to invest in. At a time where life products are under-represented in the UAE insurance market and growth is therefore particularly important, a curtailing of the funds offering that represents such a key component of the product could prove damaging for an industry that is still in its early stages. As we understand, informal consultation has been taking place between ESCA and various interested parties to try and reach some sort of middle ground as to how the fee structure can be applied however there is as yet no resolution of the matter.

"A further sign ESCA is being more active in the regulatory space is the recent introduction of a 'financial planning' activity to its licensing regime. Previously, financial advisors would apply for a financial analyst/financial consultant licence from ESCA in order to carry on financial advisory/wealth management business in the UAE. The introduction of the new financial planning activity represents a welcome development for the UAE's financial planning industry, which has existed in some degree of regulatory flux over the past 24 months as it waited for ESCA to decide on how it would approach regulating the growing industry. The new activity does not represent a new licensing regime, holders of existing financial analyst/financial consultant licences will be granted authorisation to practice the new activity and the application process for new licences is largely the same. However, ESCA has released a new set of rules dealing with the eligibility of companies and their personnel for licensing purposes that provides more detail as to what it expects from candidates.

"What we are still hearing from clients is that the division of oversight between ESCA and the Insurance Authority continues to provide practice problems for the traditional IFA model which relies on advisors being able to advise clients on both investment and insurance products at the same time. Under the current regime for an advisory firm to provide this holistic advice to its clients, it would have to use separate personnel from its ESCA-licensed entity and IA-licensed entity."

© MENA Fund Manager 2016

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