DFSA TO MAKE SUBSTANTIAL CHANGES TO ITS CURRENT CLIENT CLASSIFICATION
PROVISIONS
First published by Thomson Reuters Accelus Regulatory Intelligence/Compliance Complete
Mar 12 2015
Natalie Boyd
Following on from the implementation of the manager-friendly qualified investor fund (QIF) fund
regime in August 2014, the Dubai Financial Services Authority (DFSA) continues to make strides
in attracting international investment firms to the UAE's leading financial free zone, the Dubai
International Financial Centre (DIFC).
Committed to the continuous development of the DIFC's regulatory regime in line with
international best practices, the DFSA has recently announced proposals to make substantial
changes to its current client classification provisions with effect from April 1, 2015. (Subject to
one exception: the increase of the net asset test from "assessed" Professional Clients will come
into effect on April 1, 2016 in order to give firms sufficient time to re-assess clients who currently
exist in this category.)
The proposals stem from continuing issues identified by the regulator in its dealings with
authorised firms grappling with practical difficulties in complying with the existing client
classification regime and their own business structures and client base.
As is common to most international financial services regulatory regimes, in order to ensure that
clients are provided with adequate regulatory protection, the DFSA's existing client classification
regime requires authorised firms to determine whether a client is a retail client or non-retail client
prior to the provision of any financial services.
This distinction is derived from the general consideration that non-retail clients are more likely to
have a greater appreciation of inherent investment risk in certain financial products and services
and sufficient resources to negotiate related terms and to pursue and enforce available legal
remedies. The DFSA has however acknowledged that, since its introduction in 2007, certain
parts of the regime have become unwieldy, as evidenced by an increasing number of requests
from authorised firms for waivers and modifications.
Following an extensive consultation process which culminated in the final quarter of 2014, market
feedback has given rise to a number of significant enhancements to, and restructuring of, the
existing regulations. While still respecting IOSCO standards, the DFSA has taken care to align its
new regulations with the EU regime for investment business. This will be a welcome move for
locally regulated branches or members of international firms who have previously been impeded
from conducting business in or from the DIFC as a result of unwarranted differences between
DIFC and EU client classification requirements.
While the current regime of having three types of clients — retail clients, professional clients and
market counterparties — will not change, it will be extended to provide for three distinct
categories of professional clients. These are:

"Deemed" professional clients — wholesale or institutional clients with sufficient expertise
and resources to forego the need for the firm to undertake a detailed assessment of the
clients' assets or expertise. This category has also been extended to include large
undertakings and single family office licencees;

"Assessed" professional clients — clients to whom professional client status may be
confirmed following satisfaction of a two-fold net asset and knowledge and experience
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assessment. In order to reflect the effects of inflation, the net asset threshold will be doubled
from its current threshold to $1 million and certain additional enhancements have been made
to existing look through arrangements and distinctions between individuals and corporate
undertakings.

"Service -based" professional clients — clients who would be considered to be professional
clients based upon the nature of the financial services and associated risks involved. The
financial services identified by the DFSA for the purpose of this new categorisation are
providing credit to undertaking for business purposes and advising and arranging services for
corporate structuring and financing.
The first two client categories already exist under the current client classification regime but have
been remodelled in order to address firms' concerns as to interpretation and flexibility. The third
category is a new addition to the regime and is consistent with the DFSA's risk based approach
to its regulations.
While firms will not be required to undertake a detailed assessment of service-based clients'
expertise or net assets, they will be required to demonstrate to the DFSA that they have a
reasonable basis for electing this category of classification. Under the new regime, only servicebased and assessed professional clients will be entitled to opt in as retail clients.
Subject to limited conditions, additional flexibility has been built into the regulations in order to
allow firms to bundle financial services provided to clients with similar services provided by other
group members and, more significantly, to rely on client classifications made by their head offices
or other group members, no doubt a welcome relief to firms who experience practical
complexities in applying the current classification regime to intricate group wide structures.
Such extensive changes to the client classification requirements will inevitably impact on firms'
existing client agreements, particularly for those who rely on client agreements entered into by
their head office or other group members. The DFSA has cautioned that there will be limited
scope for an authorised firm to rely on this type of client agreement and as a consequence will
restrict the ability for a firm to do so except in limited circumstances.
Importantly, the new regime will not have retrospective effect and as such firms will not be
required to unwind existing transactions. The DFSA has been mindful to implement
grandfathering provisions into the client classification requirements in order to assist firms with
the transition of existing clients and client agreements into the new regime.
Natalie Boyd is a finance and regulatory partner at K&L Gates. Based in Dubai, she focuses her
practice on conventional and Islamic structured finance, secured bank lending, debt capital
markets, derivatives and GCC wide financial services regulation. The views expressed are her
own.
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