Malta has become increasingly attractive to financial firms seeking safe, well regulated and cost effective operating hubs within the European Union. But the jurisdiction faces a few challenges too, including attracting major custody players to service the growing fund management community, as well as training and educating a new generation of bankers, accountants, wealth managers and fund custodians.
In PWM's first Spotlight Series of videos on financial centres, Yuri Bender, editor-in-chief of PWM, speaks to leading figures in the Maltese financial industry about the strengths of the jurisdiction and future challenges.
- Joe Bannister, Chairman, MFSA
- Leonard Bonello, Senior Associate, Banking and Finance team, GANADO Advocates
- Matthew Camilleri, CEO, Castille Resources
- Kenneth Farrugia, Chairman, FinanceMalta
- Andre Zerafa, Partner, Head of the Investment Services and Funds team, GANADO Advocates
Malta's accession to the EU in 2004 led to a huge expansion of its fledgling financial services industry. The island has become increasingly attractive to financial firms seeking safe, well-regulated and cost effective operating hubs within the EU. But the jurisdiction faces challenges too.
Yuri Bender If we look at the key areas of excellence in Malta, such as alternative investments including hedge funds, private equity and real estate, how does Malta compare in terms of expertise and regulations to other European centres such as Luxembourg or more niche centres such as Guernsey?
Andre Zerafa Malta has been a fund jurisdiction since 1994, 10 years before it joined the EU. It was then that legislation was introduced specifically allowing for collective investment schemes to be set up in the jurisdiction. These were retail funds based on Ucits legislation, which already existed, and which then evolved into professional investor funds (PIFs) a few years before Malta joined the EU.
The expertise has been there and has been honed over 22 years of experience in dealing with these investment products. Malta compares very well with traditional fund jurisdictions both offshore like Guernsey and onshore like Luxembourg.
Although the typical operator we see setting up in the jurisdiction is a firm with 15 to 20 people, Malta has worked over the years on the concept of an institution in Malta forming part of a global cross-border infrastructure, as allowed by AIFM, Ucits and MiFid directives.
Yuri Bender How do the relative costs of setting up investment vehicles in Malta compare with those in rival centres?
Andre Zerafa Malta has used cost competitiveness as one of its selling points over the years. To be fair, the gap which perhaps existed 10 years ago, which was quite enormous – the cost for setting up structures in Malta was sometimes even one fifth of that found in other onshore jurisdictions – has reduced. But Malta is still quite competitive, offering around one third to half of the cost one would find in other EU onshore jurisdictions, with the same level of expertise and professionalism.
Yuri Bender What are your plans for the development of the financial sector?
Joe Bannister The good thing about Malta is that its economy is diversified. It would not be ideal to make the financial sector a predominant sector largely because this is highly mobile and obviously there is a limited population. I think there is room for further expansion largely because the economy is shifting towards a more service-type economy.
We have €10bn ($11bn) assets of funds registered here but the whole system accounts for €100bn through managed accounts, trusts, corporate services work and bank accounts.
The sector will expand in relation to the number of companies coming in. We have strong due diligence and a good authorisation team and firms are well scrutinised before they are granted a licence. We stand out as a Mediterranean country. I once heard the saying "Italian food and the British way of doing business". As long as we keep that, then it should be okay.
Yuri Bender Has Malta shaken off the old days of an offshore financial centre?
Joe Bannister That offshore financial centre didn't really survive. And there weren't really financial services companies, but more trading and holding companies.
Geographically we are offshore. But in reality we are members of the EU and we cannot be offshore as defined by the EU or the OECD, in the sense of a tax haven, with ring fencing of companies. In fact, we always appear on white lists. We never appeared on any black list.
Yuri Bender The range of EU-wide regulations have generally been quite positive for Malta but some present challenges, such as that coming in 2017, relating to the need of fund managers based in a particular jurisdiction to use a local depositary. What impact will that have on Malta?
Andre Zerafa It will affect bigger operators from setting up in the jurisdiction. On the island, there are eight local depositories, none of which are international names, although they are able to take on bigger funds.
However, a bigger fund manager might not feel comfortable associating their name with that of a smaller depository. That bigger operator would be looking at Malta for bespoke structures, which normally take the form of a PIF, which is not passportable in the EU but is very attractive to operators such as family offices.
Mid tier operators managing around €500m to €1bn typically also set up their fund structures in Malta, because all these depositories have sub-custody relationships with bigger operators. Bank of Valletta locks into the global custody network of RBC, one of the bigger global custodians. Others lock into the UBS or the Deutsche Bank global custody network. Citco, one of the biggest hedge fund administrators, has a presence on the island and works with all the prime brokers. It is a bit of a misnomer to just look superficially at the actual depository based here without really looking at the way in which that depository is functioning.
Yuri Bender Would you like to see passporting of custodians through the EU?
Joe Bannister Issues about custodians are essentially due to the fact that Malta is seen as a start up jurisdiction. Large custodians want big funds, which take time to develop. But I do feel this is a quirk in the single market because custody is the only service not passportable.
We are working on this. There are various players now looking at Malta attracted by not simply the custody for funds, but also the custody for trust work and corporate services for example. Our developing personal pension sector will also require custodians, although they are not required to be on the island but obviously we, as regulators – when we see large amounts of money in these personal pensions – believe preferably the custodian should be here.
So it is becoming clear the first large custodian player who moves here will take on everything.
Yuri Bender Some of your competitors in Luxembourg and Dublin have recorded many enquiries about moving in staff and re domiciling funds after a potential Brexit of the UK from the EU. What sort of interest are you receiving from UK and other investment houses in Malta?
Kenneth Farrugia Malta is experiencing the same level of interest as other leading financial centres in Europe, where operators in the UK are assessing a post Brexit scenario and how they will ensure the ways and means to sustain their business and operational models insofar as Europe is concerned.
We have had enquiries from asset managers, electronic money institutions, payment service providers and insurance operators enquiring on the ways they can set up operations in Malta and the implications and the requirements of doing so.
Malta today is considered as a hub, as a domicile from where both non-EU operators and EU operators can set up operations and do business cross-border into Europe using the passporting mechanism.
Yuri Bender Do you market Malta as a jurisdiction or do you market the products which Malta has to offer?
Kenneth Farrugia It is a combination of coming up with innovative products on the market within the context of EU's regulatory framework and the country's legal framework.
For example, we recently announced the launch of the Notified Alternative Investment Fund (NAIF), a ground-breaking structure which does away with the sometimes laborious process of licensing funds through the financial services authority, which may take three to four months. Within 15 days the authority will accept notification of the AIF because it is shifting the responsibility of the due diligence process of the product itself on the alternative investment fund manager (AIFM). This means a more efficient time to market for fund managers to structure AIFs and launch them within their customer base.
In addition to product innovation, other important factors strengthen the centre's value proposition, such as the presence of a singular regulatory body, the pro business mindset of the regulator and ease of accessing it, which in some jurisdictions has become a luxury. Other important aspects are the highly developed operational infrastructure, significant cost competitiveness and the ease of travelling to and from the island.
Yuri Bender Is it fair to deduce that you want to diversify away from just being a back office administration centre to also offer wealth management products for wealthy families and family offices?
Kenneth Farrugia If you look at the core financial sectors that have evolved in a marked way over these last seven to 10 years, you will clearly identify clusters in the asset management space. We have no less than 150 investment services operations operating in Malta. These are not just brass plate operations, as in Malta it is mandatory that board meetings are held here and people are employed here and there is activity within that licensed operation.
Also, there are 27 fund administrators servicing the industry, of which more than 80 per cent are international fund administrators, such as Apex, Alter Domus, Praxis and Custom House.
They are servicing funds both domiciled in Malta and increasingly funds and portfolios based outside the island.
Insurance operators have grown from eight in 2004 to 60 today, including global insurance managers such as Heath, Marsh, Aon and GLT, predominantly covering risks outside our shores. The same can be said for the wealth management space which is an important subset. We have seen the mobilisation in Malta of asset management firms and pension managers servicing this business. The Maltese financial industry, today employing around 10,000 people, is not dependent on one particular sector but is driven by the growth and traction in a number of sectors.
Yuri Bender Malta's SmartCity was built specifically to house technology firms. Is there enough interaction between technology firms and financial services firms?
Kenneth Farrugia It is never enough. Under our Financial Institutions Act, we already have around 40 fintech companies operating in and from Malta, leveraging the information and communication technology (ICT) capabilities and the IT backbone that we have in Malta. We have 4G while we are testing 5G, because Malta is small so it is an excellent test bed for technology. Clearly we are marrying technology with financial services. Companies that come here to set up fintech operations know they have a resource of skills on the financial services front, but equally so on the technology front.
Leonard Bonello IT and technological expertise was present on the island for various reasons, because of the number of software companies which set up here, and which have a huge wealth of technological expertise. At the same time, we have very strong financial services. This offers a perfect environment to set up fintech initiatives, be it a crowd funding platform, a payment institution or an exchange for a virtual currency.
There are around 30 between payment institutions and electronic money institutions in Malta, which have allowed the transition to a paperless economy. Most of them are not exclusively targeting the local market but are able to offer their products on a Pan-European basis.
Yuri Bender Within Malta's financial services community, which skills are you particularly focusing on when recruiting candidates?
Matthew Camilleri If you asked me the same question five years ago, I would have said it is predominantly back and middle office. A number of organisations in funds, in insurance have come here, set up offices usually employing the finance and the back office function, while retaining front office in London and other jurisdictions. As Malta started evolving, with many more front office positions being created, clients started recruiting investment analysts, junior portfolio managers, portfolio managers, even CIOs.
Yuri Bender What initiatives has the Maltese government undertaken to ensure the labour force is sufficient to service the growth of the industry?
Kenneth Farrugia We have undertaken a number of initiatives over the years to address such challenges. The government recently introduced free child care centres and a number of female workers that were staying at home taking care of their children took up this opportunity and entered back into the working world. We introduced highly qualified persons' rules, offering very attractive tax incentives - 15 per cent income tax if your salary exceeds around €85,000.
Also, we have streamlined the process of issuing visas for non-EU based workers to come and work here.
Matthew Camilleri The government has been very active in promoting mothers coming back to work. In certain areas like, for example, accountancy which was historically dominated by males, the balance has shifted more towards females, for example in accountancy courses at university, and a lot of female accountants joined the workforce.
There has been awareness created by the government, but also the private sector. Audit firms, in particular being faced with more competition for skills, have provided women coming back to work with more flexible working programmes.
Yuri Bender Are there enough qualified staff to help fill the industry's growth or do you have to look outside, to other EU countries to recruit staff?
Matthew Camilleri We look outside of Malta for usually quite senior positions. For more junior positions, there are pressure points for example in fund accountants and auditors, sometimes even in part qualified accountants.
With all the programmes and initiatives going on, we will be managing at the local level. But expertise will be needed from other jurisdictions to fill in gaps while we develop our own local expertise.
Yuri Bender How do you see the future of Malta as a financial centre? Is it a very positive story or are there more challenges lurking ahead?
Andre Zerafa Malta could have an even more robust offering and be the domicile of choice for many more operators than we have at the moment. There is still capacity. The challenges are coming from different places. Some are coming from the OECD and the BEPs (base erosion and profit shifting) package, others from the actual regulation within the EU. Rather than looking at these challenges as obstacles to business we need to turn them into opportunities. This is the way in which Malta has evolved over the years. By being a very small jurisdiction we always had these challenges.
Joe Bannister The future looks good, but obviously the road is bumpy. What is important is that we continue on the same road that has brought us success, which is not numbers but quality. If we keep on track, particularly in authorisation and supervision, then that success will continue. The expansion rate may not be the same every year, though, because obviously it is all about external foreign direct investment.
Matthew Camilleri It has been a very good story so far. There has not been any explosion of growth, rather it has been pragmatic growth. And we would like to see it develop even further.
Awareness about Malta has improved in other jurisdictions. Increasingly, we get candidates calling us from places like London or New York. I hope we keep our feet on the ground and we carry on addressing challenges as we have done in past years. Despite the challenges, I remain bullish about the outlook.
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