By A Paris – As European regulators push for greater homogeneity across the European Union, jurisdictions like Malta need to focus on ensuring full compliance while also maintaining the element of flexibility and agility which is one of the country’s biggest draws. Although the island has suffered from a few years of reputational issues on a broader level, Malta’s fund industry has continued working with its partners and providing a robust service.
“The funds industry itself has been robust. We haven’t had any major fund blow ups and the fundamentals are strong. Any change to repair the reputation issues the island suffered from needs to come from the top because it’s not about anything the service providers are doing wrong. It’s very difficult for us as an industry to tackle reputational issues which are not directly related to the way we do our job,” says Andrew Caruana Scicluna Associate at Camilleri Preziosi.
Some service providers have witnessed potential clients halting plans to move business to the island as a result of the broader reputational concerns. However, some managers already active in Malta say they have been largely unaffected.
Niclas Sandstrom, CEO and Co-Founder, Hilbert Capital outlines his experience: “Our business has not really been impacted by any macro issues Malta may have. It’s not something that is an obstacle for us. It has been mentioned a couple of times in over 200 meetings. People know there are many good businesses in Malta.”
He also adds that the investors he has dealt with make their selection on a case by case basis. Therefore, managers with a transparent set up provide comfort for their clients.
MoneyVal concerns
The 2020 EY attractiveness survey for Malta finds that almost half of investors (49 percent) say the island is not attractive or not attractive at all in terms of stability and transparency of political, legal and regulatory environment.
“Action needs to be taken to restore the island’s reputation and ensure it remains attractive in a post-Covid-19 world,” the study details, “This result reflects the sentiments shared by many investors on the need to improve governance and tackle reputational issues. The Council of Europe’s MoneyVal assessment was frequently mentioned by respondents as a cause for concern. Although respondents from all sectors mentioned such challenges, investors from banking, insurance, other financial services and iGaming were the most forthright.”
MoneyVal is a monitoring body which evaluates European countries regarding measures taken to combat money laundering and financing of terrorism. The most recent round of inspections focused on effectiveness. The latest report on Malta was published in July 2019 and was generally negative. The island was rated as ‘low’ or ‘moderate’ in nine of eleven areas under review with supervision, prosecution and confiscation being areas of particular weaknesses.
In an article published by the Malta Institute of Accountants, Dominic Fisher, regulatory consultant, ARQ Group writes: “Most of the gaps noted by MoneyVal were known and long-standing and a National Co-ordinating Committee was established prior to the publication of the MoneyVal report to ensure that necessary actions would be addressed.”
And although the sanctions being applied by the authorities are far more punitive than in the past, Fisher calls on his fellow players in financial services concluding that: “If we act accordingly, between the grey clouds, there is blue sky.”
Rebecca Xuereb, Manager, Business Development at BOV Fund Services, believes that not all the negative press needs to be considered pessimistically: “Yes, reputational issues have had an impact but not all result in a negative effect. For example, the recent focus on money laundering should now assure investors that, having been under scrutiny, as a result, transparency and doing the right thing are now at the forefront of everyone’s mind. So, in a way it can give potential clients some comfort that Malta now offers an even better service in a safer environment.”
Practitioners say the concerns around governance issues like corruption and money laundering have led to an increasingly discerning approach when taking on clients. “Some might not turn clients away no matter their background. We feel we need to be more discerning with the clients we accept,” explains Caruana Scicluna, “we are the first line of defence.”
Some players have admitted turning away potentially large clients with dubious backgrounds. Although this may stymie growth, it nips the problem in the bud, stopping questionable sources of capital from coming into the island.
Although regulation plays a large part in ensuring the robustness of the fund industry, the service providers, being a small community, can also take on some measure of responsibility to safeguard their own industry.
In the case of BOV Fund Services, being part of a larger banking group has meant the firm has always been somewhat more conservative in the clients it takes on. Xuereb outlines: “We’ve always had quite a rigorous client acceptance because we have supervision from many areas.
“We ask questions related to where the fund is going to be marketed, who the main underlying investors are going to be, we ask for the business plan of the project, because there is an element of reputational risk in taking on new clients, which we take very seriously.”
Building blocks
One of primary building blocks of the Malta funds industry has been assisting smaller alternative fund managers to set up their funds in a cost-efficient manner. The main structure used by such managers is the Professional Investor Fund (PIF). This is a vehicle for managers with asset levels lower than the threshold provided by the Alternative Investment Fund Managers Directive (AIFMD).
PIFs account for the lion’s share of the collective investment schemes registered in Malta – with 312 PIFs out of the total 548 structures, according to data from the Malta Financial Services Authority (MFSA) as at Q3 2020. Compared to their AIFM counterpart the Notified Alternative Investment Fund, these vehicles enjoy fewer restrictions. The set-up costs involved tend to be lower and though the funds are licensed the MFSA they not regulated – as it is the manager that is directly regulated by the authority.
The European Union is making attempts at harmonising legislation across jurisdictions. The recent recommendation to review the AIFMD is one such effort. This could lead to some difficulties to a country like Malta.
In view of potential changes, managers like Sandstrom advise: “There are many advantages to doing business here compared to, for example, the Netherlands and the UK. It’s quite quick to get something up and going. There is pressure from the EU in terms of aligning jurisdictions like Malta and the fear many of us have, in varying degrees, is that Malta will become more like mainland Europe and that all the advantages of being here will be stripped away as it converges with core EU.”
So Malta has a fine line to tread – remaining flexible, nimble and reactive while also trying to improve oversight on a national level and support the practitioners who have continued to provide a robust and transparent service to clients.
