AIFMD and why firms should look to Malta

Overview of AIFMD

Implementation of the European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) is well in train. The Directive imposes a number of requirements on European-based alternative investment fund managers (AIFMs) and AIFMs marketing into EU member states.  The scope of the Directive is all encompassing and applies to any fund manager running in excess of €100 million that does not fall under the UCITS bracket.

At the heart of the Directive is investor protection. As such, managers utilising the pan-EU passport which permits them to distribute and market across the EU without restriction must appoint a depositary bank which is tasked with providing safekeeping of assets, cash-flow monitoring and oversight of the fund. The depositary will also be held liable if cash is lost or stolen in sub-custody.  European managers of non-EU funds relying on national private placement regimes must appoint a depositary-lite. A depositary-lite undertakes all or most of the same duties of a depositary but is not liable for losses. A handful of EU jurisdictions have gold-plated the Directive and require non-EU managers of non-EU funds marketing to investors in those countries to appoint a depositary lite.

Other AIFMD requirements include submitting an Annex IV to regulators. Annex IV contains more than 300 data points and must be supplied at both a fund and aggregate level. This has proven to be very challenging for some managers lacking the scale of their larger competitors. Frequency of submission is determined by Assets under Management (AuM). Perhaps one of the most contentious aspects of AIFMD lies around remuneration.  The European Securities and Markets Authority (ESMA) advises firms defer between 40 per-cent and 60 per-cent of their remuneration over three to five years, and recommends a large proportion of pay be distributed in what it describes as approved financial instruments. This has caused challenges for fund managers. Nonetheless, to attain EU capital requires adherence with the Directive. As such, it is essential fund managers identify a jurisdiction which meets all of their needs and regulatory obligations.

Why Malta?

Malta is a jurisdiction that is rapidly gaining market share and traction as an onshore fund domicile. Research published in November 2014 by the Association of the Luxembourg Fund Industry (ALFI) in conjunction with Oliver Wyman identified Malta as the fastest growing EU fund domicile, with a growth rate far surpassing Luxembourg and Ireland, historically the onshore domiciles of choice for fund managers hoping to penetrate the EU market.  The research highlights the number of funds domiciled in Malta has grown by 66 per-cent between 2010 and 2013, with 509 funds in the jurisdiction, up from 306.  The bulk of these managers are mid-to-small sized, with Assets under Management (AuM) of around €20 million.

The reasons for domiciling in Malta are multifarious. Perhaps the most significant is the pragmatic approach adopted by the Malta Financial Services Authority (MFSA) towards implementing regulation. The MFSA has elected to adopt the ESMA Remuneration Guidelines and permits AIFMs to dis-apply aspects of the remuneration rules based on various proportionality requirements, namely size, internal organisation and complex and scope of activities.  The MFSA has said that AIFMs in Malta with less than €1.25 billion leveraged or less than €6 billion unleveraged, or fewer than 30 employees can absolve themselves from the remuneration rules.  The MFSA has also said pay need not be disbursed in approved financial instruments if the variable remuneration does not exceed 50 per-cent of the employees’ total remuneration or if remuneration is below €600,000. Such policies, which are un-intrusive and proportionate, are going to help facilitate increased appetite for domiciling funds in Malta.

It is not just sensible regulation that is going to benefit Malta. The scope and depth of service providers is increasing. Malta is home to a number of leading management companies [Mancos], law firms and fund administrators. Malta has increased the number of custodians in its jurisdiction from two in 2010 to six in 2013, according to the ALFI/Oliver Wyman research paper.  Malta has also grown its depositary infrastructure and a legal briefing by Dechert highlights Maltese AIFs and AIFMs can utilise a depositary located in another EU member state. As such, this abundance of high-quality service providers is going to play a significant role in Malta’s development as a fund domicile.

Domiciling in Malta offers an array of benefits. It is one of the more cost-efficient onshore jurisdictions to establish in, something which undoubtedly appeals to small managers. Porting business from offshore fund centres to onshore domiciles is something some institutional investors are demanding. A number of pension funds and insurers in the EU are prohibited in their mandates and by their shareholders from investing into offshore fund vehicles, citing a perceived lack of regulatory oversight. Some of these cautious investors are more amenable to allocating into an investment fund that is operating out of a regulated jurisdiction like Malta. As such, choosing a sensible domicile is a mechanism by which firms can grow their businesses and secure money from institutional allocators.

For further information, please contact Richard Corner at Linear Investments at rcorner@linearinvestment.com or on  +44 7825 757 333.