By Simon Gray – For most of the past two decades, there have been only two significant international fund domiciles and servicing centres in Europe, Luxembourg and Dublin. But just as new rules governing both traditional and alternative investments draw promoters’ and managers’ attention to the advantages of establishing fund vehicles within the European Union, the Mediterranean island of Malta is staking a serious claim to a share of this burgeoning market.
The inhabitants of the Maltese archipelago, which also comprises the sister islands of Gozo and Comino, have long wrestled with the conundrum of achieving economic development in a physically small, crowded country with little in the way of natural resources beyond a balmy climate and idyllic sandy beaches. Historically the Maltese have travelled far and wide as seamen, fishermen and emigrants, fostering an outward-looking mentality that is paying dividends in today’s globalised economy.
Over the centuries, Malta’s strategic location between Europe and North Africa and the superb natural harbour of Valetta have drawn the attention of outside powers. The island’s many rulers have left an interesting and diverse imprint on the country’s language, culture and legal system, according to Laragh Cassar, a partner with law firm Camilleri Preziosi.
“Malta’s culture reflects its geographical situation and history,” she says. “There is a strong European element, but also influence from the Arab world. Our history comes out in the way we speak, and people’s readiness to switch between English, Maltese and Italian expressions. And we should also be grateful to the English for leaving us with a work ethic more usually associated with northern Europe.”
The legal system is itself a mix of French, Italian and English concepts. “Throughout our history these influences have made their way gradually and naturally into our system,” Cassar says. “That means, for instance, that the trust is a well-established and understood concept in Maltese law, whereas its application in our neighbour Italy has not been as widespread. This has proved important to the development of our local wealth management industry.
“Our Companies Act is based on the UK Companies Act and our financial services legislation is largely inspired by the UK legislative framework, although over the past decade we have also implemented EU legislation [Malta became a member on May 1, 2004]. All our laws are published in English and Maltese, and generally, in the case of financial services legislation, the former prevails in the event of conflict.”
Cassar says the approach to adopting European directives into Maltese law reflects the country’s history of accommodating external influences. “The regulator is always trying to come up with new offerings,” she says. “With the introduction of the Alternative Investment Fund Managers Directive, it is seeking to develop a concept of regulation that will give Malta an advantage. The regulator has a great record of success in getting the most out of a situation like this.”
The proactive attitude of the Malta Financial Services Authority and its long-time chairman, Prof Joe Bannister, is widely cited as an important factor in Malta’s growing reputation as a business-friendly jurisdiction. “The Maltese culture of doing business, including the firm yet flexible regulatory approach taken by the MFSA toward hedge funds, gives us an edge over more established jurisdictions,” says Dr Joseph Ghio (pictured), a partner with Fenech & Fenech Advocates.
“In other fund centres access to the regulator can best be described as remote. In Malta we do things differently, which is down in part to our small size. At times that can be a disadvantage, but in this case it is definitely a benefit. We can be very quick in responding to a new situation, and we have seen that on account of international market events, the backdrop for international fund business is almost unrecognisable compared with two or three years ago.”
Paul Mifsud, managing director of fund custodian Sparkasse Bank Malta, says a determination to assist managers in getting their fund projects up and running as quickly as possible distinguishes Malta from rival jurisdictions. “Local service providers do a lot of work that you might not find elsewhere, and speed to market is a priority for the MFSA, which tries as hard as possible to keep within an agreed timeframe for the launch of a fund,” he says.
Ghio notes that the MFSA continues to encourage face-to-face meetings with applicants as part of the licensing process. “That’s something you simply don’t get in other jurisdictions, where licence holders only get to see their regulator when there is something wrong,” he says. “This reflects not only how much we value our reputation and pay attention to the quality of business we accept, but our openness to help applicants find flexible working solutions to meet our own and European rules.”
The openness of the regulator also underpins Malta’s ability to take on innovative types of investment strategy, which in turn helps to build up the skill base of service providers and boost the jurisdiction’s reputation for being capable of handling structures or asset classes that are off the beaten track. “The more business we see, the more our experience grows,” Ghio argues. “We are always very pleased to take on something that breaks new ground.
“Having quick access to dialogue with the MFSA is crucial, because we can discuss a variety of approaches and find workable solutions not just for the client but to ensure the regulator is comfortable with the structure and confident that there will be no damage to our reputation. Some complex structures would not have been possible had the regulator not been willing to listen to what the project was about. You probably won’t find many countries where practitioners sing the praises of the regulator in the way they do in Malta.”
The island’s appeal is not down to the virtues of the MFSA alone. According to Ghio, other contributory factors include Malta’s extensive network of almost 60 double taxation treaties, the everyday use of the English language, and the fact that the island is in a convenient time zone for Europe, Africa and the Middle East.
The country has also made considerable efforts to bring its technology infrastructure up to the standard required by the international financial services industry – IT, another industry that relies on brainpower and skills rather than raw materials, large numbers of employees or expensive operating facilities, is another priority for the government in its efforts to boost economic development.
“Since we opened our office in June 2008 a number of additional optic fibre cables have been laid to mainland Europe,” says Anthony O’Driscoll, managing director of administrator Apex Fund Services Malta. “The three telecoms operators, Vodafone, GO and Melita, have all invested heavily, and there is now plenty of redundancy built into the system. Being able to rely on a solid technological infrastructure is important not just for the financial industry but other fast-growing sectors such as gaming.”
There’s no escaping, however, the importance of the cost structure in Malta by comparison with its main rivals. “Setting up a fund from scratch in many popular jurisdictions is becoming increasingly expensive and requires the manager or promoter to have a substantial volume of assets under management,” Mifsud says. “In Malta it’s feasible to launch a fund with assets starting from EUR5m, whereas in Luxembourg or Ireland you would need significantly more to reach critical mass.”
Cost is an important factor to highlight abroad, Cassar agrees. “From service provider fees to regulatory charges, this country is much more cost-effective, and financial services firms are joining forces with the government and bodies such as FinanceMalta to get the message across,” she says. “Everyone is co-operating to raise the country’s international profile. Service providers may be marketing their own business as well, but there is a sense in which everyone is working for the same team.”
A great deal of work is done by FinanceMalta, a joint venture between the government and the private sector established in 2007 to promote the island as an international financial centre. “A number of initiatives involving local practitioners aim to put Malta on the map, including international events and roadshows” says Katya Tua, head of the investment services department at law firm Simon Tortell & Associates. “It’s to everyone’s benefit that Malta should be better known.”
Andrew Frankish, a director of administrator IDS Fund Services, agrees, saying: “The more firms we as an industry can get interested in Malta, the bigger the fund services pie becomes, and our assets under administration will grow even if individual firms’ share of the pie stays the same. The industry is growing together and everyone is doing their part to promote the jurisdiction.”
Practitioners acknowledge that in other parts of the world the country’s position as a regulated jurisdiction within the EU and the sophistication and expertise of its financial industry are not as well known and understood as they might be. “We still sometimes get queries about what Malta is and where it is,” Tua says. “A surprising number of people still do not know it is an EU member.”
George Gregory, partner and head of tax and corporate services at professional services firm RSM Malta, says that the country still can be lumped together with offshore centres, especially in the US. “Malta is not so well known as an onshore jurisdiction,” he says. “Luxembourg, which is of a comparable size to Malta, is better known, and is now a mainstay of Europe’s fund industry, whereas Malta has some catching up to do. However, I think Malta is doing a pretty good job about getting its name out there.”
The signs are that promotional efforts are making a difference, although for now the total assets of funds domiciled and serviced in Malta remain modest by comparison with numbers in other European jurisdictions. “Two years ago you wouldn’t have mentioned Malta in the same breath,” says Dermot Butler, chairman of Custom House Global Fund Services, whose global network of offices also includes operations in Dublin and Luxembourg.
“We’ve been present in Malta for nearly a decade, and I’ve long argued that it would come to the fore. Not only is it less expensive than its competitors, but Malta has been marketing itself very well. There may not yet be a huge volume of assets, but you have to consider that the jurisdiction has been in business for a considerably shorter time than its main competitors, and its growth rate is impressive.”
Mifsud says that the fallout from the financial crisis and its impact on attitudes among institutional investors continue to favour Malta over offshore jurisdictions. “We’ve seen an increase in hedge funds looking to be registered and regulated within the EU, whereas previously they would be domiciled mainly in jurisdictions such as Cayman, the BVI and the Bahamas,” he says. “Managers are following the requirements of their institutional investors, which want more robust regulation of the funds they invest in.”
Growth in Malta’s fund assets remains steady rather than breakneck. At the end of March this year, there were 331 funds with total assets of EUR7.93bn, according to the MFSA, a year-on-year increase of 7.7 per cent. Non-retail Professional Investor Funds accounted for more than three-quarters of the total at 256 funds and EUR5.31bn in assets. Malta’s fund assets peaked at EUR8.65bn at the end of December 2007 before slipping back as a result of the global financial and economic crisis, a decline from which the industry is now recovering.
O’Driscoll also expects the volume of assets for Malta-domiciled funds to grow in the near future. He says: “You have to consider the reduced number of funds globally that are launching with EUR100m or more, and the few that have such levels of assets tend to go to other centres. But for most managers, even those with well-known brand names, it’s difficult to raise assets in the marketplace.
“At the moment Malta appeals particularly to managers of smaller funds, but the focus is anyway more on the quality of the investment managers coming in than on the size of their assets under management. Already we’re starting to see asset volumes add up, and in two or three years’ time, when the market has turned, I expect to see rapid growth in asset size. It’s important that Malta starts building for that growth now.”
Gregory is more cautious. “The volume of assets is still relatively small,” he says, “perhaps smaller than some people might expect given the vigour of Malta’s marketing drive. But given the point at which we entered the market and our limitations in terms of size and geography, I think we’ve done a very good job.”
In the long term, Ghio believes, Malta is capable of challenging its established competitors for industry leadership. “Word of mouth is slowly helping us reach a critical mass, at which point we can really enter Luxembourg’s and Dublin’s league,” he says. “That won’t happen overnight, but we are very confident that given time, as well as the effort and commitment being put in by everyone from the regulator to service providers and fund promoters, we will definitely succeed.”
Industry practitioners say the government’s commitment to keeping Malta’s legislation and regulation up to date and competitive is impressive. Over the past year a series of changes to the law has made partnerships and contractual funds more attractive by comparison with investment companies by giving them greater flexibility, while incorporated cell companies have been added alongside traditional umbrella structures.
While the more traditional structures remain popular, Cassar says the important thing is to offer actual and potential clients a full range of options. For instance, she notes that the law governing cell companies only came into effect at the end of last year. “There has been interest from both the local and international fund industry,” she says.
“It is now possible to create an umbrella structure where each cell is to all intents and purposes a company in its own right, with its own governance and accounts. This interesting and novel concept is particularly useful for platform structures where each sub-fund can be treated as an individual corporate vehicle while benefitting from the efficiencies of an umbrella fund structure. This was not possible previously.”
Tua notes that the changes also make it easier for funds to be redomiciled as a going concern from offshore or other jurisdictions to Malta, keeping their portfolios of investments and track records intact, because this requires an incoming fund to adopt a similar corporate structure to that used in its previous domicile. “We did our first redomiciliation way back in 2004,” she says, while acknowledging that many managers prefer to keep parallel onshore and offshore structures for different types of investor.
While the overall outlook for Malta as a fund jurisdiction is positive, industry members say a watchful eye needs to be kept on a handful of issues that could become problematic if they are not managed carefully. Perhaps least significant for the long term is a squabble between Valetta Fund Management and domestic investors left out of pocket when the La Valette Multi-Manager Property Fund was suspended in 2008 after its assets fell in value from a peak of EUR84m to EUR34m.
Some investors have claimed they were not informed of the risks of the fund, nor about fraud proceedings brought against directors of one of the underlying funds; that a number of privileged shareholders were allegedly informed of the fund’s difficulties, enabling them to redeem shortly before the suspension; and that a EUR0.75 per share buy-back offer from Bank of Valetta was inadequate. Nevertheless, the offer eventually won acceptances totalling 98 per cent of the fund’s capital.
“Disputes are something that happens as a domicile matures, but we have to be careful that such failures that do occur cannot in any way be attributable to a lack of regulation,” Ghio comments. “You can’t regulate against all failures, but through the regulatory framework you can ensure that service providers offer adequate checks and balances against fraud. That is something that the MFSA continues to take very seriously.”
There is also measured concern that as the Maltese fund industry grows, the regulator may find it harder to maintain its reputation for rapid and efficient licensing of funds. “It’s possible we could become victims of our own success,” Ghio adds. “The MFSA can feel the strain sometimes when it has to service many applications at the same time. Currently one of our advantages is time to market, being able to get a structure licensed within weeks compared with a month in Luxembourg or Dublin.
“If bottlenecks start to grow, the MFSA will have to widen its pool of resources, which is not always easy to do quickly. You can’t just find new staff on the street, and nor can you leave new hires to their own resources. They have to be trained, and they need adequate supervision. This presents a challenge, but the MFSA has already increased headcount as its responsibilities and business coming to our shores have grown, and up to now it has coped quite well.”