Dubai has spent the last quarter of a century prudently curating a reputation as a beacon for business and commerce in the Middle East. Now, a number of embarrassing financial fall outs threaten to undo that hard work.

Two years ago, the Abraaj scandal - which involved allegations of misleading investors, co-mingling and misappropriation of funds by the Dubai-based private equity powerhouse, and which eventually lead to its dramatic collapse - caused significant damage to Dubai’s reputation as an international financial centre.

Earlier this year, the collapse of BR Shetty’s UAE-based NMC Health called into question once again the Gulf nation’s future as a commercial hub; and July dealt a further blow with the arrest of the head of Wirecard’s Dubai-based subsidiary on suspicion of fraud.

Unsurprisingly, these incidents have led to considerablescrutiny of the Dubai International Financial Centre’s (DIFC)regulatory body, the Dubai Financial Services Authority (DFSA). The DFSA has come under fire for perceived failuresto strengthen corporate governance structures in the DIFC and for failing to foresee, and indeed prevent, any of the most recent high-profile collapses.

But, against a backdrop of serious threats to its international standing, the DFSA has stepped up. Some would go as far as to say that the regulator has now entered a sustained period of ‘muscle flexing’; clamping down on a range of businesses inorder to prove its competence.

In Dubai there is now widespread acknowledgment that the DFSA has made leaps and bounds since its inception and has rightfully earned its reputation alongside other global regulators in the UK and the US.

The DFSA was praised for its response to coronavirus. Rolling out a relief package enabling firms at the very beginnings of the crisis to protect staff and support clients during the ongoing period of uncertainty. The regulator also waived fees for new firms and existing firms within the DIFC, in an effort to support businesses and their customers.

However, despite the overall positive direction that the DFSA is taking, there are some concerns that law abiding companies are being caught in the crossfire as the DFSA flexes its muscles. If this is the case, there is a real risk that this coulddo greater harm to the Emirate’s prestigious business reputation than even the collapses of Abraaj and NMC.

There are growing reports of a number of major businesses who have decided against setting up shop in the DIFC and are instead choosing to operate out of the Abu Dhabi Global Market (ADGM), the neighbouring emirate’s regulator.

Most recently, the DFSA took the unprecedented step offorcing Dubai-based fund manager Equitativa to disclose that it was under investigation by the regulator in relation to its management of real estate fund, Emirates REIT. In a statement issued on 14 July, in response to local media coverage, Equitativa denied the “wholly unsubstantiated allegation” that it has breached its fiduciary duty as REIT Manager. The forced disclosure will certainly have raisedeyebrows in the business community, as it was the first time the DFSA has ever issued such an order.

One could question what the DFSA hoped to get out of forcing such a disclosure, given that often, these announcements work against the investigator as they give rise to instances of external interference. It is also why one would be hard pressed to find another international regulator who has ordered similar disclosures.

If the investigation does not reveal any substantial findings,the move could fuel the argument that, in light of the recent scandals, the DFSA is putting prioritising protecting its own reputation ahead of protecting companies lawfully operating within its regulatory environment. One could even argue thatgenuine cases of financial misconduct are being overlooked, and resources misdirected, in the eager attempt to repair its reputation as a competent regulator.

Emirates REIT has since announced it was considering de-listing from Nasdaq Dubai as part of a “comprehensive review of strategic options”.

This should be especially concerning for the regulator as Emirates REIT stock is becoming increasingly valuable to Nasdaq Dubai. Indeed, in the last week alone, 100% of all stock traded on Nasdaq Dubai belonged to fund.

The fact that despite this, the REIT is still questioning the benefits of remaining publicly listed, casts further doubt over the actions that the DFSA is prepared to take at this time.

Of course, few would dispute the importance of a strong regulator in any business environment, and few would fail to welcome the positive steps that have been taken by the DFSA. But the emirate risks doing more harm than good if compliant businesses find themselves becoming collateral damage of the DFSA’s efforts to raise standards.

Financial centres across the world will suffer as we edge ever close to a global recession in the wake of the Coronavirus. In the Gulf, the difficult times ahead will be further compounded by a collapse in oil prices; the backbone of most of the region’s economies.

As a result, given its international exposure, Dubai, more than most, cannot afford for companies to develop the impression that the city is not as business friendly as it presents itself to be and look elsewhere.  Efforts to protect the reputation of Dubai, and the reputation of the DFSA, must not come at the expense of companies who are already operating within the confines of the law. Otherwise the greatest challenge to Dubai’s reputation may be yet to come.