Malta is benefiting from the trend of near-shoring in the securities services business, writes Iain Morse
Deutsche Bank has just obtained a Category 4 investment service licence from the Maltese Financial Services Authority (MFSA) permitting it to act as local and global custodian in this small and sunny jurisdiction. HSBC Security Services is already there, not to mention Bank of Valetta, Sparkasse Bank Malta and Custom House. Meanwhile, Thomas Murray, a specialist in custody banking, has been retained by the MFSA to make the business case for other global custodians to take up a licence.
The island, an EU member since 2004, is certainly developing its financial services infrastructure and has won plaudits from no less than Michel Barnier, European Commissioner for internal markets and services. This build up is being done with the expectation of near-term expansion of existing business. A new ‘Malta story' is clearly in preparation. Anyone familiar with the original film, which described the siege of Malta during World War II, will recall a poverty stricken but plucky island. Malta is still plucky, but its growing role as an EU-regulated cross-border financial centre, competing with Dublin and Luxembourg, is creating a lot of local wealth.
"There are two main lines of fund business in Malta," notes Tim Reucroft, director of research at Thomas Murray, "for professional investor funds (PIFs) and UCITS funds." Malta has already built a niche in the PIF market, where the underlying investments are mainly hedge funds, offshore and unregulated, which enter the EU marketplace in a PIF wrapper. Investors are either high net-worth investors or institutional investors, who typically add them to a managed portfolio for onward distribution. "Offshore hedge funds might set up a feeder fund here, but Maltese-regulated PIFs do not need to be administered here," adds Reucroft.
Fund administration can be carried out in the US, or just about anywhere. Neither do PIFs currently require a custodian, although this might well change with the final introduction of the new AIFM Directive. Luxembourg SIFs, against which the PIF directly competes, by contrast, require the appointment of a local administrator, local custodian and CSSF-approved auditor.
Malta is also low-cost when it comes to licence fees. For instance, the MFSA will issue a PIF umbrella fund licence for €1,500 and a sub-fund licence for €1,000. In Luxembourg, the CSSF charges €5,000 for an umbrella fund. Audit fees are also substantially lower in Malta; the cost of a big-four audit of a plain vanilla hedge fund in Luxembourg ranges from €15,000-25,000 but in Malta the cost will be about one third of these amounts.
PIFs remain the largest component of Malta's cross-border business but UCITS funds are growing fast and need the support of a global custodian. UCITS IV is driving offshore business onshore and will also permit the wider distribution of hedge funds. Funds domiciled in offshore centres like the Cayman Islands are looking for a new, regulated, low-cost option and Malta is attracting an increasing number of these.
Aside from its balmy weather, Malta is attractive to hedge funds for other, more quantifiable reasons. The population is educated, and staff relatively low-cost compared with Ireland or Luxembourg. The regulatory framework is designed to permit a business presence on the island with the minimum number of local employees.
Malta is also the only EU member state to operate a full imputation of tax. Tax is paid by a Malta-registered company on profits but when this company distributes profits to shareholders, irrespective of their residence, the shareholders are entitled to receive a refund of six-sevenths of the tax paid. Malta-domiciled investment service companies pay 35% tax on items such as management fees but, again, these are refunded to non-resident shareholders in the same companies at the six-sevenths rate.
Matters are even more generously arranged when it comes to ‘non-prescribed funds' - those with less than 85% of their assets domiciled in Malta. These are exempt from income and capital gains tax. But even ‘prescribed funds' with over 85% of assets domiciled in Malta, pay only 10% on investment income and 15% on bank interest. Neither do non-resident investors pay tax on capital gains or dividends, or for that matter any stamp duty. Malta is clearly serious about attracting cross-border business.
This helps to explain why the MFSA expects an upturn in new business and wants global custodians to establish offices here. But the authorities' flexible approach to both businesses and investors also says a lot about the rapidly evolving, post-credit-crunch administration and custody industry. "They are not looking to build huge new offices or employ armies of local staff," says Reucroft. "Instead they want increasing flows of money going through the island." Global custodians are already near-shoring, looking for cost savings within the EU. State Street has a substantial office in Krakow, BNP Paribas in Portugal. At the height of the pre-crunch boom, fund administration was already being near-shored to Malta from Dublin and Luxembourg.
The new Malta story is designed to fit neatly into this wider narrative of cost saving and rapid evolution. The regulatory requirements for custodians operating in Malta have clearly been designed with this in mind. Eligibility criteria include EU or EEA member credit institution, or, more widely, an overseas credit institution subject to prudential requirements at least equivalent to those applicable to a Maltese credit institution. A custodian can also be incorporated on the island with paid-up share capital of no more than €5m and, however constituted, will also need to meet an initial capital requirement of €125,000. In this case it will also need one board director who is resident on the island. These are relatively low cash thresholds compared with many other EU jurisdictions.
Where a branch of an already established custody bank is established in Malta, the MFSA will also take into account the amount of back-up and support provided by the branch's head office. "We can offer any and all of the HSBC range of custody services through Malta without having to maintain a big office here," says Charles Azzopardi, managing director of the global custodian's Maltese subsidiary. What this means in practice is that a custodian setting up an office in Malta can service this office from a regional hub elsewhere. This is already an established business model in Europe with markets such as the Nordic region serviced from London via local offices.
It is rumoured that at least one other global custodian is likely to seek a Category 4 licence from the MFSA within the next few months, although its identity remains under wraps. The island, meanwhile, also hosts 14 fund administrators. Hedge funds continue to defect from the Cayman Islands. This story could end well for Malta, although Dublin and particularly Luxembourg may yet try to influence EU regulators with the intention of pushing up the costs of using Malta as a cross-border domicile.