By Kenneth Farrugia (pictured) – Malta’s fund industry is increasingly making the headlines in the financial media, which have highlighted the island’s attractiveness as a domicile. Journalists and finance analysts progressively see Malta as a complementary EU jurisdiction to traditional fund domiciles, where regulatory environment supports innovative strategies and solutions.
According to the country’s financial regulator, the Malta Financial Services Authority (MFSA), the number of Maltese-based funds has grown from around 130 in 2004 to more than 550 at the beginning of this year, with EUR8.3bn in assets under management. Much of this growth has taken place since the island joined the European Union. In 2011 alone, the country added more than 100 new registrations from fund managers primarily using the island to tap into EU markets.
But it is not only EU membership that gives Malta the edge over other fund domiciles. It also offers easy market access to non-EU countries through various tax treaties and other bilateral agreements, while the island’s geographic location makes it a convenient gateway for European and international financial services firms targeting North Africa and the Middle East.
Malta offers a number of fund options, including alternative funds under the Professional Investor Fund (PIF) regime, and UCITS (Undertakings for Collective Investment in Transferable Securities). Hedge, private equity and property funds are usually set up as PIFs, which make up three-quarters of all Malta-based funds.
Free from investment restrictions and targeted at financially-literate high net worth investors, PIFs can invest in a variety of assets, from financial securities and instruments to real estate. However, to protect the country’s reputation as a quality fund domicile, the MFSA has repeatedly refused to license funds focused on exotic investments, such as racehorses. Malta’s Investment Services Act provides for three categories of PIFs with different eligibility criteria for investors, based on their experience and knowledge.
Under the assumption that investors are familiar with strategies and markets and aware of risks, PIFs are not regulated as tightly as UCITS and other non-UCITS retail funds. UCITS currently play a relatively minor role in Malta’s fund sector with some 60 schemes currently registered, but their number is gradually increasing.
Full range of structures
PIFs or UCITS can be formed in a number of possible vehicles, including open-ended and closed-ended corporate entities, trusts, limited partnerships and contractual funds. The investment company with variable share capital (SICAV) is currently the most widely-used vehicle in Malta, especially by PIFs, and it can be structured to include master-feeder funds and umbrella funds with segregated sub-funds.
In 2011 the MFSA enacted new regulations making it possible for a fund to be constituted as an incorporated cell in an Incorporated Cell Company (ICC). While under the SICAV Regulations a fund and its segregated sub-funds form a single legal entity and the sub-fund has no separate identity, each incorporated cell is a limited liability company endowed with its own legal personality.
As a relatively new concept, the ICC regime is still under development, and in November 2011 the MFSA announced that it was considering extending it into a platform concept that would involve a Recognised Incorporated Cell Company (RICC) providing administrative services to any number of incorporated cells licensed as collective investment schemes.
Malta’s legislation also scores highly in other areas, especially the appointment of service providers. Service providers to PIFs may be based in any jurisdiction in the world that is recognised by the MFSA, a non-protectionist approach that gives promoters the flexibility to work with institutions with which they have already established a business relationship.
However, a large number of funds choose to work with local service providers, especially in the field of fund administration. More than 70 per cent of Malta-domiciled funds have a Maltese administrator, a clear testament to the high quality of service offers by local providers.
Another competitive advantage for the island is that PIFs and UCITS can be set up with a self-managed structure as an alternative to external management, subject to the appointment of an investment committee. Around 10 per cent of Maltese funds follow this model, with 40 per cent managed from Malta and almost 50 per cent managed from outside the country.
Cluster of global leaders
Promoters looking for a local service provider are spoiled for choice. In tandem with the growing number of funds, more and more service providers have set up operations in Malta in recent years. Similar to the licensing process for collective investment schemes, managers, investment advisors, custodians and prime brokers establishing operations in Malta need to apply for a licence under the Investment Services Act, while firms intending to provide purely administrative services must apply to the MFSA for a recognition certificate.
Around 70 fund managers are currently operating in Malta, including Liongate Capital Management, Clive Capital, Comac Capital, and BlueGold Investments, while 24 fund administrators such as Valletta Fund Services, HSBC, Apex, Custom House, Praxis, TMF and Valetta Fund Services have been recognised by the MFSA. Six global custody providers have a presence in Malta, including HSBC.
Malta has the capacity and expertise to help the fund industry continue to expand, with the ‘Big Four’ accounting firms all established on the island, adding weight to the small and medium-sized accountancy firms and large number of law firms servicing the fund sector. Having developed a versatile industry cluster, Malta is keen to attract further service providers – particularly custodians – to increase its share of UCITS business.
Interest in Malta is also set to grow as the implementation of the EU’s Alternative Investment Fund Managers Directive in July 2013 draws closer. Many offshore fund managers are currently assessing whether it might be more cost-effective to establish a permanent base in the EU.
With its generally lower cost structure and a track record in the management of alternative funds, Malta offers an attractive base for alternative managers in this new environment. The first firms to have relocated include managers from traditional offshore centres such as the Cayman Islands and the British Virgin Islands.
Increasing competitive edge
Effective oversight and a highly personalised approach have helped Malta to establish itself as a fund domicile of international repute. In the coming years, the industry expects a further boost when the full impact of regulatory developments such as the AIFM Directive will become apparent.
The island has already seen a significant inward migration of funds and service providers. Funds from other jurisdictions can easily be transferred to Malta, where the fund undertakes the licensing process with the MFSA concurrently with the corporate redomiciliation procedure. Maltese legislation allows redomiciliation from all EU, EEA and OECD countries as well as from most offshore centres.
Malta has already proved it is well suited as a base for fund operations, serving not only domestic clients but also European and international markets. With low costs, efficient regulation, beneficial tax treatment and a flexible and accessible regulator, the island is an attractive domicile for both funds and managers. Competition may be increasing in the fund industry, including between jurisdictions, but as long as Malta maintains its competitive advantages, it is well placed to capture an even bigger share of the world’s fund business.
Kenneth Farrugia is the chairman of FinanceMalta