Q&A with Stephen Paris, Director and Financial Services Industry Leader at Deloitte, & Patrick Mangion, Principal, Financial Services Industry at Deloitte
Over the past decade, the regulatory landscape for funds has undergone a number of major developments at both European and national level. What was the impact on the fund industry?
To say that the regulatory environment for funds has undergone anything short of a transformation in recent years would be an understatement. Since the 2008 financial crisis, a tremendous effort has been made at a European level to harmonise pockets of financial services legislation that were previously regulated in a fragmented manner, or which were left purely in the domain of national supervisory authorities. A push has also been made to increase transparency with the aim of re-igniting consumer confidence.
Without a doubt, the game-changer for fund regulation was the introduction of the Alternative Investment Fund Managers Directive (AIFMD), which has created a blanket regulation for the fund industry. Together with the UCITS V Directive for retail investors, these directives provide a framework for fund managers operating within the EU. Both directives have undergone a number of changes since inception, to which the industry had to adapt.
Whilst discussions have already started on UCITS VI and AIFMD II, new regulations on money market funds (MMFs) were issued in 2017. The aim of this new regulation is to establish EU-wide rules to make funds more resilient and better able to withstand market shocks. These regulatory additions, together with the introduction of targeted legislation like the EuVECA, EuSEF and ELTIF regulations, will shape the European fund industry for years to come.
Outside from fund-specific regulation, the revision to the Markets in Financial Instruments Directive (MiFID II), entering into force in January 2018, will also usher in a radical change, amongst others, in the governance, supervision and reporting mechanisms of EU-based AIFMs and UCITS management companies.
In a regulatory landscape that is becoming ever more harmonised on a European level, how has Malta dealt with these changes whilst retaining its competitiveness?
Notwithstanding the breadth, scope and speed with which new regulation has been introduced, Malta has consistently ranked at the top of the league among its European partners in terms of its capability to transpose legislation effectively and comprehensively.
Malta has continued to rank at the top against other EU members states, for transposing Directives into domestic legislation. This is according to the latest scoreboard issued by the European Commission. For example, Malta was the first EU Member State to fully transpose the AIFM directive and manage its updates. This provides asset managers with the necessary tools to ensure they remain ahead of the pack.
One of Malta’s strongest advantages as a financial services centre lies in its nimbleness. This allows legislator, regulators and service providers to have full visibility of the industry thus ensuring a timely response to any concerns which might arise.
In this respect, promoters have the opportunity of taking advantage of Malta’s highly skilled workforce, English speaking environment, low set-up and operational costs, fiscal regime, and quality of life, whilst ensuring their concerns are on the agenda.
How has innovation helped Malta retain its competitiveness in an environment that is constantly changing?
Innovation is key to retaining the attractiveness of our jurisdiction. In addition to the above, our success will continue to rest on Malta’s ability to mould regulations in a manner that allows schemes to reach their full potential while furnishing consumers with the right information to make the choices that suit them.
Despite the wealth of regulatory developments and best practices already available in the market, Malta continues to innovate to remain a client-centric jurisdiction. For instance, funds in Malta can opt to be self-managed by establishing an internal investment committee which effectively eliminates the requirement to appoint an external regulated investment manager.
Malta has also established interesting legislative provisions for redomiciliation, which allows funds to shift their operations to Malta without needing to wind up in their country of incorporation. Likewise, Malta also offers funds a clear exit route out of Malta, affording funds the luxury of choice and adaptability at all times.
Another element that has generated significant interest is the adaptability of our regulatory system to fund platforms by offering different legal modules within which funds can establish themselves and operate. These range from the traditional ring-fenced model, to the more recent incorporated cell concept, with distinct legal personality and board of directors for each fund scheme.
Considering the regulatory environment is so diverse and the innovations discussed above, what licensing options are available for setting up funds in Malta and how does one go about selecting the right regulatory framework?
Malta is proud of its open architecture and has in fact retained several of the success stories of its legacy regulatory regime, most notably its acclaimed Professional Investor Fund (PIF) Schemes structure. Though PIFs cannot benefit from the EU’s passporting mechanism, the regime itself remains popular because it is less cumbersome than AIFMD and is particularly suited for funds sold internationally on a private placement basis.
Apart from PIF, AIF and UCITS schemes, Malta also offers regulatory frameworks for Private Collective Investment Schemes and Notified Alternative Investor Funds (NAIF), the latter being Malta’s newest fund regime.
NAIFs, unlike existing Malta fund regimes, will not need to be licensed, authorised, or approved by the MFSA nor will they be subject to any ongoing regulation. Although they must be managed by a regulated manager under the AIFMD, NAIFs can be set up in just 10 days and they can be passported across the EU.
Ultimately, the decision on which regulatory regime is best suited for a new fund will depend on any number of factors, be they the appetite for passporting, the target investors, the management model the fund wishes to pursue and available models to tailor regulation in a proportionate manner.
What do you think will be a major regulation which will shape the investment services and funds industry in the coming years?
One of the major planks in this regard is MiFID II. Generally, AIFMs, CIS operators and UCITS managers are exempt from MiFID II given that they are subjected to their own specific regulation. There might, however, be instances where asset managers are impacted, especially in the performance of MiFID-related activities. MiFID II will apply in full to investment managers that are not AIFMs and UCITS managers.
MiFID II and MiFIR add a broad range of new and enhanced requirements upon asset managers which add to those enshrined in the present MiFID regime. These include increases in best execution, inducements, research, reporting and transparency requirements, which strengthen the hand of European and local supervisory authorities.
What we see in the market today is asset managers requesting us, as regulatory and risk advisors, to perform business impact analysis and develop action plans to ensure compliance with MiFID II and other wide-ranging regulations; for example the new 4th AML Directive that came into force in June 2017 and the new General Data Protection Regulation to be introduced in May 2018. Inevitably asset managers continue to focus on their core activities in creating value for their clients whilst seeking outside support on regulatory matters.
