As established financial centres disagree on the merits of proposed European legislation, smaller jurisdictions such as Malta hope to benefit, writes Marc Smith.
Proposed changes to the laws regulating alternative investment funds in Europe have been making waves that have washed over markets across the world. The European Union, which has led on the changes since it proposed them in 2009, claims it wants to create a comprehensive and effective regulatory and supervisory framework for alternative investment funds at the European level.
In May 2010, both the European Parliament's Committee for Monetary and Economic Affairs and the EU Council's group of finance ministers voted in favour of the draft directive, which has implications for hedge funds, private equity and property funds as well other funds not covered under the UCITS regime. German chancellor Angela Merkel immediately implemented one of the suggested changes – a ban on "naked short-selling", but not everyone was impressed. The new UK chancellor George Osborne and his Czech counterpart both lodged reservations, although their room for manoeuvre may be small given they have no veto. The UK in particular has reason to worry given that, according to best estimates, 80% of the European hedge fund industry is based in London.
Vincent Derudder, chairman of lobbying group FECIF, told Campden FO that he doubts the draft will go through in its current form and says the regulation is "messy" and "misses the real point" – the result, he claims, of politicians trying to draught a policy in which they are not expert.
The international financial services centres community has been looking on to see whether the ultimate adoption of the new directive will change the hegemony that London in particular has over Europe's financial industry.
One of the jurisdictions that is keeping a close eye on developments is Malta. The island has been working hard to establish itself as a base for the funds industry, particularly since it was welcomed into the European Union in 2004. This accession meant that funds registered and licensed in Malta and structured as UCITS can be freely distributed throughout the EU – a boon to its financial services industry as it hugely increased Malta's ability to compete with Switzerland and Liechtenstein on cross-border trade.
The number of funds domiciled in Malta had been increasing year-on-year until 08/09 when the financial crisis caused the number to fall by roughly 5% – it is now home to over 300 – while the value of funds increased in 2009 to over €7 billion following a dramatic fall the previous year.
Charles Azzopardi, MD of HSBC Securities Services in Malta, believes 2010 will see both the number of funds and their overall value rise again. "There was clearly a period of stagnation in 2008, but I am confident we are on an upward spiral now," he said.
When the International Monetary Fund visited Malta in 2009, it reported that the financial sector was coping relatively well with the recession but needed to do more to manage its risk profile. In particular, it said banks were highly exposed to the real estate sector. It did, however, say credit was flowing and no government intervention to shore up capital or liquidity was necessary.
Kenneth Farrugia, chairman of FinanceMalta, says as with any island state Malta has its fair share of challenges; in particular, accessibility and human resources. As a contribution of GDP, Farrugia says Malta's financial services industry has increased by 30% in both 2007 and 2008, and by 22% over 2009. "The growth being experienced in this industry is creating a year on year increased demand for skilled human resource," he said.
For family offices, the ultimate choice of jurisdiction depends on factors such as the location of investors and the fund manager, the regulatory framework in place, the skill sets of the work force and the operational infrastructure but according to Farrugia, Malta is well placed: "We have a robust regulatory and legal framework, a cost competitive and highly skilled workforce and a meticulous yet accessible financial services regulator."
As Europe waits on whether the new directive will get the green light, Azzopardi is hopeful it will further aid Malta: "We're in a state of flux as regards at the moment but overall we welcome the directive and increased competition if it ensures more efficiency across the board."