The following interview was conducted by and first published in AirMalta’s popular in-flight magazine, ‘Il-Bizzilla’.
If you are en route to Malta to do business, you are probably aware that our little island’s hedge fund offering has made a lot of noise internationally. We caught up with Dr Richard Bernard, Managing Partner at Be. Legal Advocates, to find out why.
Much has been made of Malta’s ‘coming of age’ as a European financial services centre. What makes Malta so attractive to financial services operators?
Malta’s success in this sector is rooted in the island’s accession to the European Union back in 2004, which proved to be the primary catalyst for the exponential growth of our financial services industry in general. EU membership effectively introduced ‘passporting’ rights so that certain funds may be registered in Malta and passported to any other EU country, with instant access to the EU’s internal market of over 500 million people in 28 EU economies.
Combine this with a forward-looking, pragmatic regulator in the Malta Financial Services Authority (MFSA) and unrivalled cost- and tax-efficiency, and Malta’s role as a European hub for financial services starts to make a great deal of sense.
Without turning this interview into a barrage of numbers and statistics, what does this growth mean to the Maltese economy?
The growth of our asset management sector has resulted in the establishment of some 600 investment funds with a combined net asset value of circa €10 billion … A staggering 98% of all foreign direct investment in 2014 stemmed from financial services
‘Numbers’ are perhaps the most effective way to illustrate the jurisdiction’s robust growth. Summarily, financial services now represent a major force in the country’s economy, contributing approximately 13% to the country’s GDP in 2014. The growth of our asset management sector, driven by new fund set-ups and redomiciliations from non-EU jurisdictions, has resulted in the establishment of some 600 investment funds with a combined net asset value of circa €10 billion. A staggering 98% of all foreign direct investment in 2014 stemmed from financial services and insurance. That’s an astounding €139bn out of €142bn and should go some way to demonstrating the breadth of the sector’s growth to our readers.
What type of fund structures does Malta offer?
Maltese law accommodates a full complement of EU fund structures as well as various innovative, EU-compliant products.
The most attractive, and by far the most popular, aspect of the Maltese hedge fund framework broadly comprises (i) the Professional Investor Fund (PIF) regime which offers three different fund typologies, each based on the participating investors’ wealth and experience, with the regulatory regime being relaxed proportionally to the minimum entry threshold required from each individual investor; and (ii) an Alternative Investment Fund (AIF) regime allowing fund managers to launch AIFs in terms of the Alternative Investment Fund Managers Directive (known as the AIFM Directive).
Self-managed AIFs which have assets under management in excess of €100 million, or €500 million if the AIF is unleveraged, will be required to operate within the heightened regulatory strictures of the various regulations transposing the AIFM Directive into Maltese law. Operators not exceeding the said prescribed thresholds qualify as ‘de minimis’ AIFMs.
The Maltese regulatory framework also provides for retail investment funds (UCITS and non-UCITS) and private funds. Unlike other fund structures, ‘private funds’ escape full licensing, instead requiring ‘recognition’ by the MFSA. In order to be recognised as ‘private’ a fund must satisfy certain conditions including that the total number of participants is limited to fifteen persons who are close friends or relatives of the promoter/s.
Much of today’s financial services legislation appears to be EU-wide. Would it be fair to say that the structures available in Malta may also be availed of in any other EU member state?
Not entirely. Much of our success in the infinitely complex and increasingly rule-laden world of hedge funds is a manifestation of pro-active legislation and the MFSA’s forward-looking and pragmatic approach to regulation.
Our retention of the PIF has, effectively, guaranteed the survival of the ‘start-up’ fund which may well be financially overwhelmed by the regulatory load inherent in AIFMD compliance
Consistent with this approach, whilst many saw the introduction of the AIFM Directive as a potential end to the popular PIF regime, the Maltese regulator seized an opportunity to strengthen one of our most prolific unique selling points. Accordingly, whilst many EU jurisdictions have seemingly been left reeling by the regulatory overhaul that is the AIFM Directive, Malta has coupled its transposition into the local legislative framework with the retention of the light-touch, more flexible PIF regime. A PIF is fundamentally an AIF which escapes the necessity of full AIFMD compliance when structured as a self-managed fund satisfying certain de minimis thresholds.
Our retention of the PIF has, effectively, guaranteed the survival of the ‘start-up’ fund which may well be financially overwhelmed by the regulatory load inherent in AIFMD compliance and, in so doing, has ostensibly created niche market which we are well-positioned to service.
One of the more innovative vehicles added to Malta’s repertoire of fund structures is the Recognised Incorporated Cell Company (“RICC”) which specifically targets platform providers, in that it facilitates the creation of a RICC or ‘core’ with the sole purpose of providing standardised administrative services to any number of incorporated cells (ICs), each established within its platform structure and each duly licensed as a fund.
A key advantage of a RICC platform is the ‘standardisation’ of fund documents, such that a new cell, or fund, can be added at a fraction of the time that would be required were the fund to be established from scratch as a ‘stand-alone’ entity.
Hedge funds have sometimes made the news for the wrong reasons. Has this affected Malta at all? How can the jurisdiction continue to grow in this sector?
Malta was affirmed the ‘most favoured domicile in Europe’ by the prestigious Hedge Funds Review in its Service Provider Rankings in 2013 and 2014 and was ranked amongst the top twenty financial services jurisdictions worldwide by World Economic Forum
Despite the turbulence that has plagued global markets over the course of the past years, Malta’s fund industry has managed to secure consistent growth.
Malta was affirmed the ‘most favoured domicile in Europe’ by the prestigious Hedge Funds Review in its Service Provider Rankings in 2013 and 2014 and our modest island has retained its status as one of the most advanced global economies and was ranked amongst the top twenty financial services jurisdictions worldwide by World Economic Forum.
The key to securing Malta’s year-on-year growth is ostensibly quite simple. More of the same. As a jurisdiction, we must continue to leverage our unique selling points by fostering innovation through regulation, unrivalled efficiency and a highly skilled professional workforce.
Of course, the ever-increasing regulatory load inherent in this industry means that proper preparation and careful selection of professional advisors will be paramount for operators to correctly implement a structure which suits their requirements.