Key to the success of any fund jurisdiction is a commitment to constant innovation and in that respect Malta, a tiny island nestled in the Mediterranean, has much to be excited about. Whether it is the streamlining of regulation, the introduction of innovative manager-led products in the form of the Notified AIF, a commitment to becoming Europe’s leading securitisation market, or indeed Europe’s leading hub for blockchain technology, Malta continues to push the boundaries.
A recent survey of professionals working in Malta’s financial services industry conducted by Managing Partners Group (MPG) underscored the collective sense of optimism. Currently, the industry contributes approximately 12 per cent of Malta’s GDP but 70 per cent of respondents said that they expect it to contribute 15 per cent or more within five years. Innovation lies at the heart of this optimistic outlook.
Some 16 per cent of respondent said they expect product innovation in the Maltese financial services sector to increase `dramatically’ over the next five years as more financial services locate to the island. Key growth areas are expected to be fund administration, followed by asset management, asset servicing and corporate banking.
Commenting on the survey’s findings, Jeremy Leach, Chief Executive Officer at MPG, said: “The pool of talent in the industry, its level of professionalism and the robust but flexible regulatory environment provide the building blocks for the industry to continue to grow and build on its reputation as a leading international financial services centre.”
Kenneth Farrugia is the Chairman of FinanceMalta. In his view, the highly positive outlook is primarily driven by the growth that the industry is currently experiencing particularly in the asset management, insurance and private wealth sector.
“Despite Malta’s relatively recent entry in the international financial services arena, innovation-led developments such as the Notified AIF (NAIF) in the asset management sector, the Protected Cell legislation in the insurance sector, which I must add is unique in Europe, as well as the presence of a highly competitive securitisation framework, have attracted a number of international operators to Malta.
“This has in turn brought about a marked increase in business as a result of an increase in the business being managed through existing operators but equally so driven by the new financial services operators that are setting up in Malta.”
The survey provides a pulse reading on the health of Malta and the kind of activity it is currently seeing in the asset management space. “Another survey by MPG has also just been published on the growth and demand for resources in Malta’s financial services space,” continues Farrugia. “It is very much a reflection of where the industry is heading. Malta is a recent entrant into the financial services industry – Malta only started promoting itself as a funds jurisdiction nine years ago, having become an EU Member State in 2004. We set up FinanceMalta in 2007 and within a few years we started to see the results of our collective effort driven through the members of FinanceMalta. As a result, we’ve come a long way.
“Looking ahead, there are opportunities for Malta to further grow its financial services industry, which this survey would seem to support. One interesting growth area is blockchain, Initial Coin Offerings, (ICOs) and Fintechs. We recently organised a blockchain event recently and over 140 people attended this event. The MFSA is currently preparing guidelines for cryptocurrencies, which we should hear about before the end of the year and the Government is formulating a strategy for blockchain technology and ICOs.
“I think our size and our agility is something we will continue to leverage.”
Patrick Mangion is Principal, Financial Services Industry, Deloitte. He believes that in terms of attracting start-up managers, Malta is uniquely positioned. Ireland and Luxembourg are well established jurisdictions that have a history of attracting larger established managers, but Malta has a unique value proposition, being the sum total of a number of operational characteristics, which makes it particularly attractive to a promoter who is looking to establish a regulatory structure.
“We now have circa 600 regulated fund schemes domiciled here and in excess of 180 regulated investment services companies, so Malta has been particularly successful when it comes to serving a particular niche of the market; especially start-up managers who are jurisdiction agnostic,” says Mangion.
“When we are given the opportunity to really understand the objectives of the manager, and are able to explain what the advantages are of operating a fund in Malta, we’ve seen quite a successful conversion rate over recent years.”
Development No1: Streamlined fund regulation
One of the major legislative developments in Malta over the last 12 months has been the update to the PIF regime. This regime used to regulate three types of fund; the Experienced Investor Fund, the Qualifying Investor Fund and the Extraordinary Investor Fund.
The latter and the former categories have been removed and the PIF regime now only offers one category: the Qualifying Investor Fund (the more popular of the three). New applications can no longer be submitted to the MFSA under the old regime.
“The rationale behind this was that the Experienced Investor Fund was more akin to a retail-type of fund in terms of the restrictions that applied,” explains Jean Farrugia, Partner, DF Advocates.
“The PIF is really a platform for single funds that are targeting professional or sophisticated institutional-type investors so really the first category was not appropriate, and wasn’t used very often. It was too close to being a UCITS fund.”
Given the choice, fund promoters would rather launch an actual UCITS fund than an Experienced Investor Fund as they would be restricted to marketing the fund via private placement regimes and would not have the ability to passport it like a UCITS fund.
Robert Higgans is Head, Financial Services Practice at DF Advocates. He notes that part of the reason for Malta’s regulator, the MFSA, wanting to simplify the PIF regime was because the Extraordinary Investor Fund was already captured in the Qualifying Investor Fund regulation, in terms of the type of investor and the minimum amount needed to invest.
“The Qualifying Investor Fund postulates that an institutional investor has to allocate EUR100,000 as a minimum investment, whereas the Extraordinary Investor Fund postulated that it needed to be EUR750,000. As such, the Qualifying Investor Fund was already capturing these larger investors in the first place. With the Qualifying Investor Fund, one can target what used to be the Extraordinary Investor; there are no restrictions.
“To capture more investors, one could choose to structure a Qualifying Investor Fund with two investor classes: those investing EUR100,000 or more, and those investing EUR750,000 or more, under the same regime,” comments Higgans.
He says that previously, with numerous different regulatory frameworks available to funds – UCITS and retail AIFs, PIFs for three categories of investors and professional AIFs for three categories of investors – it was necessary to make changes to the rulebooks.
“When it came to the PIF and AIFMD regime, the decision was taken for PIFs and AIFs to only be made available to Qualifying Investors, going forward. On the retail regime, there are now two options. The first is the UCITS regime, and the second is the retail AIF regime. The MFSA has done away with the retail non-UCITS.
“In addition, the MFSA has embarked on an exercise to facilitate the application process, particularly with respect to PIFs. There is a new application process to speed things up and the MFSA has committed to certain turnarounds when it comes to the review of fund applications. The MFSA this year has also been reviewing its rulebook in anticipation of the MiFID II regime next January,” explains Higgans.
Impact of AIFMD
Over the last few years, the impact of AIFMD has worked to the advantage of Malta’s service providers as they have looked to widen out the scope of services to support those running AIFs. Prior to this, Malta was already running the PIF regime referred to above. This could have easily been eradicated following the introduction of AIFMD but wisely the MFSA choose against this.
“The MFSA wisely decided to defend its territory,” comments Joseph Camilleri, Executive Head, Business Development & Corporate Services, BOV Fund Services, one of the island’s leading fund administrators. “Malta had, by the time AIFMD was introduced, already attracted a relatively large community of international small and medium sized fund managers to structure their fund vehicles in Malta. It was thus imperative that the goose that laid the golden eggs be safeguarded from the overarching burden that the new regulation was set to bring to the table.”
In effect, rather than replacing the old with the new, the MFSA introduced a new fund regime, the Alternative Investment Fund rule book, as distinct from the already existing Professional Investor Fund rule book.
“This latter regulatory platform for alternative funds, with its inbuilt flexibility within a robust framework, has enabled hundreds of fund managers to structure their alternative strategies, ranging from hedge funds, to private equity, real estate, fund of funds, distressed debt, high frequency trading funds and so on.
“It was inconceivable that this segment should be burdened by the heavy regulatory baggage that the AIFMD promised to introduce. In view of the fact that the Directive’s provisions become mandatory for alternative managers with an AUM in excess of EUR100 million, it followed that those below that AUM threshold should be given the opportunity to retain the status quo in terms of the regulation they were subjected to.
“Now that the directive has been up and running for a number of years, it is clearly evident that retaining the PIF regime was a wise decision: alternative funds subject to this rule book continue to grow year-on-year,” outlines Camilleri.
This has been important for Malta, helping it to build on the bedrock of fund managers already using the PIF regime. This in turn has kept Malta’s service providers busy and allowed them to broaden and diversify their revenue streams, which in turn has benefited Malta’s GDP.
Development No2: AIFM hub
Although over the years Malta has worked hard to carve out a niche as a funds jurisdiction, there is a big opportunity to become an AIFM jurisdiction, especially with the UK’s decision to leave the EU. Come 2019, London fund managers might not necessarily have the opportunity to continue passporting in Europe if the UK Government fails to secure an equivalence arrangement. Teaming up with a third party AIFM in Malta, for example, or setting up a standalone Maltese AIFM, could become a viable option.
“As you know you have the opportunity of using two jurisdictions under AIFMD where you have the fund in one jurisdiction and the investment manager in another jurisdiction,” comments Steve Paris, Director and Financial Services Industry Leader, Deloitte. “Promoters have leveraged on this opportunity and we are seeing an increasing number of promoters establishing regulated managers in Malta to service funds domiciled in other jurisdictions.”
There are always opportunities, it just depends on the manager. If they are looking for a close port to home then Ireland would likely be the first choice under Brexit. “However, if they are looking for a jurisdiction that gives them a foothold in Europe but also in the Middle East, then Malta has a good potential to offer a bridge north into Europe and east into the Middle East. It is certainly well placed for managers wishing to offer Islamic finance products, for example,” says Nicholas Warren, Senior Manager, Financial Services, Chetcuti Cauchi Advocates.
AIFMs that are licensed in Malta are free to outsource some of their operations back to London. That said, one needs to be aware of the guidance issued by ESMA, which makes it very clear that it will not allow brassplate operations; not just in Malta, but any EU jurisdiction.
As Warren adds: “It’s not simply a matter of obtaining a license from the MFSA and operating the AIFM entirely out of the UK. What one can do, just as certain insurance companies have done, is to establish an AIFM in Malta to handle one’s European business, and keep the UK manager separate to handle all of the fund’s UK and offshore business.”
Two licensing regimes
When it comes to setting up fund management companies, the MFSA has taken the approach to allow full-scope AIFMs to be set up in Malta to service AIFs under the Directive and also allows de minimis fund managers to be licensed. There are therefore two licensing regimes: one for de minimis fund managers and one for full-scope AIFMs.
At the same time, Malta has the UCITS fund management regime. “One interesting theme that I am seeing is that more fund managers are interested in getting dual authorisation; both as a UCITS fund manager and an AIFM. The licensing of full-scope AIFMs continues on a consistent basis,” confirms DF Advocates’ Farrugia.
“There is still good uptake for the de minimis fund management regime. It is ideal for small fund managers who may not have the desire to grow beyond EUR100 million and become subject to full licensing and oversight, and higher compliance costs associated with AIFMD. This regime is especially attractive for those fund managers who have a PIF and wish to target a limited number of institutional investors.
“Overall, the fund management sector in Malta continues to grow, both for UCITS funds and AIFs,” adds Farrugia.
Malta’s service provider community is well positioned to advise accordingly on how managers – start-ups or established – should best approach the AIFM solution and how the AIFM Directive should be interpreted from a proportionality rules perspective.
“Certain jurisdictions treat managers in a one-size-fits-all fashion but I would say Malta takes a more tailor made approach,” suggests Mangion. “We have seen a situation where even if people choose not to use Malta as a fund jurisdiction, they can use the island as an investment management solution, where they set themselves up as a standalone AIFM, or choose to join a third party AIFM platform.
“If managers in London are forced to find a European solution to maintain a regulatory presence outside of the UK, we see ourselves as being an attractive option.”
Although seen by some people as the most cost-effective solution for start-ups, there are risks to using a third party AIFM who also provides a fund platform (typically a SICAV) upon which to establish a sub-fund.
Peter Jakubicka at Circle Partners says that each one of its Malta-based clients chooses to launch their own standalone fund. “This is purely caused by the simple fact that clients are afraid of who the other members of a platform are and what risks they might be exposed to. Imagine a situation where one of the other members does something illegal or commits a fraud? Your sub-fund will face immediate bad publicity and 100% redemptions, killing your sub-fund and your fragile business name as well.”
Assuming the manager is already established and operating as an FCA-licensed AIFM, there is nothing to stop them setting up a separate AIFM in Malta as a plan B, to hedge against Brexit risk.
Substance is needed
The regulator has to be satisfied with various criteria when assessing an AIFM application, such as the manager’s operational set-up and the extent of their investment activities being undertaken from Malta.
“The MFSA has always focused on two key functions of the AIFM: the portfolio management function and the risk management function when setting up shop. The regulator is strict on the operational aspects of the AIFM and that there are competent people on the ground involved in those two core functions. The MFSA is only likely to issue a license if the AIFM being set up in Malta fully satisfies the regulatory requirements of AIFMD,” comments Higgans.
There is an obvious risk that if the manager is also offering its AIFM license as a platform to third parties that they won’t have full control of the portfolio management or risk management of an appointed sub-fund; this ties in with the earlier point made Jakubicka. It all comes down to compliance and effective oversight. “It’s not something the MFSA can anticipate or regulate in advance. On an ongoing basis it will carry out spot checks on AIFMs to make sure they are operating correctly,” says Higgans.
“Irrespective of the operational set-up of an AIFM, the MFSA always puts a condition in the license that if the business grows and the AUM increases, the AIFM has to step up its operational oversight. They want to see evidence that the AIFM has the relevant expertise in the asset classes of each sub-fund on their platform.”
If one looks at the clusters of operators in the asset management space there are four distinct categories: firstly, those who are based in the UK who are not passporting into Europe and are using a UK platform to do business in non-EU markets; secondly, UK managers who are solely doing business in the UK; thirdly, UK managers who already have a European platform and just need to shift some of their operational headcount to maintain their business in Europe; and finally, the fourth category are those managers who are based in the UK and are relying on the AIFMD passport to distribute their funds from the UK (but who have no current European footprint).
“It is this last cluster of managers who are now looking for solutions to sustain their business, going forward, under AIFMD,” says FinanceMalta’s Farrugia. “One way to do this is to set up an AIFM in a jurisdiction like Malta and then delegate the investment management function back to the UK. Our laws here are based on English common law, we are an English-speaking jurisdiction and the operational costs of running a Maltese AIFM are highly competitive.
“Malta therefore ticks a number of boxes for UK portfolio managers to be able to sustain their business in Europe.”
Alternatively, managers have the option of availing of an existing Maltese management company who they can appoint as their third party AIFM, should they decide not to set up their own standalone AIFM.
“It depends on the extent to which the manager intends to grow his business, how many fund products they are likely to have, if they want to retain the exclusivity of their own brand as opposed to using someone else’s (when using an outsourced AIFM); these are all factors the board of directors needs to take when considering their options,” adds Farrugia.
Going forward, Paris is of the opinion that Malta will became an increasingly attractive jurisdiction for managers who wish to establish a regulated manager in the EU. Especially in the context of the AIFMD rules, which allow a degree of delegation, thus allowing a measure of flexibility when establishing the regulated structure.
As long as one can prove that they have substance in Malta, and the proper controls in place, then it’s fine. What won’t be possible is for a UK manager to exploit Malta by setting up a Maltese AIFM with one or two operations people on the ground and everyone else working out of London.
Development No3: Securitisation
Malta is pushing hard to position itself as Europe’s `go-to’ jurisdiction for securitisation products. Previously, the jurisdiction already had the protected cell company (PCC), which was established in both law and practice when the Securitisation Cell Company (SCC) Regulations came into force at the end of 2014. Leveraging the PCC, the Securitisation Cell Company allows fund managers to establish securitisation vehicles that use multiple compartments (cells) to cater for different groups of investors and different sets of assets or risks.
Insurance sits alongside Malta’s asset management sector and today has around 59 insurance offerings for both life and non-life areas of the market; the latter accounting for a large chunk. It is home to some big name insurance managers including Aon, Munich Re.
Groups like Arphan SCC Plc, which has partnered with Amergeris Management Services Ltd, have established special purpose vehicles to run securitisations for its clients across numerous asset backed securities including: real estate, commercial credit, commodities and even artworks.
“I believe the securitisation market is important as it complements the other markets we have here,” remarks Warren. “It’s important to have a well diversified financial services sector. You can’t afford to focus on one specific area. The SCC structure is very helpful in that sense, as it allows you to segregate the assets and liabilities. The time to market is also very quick. We are working on a few SCC proposals at present.”
He continues: “The fact that one can set up an SCC will, I think, definitely help to grow the asset management industry in Malta. There is a general feeling of optimism and growth on the island. There is a feel-good factor. We continue to invest in infrastructure – roads, buildings, etc – and are paving the way for further growth in the economy.”
Malta provides a legal framework for securitisation vehicles, primarily through the Securitisation Act which has been in place since 2006, and more recently, the Securitisation Cell Companies Regulations, introduced in 2014.
This legal framework has enabled Malta to develop into a jurisdiction of choice for securitisation transactions. The Securitisation Act provides both legal clarity and investor protection whilst enabling flexibility in the structuring of securitisation transactions. Any asset can be securitised including future receivables and the securitisation vehicle may take many different forms, which means that there is a vast scope of options for securitisation structures.
Tailored income tax neutrality provisions, statutory bankruptcy remoteness provisions and a network of over 65 double tax treaties increase the attractiveness of the legal framework. Malta also offers efficient solutions for access to capital markets through the Malta Stock Exchange and the European Wholesale Securities Market (EWSM), both of which are supervised by the MFSA.
Re-insurance opportunities using the SCC
The Securitisation Cell Companies framework can also be adopted for the structuring of reinsurance special purpose vehicles in order to tap into the cross-border opportunities of insurance linked securities since the coming into force of the Solvency II Regime.
Last year, Malta launched its first re-insurance SPV, when USA Risk established Exchange Re SCC Limited– a platform for collateralised reinsurance transactions that avails of the SCC structure.
The platform calls itself the first “ILS platform in Malta for private collateralised reinsurance transactions organised as a securitisation cell company (SCC)”.
The Securitisation Act is both non-intrusive and flexible, and at the same time secures the required level of investor protection.
Should the securitisation company become insolvent, the Securitisation Act provides for rules aimed at protecting the rights of the investors, the originator and other securitisation creditors over securitisation assets.
Furthermore, the bankruptcy remoteness principle isolates the securitisation assets from any insolvency risks of the securitisation vehicle, the originator or any service providers. Securitisation creditors, including bondholders in a securitisation vehicle enjoy a privilege over the assets of the securitisation vehicle, and therefore rank prior to other claims at law.
Overall, the SCC framework has brought in an additional structuring option for Malta; one that increases economies of scale and enhances investor protection while enabling the structuring of multiple transactions though a single securitisation vehicle.
This is likely to be an important growth area for asset servicers based in Malta, going forward, as more insurance groups and financial institutions develop securitisation products for the European market.
“We’ve seen a lot of enquiries from fund managers as they start to consider Malta for their operations. This is also the case for insurance companies as we are the only EU jurisdiction offering protected cell and incorporated cell legislation and the SCC structure. We are seeing very strong growth on the securitisation front,” concludes Farrugia.
