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A ten-year marriage and still no itch

By Dermot Butler, Custom House – Custom House has been an active supporter of the financial services industry in Malta for almost ten years, since before Malta joined the EU. Since then, Malta has grown, as we had predicted, although at a much faster rate than I had anticipated all those years ago.

Of course, next to Luxembourg and Dublin – the two EU Goliaths in the international hedge funds servicing world – Malta is still David looking for a suitable little pebble for his sling shot. In my experience over the last ten years, Malta’s “little pebble” has been well represented by the approach of the MFSA (the Maltese Regulator), which I would describe as a combination of efficiency and pragmatism.

I say this because, despite its smaller size and, therefore, inevitably fewer resources, Malta has taken on the plethora of EU regulation that has been thrown at the hedge fund industry and all of the European financial services centres since the financial crisis. This, of course, has been led by the AIFMD, which was introduced in 2009 and affects all EU members. It says a lot for the MFSA that the implementation of AIFMD involved the amendment of all investment services related rulebooks (except those applying to UCITS), the issue of four new sets of regulations, as well as the amendment of the Investment Services Act and the exemption regulations.

Even more surprisingly, in spite of the volume of work done to implement the Directive and the MFSA consulting the industry every step of the way (no less than 7 consultation papers were issued and several industry update sessions), Malta was one of the first EU member states to fully implement AIFMD.

It must be recognised that AIFMD is just one, albeit major, piece of legislation to hit the global market in the last few years. We have seen a huge slate of legislation in the United States, including Dodd Frank and FATCA and the introduction of other regulations in other jurisdictions.

For example, FATCA, which started out as a US initiative, is now being taken up in different ways by many of the developed world, including the UK, who are introducing their own version. Such is the universal demand for tax revenues following the 2007/8 financial debacle.

Furthermore, the introduction of new legislation is not limited to the UK and the US. Indeed, the AIFMD has its own collateral effect in terms of creating additional legislation. For example, Malta has introduced improvements to their Professional Investment Fund (“PIF”) regime. This is different to some other jurisdictions, which have terminated PIFs and introduced other products. The PIF, which was a very successful product in Malta, has been improved upon so that it may be self-managed (provided they meet the minimums) or managed by non-EU AIFMs or de minimis AIFMs. The major improvements made to the PIF Regulations (Qualifying and Extraordinary Investor PIFs) include the removal of the risk spreading requirement, as well as clear rules on cross sub-fund investment (up to 50 per cent).

In addition to the improvement of the PIF structure, Malta has introduced a new Alternative Investor Fund regime for those EU AIFMs that prefer an Out-Of-The-Box fund structure, as well as self-managed funds that exceed the AIFMD de minimis thresholds. The Alternative Investor Fund seeks to capitalise on the AIFMD brand.

Since the Alternative Investor Funds licensing conditions dovetail with the obligations of EU AIFMs, this regime should facilitate compliance. Alternative Investor Funds are not subject to any minimum investment requirement, other than a requirement to maybe market it to Professional Investors. Having said that, Alternative Investor Funds can apply for a “top-up authorisation” to be also marketed to retail investors.

One other change to the fund structures has been improvements to Malta’s SICAV (these are changes that apply to all types of funds). The MFSA took the opportunity to further refine Malta’s legislation on SICAVs, which is the vehicle of choice for funds, by adding, in addition to cross fund investments, provisions permitting T+ settlement of subscription proceeds; for example, provided certain conditions are satisfied, Maltese funds may entertain settlement arrangements of up to T+5, which is a particularly welcome development for retail funds listed on Euroclear, or other fund settlement platforms that use this settlement cycle.

I would mention that the MFSA took the opportunity presented by this plethora of legislation to update its rulebooks and to launch a dedicated rulebook for Maltese custodians of funds – the new Part B1V. This development was welcomed by the custody industry because it offers both clarity, as well as relieving fund custodians that do not qualify as MiFID firms from surplus regulatory requirements.

Of course, Malta’s hands are tied by the EU and therefore they have not been able to ignore any of the other requirements of the Directive, but they have proved themselves to be extremely efficient and industry friendly in implementing them. This will explain why Malta has now grown so that, at the end of last year, it had 556 funds, of which 400 were hedge funds and what is also interesting is to see that Malta’s objective, which I have always understood to be that it should become a major fund servicing centre, is being achieved.

There are now 26 banks, six custodians and 26 fund administrators on the island (excluding some 120 investment firms including managers). It also explains why approximately 70 per cent of all Maltese domiciled funds are administered on the island. Custom House opened its administration office, which became the head office of the Group, in Malta, in 2008, but before that it had been administering more Maltese funds than any other administrator.

Malta’s growth performance and the regulatory approach to the industry have done everything to persuade us that our decision in 2008 was the right one. And it is very satisfying to find that many people in the hedge fund industry have come round to our way of thinking – including many who originally took, at best, a sceptical and, at worst, a down right negative view of Malta as a first class financial centre. It says a lot for the MFSA and our fund service colleagues that those sceptics are now having to eat their words.

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