Reduced regulatory burden for smaller firms in the DIFC

On 7 November 2022, the DFSA issued Consultation Paper 145 which sets out proposals on reducing the prudential burden for select lower risk firms by:

1.      Defining lower risk firms and carving out a new prudential regime
2.      Removing EBCM but increasing base capital
3.      Adjusting the credit floor for liquid assets
4.      Liquid assets to match base capital
5.      No IRAP

The DFSA has invited comments on its proposals by 6 January 2023 with changes are planned to take effect from 1 January 2024.

The DFSA proposes to introduce a more proportionate prudential framework based on the size, complexity and risk inherent in smaller firms. This means material changes for those firms labelled as Category 4 and which have straightforward, lower risk business models.

If an Authorised firm now qualifies as a Lower Prudential Risk Firm, the suggestion is it will no longer need to maintain an EBCM component, but its Base Capital component will increase from $10,000 to $30,000. For all other Category 4 firms, it is proposed that the Base Capital will increase to $30,000 or $140,000 depending on licensed activities, and the EBCM component will remain in the range of 6 -18 weeks of operating expenses. There are additional capital components set out in the Consultation Paper for Money Service transmitters in relation to stored value and transactions if providing payment services sizes.

If the proposals go ahead, the requirement to maintain liquid assets in excess of the EBCM will fall away for Lower Prudential Risk Firms. Instead, the requirement will be to hold liquid assets in excess of the base capital component. For other Category 4 firms, the liquid assets Rule will remain in force against the EBCM component.

Additionally, there is a proposed relaxation to the credit rating floor from AAA to BBB/Baa2 to facilitate the holding of liquid assets. This will allow Authorised Firms access to a broader set of banking relationships and hopefully make the banking process smoother.

In terms of EPRS reporting requirements, the need to submit a B180 form would be removed for Lower Prudential Risk Firms. There would be no requirement for any Category 4 firm to submit an IRAP (this relaxation has been similarly extended to Category 3B, 3C and 3D firms).

As things stand, those firms captured in the new set of Lower Prudential Risk Firms are those offering the following financial services on the left of the table. On the right are all those firms who will experience no change:

We at Clarity Solutions recognise that the DFSA Prudential Rules can be a complex area to interpret and we are available to help you understand the prospective changes and frame any responses you might like to make. Please contact us at [email protected] and we can help you decide on your next steps.