Malta fears fallout from disorderly Brexit

The tiny Mediterranean financial centre of Malta prides itself on innovation. The latest trend to be embraced is technology-themed investment, with the launch of virtual currency funds, which regulators at the Malta Financial Services Authority (MFSA) hope will attract new business.

“These funds require focus on competence and experience,” says Rebecca Xuereb, business development manager at BOV Fund Services, one of the island’s major fund servicing operations, speaking on a fund management panel at a recent Finance Malta event in London.

“The authorities are looking for these qualities particularly in the service providers – the custodian and auditor. They need a statement requiring them to detail their experience in this sector. There is a focus too on risk management and currency volatility, discussed in a preliminary meeting with the MFSA,” reveals Ms Xuereb.

According to MFSA figures, Malta has around 600 investment funds. The 121 asset managers with a presence on the island run €110bn ($125bn) in assets, serviced by 11 depositaries and custodians and 24 administrators.

The sweet spot for the island nation, says Ms Xuereb, lies in working with small to medium asset managers, looking to register funds in double digit millions, and smaller amounts, in the alternative assets space. This is a particularly attractive niche for Malta, where island law firms reckon registering funds is cheaper than rival centres.

Funds typically need to pay two Malta-based board members, a regulatory fee per sub-fund, plus audit costs. Practitioners agree that these are relatively low, shaving 30 to 40 per cent from operational bills compared to Luxembourg and Dublin.

The fund category of which island practitioners are most proud is the Notified Alternative Investment Funds (NAIFs), which have been launched in Malta to cater for an eclectic range of assets, including traditional stocks and bonds, real estate, precious metals, nautical vessels and works of art.

Despite these successes, the island must face the challenge of dealing with a disorderly Brexit, which may not necessarily play out to its favour. “The UK has always been an ally to Malta,” which gained independence from Britain in 1964 and remains in the Commonwealth, says Mark Caruana Scicluna, Associate responsible for investment funds at Valletta-based lawyers Ganado Advocates. “It has been by our side in the European Council and have been a great influence.”

Island practitioners are hoping for an influx of post-Brexit business. But the fear is that the city of London may be negatively impacted, with these shock waves spreading to Valletta. One thing is certain. The recent 11^th hour agreement by the EU27 to continue the delegation of asset management – allowing funds registered in a jurisdiction such as Malta, Luxembourg or Dublin to outsource asset management activities to London – was greeted by a collective sigh of relief across Malta’s finance hub.

“All our clients have calmed down, because delegation was agreed at the last moment,” admits Mr Caruana Scicluna.

After the UK voted narrowly to leave the EU in the Brexit Referendum of June 23, 2016, Malta saw a surge of enquiries from fund managers nervous about losing passporting rights for their funds. “Initially, we had large numbers of requests from clients,” with a steady stream of managers coming to look at the facilities Malta had to offer, reveals Chris Portelli, Associate Partner of EY Malta and leader of the firm’s asset management practice. 

While firms such as M&G then decided to move assets and resources to Luxembourg, Malta has so far attracted a handful of smaller firms rather than a “huge shift”, he says, with many fund managers yet to ascertain what Brexit will mean for them in practical terms.

“Everyone needs to understand how Brexit will actually happen,” he warns.

Practitioners praise the “hands-on” approach of the MFSA, which meets providers before registering funds, to discuss the crucial issue of “substance”, coming to a loose arrangement of how many staff and level of resources a migrating firm will devote to Malta, so that “there is no time wasted,” says Mr Caruana Scicluna at Ganado. “A provider might say they want one person on the ground and the MFSA will reply ‘sorry, that will not work, you need at least two’. They will never ask for seven people on the ground, like Luxembourg.”

Locating staff in Malta is facilitated by a 15 per cent flat tax on earnings in the financial services sector, he says. “This is very encouraging for people who want to come down to work in Malta.”

But challenges should not be discounted. For the last 20 years, international players have been nervous of locating funds and operations in Malta because there are no big-name custodians such as State Street, BNP Paribas or JP Morgan stationed there, even though regulators and promotional bodies have long promised deals with major custody banks were in the pipeline.

“It’s a chicken and egg story,” says EY’s Mr Portelli. “The bigger custodians would come if the bigger funds were in Malta. But who will come first? We have a number of depositaries on the island, but it’s a tricky situation for anyone who wants to set up shop in Malta.”

During the discussion, panellists also reflected on recent regulatory problems with banks and accusations of money laundering, which accompanied the murder of a prominent investigative journalist. But they concluded these sorts of events happen everywhere and are more prominent in other financial centres.

Malta, they felt, is a well-regulated country, with low costs and innovative structures. The key challenge ahead will be what happens with Brexit and how the island will react.

Gateway to Europe

While the lack of a globally renowned custody bank operating in Malta is seen by some as a hindrance to growth of the funds industry, others see this as an opportunity.

“We saw an opportunity in the market as there are limited service providers in the custody and execution space, coupled with the investment services sector making up a substantial portion of the Maltese GDP,” reflects Georgios Ercan, head of sales at wealth firm Dolfin, which recently based its offshore operations hub in Malta.

“There are a number of start-up funds and investment managers here that lack access to global custody solutions. We have brought a network of the world’s largest sub-custodians to Malta.”

He also cites the country’s strong European regulatory framework, the use of English as an official language and the incentives offered to encourage companies and employees to move to Malta.

Family offices, he says, are increasingly looking for “an all-in wealth management solution”, including custody, execution and investment management, within tax efficient and cost-competitive structures.

“Malta offers a multitude of double taxation treaties and a variety of structuring possibilities starting from simple special purpose vehicles and trusts, to more complex fund structures, while being based on UK law,” says Mr Ercan.

The most popular fund structures have been Professional Investor Funds (PIFs), Alternative Investment Funds (AIFs) and Notified Alternative Investment Funds (NAIFs). He says these structures are fully EU regulated, flexible in terms of investable asset classes, tax efficient and allow for oversight by independent parties including depositary and compliance officers.

Sourcing talent can however be a challenge, “something that companies and the government should focus on further improving,” says Mr Ercan. “The island’s breadth of global wealth has increased significantly in the last few years but has not been matched on a human resources basis.”

Dolfin would like to see the government and private sector placing additional focus on benefits for employees moving to Malta, in addition to encouraging high net worth client families to come there.

He expects some Maltese expatriates in the UK to return to Malta after Brexit. “Malta can become the UK’s EU business gateway to Europe.”