Regulatory framework drives fund industry expansion
As part of its recent growth as a financial services centre, Malta has gained a strong reputation as an efficient fund domicile that provides competitive access to the European market and beyond. Business continues to expand and the country is now home to nearly 500 funds including 280 alternative investment funds, as well as a significant number of Ucits and other retail funds. Hedge funds domiciled in Malta comprise single manager funds, funds of hedge funds and multi-strategy funds and include large, mid-sized and small cap funds.
The country's fund servicing infrastructure continues to consolidate with the arrival of more international providers. Custom House Global Fund Services, SGGG Fexco Fund Services and Praxis Fund Services, which have all established operations in recent months, praise the availability, quality and competitiveness of employees and the strength of professional services. Administrators already established in Malta include TMF, Apex, HSBC and Valletta Fund Services.
At the same time, the asset management industry has also registered significant growth following the recent arrival of a number of European managers, particularly from the Netherlands, Switzerland and the UK.
Malta's regulatory framework is designed to ensure the highest standards of probity and transparency while allowing operators the freedom to compete and innovate. The industry is overseen by a single regulator, the Malta Financial Services Authority (MFSA), which was set up in 2002 to consolidate the work previously carried out by several agencies, and seeks to combine a high standard of regulation with an efficient response to industry needs.
The Investment Services Act provides the statutory framework for the licensing and supervision of investment services and collective investment schemes, and offers the flexibility to adopt different business models within parameters set by Maltese and EU legislation.
The MFSA's Rulebook distinguishes between Retail Collective Investment Schemes and Professional Investor Funds. Retail Collective Investment Schemes comprise both Ucits and non-Ucits schemes that are subject to strict regulatory requirements, and are based on the Ucits III directive, including the new eligible assets regime, which is fully transposed into the Maltese regulatory framework.
Professional Investor Funds are governed by a customised version of the rules and benefit from a lighter form of regulation through the non-application of certain provisions that are standard for retail funds. The PIF framework is used by hedge funds and other alternative investment vehicles.
PIFs may be set up as open-ended or closed-ended investment companies, investment partnerships or unit trusts, or may be formed through other non-corporate investment vehicles. They may be stand-alone funds or incorporate various segregated sub-funds or managed accounts.
There are three separate categories of PIF, each with particular licence parameters depending on the level of sophistication of the end-investor. The most common type is the Qualifying Investor Fund, which entails a minimum investment of EUR75,000, has no investment or borrowing restrictions, and may make unlimited use of leverage. These funds need not appoint a custodian or prime broker provided adequate safekeeping arrangements are in place.
Extraordinary Investor Funds are designed for private equity investment and have a minimum threshold of EUR750,000. In addition to the advantages enjoyed by qualifying investor funds, these funds have customised disclosure requirements and even faster licensing turnaround times, particularly where the directors, service providers and founder shareholders originate from recognised jurisdictions.
At the other end of the scale, Experienced Investor Funds have a minimum investment of EUR15,000. They require the appointment of a custodian and can use leverage only up to 100 per cent of net asset value. Changes are in the offing to introduce an element of risk diversification and further improve this framework.
PIFs that do not appoint a third-party manager may be set up as self-managed funds, with management of the assets the responsibility of the board of directors. The board may delegate certain functions to an in-house investment committee whose role is to monitor and review the investment policy, establish and review guidelines for investments and issue rules for stock selections, and set up the portfolio structure and asset allocation. Day-to-day investment management of the fund's assets may be delegated to a portfolio manager appointed by the investment committee. Self-managed PIFs must have a minimum capital of EUR125,000.
The turnaround time for a Qualifying Investor Fund could be as little as seven days, down to just three days for an Extraordinary Investor Fund. Continuation provisions within the legislation also allow funds to redomicile to and from Malta at the lowest possible cost, while listing of funds on the Malta Stock Exchange is also an option.
A fund may set up special purpose vehicles in any jurisdiction not blacklisted by the Financial Action Task Force, provided this is in line with the fund's objectives and policies disclosed in the offering document. The fund's directors must retain control of the SPV's board.
The regulatory framework for service providers is based primarily on the EU's MiFID and Capital Requirements Directive. Managers, investment advisers, custodians and prime brokers establishing operations in Malta must be licensed under the Investment Services Act, although fund administrators intending to provide purely administrative services may apply to the MFSA for recognition certificates. Subject to certain conditions, alternative funds domiciled in Malta may also be serviced by administrators, managers or custodians authorised elsewhere in the European Economic Area or in other recognised jurisdictions.
Credit institutions constituted and licensed in Malta, or exercising freedom of establishment rights under EU legislation, as well as branches or subsidiaries of overseas institutions subject to prudential requirements equivalent to those applicable in Malta, are among the institutions that may seek a custody licence under the Investment Services Act.
Malta is well positioned to continue making headway in financial services. As a domicile it is widely respected and provides a highly attractive business environment. Legal and accounting expertise is fully developed, underpinned by the presence of the major accountancy firms and traditionally strong links with City law firms.
Advantages include high-quality human resources; an internationally accepted tax regime with an extensive network of bilateral treaties; a unique legal system that combines continental Europe's civil law system with Anglo-Saxon commercial law principles; an excellent IT and communications infrastructure; and good air links with other financial centres and surrounding markets.
In a country whose professional resources are already well supported by a deep pool of multilingual administrative staff, the funds industry is investing heavily in training at the specialised end. Malta is fast becoming an important alternative for fund promoters, capitalising on its position as an established onshore jurisdiction and integral part of the EU single market in financial services.
Strongly biased in favour of quality rather than quantity, Malta has reached critical mass as a fund domicile, attracting more managers and administrators to establish operations. The advent of the single management passport in the EU, the structural shift taking place in the financial services landscape and increased specialisation in the local industry are set to influence Malta's development going forward and strengthen the role played by fund services, in particular custody and management services.
Michael Xuereb is director of the strategic development unit at the Malta Financial Services Authority
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