By Simon Gray – At a time when an uncertain economic environment and financial climate is forcing existing investment fund managers to rethink their tried and tested models, and newcomers to the industry are struggling to gain traction amid rising regulatory constraints and costs as well as greater investor reticence, the emergence of the Mediterranean island nation of Malta as a player within Europe’s established fund centres is providing the industry with an attractive alternative at a vital time.
With a cost base significantly lower than in Luxembourg and Dublin, which up to now have been the continent’s main centres for both traditional and alternative investments, a regulator hailed for its flexibility and accessibility, a well developed physical and technology infrastructure and a well-educated and increasingly skilled workforce, Malta is rapidly becoming a popular choice as a domicile both for funds and management companies.
The island’s near-constant sunshine and quality of life – along with efficient fiscal concessions – is a lure for industry professionals who do not need to be permanently based in Europe’s main financial centres. And the interest in Malta appears destined only to grow as the European Union’s impending Alternative Investment Fund Managers Directive, which will come into effect in July 2013, prompts non-EU alternative fund firms to consider how they plan to access European investors in the future.
According to Bruno L’ecuyer (pictured), head of business development at FinanceMalta, a public-private initiative established to promote Malta’s international financial centre, a number of unique selling points make Malta attractive for investors, “each having a different meaning to people,” he says. “There are three key areas, the first being steadfast regulation: the strength of the institutional and regulatory framework, coupled with the regulator’s firm but pragmatic approach and, of course, accessibility.
“The second is the domicile’s agility in the market, the can-do attitude in the industry, and the efficient, dynamic and effective business environment. Being a small country in fact works in our favour. Third is the cost-competitive quality of the English-speaking skills available thanks to an excellent domestic further and higher education system, an ongoing training culture in the sector, and a highly motivated workforce with a strong work ethic.”
Andrew Zammit, managing partner of Zammit & Associates Advocates, says the law firm is seeing a lot of interest in Malta for category two investment services licences, the category applicable to investment managers. “Although this has increased on the back of the AIFM Directive, the momentum was already there beforehand,” he says. “Managers are looking favourably at Malta, especially those breaking away from larger structures to set up their own boutique fund businesses. They are more sensitive to cost but still want to be within Europe, and Malta can meet those requirements.”
The development of the fund industry over the past decade, and especially since Malta joined the EU on May 1, 2004, has attracted a broad range of fund service providers to the island. They include leading alternative and Ucits administrators but also a number of custodian banks, adding depth to a sector that already includes the ‘Big Four’ accounting and audit firms and various law firms specialising in international financial services business.
“According to the Malta Financial Services Authority, there are now more than 100 asset management firms licensed on the island, as well as around 20 fund administrators,” says Charles Azzopardi, managing director of HSBC Securities Services (Malta). “Fund managers and promoters are setting up in Malta to benefit from advantages such as the level of costs and tax efficiency, as well as the regulator’s flexible but firm approach. As Malta becomes more a domicile of choice, we have seen some big investment managers come to the island. Whatever the scale of the fund manager, it is highly probable that they will find it easier to set up in Malta than in larger jurisdictions such as Luxembourg or Dublin.”
According to David Griscti, senior partner of law firm David Griscti & Associates, interest is particularly strong among existing firms based outside the EU that may be currently facing issues with regulatory changes in their current domicile and want to be certain they are positioned to tap into the European market after 2013.
“Many managers in third countries now see the need to have a permanent base within the EU, in part because they do not yet feel confident that there really will be an AIFMD passport for outside firms after 2015, so they’re looking at alternatives,” he says. “Malta benefits from having a regulator that treats its licensees reasonably and sensibly, and in general has a mature and engaging approach to the industry.”
Alongside the island’s advantage on overheads, which are materially lower than in Luxembourg or Ireland, uncertainty about future levels of taxation is a further factor, says Joseph Ghio, a partner with law firm Fenech & Fenech Advocates. “Not even during the depths of the financial crisis in 2008 have managers been under so much pressure as a result of declining performance and profitability threatening their very existence,” he says.
“Because of our attractive fiscal environment, the issue of redomiciliation to Malta can make or break an asset manager currently established and taxed in another jurisdiction. At a time when most European governments are looking to increase their tax take and find ways of raising new revenues, considering jurisdictions where you can manage your costs, including taxes, more efficiently is therefore paramount.”
The Malta advantage
Malta has benefited from a substantial overhaul of its corporate law and fund regulations, undertaken in stages over the 1990s, according to Chris Casapinta, managing director for Malta at fund administration firm Alter Domus. “Our corporate law is based on that in the UK, which provides managers and investors with a lot of confidence because they recognise and understand the kind of structures used in Malta,” he says. “At a second level, there are the operational advantages of an English-speaking working environment and a sound level of education with a very good work ethic.”
The country’s location in the Mediterranean is not a handicap, Casapinta argues, because it is in the same time zone as mainland Europe. “In part because Malta is a tourist destination, there are regular flights from all over the continent,” he says. “We are just two and a half hours away from London or Frankfurt, two hours from Munich and just an hour from Rome.”
International financial services firms are attracted by the combination of a Mediterranean quality of life and an Anglo-Saxon business and work ethic, says Paul Mifsud, managing director of custodian Sparkasse Bank Malta. “In addition, the country has a very mature regulatory and legislative framework that offers fund promoters – and indeed investors – security of law,” he says. “There are no grey areas; everything is documented as part of a coherent framework, and there is also political stability. That has been a factor in the arrival of firms such as Sparkasse Bank, whose parent is based in Austria.”
Members of the industry point to Malta’s sizeable (at least compared with other island jurisdictions) and well-educated workforce, noting the range of initiatives underway to develop skills in areas where demand is greatest. “A few years ago, specialist education and training mostly consisted of seminars organised by the MFSA, but today there is a proliferation of courses and qualifications offered by local and foreign educational institutions in partnership with industry organisations such as the Institute of Financial Services Practitioners,” Ghio says.
Joe Agius, head of custody at HSBC Bank Malta, notes that a steady stream of university graduates is coming into the industry every year. “About two or three years ago, a diploma in fund administration was launched by a leading UK university, and this has proved very successful amongst industry practitioners and service providers,” he says. “In addition, we are keen to encourage younger people to gain experience in other jurisdictions.”
Casapinta says that fund managers that have opted not to outsource their administration to third-party providers have found it easy to recruit staff with the required skills, and firms always have the option of bringing people over from Dublin or other centres if they need specific expertise not available locally.
Meanwhile, earlier this year the government brought in a new tax regime designed to attract expatriates with high-end skills and capable of transferring knowledge to local employees. Says Zammit: “The Highly Qualified Persons Regulations aim to attract highly-qualified professionals, predominantly within the financial services sector, who would be working with licensed companies in Malta and whose annual income exceeds EUR75,000 a year. They must hold certain prescribed posts such as portfolio manager, chief executive or chief investment officer.
“They are eligible for up to five years for an income tax rate of 15 per cent, compared with the usual rate of 35 per cent, and anything above EUR5m is completely exempt from Maltese tax. The government is sending a message that it doesn’t simply want an increase in the number of licensed companies if it means brass nameplate entities. They want to bring substance and know-how to Malta.”
Easy first steps
The process of establishing a fund or other business in Malta is relatively straightforward, and can take just a matter of weeks. “A lot can be done in a first meeting,” Mifsud says. “Investment managers or promoters can obtain quite in-depth information free of charge before they actually set out on the process of establishment. That’s an advantage because there are no research and development fees to be paid before you set up an investment management company or fund.”
A management company established in another jurisdiction can in many cases be redomiciled to Malta without losing its continuity of existence. “Malta’s Continuation of Companies Regulations, which have been in place since 2002, make it possible to transfer a legal entity structured in a similar way to local companies to Malta without losing its legal personality,” Ghio says. “It would just be a continuation of the legal personality that started in another jurisdiction.”
Whether this is possible depends on whether the original jurisdiction allows outward redomiciliation – for example, he says, Ireland does not, but Caribbean jurisdictions such as the Cayman Islands and British Virgin Islands do. “What you need in practice is that the statute of incorporation of the foreign entity allows redomiciliation outside the jurisdiction,” Ghio says. “If that is not already included, a simple amendment of the statute or memorandum of incorporation will do, and the resolution by the company to continue in Malta, then filing the necessary documents in the original jurisdiction of incorporation and in Malta to allow for that continuation.
“For a fund manager, the company would also need to be authorised in Malta. If it is coming from a European jurisdiction where the asset manager is already regulated, or an outside jurisdiction that has legislation equivalent to MiFID, the process will be easier and quicker. In the case of a company moving from the UK to Malta, it would be much faster for the Malta Financial Services Authority to issue a new licence on the back of the authorisation the company previously had from the FSA. In tandem, the redomiciliation process will be carried out with the Registry of Companies – on the day the MFSA issues the license or authorisation, the registry issues the certificate of continuation that will make it a Maltese company.”
The MFSA allows transitional arrangements to facilitate the movement of an established firm from one jurisdiction to another. “The MFSA is willing to allow the launch of a fund management business with IT back-up based elsewhere,” Griscti says. “You can have a management set-up with research and back-office activities carried out here while the other operations would still be carried out in other jurisdictions, at least temporarily until the fund manager builds sufficient capability to move other parts of its operations here.”
L’ecuyer says the long-term vision for the fund industry involves the development of clusters to make Malta a full-service domicile in every respect. “This organic development is well underway, although more work needs to be done in the area of multinational banks and custodians,” he says. “But watch this space.”
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