Summary of Feedback on Consultation Paper 161 – Enhancing Proportionality in Prudential Regulation

The Dubai Financial Services Authority has finalised a series of reforms to its prudential framework, following industry feedback on Consultation Paper 161 (issued in October 2024).

The Authority’s Board approved the rule changes on 30th April 2025, with revised rules published and coming into force on 1st July 2025. Certain new requirements will take effect after a transitional period, from 1st July 2026.

The reforms are designed to ensure capital and liquidity requirements are proportionate to firms’ size, complexity, and risk profile, supporting a more efficient and internationally aligned regulatory environment in the Dubai International Financial Centre.

Summary of Feedback

• Removal of the Expenditure Based Capital Minimum – The Dubai Financial Services Authority’s proposal to remove the Expenditure Based Capital Minimum (EBCM) requirement for Category 3 firms (except those undertaking specific licensed activities) that do not hold client assets or insurance monies was broadly welcomed. Some respondents favoured maintaining a blanket requirement for all firms in this category, but the Authority confirmed that wind-down capital will now only be required for firms holding client assets or insurance monies, with ongoing risks addressed via a new activity-based capital requirement.

• Liquidity Requirements – The Dubai Financial Services Authority clarified their proposal for firms in Category 3 to hold liquid assets in the form of their applicable Base Capital Requirement (BCR), even if they are no longer subject to the EBCM. This aligns with the current rules for most Category 4 firms and is meant to ensure firms remain financially sound.

• Eligibility Criteria for Liquid Assets – Respondents supported widening the scope of liquid assets to improve flexibility. Based on feedback, the Authority expanded eligible currencies for government bonds used to meet liquidity requirements to include British pounds and euros, in addition to United States dollars and United Arab Emirates dirhams. Proposals to allow exchange-traded funds and securitisations were rejected due to their market and liquidity risk profiles.

• Activity Based Capital Requirement – Industry respondents supported the introduction of an activity-based capital requirement to ensure firms maintain an appropriate level of loss-absorbing capital. Some firms requested further clarification on how specific components would apply to their business models. The Authority advised that firms should consult their supervisory contacts during the transitional period. Proposals to introduce additional factors, such as daily trading flow, were not adopted.

• Matched Principal Dealers and Prudential Category Changes – The Authority’s decision to move firms dealing as matched principal from Category 3A to Category 2 was largely accepted. Some firms sought clarification on prudential implications. The Authority confirmed that these firms will continue to follow the Basel framework but will be exempt from requirements such as the leverage ratio and capital conservation buffer.

• Removal of Internal Capital and Risk Assessment Processes – The removal of the requirement for internal capital and risk assessment processes for Category 3 firms was supported. The Authority emphasised that it retains the power to impose additional capital or liquidity requirements where justified by a firm’s risk profile.

• Professional Indemnity Insurance Requirements – Opinions were divided. The Authority will proceed with its proposal to remove mandatory professional indemnity insurance for firms subject to the activity-based capital requirement, except where international standards suggest it should remain (for example, insurance intermediaries and financial advisers). The required cover period was reduced from continuous to four years.

• Implementation Timeline – Respondents supported a phased approach. Easing measures, such as the removal of the Expenditure Based Capital Minimum, will take effect from 1 July 2025. New requirements, such as the activity-based capital requirement and revised professional indemnity insurance rules, will take effect from 1 July 2026.

What is Consultation Paper 161?

As a reminder, Consultation Paper 161, issued in October 2024 by the Dubai Financial Services Authority, proposed reforms to enhance the proportionality of prudential regulation for authorised firms operating in the Dubai International Financial Centre.

The reforms aim to ensure that capital and liquidity requirements are better aligned to firms’ size, complexity and risk profiles, reducing unnecessary regulatory burden while maintaining market integrity and client protection.

The changes particularly affect firms in Category 3 but also introduce targeted adjustments for firms in Categories 2 and 4. The proposals build on earlier reforms to the framework for Category 4 firms and draw on international standards, including those used in the European Union and the United Kingdom.

How Clarity Can Help

With the Dubai Financial Services Authority finalising key reforms under Consultation Paper 161, firms must review how the new capital, liquidity and reporting requirements will affect their business.

Clarity provides expert support to help firms interpret the revised rules, assess their capital planning, and prepare for both the 2025 and 2026 implementation milestones.

For expert assistance in adapting to the updated prudential regime, contact Clarity today.