Feedback Statement on CP161 - Enhancing Proportionality in Prudential Regulation

The Riffle

The Dubai Financial Services Authority (DFSA) has released its Feedback Statement on Consultation Paper No. 161 (CP161), outlining key enhancements to proportionality in prudential regulation. These changes are designed to align capital and liquidity requirements more closely with the specific risk profiles and activities of Authorized Firms (AFs) operating in the DIFC. Following public consultation, the DFSA has confirmed several significant updates that will shape the regulatory landscape over the coming years.

Key Changes and Facts

✅ Capital Requirements Overhaul

• Removal of Expenditure-Based Capital Minimum (EBCM) for certain category 3 AFs not holding client assets or insurance monies.

• Introduction of Activity-Based Capital Requirement (ABCR) to better reflect the nature of services provided.

• Clarification of Base Capital Requirements (BCR) across multiple financial services.

✅ Liquidity Rules Update

• Expanded eligible currencies for high-quality liquid assets, adding GBP and EUR alongside USD and AED.

• Alignment of liquid asset requirements across category 3 and 4 firms.

• Recategorization of AFs dealing as matched principal from category 3A to category 2 under the Basel framework.

✅ Professional Indemnity Insurance (PII)

• Removal of mandatory PII for AFs subject to the ABCR, while retaining it for insurance intermediaries, managers, and financial advisers.

✅ Phased Implementation

• Changes that reduce regulatory burden will take effect from 1 July 2025.

• New requirements (e.g., ABCR, PII) will have a transitional period until 1 July 2026, giving firms time to adjust.

• Mandatory reporting for ABCR will be required via the EPRS system by Q3 2026.

Next Steps

• For AFs: Review the revised rules, assess the impact of ABCR, and begin preparations to meet the new capital, liquidity, and reporting requirements by the specified deadlines.

• For DFSA: Publish supporting templates and guidance for ABCR reporting and provide supervisory engagement during the transition period.

• For industry stakeholders: Stay updated on the phased rollout and seek clarification where needed to ensure timely compliance.

Summary

The DFSA’s feedback on CP161 marks a significant step in tailoring prudential regulation to the realities of the DIFC market. By replacing broad, one-size-fits-all measures with more proportionate, activity-based requirements, the regulator aims to strengthen financial stability while reducing unnecessary regulatory burden. With a clear roadmap and a phased approach, AFs now have the time and tools to transition smoothly into this updated framework.

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