March 2014

ASSOCIATION COLUMN: Growth challenges

Kenneth FarrugiaPlans to develop Malta’s fund industry were put in place in 1994 through a specific regime, the Investment Services Act, which allows setting up of retail funds. The Malta Financial Services Authority, Malta’s single regulator for financial services business, then launched its professional investor funds vehicle (PIF) in 2000 to attract hedge funds, private equity and property asset managers. The PIF regime meant that the country became an increasingly attractive place to domicile alternative funds. EU membership brought about the transposition of the Ucits III and eventually the Ucits IV Directive, which gives eligible funds the opportunity to base themselves in Malta, but use passporting arrangements to promote and sell their funds into every country in Europe. The regulatory framework is supported with an equally comprehensive legal framework, allowing funds to be set up as Sicavs, limited partnerships, trusts and contractual funds. In just a few years, Malta has attracted over 600 investment funds, which were authorised. Those include PIFs, private equity and Ucits schemes. The funds sector is also seeing service clusters developing, with 27 fund administrators, over 80 Category 2 asset managers and the top four audit firms that have set up operations here. Malta’s legal firms are multi-disciplinary and well-connected, and provide advice across a broad range of financial services areas. Growth has not come without challenges and we need a new, specialised skills set. This is being addressed through the introduction of various degree/diploma and certificated training programmes. Although Malta’s most prized asset is its human resource, its population of 410,000 means the country has to constantly manage the demand for new resources. A number of initiatives have been launched to strengthen the employability of our economy. These include the introduction of favourable tax incentives for women to return to work after childbirth and highly qualified persons rules to attract expats. The government will also be introducing free childcare centres. Other challenges include the raft of new and complex regulations being faced by the industry, which bring about their own burdens, particularly for those financial services organisations in the small and medium enterprise strata. Malta’s physiognomy as an island state also brings with it logistical issues, though the onset of numerous international airlines flying to Malta from the main European hubs has improved connectivity. Yet the country today operates on a level playing field with other EU-based fund domiciles in terms of the passporting rights to other EU jurisdictions. EU membership is in itself a confirmation that the comprehensive legal and regulatory framework in place meets EU standards. Malta also has a pro-business regulator for financial services and English is widely spoken. As the smallest member state, Malta plays to its advantage by way of being agile and responsive to the needs of the industry which have been critical to the success achieved so far. Set-up and operational costs are increasingly becoming an important factor in the decision making process to select a fund domicile as fund sizes and seeding have been negatively affected by the performance of the markets over the past years where it is becoming increasingly challenging to deliver above average returns. As a result, Malta is a compelling option for fund managers to revisit their fund location and seek alternatives with more cost-competitive set-up and ongoing servicing costs.  Its geographic location right in the middle of the Mediterranean makes it an ideal gateway to the EU for non-EU financial services firms and, an open door to the financial services businesses of the Arab world. Kenneth Farrugia is chairman of Finance Malta ©2014 funds europe

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