Prudential categories
The eight DFSA categories and what each one costs to hold
In short
Your category follows from the activities you intend to carry on. It sets base capital, the expenditure based capital minimum, reporting frequency and supervisory intensity. Most new DIFC entrants land in Category 3C at US$500,000 base capital, or Category 4 at US$10,000.
Category 1
Banks and deposit-taking institutions
Permitted activities
- Accepting Deposits
- Providing Credit from own balance sheet
The heaviest prudential category. Firms face full capital adequacy, liquidity and large exposure requirements, and the authorisation process is correspondingly long.
Category 2
Proprietary trading firms and principal dealers
Permitted activities
- Dealing in Investments as Principal
- Providing Credit where not Category 1
Applies where the firm puts its own balance sheet at risk in market transactions. Market risk and credit risk capital requirements apply on top of base capital.
Category 3A
Brokers and execution-only intermediaries
Permitted activities
- Dealing in Investments as Matched Principal
- Dealing in Investments as Agent
The firm transacts for clients without taking principal risk on its own account beyond matched positions.
Category 3B
Fund custodians and trustees
Permitted activities
- Providing Custody for a Fund
- Acting as Trustee of a Fund
Holding or controlling client assets on this scale attracts the higher base capital and stricter client asset rules.
Category 3C
Asset managers, fund managers and discretionary portfolio managers
Permitted activities
- Managing Assets
- Managing a Collective Investment Fund
- Providing Custody other than for a Fund
- Managing a Profit Sharing Investment Account on an unrestricted basis
The most common category for new DIFC entrants in asset and wealth management. The expenditure based requirement usually exceeds base capital once the cost base is real.
Category 3D
Payment service providers and money transfer businesses
Permitted activities
- Providing Money Services
- Operating a Crowdfunding Platform
Payment and money services carry heavy AML expectations relative to their capital requirement, and safeguarding rules apply to client funds.
Category 4
Corporate finance advisers, insurance brokers and arrangers
Permitted activities
- Advising on Financial Products
- Arranging Deals in Investments
- Insurance Intermediation
- Insurance Management
- Operating an Alternative Trading System
- Providing Fund Administration
- Acting as Trustee of a Fund where not Category 3B
The lightest category. The firm neither holds client assets nor deals as principal, so the expenditure based requirement is what usually sets the capital number.
Category 5
Islamic financial institutions operating the entire business in accordance with Shari'a
Permitted activities
- Islamic Financial Institution managing a Profit Sharing Investment Account on an unrestricted basis
Requires a Shari'a Supervisory Board, a Shari'a compliance function and systems that evidence compliance throughout the business.
Base capital is only half the answer
Every Authorised Firm also holds an expenditure based capital minimum, calculated as a number of weeks of annual audited expenditure. For most firms with a real cost base that figure exceeds base capital. Model both across three years and hold the higher number with headroom. See DFSA capital requirements.Not sure which category applies?
It follows from the activities, and the activities are defined in the DFSA General Module rather than in commercial language. We map it before anything is drafted.