High set up costs could stymie the fortunes of emerging and start up managers before they even make their first step. Malta offers such organisations the opportunity to set up their business in a low-cost jurisdiction while taking advantage of the high touch service they would benefit from due to the size of the industry.
“Malta is well placed to attract small and medium sized business. The island is attractive to these funds where high cost would really impact their total expense ratios and make medium to long-term viability impossible. I don’t see any reasonable manager or fund with just a few million in assets setting up in Ireland or Luxembourg. The costs in both countries are exponentially higher than Malta which would simply not make it possible,” remarks Andrew Caruana Scicluna, senior associate at Camilleri Preziosi Advocates.
These are the niche clients Malta should be focusing on, with cost as one of the key selling points. Caruana Scicluna points out: “Cost can be a decisive factor. The cost of doing business with service providers is considerably lower here. From a structuring perspective we’re on par, in that anything that can be structured in Ireland, Luxembourg or London can also be done here, but with a lower cost base.”
Caruana Scicluna explains that funds which would otherwise not have seen the light of day have a chance to grow in Malta and then expand operations overseas once they reach a certain size, if they choose to do so. “We have clients who started out with a couple of million and are now looking to set up other structures in Luxembourg and Ireland as they hit around EUR400 million in assets. That kind of growth would not have been possible in a jurisdiction where start-up costs are high,” he explains.
“Another advantage of Malta is its dedicated service to clients, irrespective of size. In larger jurisdictions, players which are large here are considered small so clients are bound to see a change in the high touch service they are used to,” Caruana Scicluna comments.
Custody concerns
One of the obstacles standing in Malta’s way of further progression is a lack of development in the custody space.
“There simply aren’t sufficient players of standing which means clients have little choice when it comes to custody providers,” outlines Caruana Scicluna. At present, the law mandates the fund and the custodian be domiciled in the same jurisdiction for AIFs and UCITS. In principle, Caruana Scicluna doesn’t agree this is necessary: “It makes no sense for there to be a rule requiring the depository to be in the same jurisdiction as the fund. If you look at the way assets are held in a normal custody chain, most assets end up being held across multiple jurisdictions anyway, even if the custodian fronting the business is in Malta. Having the custodian in the same jurisdiction as the fund does nothing to safeguard investors.”
However, in truth the rules are not expected to change, and funds domiciled in Malta will continue to require a custodian based on the island. In view of this, the industry needs to work on attracting custody banks to move there.
Asked about what could encourage custody players to Malta, Caruana Scicluna states: “It’s a chicken and egg situation. We don’t yet have the clout of a major fund domicile, so a firm needs to take a chance on the jurisdiction. Once that first big name makes that leap of faith, I’m sure many others could follow suit.
“The jurisdiction has a lot to offer in terms of the service providers which are already here. Lawyers, audit, fund administrators; the infrastructure is all there except for custody – this is the piece of the puzzle we’re still missing.”
Looking ahead
More broadly, although Malta has been suffering from some reputational issues, the island’s fund industry has remained robust. “The fund industry is strong. We haven’t had any major fund blow ups, beyond a couple which is normal for any jurisdiction. Change needs to come from the top. What we as an industry can do is to be more discerning about the clients we take on. “Us service providers can be the first line of defence and be more selective with the business we accept. However, it is exceedingly difficult for us as an industry to clean up the island’s broader reputation,” Caruana Scicluna counsels.
He adds that the service providers need to ensure they provide clients with top quality work each and every time: “Professionals need to realise that when we do shoddy work it’s a reflection on the industry as well. So, we need to make sure we employ people who are capable, offer good service and keep abreast of the latest developments in the market.”
The quality of professionals is critical in ensuring the jurisdiction forges ahead. “To take Malta to the next level we need more people need to go and study abroad. There should also education specifically dedicated to the funds sector and financial services in general,” Caruana Scicluna advises.
Andrew Caruana Scicluna
Senior Associate, Camilleri Preziosi Advocates
Andrew’s main areas of specialisation are asset management, investment funds and investment services regulation. He regularly advises on the incorporation of UCITS funds, AIFs and PIFs in Malta and also advises a number of investment managers and fund administrators on their regulatory and transactional affairs. Andrew is also actively involved in M&A, capital markets and corporate finance transactions, involving both local and cross border elements.
Andrew joined the firm as a Trainee in 2013. That same year he graduated as Doctor of Laws from the University of Malta and embarked on an LL.M. in Banking and Financial Law at the London School of Economics. Andrew was appointed as Associate in 2014, forming part of the Corporate & Finance practice group and was promoted to Senior Associate in 2018.
