12 Apr 2017

Single Family Office Regime

Authored by: Hadef & Partners, Sector Groups

Single Family Office Regime

Family Holding Company Structure in the DIFC

We were recently involved in a family restructuring advising a large family group whereby a DIFC holding special purpose vehicle incorporated as a company limited by shares (“Family Member SPV”) was created for each family member who owned the entire interest in order to achieve a number of different objectives, including the following:

  1. own shares in the family holding company so shares were not held directly to ensure that each family member would only own shares in the business by indirectly owning shares in a Family Member SPV (“Family Member SPV Shares”);
  1. ensure that the majority of the legal and economic interest in each Family Member SPV would, in aggregate, be owned by the relevant family members;
  1. ensure to the extent permitted under Shariah Law, that a foreign family member who becomes shareholder in a Family Member SPV under the rules of Shariah Law cannot affect the operation and management of the group companies; and
  1. enable the interest held by a family member to be inherited through successive generations by transferring his respective Family Member SPV Shares.

We note that the DIFC would generally grant an exemption to each Family Member SPV from being required to lease separate office space provided that the family holding company is established in the DIFC so this substantially reduces the costs associated with such structure.

With respect to the intermediate holding companies established along the key business lines, Intermediate Special Purpose Vehicles (“Intermediate SPVs”) were introduced in the DIFC by the DIFC Authority. Intermediate SPVs are only available to entities that already have a substantive presence in the DIFC, which therefore requires the applicant to already be licensed or incorporated in the DIFC and have a physical presence in the DIFC. The establishment of the family holding company in the DIFC will satisfy this requirement.  Unlike the family holding company, an Intermediate SPV does not need to lease its own separate office premises and can instead be located at the office address of the family holding company. Currently, the application fee to establish an Intermediate SPV is US$1,000 and the annual licensing fee is US$3,000.

Single Family Office Regime

The proposal to establish a Single Family Office (“SFO”) regime is driven by a desire to encourage ‘super wealth bracket families’ to manage and administer their wealth in or from the DIFC under an appropriate regulatory environment.

Under the current regulatory arrangements, the Dubai International Financial Centre Authority (“DIFCA”) and the Dubai Financial Services Authority (“DFSA”) share the responsibility for regulating activities that constitute private wealth management. The key features of the current regulatory regime include the following:

  1. The DIFC is a common law jurisdiction, in that it has its own civil and commercial laws, administered by the DIFC courts;
  1. The DIFCA is the Centre’s authority, and has the responsibility for providing and administering the regime which provides the infrastructure for the operations within the DIFC. For this purpose, it administers a range of legislation, which includes the DIFC Companies Law;
  1. The DFSA is the financial services regulator of the financial services and related activities in the DIFC. Any activity which falls within one or more definitions of a ‘financial service’ under the General (GEN) Module of the DFSA’s Rulebook requires a DFSA licence. For the purposes of administering the financial services and related activities in the DIFC, the DFSA has wide administration powers, which stem from the DIFC Laws it administers, including DIFC Law 1 of 2004 (the “Regulatory Law 2004”);

There are three distinct features of the DIFC wealth management regime:

  1. There is a bespoke regime for regulating SFOs, under which the SFO can operate in the DIFC with a licence granted by DIFCA. The DFSA does not regulate SFO activities or their operators, by providing them express carve-outs from its financial services licensing regime. However, SFOs are required to register under the DFSA’s Designated Non-Financial Businesses and Professions (“DNFBP”) regime and this makes them currently subject to the DFSA administered Anti-Money Laundering (“AML”) regime.
  1. Any third party who provides wealth management services to one or more SFOs, which qualify under the General Module of the DFSA’s Rulebook as financial services, is subject to the DFSA regime. This is on the basis that only self-managed SFOs are excluded from the DFSA regime. A distinction is drawn between managing or advising in respect of a family’s own funds.
  1. There are a number of structures which can be used for family wealth management, whether on a self-managed basis or through third-party management/advisory services, which provides flexibility and choice. The structures currently available in the DIFC include common law trusts, partnerships and corporate vehicles.

The four key findings from the Wealth Management Working Group, of which Hadef & Partners was a member, in respect of the DIFC’s current regulatory environment concerning SFOs were that:

  1. The DNFBP regime being made applicable to SFO’s is perceived by some to be a deterrent to establishing in the DIFC.
  1. Provided that the self-management principle is being adhered to, regulatory involvement with SFOs and their management/advisory/enforcement structures should be kept at a minimum.
  1. Privacy of information remains a key concern and the DIFC’s public register is not conducive to SFOs setting up entities in the DIFC as part of their family wealth management structures.
  1. The minimum qualifying amount of assets to qualify as an SFO in the DIFC should be reconsidered.

The following recommendations were made by the Wealth Management Working Group:

  1. The automatic DNFBP registration requirements for SFOs to be replaced with a regime where DIFCA, during the assessment of the SFOs application for establishment in the DIFC, will make an assessment of whether the SFO should register with the DFSA as a DNFBP. DIFCA and the DFSA should agree on the risk assessment guidelines to be applied in this regard. Such guidelines should be published on DIFCA’s website.
  1. Private trust companies and management/advisory/service entities and enforcement/protector mechanisms of such private trust companies, established for the sole purpose of overseeing or managing the affairs of an SFO should not be subject to any form of financial services regulation by the DFSA and that the DFSA’s GEN Rule 2.23 (Providing Trust Services) be amended accordingly. It was also suggested that DIFCA and DFSA agree to the guidelines in this regard to ensure that DIFCA properly assesses whether such entities/structures should be referred to the DFSA for a financial services license application. Such guidelines should be published on DIFCA’s website.
  1. The ownership details of SFOs and the private trust companies and/or management entities (insofar as they are incorporated entities) should be held on a private register. However, such details should remain disclosable to regulators and other authorities that may request such information under compulsion of law or any purpose permitted by DIFC Law 1 of 2007 (the “DIFC Data Protection Law”).
  1. The minimum qualifying amount to constitute an SFO in the DIFC should be increased to US$50 million but illiquid assets should also be included in calculating the amount.

These recommendations have all been accepted by the DIFC Authority and the changes to the SFO Regime are expected to be implemented in the near future.