As a part of Saudi Arabia’s Vision 2030, the Al Wajh Bank will soon undergo major coastal development to be transformed into a sustainable luxury tourist destination, with goals to safeguard the marine and coastal habitats in order to achieve a net conservation benefit of 30%. To realize these objectives, it is essential to establish baseline data on the marine communities to gauge the success of conservation goals. In this study, we evaluated and compared the taxonomic and functional diversity of reef fish assemblages between two areas in the Al Wajh Bank, sites inside the lagoon and those outside of it, in order to establish differences in fish communities across environmental gradients. Conditions within the lagoon, such as temperature and salinity, have been shown to differ from most other Red Sea areas and are thought to result in unique fish assemblages. Underwater assessments of fish communities and benthic composition were conducted throughout the Al Wajh Bank during cruises in 2016 and 2017. We found that of the 168 fish species recorded, 75 species were exclusive outside the lagoon, 22 were exclusive inside the lagoon, and 71 species were shared between inside and outside. Sites within the lagoon had significantly less species richness as well as lower abundances. While taxonomic composition differed between the two areas, functionally they were very similar. Two functional metrics (functional richness and functional dispersion) indicated different levels of functional diversity, while two other metrics (functional evenness and functional specialization) showed no differences in functional diversity. The outside had five groups comprising eleven species with functional redundancy; in contrast, the inside had two species which were functionally redundant. This study was able to establish that the inside and outside habitats are different and have dissimilar species compositions, yet the functional characterization of fish assemblages in conserved. These results advocate for the use of functional diversity metrics as a way to evaluate changes to community composition, and is an initial assessment towards tracking changes in the fish communities as coastal development progresses