MALTA TRAINS ITS GUNS ON DUBLIN AND LUXEMBOURG

In May last year Malta joined the EU, increasing the opportunities for further development of its financial services industry. An effective and approachable regulator, competitive costs and a highly educated population are they key factors on which Malta’s future is relying on.

Malta started focusing on the financial sector in 1988 when the government decided to set up an offshore business authority. This was abolished only six years later when all businesses were brought back onshore.

However, many still have n0t forgotten Malta’s offshore past. “Because of our geography people tend to form misconceptions,” says Joe Bannister, chairman and president of the Malta Financial Services Authority (MFSA). “They see us as being offshore, but what does offshore really means? An island is always offshore,” he adds humourously. “So yes, geographically we are offshore, but in terms of connotations of offshore in relation to financial services we are not. Everybody is supervised.”

“All companies have to submit accounts, our accounting standards are more advanced than most EU member states because we adopted IAS accounting standards in 1998. All company records are public records, so they can be viewed by anybody and they are all online now so the levels of transparency are very high,” he explains.

Since 1994 the regulator has worked hard to regulate domestic financial services, but realised that if Malta wanted to develop on the lines of jurisdictions such as Dublin or Luxembourg more needed to be done.

COST CUTTING

Since 1999 all legislation has been more or less in line with with that of the EU so major adjustments were not required prior to membership. Since accession the country has seen a fair increase in new business, mainly coming from companies that look at Malta as competitive market in terms of cost.

“Everybody is looking to minimise costs and, compared with the rest of Europe, it is cheaper for them to operate from here,” Mr Bannister notes.

But Malta does not just rely on cheaper prices to attract new companies. A highly educated population and, most importantly, an approachable and engaging regulator, are other key factors for firms considering setting up their businesses here.

“Companies are looking for a regulatory authority they can meet,” Mr Bannister says. “What we do is not something where everything is done by exchange of letters that take months. It is an open system.”

Given this background, can Malta really compete with the large and wellestablished jurisdictions in Europe? In one area in particular this may prove to be difficult when competing with Dublin or Luxembourg – fund administration. Developing fund administration services is crucial for any jurisdiction wanting to compete in the fund management sector. Although it is still early days, some companies in Malta are already offering third-party administration services as demand increases.

Current regulation allows for funds registered in Malta to be managed or administered from another jurisdiction provided it is part of the EU. Mr Bannister says: “Once there is a critical mass of these funds, we will see some movement towards administrators establishing here. So they will be able to start managing particularly the small funds here and then, as they increase in complexity, they can move somewhere else.”

However, he points out that some small accountancy firms are setting up fund administration services, just as they did in Dublin 12 years ago.

“It is a move that is coming because fund managers want their funds here, because of the regulation, the contact with the regulator and the cost. At the same time they also prefer to have the administration here because costs will be lower compared with Dublin or Luxembourg,” Mr Bannister says.

One of the firms that believes in the potential for fund administration in Malta is Valetta Fund Management (VFM). With more than E500m under management it is the country’s largest fund management operation. VFM is already offering fund administration to third parties including domestic and foreign names. “There are some economies of scale for the promoter for not having to set up their own back office structure in terms of buying systems and employing people,” says Kenneth Farrugia, general manager at VFM.

“Operators want to focus on what they do best, that traditionally is investment management, and they are outsourcing fund administration capabilities.”

Mr Farrugia explains that one of the obstacles to offering these services outside the domestic market has been the fact that Malta was relatively unknown in the field of financial services, making it difficult to promote its capabilities internationally. “Today it is not easy, but it is less difficult than a few years ago,” he says.

With the backing of its shareholders, VFM has recently changed its systems and is now using the technology provided by Luxembourg’s European Fund Administration and Mr Farrugia is optimistic about the future growth of this part of the business.

“Malta today, as an EU member, enjoys the same status as other financial jurisdictions in that operators that register a fund in Malta can seek Ucits certification. We can do the fund administration because we are very cost competitive in that field, and they can focus on the investment management and on customer services. That is a model that we are promoting in Italy, for instance,” he says.

For Wilfred Mallia, chairman of the Maltese College of Stockbrokers, Malta has a clear chance to attract some of the business that is currently done in Luxembourg or Dublin. “I am not saying that these centres will be finished and that we will take over. But as business in these centres outgrows their size and the level of service diminishes, we will pick up good business in the coming years.” Mr Mallia adds: “There was a time when the fact that we were non-EU was a bit of a handicap. Now I think we can make inroads in those kind of services.”

He says he is already working with a couple of firms in London that are about to register their funds in Malta which will use outsource fund administration to a Maltese company. “And I am now the only person doing this. I am sure that other accounting firms are finding that certain institutions are getting tired of other bigger, more established centres.” In his view what the sector needs in order to really take-off is a few really good household names to start doing business in Malta. “That would create momentum.”

‘Managers want their funds in Malta because the cost will be lower compared with Dublin or Luxembourg’ - Joe Bannister, MFSA

It is clear that because of its size Malta cannot aspire to attract huge amounts of business from other jurisdictions, but just a very small piece of the cake could really make the difference.

“They are giants and we are tiny,” says Simon Tortell, lawyer at Maltese firm Grech Vella Tortell & Hizler. “But being part of the EU, and providing our costs remain competitive and our regulator remains easily engaged, we have a hope that we could play with these boys,” he says. Mr Tortell, once a football player for the Maltese national team, adds: “We are still in the fifth division and they are in the premier league.”

Outside Malta, industry players have their reservations. Hermann Beythan, partner at Linklaters in Luxembourg, has doubts about how realistic all this is. “First of all, fund administration means experience and it is very difficult to build something from scratch,” Mr Beythan explains. “Second, it means systems that carry huge investments that may not be economically feasible in a start-up phase. Certainly fund administration means also multi-lingualism and for this Luxembourg is terrifically well placed.”

He also mentions the location of Luxembourg and Dublin as an advantage because people want to see their fund administrators. “They want to go there and it is easier to get to Luxembourg or Dublin.”

LACK OF EXPERIENCE

Asked about attracting just a small share of the business could work out for Malta, he shows his reservations. “I am not really sure whether this works, because fund administration is extremely complex and if you don’t have the experience of various sorts of funds and distribution countries it is just very difficult even to run a small segment.”

“Just imagine that you have one fund that is a fund of hedge funds, then you have plain vanilla fund and a derivatives fund. This is a very small segment but for each of those funds you need specific expertise. This means you need a certain minimum size, in my view, to be viable.”

To be fair to Malta, almost everyone on the island speaks at least three languages, and many speak four. In addition, air connections with the major financial centres are easily available. It is true that it lacks the skill to perform the most complex fund administration duties, but measures are being taken to improve this.

It is still early days but important steps have been already taken. Malta is aware of its limitations and its aspirations are always related to its size. “Sometimes people ask me if we are going to compete with Dublin,” says Mr Bannister. “I don’t compete with anyone. There is plenty of business around for everybody.”