Strengthening Internal Audit Functions

Navigating DFSA and FSRA Requirements in 2025

As regulatory scrutiny intensifies, robust internal audit frameworks become essential for compliance and competitive advantage

The regulatory landscape for wealth management firms, External Asset Managers, and private banks operating within the DIFC and ADGM has evolved significantly throughout 2025, with both the DFSA and FSRA placing heightened emphasis on internal control frameworks and audit effectiveness. This intensified focus reflects global regulatory trends and prepares UAE financial centers for the upcoming FATF mutual evaluation in 2026. For compliance professionals, understanding and implementing robust internal audit functions is no longer optional, it's a fundamental requirement for regulatory survival and business success.

The Regulatory Context: Why Internal Audit Matters More Than Ever

The DFSA's Business Plan for 2025-2026 explicitly identifies governance arrangements and internal control effectiveness as priority supervisory areas, particularly within the wealth management sector which comprises approximately 78% of DIFC regulated firms. The regulator's thematic reviews are examining how firms structure their second and third lines of defense, with internal audit functions forming the critical independent assurance layer.

Similarly, ADGM's FSRA continues refining its supervision approach, incorporating lessons from international regulatory bodies and adapting frameworks to address emerging risks including cyber threats, operational resilience, and the complexities introduced by digital assets. The July 2025 introduction of the comprehensive Cyber Risk Management Framework exemplifies regulators' expectations for sophisticated risk management and internal oversight capabilities.

For wealth managers and EAMs, these developments signal that superficial compliance approaches no longer suffice. Regulators expect firms to demonstrate genuine risk awareness, embed controls throughout their operations, and maintain independent assurance functions capable of identifying deficiencies before regulators discover them.

Core Internal Audit Requirements in DIFC

Regulatory Framework Foundation

The DFSA's rulebook establishes comprehensive internal audit requirements for authorized firms, with specifications varying based on firm size, complexity, and risk profile. However, certain core principles apply universally across the wealth management and private banking sectors.

All authorized firms must establish and maintain effective systems and controls to enable compliance with applicable requirements and standards under the Regulatory Law 2004. This encompasses not merely technical compliance with specific rules but also adherence to broader principles of sound business conduct, client asset protection, and market integrity.

The systems and controls framework must include independent audit functions proportionate to the nature, scale, and complexity of the firm's business. For larger wealth managers and EAMs, this necessitates dedicated internal audit departments with clearly defined mandates, adequate resources, and direct reporting lines to boards or audit committees.

Governance and Reporting Lines

Perhaps the most critical aspect of effective internal audit functions is structural independence. The DFSA expects internal audit to operate free from management interference, with reporting lines designed to ensure audit findings reach those with ultimate governance responsibility.

Best practice structures involve internal audit heads reporting functionally to the board audit committee while maintaining administrative reporting relationships with senior management. This dual reporting model ensures audit independence while facilitating practical coordination of audit activities with business operations.

For smaller wealth management firms without dedicated audit committees, the DFSA expects alternative arrangements providing equivalent independence and board-level oversight. This might include direct chief executive engagement with internal audit outputs and board agenda items dedicated to audit findings.

Scope and Coverage Requirements

Internal audit scope must encompass all material risks facing the firm, including prudential risks relating to capital adequacy and liquidity, conduct risks affecting client outcomes and market integrity, operational risks including technology, cyber security, and business continuity, and compliance risks covering regulatory breaches and control failures.

The DFSA's 2025 supervisory priorities particularly emphasize client onboarding processes, suitability assessments at point of sale, client asset protection mechanisms, and marketing practices. Wealth managers should ensure their internal audit plans incorporate comprehensive coverage of these high-risk areas.

For firms operating under multiple regulatory permissions, internal audit must address the specific risks associated with each activity. An EAM providing discretionary portfolio management, investment advisory, and custody services requires audit coverage spanning all three business lines, with particular attention to conflicts of interest management and client asset segregation.

ADGM Internal Audit Framework

FSRA Expectations and Standards

The FSRA's approach to internal audit oversight reflects principles similar to DIFC while incorporating distinctive elements aligned with ADGM's regulatory philosophy. The General Rulebook establishes requirements for authorized persons to maintain adequate organizational arrangements including internal audit functions appropriate to their business.

The FSRA's emphasis on proportionality means internal audit obligations scale with firm size and complexity. However, even smaller wealth managers must demonstrate systematic review of key controls, independent challenge of first-line risk management, and documented escalation of significant findings to governance bodies.

One distinguishing feature of ADGM's framework is the integration of internal audit requirements with broader risk management and compliance obligations. The FSRA expects firms to demonstrate how internal audit findings inform risk appetite refinement, control enhancement, and continuous improvement of the overall control environment.

Cyber Risk Management and Internal Audit

The FSRA's July 2025 Cyber Risk Management Framework introduces specific internal audit considerations for firms subject to the new rules. All authorized persons and recognized bodies must implement robust cyber risk management frameworks approved by boards and integrated into overarching risk governance structures.

Internal audit functions must develop capabilities to assess cyber control effectiveness, including evaluating vulnerability assessment processes and penetration testing adequacy, reviewing incident response and recovery arrangements, assessing third-party ICT service provider oversight, and validating cyber risk reporting to senior management and boards.

These cyber audit requirements demand specialized technical expertise often unavailable within traditional internal audit teams. Many firms are addressing this capability gap through external specialist engagement, co-sourcing arrangements with technology audit firms, or targeted training to develop in-house expertise.

The three-month implementation period following framework finalization provides limited time for firms to establish appropriate cyber audit capabilities. Proactive organizations are already conducting gap analyses, developing cyber audit methodologies, and securing necessary resources to meet FSRA expectations.

Critical Areas for Wealth Management Internal Audit

Client Onboarding and Due Diligence

Client onboarding represents one of the highest-risk areas for wealth managers and EAMs, with deficiencies potentially triggering significant regulatory sanctions and reputational damage. The DFSA's enforcement actions have repeatedly identified client onboarding weaknesses, making this a priority audit area.

Internal audit reviews of client onboarding should assess whether know-your-customer procedures adequately verify client identities and beneficial ownership, enhanced due diligence applies appropriately for higher-risk clients, client classification processes correctly categorize clients based on knowledge and experience, and documentation standards ensure complete audit trails supporting onboarding decisions.

For firms utilizing automated onboarding systems, internal audit must evaluate technology controls, data validation processes, and manual intervention protocols when automated checks identify potential issues. The increasing sophistication of onboarding technology introduces new risks alongside efficiency benefits.

Suitability and Conduct of Business

Product and service suitability assessments represent another critical audit focus area, particularly given DFSA's 2025 emphasis on point-of-sale client protection. Internal audit must verify that wealth managers implement robust suitability frameworks spanning all client interactions.

Key audit considerations include confirmation that investment recommendations align with documented client objectives, risk tolerance, and financial circumstances, assessment whether suitability processes consider total client relationships rather than isolated transactions, evaluation of periodic suitability reviews for ongoing advisory relationships, and verification that suitability documentation enables reconstruction of advice rationale.

The DFSA's thematic reviews examine not merely whether firms maintain suitability policies but whether these policies operate effectively in practice. Internal audit provides the independent verification regulators expect to see, evidencing management's commitment to conduct of business standards.

Client Asset Protection

Safeguarding client assets ranks among wealth managers' most fundamental obligations, with regulatory frameworks in both DIFC and ADGM establishing detailed requirements. Internal audit functions must verify compliance with these complex rules through regular, comprehensive testing.

Client asset protection audits should confirm that client money and assets maintain segregation from firm proprietary holdings, reconciliations between internal records, custodian statements, and registry positions occur with appropriate frequency, and client disclosure regarding safeguarding arrangements meets regulatory standards.

For wealth managers utilizing third-party custodians, internal audit must assess the due diligence conducted on custodian selection, ongoing monitoring of custodian financial stability and operational capability, and contractual protections ensuring client asset availability even if the wealth manager or custodian encounters financial distress.

The introduction of digital assets and tokenization adds complexity to client asset protection. Firms offering these services require specialized audit approaches addressing cryptographic key management, wallet security, and blockchain-specific custody risks.

Audit of Regulatory Returns and Prudential Requirements

Financial Reporting and Auditor Coordination

Wealth managers and EAMs operating in DIFC and ADGM must submit various regulatory returns demonstrating ongoing compliance with prudential requirements including capital adequacy, liquidity maintenance, and large exposure limits. Internal audit plays a vital role in verifying return accuracy and completeness.

Internal audit should conduct periodic reviews of regulatory return preparation processes, assessing whether source data flows reliably into return calculations, return preparation involves appropriate review and approval procedures, and firms maintain documentation supporting return submission.

Coordination between internal audit and external auditors authorized by DFSA or FSRA enhances overall assurance effectiveness. Many firms establish protocols for sharing audit findings, coordinating audit coverage to minimize duplication, and ensuring consistent application of accounting policies affecting both financial statements and regulatory returns.

Capital and Liquidity Management

For wealth management firms operating under prudential regimes, internal audit must verify capital and liquidity management processes operate as intended. This includes assessing whether firms accurately calculate capital requirements across all business activities, maintain appropriate buffers above minimum regulatory requirements, and implement early warning indicators triggering management action before capital breaches occur.

Liquidity risk management represents another critical audit area, particularly for firms maintaining client money holdings or operating complex custody arrangements. Internal audit should evaluate stress testing assumptions, contingency funding plans, and cash flow forecasting methodologies supporting liquidity management decisions.

Building Effective Internal Audit Capabilities

Resourcing and Expertise

Perhaps the most significant challenge facing wealth managers in meeting regulatory internal audit expectations involves securing appropriate resources and expertise. Effective internal audit requires individuals combining technical accounting and regulatory knowledge, understanding of wealth management business models and risks, audit methodology and testing skills, and the interpersonal capabilities to challenge management constructively.

For smaller EAMs and boutique wealth managers, maintaining dedicated internal audit staff may prove economically challenging. Regulatory frameworks in both DIFC and ADGM acknowledge this reality by permitting proportionate approaches including outsourcing to specialist audit firms, co-sourcing arrangements combining internal staff with external specialists, and shared service models where multiple entities pool resources.

However, outsourcing doesn't eliminate management responsibility for internal audit effectiveness. Firms utilizing external providers must maintain oversight of audit quality, ensure independence from any other services provided by the same firm, and confirm audit methodologies align with regulatory expectations and business requirements.

Audit Planning and Risk Assessment

Effective internal audit begins with comprehensive risk assessment informing audit plan development. Leading wealth managers structure their audit planning processes around periodic enterprise risk assessments identifying key business risks, regulatory priorities and supervisory feedback, changes in business activities or operating environment, and findings from previous audit cycles requiring follow-up.

The DFSA and FSRA expect audit plans to demonstrate risk-based prioritization, with higher-risk areas receiving more frequent and intensive audit coverage. Plans should balance cyclical coverage ensuring all material areas receive periodic review with flexibility to address emerging risks or respond to incidents requiring investigation.

Multi-year audit planning helps ensure comprehensive coverage while avoiding over-concentration in particular areas during single periods. Three-year rolling plans work well for many wealth managers, providing sufficient forward visibility while retaining flexibility for annual refinement based on evolving risk profiles.

Audit Quality and Methodology

Internal audit effectiveness depends critically on methodology quality. Regulators increasingly scrutinize not only whether firms perform audits but whether these audits generate meaningful insights and drive control improvements.

Leading internal audit functions develop detailed audit programs for each engagement specifying control objectives being tested, specific tests performed to assess control effectiveness, sample sizes and selection methodologies, and documentation standards ensuring work papers support conclusions.

Quality assurance processes help maintain audit standards consistency across engagements and auditors. Many firms implement peer review procedures where senior audit staff review completed engagements before finalization, periodic quality assessments of overall audit function effectiveness, and external validation through regulatory examinations or independent quality reviews.

The MLRO and Internal Audit Relationship

Collaborative Oversight Models

The relationship between internal audit and the Money Laundering Reporting Officer function requires careful structuring to ensure both independence and effective collaboration. The MLRO holds first-line responsibility for anti-money laundering and counter-terrorist financing compliance, while internal audit provides independent assurance over MLRO effectiveness.

Best practice involves internal audit regularly reviewing AML/CTF control frameworks including customer due diligence procedures, transaction monitoring effectiveness, sanctions screening processes, and suspicious activity reporting decisions. However, audit must avoid assuming MLRO responsibilities or compromising independence through excessive involvement in control design.

For smaller firms where MLRO and internal audit resources are limited, the challenge of maintaining appropriate separation intensifies. Regulatory frameworks acknowledge this reality but expect firms to implement alternative arrangements ensuring independent challenge occurs even when dedicated resources are constrained.

Financial Crime Risk Assessment

Internal audit should conduct periodic assessments of firms' financial crime risk frameworks, evaluating whether risk assessments appropriately identify money laundering, terrorist financing, and sanctions risks relevant to the firm's business, controls adequately mitigate identified risks, and monitoring systems detect suspicious activities consistent with the firm's risk profile.

The upcoming 2026 FATF mutual evaluation provides additional impetus for ensuring financial crime controls operate effectively. Regulators will examine whether UAE financial institutions, including those in DIFC and ADGM, maintain robust AML/CTF frameworks demonstrating technical compliance with FATF recommendations and effectiveness in preventing financial crime.

Looking Ahead: Emerging Internal Audit Challenges

Artificial Intelligence and Automated Controls

As wealth managers increasingly adopt artificial intelligence and machine learning technologies, internal audit must develop capabilities to assess these complex systems. The DFSA's Business Plan explicitly identifies AI as a transformative force raising questions about technology oversight and output monitoring.

Internal audit functions must understand how AI systems make decisions affecting clients, including investment recommendations, risk profiling, and portfolio rebalancing. Audit approaches must verify that AI models are validated before deployment, produce explainable outputs enabling suitability assessment, and remain subject to ongoing performance monitoring and human oversight.

Digital Assets and Tokenization

The proliferation of digital asset services and tokenization introduces novel audit challenges. Internal audit teams require specialized expertise in blockchain technology, smart contracts, cryptographic key management, and virtual asset custody to assess these services effectively.

Firms offering digital asset services should consider whether existing internal audit resources possess necessary expertise, external specialists can supplement internal capabilities, or firms should develop in-house expertise through targeted training and recruitment.

Conclusion

Internal audit functions in UAE financial centers have evolved from compliance necessities to strategic assets supporting sustainable business growth. The DFSA and FSRA's heightened emphasis on governance, risk management, and internal controls reflects global regulatory trends and positions DIFC and ADGM alongside the world's most sophisticated financial centers.

For wealth managers, EAMs, and private banks, investing in internal audit capabilities delivers multiple benefits including reduced regulatory risk through early identification of control deficiencies, enhanced client confidence from demonstrated commitment to sound governance, operational improvements from systematic review of business processes, and competitive advantage through the trust associated with robust control environments.

The firms that approach internal audit as a value-adding function rather than a regulatory burden will be best positioned to navigate the increasingly complex operating environment facing UAE financial center participants. By embedding effective internal audit within their governance frameworks, maintaining appropriate independence and resources, and ensuring audit findings drive continuous control improvement, wealth managers can transform regulatory obligations into strategic advantages supporting long-term success.

Disclaimer: This article is provided for general informational purposes only and should not be construed as legal, regulatory, or professional advice. While we have made every effort to ensure the accuracy and completeness of the information presented, regulatory requirements are subject to change, and interpretations may vary based on specific circumstances. Readers should not rely solely on this content for compliance decisions. For definitive guidance, please refer directly to the official regulations, rulebooks, and guidance published by the Dubai Financial Services Authority (DFSA), the Financial Services Regulatory Authority (FSRA) of ADGM, and other relevant regulatory bodies. For advice tailored to your specific situation and regulatory obligations, please reach out to us at VelthRad  and our qualified team of professionals are here to assist you.