Despite being a small island nation, Malta's influence on the wider European financial sector is a significant one. Michael Imeson looks at how the country so consistently punches above its weight.
Malta continues to have more influence in the international financial markets than its size might warrant, with financial services accounting for 11% of its gross domestic product (GDP) and more than 90% of its foreign direct investment.
With a population of 436,000 crammed onto an island of 316 square kilometres, Malta’s financial sector is necessarily outward looking. Its reliable regulatory and professional environment attracts firms from Europe and the rest of the world, which use it as a tax-efficient Mediterranean launchpad to passport services throughout the EU.
And the number of financial businesses is growing. “Three years ago, the Malta Financial Services Authority [MFSA] was responsible for the regulation of 1818 licences,” says director-general Marianne Scicluna in the authority’s latest annual report. “Currently it is 2180 licensed entities, varying in nature and complexity.”
The UK's exit from the EU in 2019 should accelerate this growth, says the MFSA’s previous chairman, Joseph Bannister, who retired in 2018 after nearly two decades at the helm. “UK companies in securities and payment services are in the process of transferring more of their UK business to Malta,” he adds.
Diverse financial services
Domestic and international banking, payment services, asset management, pensions, insurance, trusts and securitisations are the mainstays of the Maltese financial sector. Underpinning it is a strong economy. Real GDP growth was 6.6% in 2017 – the highest of any EU country apart from Ireland and Romania, according to the European Commission’s latest European Economic Forecast. The forecast for 2018 is 5.8%, the highest in the EU and not far behind China’s 6.6%.
Furthermore, the EU’s Alternative Investment Fund Managers (AIFM) Directive has boosted asset management in the country. At the end of June 2018 there were 116 alternative investment funds (AIFs) in Malta, up from 101 at the end of 2017, according to Kenneth Farrugia, chairman of promotional body FinanceMalta. “The growth in AIFs has been helped by Malta’s introduction of the notified AIF [NAIF], which gives us a competitive advantage,” he says.
A NAIF is where the AIFM ‘notifies’ the MFSA that it has set up a compliant AIF, rather than having to go through the formal licence application. It can take as little as 10 working days to get a NAIF licence, which is a lot quicker than the formal process. “It is process innovation as opposed to product innovation, and cuts down on time to market,” says Mr Farrugia, who is also chief business development officer at the Bank of Valletta.
Roberto Colapinto, founder and chief executive of Abalone Asset Management, set up in Malta three years ago. “Having worked in Luxembourg for two years, I was facing a vitamin D deficiency, so I decided I needed sun in my life and came to Malta,” he jokes.
Malta’s business advantages include “a quick regulatory authorisation process for new businesses compared with some other European countries and fiscal attractiveness”, he says. “Staff costs are much lower than in most of Europe, and the tax and social security burden on employers and employees is low.” Abalone manages AIFs and Ucits mutual funds for investors in other parts of Europe. It now has about €1bn of assets under management.
“The disadvantage is that Malta is on the periphery of Europe,” he says. “Going to London takes three hours, which complicates our business development efforts, so we are branching out to other European Economic Area countries.”
Malta has profited from a change to UK pensions law of more than a decade ago. This allows UK citizens living in an EU country to transfer their pension schemes to another EU country and gain certain tax advantages, under the UK’s qualifying recognised overseas pension scheme (QROPS).
Malta has also been taking advantage of the EU’s institutions for occupational retirement provision (IORP) directive, which allows pan-European IORPs to be set up in one EU state and passported to other EU states.
“Malta has benefited from QROPS because its pensions laws are based on the UK’s, there is regulatory oversight by the MFSA and it has a double taxation treaty with the UK and more than 70 other countries,” says Bethell Codrington, global head of international pensions at London company TMF Group. TMF has a substantial operation in Malta and Mr Codrington is chairman of the Malta Association for Retirement Scheme Practitioners.
However, the QROPS market is threatened by Brexit. “If we end up with a soft Brexit then QROPS will probably continue, but if it’s a hard Brexit QROPS may end. If I was the chancellor, why would I allow pension funds to be transferred to Europe and not pay tax?” says Mr Codrington.
This means while Brexit will attract British firms to Malta to use its EU passporting rights, it could also have negative consequences for the country too.
Originally published in The Banker - September 2018
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