DFSA Proposes Biggest DIFC Collective Investment Fund Overhaul in 16 Years

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DFSA's biggest DIFC funds overhaul in 16 years opens for consultation until 7 September 2026 - what fund managers must review now.

The DFSA has launched Consultation Paper 173, its most significant review of the DIFC Collective Investment Funds framework since 2010.
Proposals would replace rigid private fund classifications with a more flexible, risk-based model for Qualified Investor Funds and Exempt Funds.
Credit fund rules would relax significantly, including removal of the 90 per cent lending requirement and new scope for hybrid debt-equity strategies.
The DFSA plans to abolish the External Fund Manager regime and expand the definition of Master Funds within master-feeder structures.
Early-stage proposals explore tokenised fund units and a Long-Term Investment Fund regime that could give retail investors access to illiquid assets.
The consultation closes on 7 September 2026, with a three-month implementation period proposed once the reforms are finalised.

How Qualified Investor Funds Fit Into the DFSA's Reform Plans

The Dubai Financial Services Authority (DFSA) has opened its most far-reaching consultation on the DIFC Collective Investment Funds framework since 2010. Consultation Paper 173 sets out proposals that would reshape how Qualified Investor Funds (QIFs), Exempt Funds and credit funds are structured, licensed and supervised within the Dubai International Financial Centre (DIFC).

Alongside changes to the master-feeder fund structure rules, the DFSA is also floating longer-term ideas, including tokenised fund units and a possible retail route into illiquid assets. For investment advisers, fund managers, accountants and compliance teams operating in the DIFC, the scope of CP 173 makes early engagement worthwhile.

Why the DFSA Is Overhauling the DIFC Funds Framework Now

The DFSA published Consultation Paper 173 on 7 July 2026, describing it as the most significant review of the DIFC's fund framework since the regime was last substantially updated in 2010. The original rules, introduced in 2006, have remained largely intact even as the funds and asset management industry evolved considerably over two decades.

According to the DFSA, the proposals aim to align regulatory requirements more closely with the risks each fund structure presents, improve clarity and consistency, and reduce unnecessary regulatory burden while maintaining a proportionate approach to investor protection. This is not the DFSA's only live consultation this year; CP 172 on Islamic finance rule enhancements remains open too, underlining a busy regulatory calendar for DIFC-based firms.

The consultation is split into two parts. Part I sets out concrete rule changes covering private funds, credit funds, investment manager licensing and master-feeder structures. Part II seeks early feedback on emerging areas, including tokenised fund units and a possible Long-Term Investment Fund regime. Feedback closes on 7 September 2026, with the DFSA proposing a three-month implementation period once the final rules are confirmed.

A More Flexible, Risk-Based Approach to Private and Credit Funds

Removing Rigid Fund Classifications

CP 173 proposes eliminating the DIFC's dedicated fund categories for money market funds and private equity funds within the Exempt Fund regime. Rather than fitting a strategy into a fixed label, managers would apply a single, more flexible standard across QIFs and Exempt Funds, based on the risk the structure actually presents.

The DFSA also proposes wider participation by employees involved in investment management. Staff would be able to invest directly in employer-managed private funds, or through dedicated employee investment vehicles, with certain Professional Client thresholds disapplied for those who meet relevant experience criteria. The DFSA frames this as a way to strengthen recruitment and align staff interests with fund performance.

Greater Flexibility for Credit Funds

Credit funds stand to see some of the most material changes. The proposals would remove the current requirement that 90 per cent of a fund's assets be used specifically for lending, opening the door to hybrid debt-equity strategies that blend credit and equity exposure within a single vehicle.

Cross-border trade finance activity, currently restricted, would also become permissible, alongside NAV lending - borrowing secured against a fund's net asset value - within defined limits. The DFSA further proposes reducing the higher base capital requirement currently applied to credit fund managers and removing dedicated credit fund application and annual fees.

Area	Current DIFC Rule	Proposed Change Under CP 173
Credit fund lending requirement	At least 90% of fund assets used specifically for lending	Requirement removed; hybrid debt-equity strategies permitted
Master Fund participation	Feeder Funds capped at 20% holding; three market makers required	Cap and market-maker requirement removed; public Feeder Funds enabled
External Fund Manager (EFM) regime	Offshore managers can rely on EFM status without a full DIFC presence	EFM regime abolished; full DFSA authorisation required to manage Domestic Funds
Fund valuation and pricing	Functional separation from investment management required for hedge funds only	Functional separation required across all fund types

Simplifying Fund Manager Licensing and Expanding Master-Feeder Structures

Licensing and Delegation Changes

CP 173 also targets how investment managers are licensed. The DFSA proposes clarifying that dealing and arranging activities are inherent to asset management, allowing firms to operate under a single Managing Assets licence rather than holding multiple permissions for delegated fund mandates.

The most consequential licensing proposal is the abolition of the External Fund Manager (EFM) regime, which currently allows offshore managers to run DIFC-domiciled funds without establishing a full DIFC presence. Under the proposals, non-DIFC managers would need to obtain full DFSA authorisation to manage Domestic Funds, a change the DFSA attributes to a growing pipeline of firms already seeking full authorisation.

Master-Feeder Modernisation

Master-feeder arrangements would also be modernised. The proposals broaden the definition of a Master Fund to accept direct subscriptions from institutional and professional investors, alongside its Feeder Funds. They also remove two long-standing eligibility barriers: the requirement for three market makers and the 20 per cent holding cap that limited Feeder Fund participation.

Removing these barriers should make it easier to establish public Feeder Funds in the DIFC, widening market access beyond arrangements previously limited to specific investor types. Firms already using the DIFC's Variable Capital Company regime, finalised earlier in 2026, should assess how these changes interact with their existing structuring choices.

Tokenised Fund Units and a Future Retail Route Into Illiquid Assets

Beyond the immediate rule changes, CP 173 opens early-stage discussion on two forward-looking initiatives. The first covers tokenised fund units and assets, including tokenised money market funds, exploring how digital unit registers and distributed ledger technology could support fund administration and settlement within the DIFC.

The second is a proposed Long-Term Investment Fund (LTIF) regime, inspired by the European Union's ELTIF (European Long-Term Investment Fund) and the United Kingdom's LTAF (Long-Term Asset Fund) models. If developed, it would create a regulated route for retail investors to access illiquid, real-economy assets such as infrastructure, real estate and energy transition projects, currently reserved largely for professional and institutional investors.

Both initiatives remain at an early, feedback-gathering stage rather than firm proposals, and the DFSA has posed open questions on investor access, redemption mechanics and investor awareness requirements. Even so, they signal where DIFC fund regulation may be heading over the medium term, and firms with tokenisation or illiquid asset strategies already in development would be well placed to respond early.

Practical Steps for Investment Advisers, Fund Managers and Compliance Teams

Fund managers holding existing DFSA waivers or modifications should map how CP 173 affects each one, since several current permissions rely on rules the consultation proposes to amend or delete. Firms relying on the External Fund Manager regime face the most immediate strategic question, given the DFSA's proposal to abolish it entirely.

Investment advisers distributing DIFC funds to UAE clients should track the consultation alongside other perimeter changes already reshaping the advisory landscape, including advisers already adjusting to the CMA's expanded federal perimeter for cross-border investment advice. Compliance teams should also begin reviewing valuation governance now, given the proposal to require functional separation between fund valuation and investment management across all fund types, not just hedge funds.

Accountants and administrators supporting DIFC funds should note the proposed changes to credit fund capital requirements and fee structures, along with the extended first reporting period, which could ease early-stage administrative costs for newly registered funds. With the consultation open until 7 September 2026, firms that respond early are better placed to influence the DFSA's final rules rather than simply adapting to them afterwards.

What Clients are Asking their Advisors

What is DFSA Consultation Paper 173?

DFSA Consultation Paper 173 (CP 173) is the Dubai Financial Services Authority's proposal to overhaul the DIFC's Collective Investment Funds framework. Published on 7 July 2026, it is the most significant review of the regime since 2010, covering private funds, credit funds, investment manager licensing and master-feeder structures.

How can fund managers respond to the DFSA's fund consultation?

Fund managers, advisers and other stakeholders can submit feedback through the DFSA's online response form before the consultation closes on 7 September 2026. The DFSA has published the consultation paper and draft legislative instruments on its website for firms to review before responding.

What is the difference between a Qualified Investor Fund and an Exempt Fund under the new DIFC proposals?

Both are private fund categories aimed at professional investors, but CP 173 proposes removing several classification distinctions between them, including dedicated money market and private equity fund rules. Under the new risk-based approach, requirements would depend more on a fund's actual strategy than on a fixed category label.

What happens to existing DIFC funds if the DFSA's proposals go ahead?

Existing funds and managers would move into a three-month implementation period once the DFSA finalises the reforms. Firms relying on rules the consultation proposes to amend, such as the External Fund Manager regime or current credit fund requirements, should start assessing the practical impact now.