2016 - A renaissance for the funds industry

How did the advent of EU hedge fund regulation called the Alternative Investment Fund Managers Directive (AIFMD) affect the industry?

Quoting a recent survey by Misco, it reveals inter alia how the economy inspires  confidence among respondents, with 85 per cent saying they felt that the economic situation in Malta was good.

Talking to practitioners one acknowledges that following the multi million euro branding gained as a result of the Valletta Summit and CHOGM international events, the perception for attracting new business is positive.

Just consider the meteoric trajectory of the local fund industry, in which in 1995 there were only five Collective Investment Schemes (CIS) that were licensed, yet this rose to more than 750 today.

In addition one hopes that the creation of a new regime for Alternative Investment Funds (AIFs) will be one of the developments to feature boldly in the new year.

So how did the advent of EU hedge fund regulation called the Alternative Investment Fund Managers Directive (AIFMD) affect the industry? More benefits are expected as AIFMD regulations came into effect since now investors are obliged to comply with the EU’s regulatory system.

Starting way back in June 2013, Malta became the first EU Member to complete the transposition of the requirements of the Directive into national law. AIFMD permits only managers headquartered in the EU to market funds within the Single market, excluding funds based in the Caymans or Switzerland, not to mention the US, from raising money in the EU.

The AIFMD directive is broad in scope and regulates managers of all varieties of collective investment undertakings other than UCITS, ranging from securities funds to funds investing in illiquid assets.

Currently, Maltese law requires that Retail CISs and PIFs targeting experienced investors entrust the fund’s assets to a custodian for safekeeping; the custodian is also responsible for monitoring the extent to which the investment manager abides by the investment and borrowing restrictions to which the fund is subject.

Professional Investor Funds (PIFs) targeting Qualifying or Extraordinary Investors would generally be expected to appoint a custodian or prime broker(s) for the safekeeping of the PIF’s assets but may adopt adequate alternative safekeeping arrangements instead, subject to the MFSA’s approval.

Readers may ask:- if you choose to set up an AIF in Malta what are the advantages for the investor? The answer is:- benefits are numerous, such as solid diversification and spread of risk, professional research, and access to timely information – just some of the advantages that can be enjoyed in Malta.

Simply put, the main benefit of professionally managed funds is that they provide access to an investment that offers numerous opportunities that the individual investor would otherwise not have been able to access. Additionally, the increased variety of managed funds available to consumers ensures that the personal requirements of each retail investor can be met.

Whether choosing high risk/high capital growth investments or conversely a  low risk investment, all can provide consistent income over a period of time. Naturally all depends on your risk appetite yet the versatility of managed funds offer solutions for almost every investor.

To start with, the consumer is able to be guided through a broker firm before selecting a managed fund – this means being guided by a range of experts ready to help you select the best portfolio, as guided by the funds’ predetermined mandate.

Continuing on the theme of using Malta as a hub for funds, one can mention more unique selling points such as double tax treaties in force with over 65 countries. These are mostly based on the OECD model, Malta being the only EU member with a full imputation system; operates a tried and tested refundable tax  scheme – triggered when dividends are paid to shareholders from taxed revenues.

It is fully compliant with the EU non-discrimination system and gained approval from the OECD. Furthermore adoption of the euro acts as an effective catalyst for attracting funds, with the added advantage of EU passporting rights for retail UCITS and PIF’s.

As a result, in 2016 more offshore fund managers are expected to move into regulated onshore jurisdictions or base at least part of their operations in the EU.

Another feather in our cap is the competitive taxation regime for collective investment funds (CIS) (including Professional Investor Funds – PIFs and retail UCITS). As stated earlier, the number of funds located in Malta has in fact grown to more than 750, with €10 billion under management. Quoting FinanceMalta we see that the industry is subdivided into four sectors:-

• Total net assets of funds domiciled in Malta (June 2014): €9.7 billion

• Professional Investor Funds (PIF) total net asset value (June 2014): €6.6 billion

• UCITS funds total net asset value (June 2014): €2.42 billion

• Retail Non-UCITS funds total net asset value (2013): €0.7 billion.

It is encouraging to note that since 2010, the number of funds increased almost by 30% and the influx of hedge funds to Malta has been a huge turning point and is slowly feeding into the economy, as do the multiplier effects of legal, audit and accounting fees which the industry generates.

Total income from financial services constituted about 12% of Malta’s gross domestic product of €6.2 billion in 2010 and lobby groups aim to double this mark by 2020.

According to Bloomberg Markets Magazine journalist Jeremy Kahn, “In 2010, nine companies from the British Virgin Islands, seven from the Cayman Islands and six from Luxembourg switched their legal domicile to Malta.. Many of these larger hedge funds, while serviced from Malta, remain legally domiciled elsewhere, so those assets aren’t counted in Malta’s official tally.”

Malta can be classified as a hybrid financial gateway to Europe since its finance industry offers a number of attractions – including a stable economy, liquid markets, skilled workforce, cost efficient business infrastructure, and advanced IT support.

Its work ethic is what fund managers consider to be the secret ingredient encouraging them to transfer their domicile to the island. Ever since the onset of the financial crisis which hit the globe in 2008, sentiment by investors changed – they prefer transparency to secrecy, so Malta’s regulatory scrutiny and accountability have become unique selling points, including adoption of the euro in 2008, which resulted in a boost to the island’s ambitions as a hedge-fund centre by eliminating a layer of foreign exchange costs.

While the custodian of Retail CISs must have an established place of business in Malta and be in possession of a Category 4 Investment Services Licence issued under the Investment Services Act, PIFs may appoint a custodian/prime broker established abroad.

The AIFMD requires that the depositary be established in the following location: for EU AIFs, in the home Member State of the AIF and for non-EU AIFs, in the third country where the AIF is established or in the home Member State of the AIFM managing the AIF or in the Member State of reference of the AIFM managing the AIF.

Thus, under the new regime, a Maltese AIF, authorised under AIFMD, would eventually be required to appoint a custodian who is established (including establishment through a subsidiary or branch) in Malta. In order to develop and sustain the growth that Malta’s financial services anticipates more custodians of the highest repute will set up in the near future.

Certainly no effort is being spared by the MFSA to attract new custodians. In conclusion, the future looks bright and our administrative landscape is expected to evolve even further with the hope of attracting mega fund companies – something that is likely to raise the profile of the jurisdiction and, hopefully, attract more affluence for everyone.