DFSA Consultation Paper No. 173: Overhaul of the DIFC Collective Investment Funds Framework

On 7 July 2026, DFSA published Consultation Paper No. 173 (CP 173), proposing a comprehensive modernisation of the DIFC’s Collective Investment Funds framework.

The consultation represents the most significant review of the regime since its introduction in 2006 and subsequent reforms in 2010. It reflects the considerable growth and increasing sophistication of the DIFC’s asset management sector, as well as evolving international regulatory standards and the DFSA’s supervisory experience.

At its core, CP 173 seeks to move the regime towards a more risk-based and proportionate model, particularly for funds marketed to professional investors. The proposed reforms would reduce prescriptive requirements where investor protection concerns are lower, while maintaining safeguards in areas the DFSA considers to present material risks.

A shift towards proportionate regulation

A recurring theme throughout CP 173 is the DFSA’s intention to regulate according to risk rather than fund label.

The DFSA recognises that many existing requirements were designed for a market that looked very different two decades ago. As fund structures have become increasingly sophisticated, rigid classifications and specialist fund rules can create regulatory friction without necessarily improving investor outcomes.

The proposals therefore seek to provide greater flexibility for professional investor funds while preserving more extensive protections for Public Funds that may be accessible to retail investors.

This approach aligns with broader international trends, where regulators are increasingly focusing on governance, transparency and risk management outcomes rather than highly prescriptive product-specific rules.

1. Greater flexibility for private funds

One of the most significant reforms is the proposed scaling back of specialist fund classifications and associated requirements for Qualifying Investor Funds and Exempt Funds.

Key proposals include:

• Removing or reducing a number of specialist fund requirements that currently apply regardless of a fund’s actual risk profile.
• Eliminating dedicated money market fund and private equity fund rules for Exempt Funds.
• Relaxing certain restrictions applicable to credit funds, including: 
  • lifting prohibitions on cross-border trade finance activities;
  • removing certain related-party lending restrictions; and
  • facilitating financing strategies such as NAV lending, subject to appropriate safeguards.
• Providing greater flexibility for hybrid debt and equity strategies.

The practical effect is that managers will have greater freedom to structure funds according to investment objectives rather than regulatory classifications.

For alternative asset managers in particular, the changes should reduce complexity for multi-strategy vehicles and make the DIFC framework more accommodating to market developments that have emerged since the original rules were introduced.

Public Funds, however, would continue to be subject to more detailed specialist requirements given their retail investor exposure.

2. Streamlined licensing for investment managers

CP 173 also seeks to simplify the licensing framework for fund managers.

Under the proposal, activities such as Dealing in Investments as Agent and Arranging Deals in Investments would be treated as integral components of fund management when carried out pursuant to delegated fund mandates.

As a result:

• a single Managing Assets licence would generally be sufficient for delegated fund management activities; and
• managers would no longer need to obtain multiple licences to perform functions that are ancillary to portfolio management.

This is a relatively technical amendment but could have meaningful practical benefits. It should simplify authorisation processes, reduce compliance costs and remove uncertainty around the scope of permissions required by fund managers operating within delegated structures.

Importantly, the proposal may not extend to all business models. Firms managing separately managed accounts (SMAs) may still need to consider whether additional permissions remain necessary.

3. Modernising master-feeder structures

The DFSA is also proposing a number of changes aimed at modernising master-feeder arrangements for Public Funds.

The proposals include:

• expanding the definition of "Master Fund" to permit direct investment by institutional and professional investors alongside feeder funds; and
• removing legacy eligibility requirements that have limited the practical use of feeder structures, including: 
  • the requirement for regular offerings by at least three market makers; and
  • the 20% cap on a feeder fund’s participation in a master fund.

These changes appear intended to make the DIFC regime more consistent with international fund structuring practices and could increase the attractiveness of DIFC-based Public Funds for both regional and international managers.

4. Removal of the external fund manager regime

One of the more consequential proposals is the abolition of the External Fund Manager (EFM) regime.

The EFM framework currently allows certain non-DIFC managers to manage domestic DIFC funds without obtaining full DFSA authorisation

The DFSA proposes removing this route entirely.

In practice, this reflects a broader policy preference for firms managing DIFC funds to maintain a meaningful presence within the DIFC and operate under full DFSA supervision.

While this change may increase regulatory obligations for certain existing managers, it also aligns with wider international regulatory expectations regarding substance, accountability and supervisory oversight.

Managers currently relying on the EFM framework should begin assessing the potential operational and licensing implications at an early stage.

5. Expanded co-investment opportunities

The consultation also proposes more flexible arrangements for employee and sponsor participation in private funds.

The changes would:

• enable certain employees involved in investment management or advisory functions to invest in funds managed by their employer;
• permit participation directly or through dedicated investment vehicles;
• disapply certain minimum subscription requirements; and
• relax aspects of the client classification framework for eligible participants.

The DFSA is similarly proposing to expand sponsor investment exemptions, including in relation to venture capital fund structures.

These changes recognise that employee participation and sponsor co-investment are common features of private fund structures internationally and can help align the interests of managers, sponsors and investors.

Looking ahead: Tokenisation and long-term investment funds

CP 173 also seeks feedback on a number of emerging areas that may shape future reform.

These include:

• the tokenisation of fund units and fund assets, including tokenised money market funds; and
• the potential introduction of a Long-Term Investment Fund (LTIF) regime to facilitate retail access to certain illiquid real-economy assets.

While these proposals remain at an early stage, they provide a useful indication of the DFSA’s longer-term policy priorities and its willingness to explore innovative investment structures within an appropriately regulated environment.

Key takeaways for fund managers

For most fund sponsors and managers, the consultation is likely to be viewed as a positive development.

Potential benefits include:

• greater flexibility for private and alternative investment funds;
• reduced regulatory complexity for multi-strategy structures;
• streamlined licensing requirements;
• modernised master-feeder arrangements; and
• enhanced employee and sponsor participation mechanisms.

At the same time, firms should assess the impact of the proposed reforms on:

• existing fund structures;
• governance and valuation frameworks;
• borrowing and leverage disclosures;
• employee investment arrangements; and
• any reliance on the External Fund Manager regime.

Several proposals may also warrant further industry feedback, particularly around valuation independence requirements, the scope of employee investment relief and the operation of sponsor investment exemptions.

Next steps

The consultation is open until 7 September 2026, with the DFSA proposing a three-month implementation period following finalisation of the reforms.

Given the breadth of the proposed changes, firms should consider conducting an early impact assessment and, where appropriate, engaging with the consultation process.

Conclusion

CP 173 represents a significant evolution of the DIFC funds framework. Rather than introducing wholesale new obligations, the DFSA has focused on recalibrating the regime to better reflect the risks presented by different fund structures and investor types.

If implemented substantially in their current form, the proposals should further enhance the DIFC's attractiveness as a regional fund domicile while maintaining the regulatory standards expected of a leading international financial centre.