Malta Brexit Solutions (1)

Ccmalta Default

Rising challenges of Brexit

Britain’s unpredicted decision to withdraw from the European Union produced certain tensions and insecurities worldwide. The process underlying Brexit brought about high levels of scepticism amongst industrial key players with regards to the outcome of the said process and its ripple effect on the relationship between the UK and the EU. Moreover, Brexit poses significant risks to the European asset management industry and its relationship with UK-based asset managers, given the uncertainties that there are, with regards to the UK’s access to the EU market following the finalisation of the Brexit negotiations; an issue which will be left in an ambivalent state until a compromise is reached.

The ripple effect of Brexit on UK-based financial firms

A research conducted by Reuters revealed that over 10,000 finance jobs will be impacted by the UK’s decision to move out of the EU. In this survey, over 100 leading financial firms explained their visions following Brexit. On the one hand, some participants are hoping for a ‘soft’ Brexit, whereby they would be able to retain their European Passporting rights and have not conceived a plan in case the Brexit negotiations turns sour, regardless of the warnings from Bank of England Governor Mark Carney against doing so. On the other hand, however, most argued that they are rethinking their strategies by focusing on relocating their operations elsewhere. To this effect, whilst new roles will be created in Europe, thousands of financial roles will be shifted out of the UK, begging the question, where to next?

Let us show you why Malta should be the answer. 

Addressing the needs of Fund Managers and other Industrial Players

From the outset, Brexit has engendered apprehension and perturbation amongst stakeholders who fear an adverse outcome, in default of a favourable accord. This prompted several large, multimillion corporations to leave the UK and redomicile elsewhere, causing unprecedented market fluctuations which are not appealing to fund managers and other industrial players who seek stable markets in which to operate.

Besides stability, fund managers constantly seek further growth and development by setting cross-border targets which help them in the acquisition of Passporting rights for their products and services. They are attracted to jurisdictions which have an EU compliant tax regime and legislation from which they can benefit. Moreover, they are in constant pursuit of probusiness, non-bureaucratic jurisdictions in which they can seamlessly operate without being barred by technical restrictions such as language barriers and hefty operational costs.

Throughout the years, Malta has developed a stable economy and a positive outlook for investment. Due to its ability to quickly adapt to the everchanging needs of the industry whilst being fully EU compliant, Malta has been designated as the European domicile of choice for hedge fund managers and in 2017 it was granted the International Finance Centre- Editor’s Award at the Wealth Briefing Swiss Awards.

Our financial services lawyers and expert consultants are committed to help clients achieve both their personal and business goals through their financial services background and experience in assisting clients to relocate and set up their operations in Malta, providing an expedient solution which is tailored to the needs of the client.

Malta’s ties with the UK

Malta’s positive and stable relationship with the UK is the product of a long series of interactions which date back to the early 19th century. From a former coloniser to an industrial ally, Britain has left a huge impact on the Maltese islands, the fragments of which are still ingrained in the fabrics of the Maltese legal system. Our legal system, which is in itself a reflection of our variegated history, encompasses both common law and continental elements which congenially coexist, making it possible for the regulator to offer solutions that are adequate to each system.

What renders Malta an excellent jurisdiction for relocation and domiciliation is its ability to strike a balance between the two traditionally antagonistic forces – the need for regulation and compliance and the dynamic, everchanging needs of the industry. Given the mixed nature of the Maltese legal system, our EU membership and the creative and liberal vision of the regulator, the Maltese asset management industry is characterised by its flexible approach which allows fund managers to seamlessly access the main financial services passports, giving them a competitive edge whilst being fully EU-compliant.

With the establishment of innovative products such as the Notified Alternate Investment Fund, Malta’s asset management industry is becoming increasingly appealing to fund managers and other industrial key players who are intrigued by the efficiency of this product, given that it only imposes a nominal 10-day notification period, allowing them to latch on to every opportunity that may arise. Furthermore, the receptive approach of the Malta Financial Services Authority (MFSA), which is the exclusive financial services regulator in Malta, encourages debate with asset managers prior to their relocation to Malta. 

In addition to the aforementioned benefits, language barriers are practically non-existent in Malta, given that English is constitutionally one of our official languages and is spoken by the majority of the population, making it much easier for fund managers to relocate here. Moreover, while Brexit will sever the UK’s ties with the EU, Britain’s relationship with Malta continues to flourish as a result of the several bilateral agreements which have establish a long-lasting connection between the two, thus making Malta an ideal domicile for UK-based asset managers who seek relocation.

The priorities of the European fund industry in light of Brexit

As the UK is negotiating its way out of the EU, the European fund industry will need to adapt in order to be prepared for any possible outcome. Industrial players will need to go back to the drawing board and evaluate their products and services, clients and target market, distribution instruments and business model in the ambit of the Brexit negotiations.

Key areas that industry specialists need to concentrate on are:

  • Access to the EU market, for Management Companies (ManCos) following the Brexit negotiations – Whilst an ‘equivalence regime’ compromise (whereby the UK and the EU regulatory regimes would remain identical) would be ideal so that management companies could continue to enjoy limited access to the EU market, the industry needs to cater for the eventuality where management companies could  lose their MiFID passports. This would call for the founding of an EU entity besides casting doubt on the continued access of the UK market through the use of EU UCITS funds. In order to retain their EU passports, ManCos are becoming interested in constituting Maltese UCITS and Maltese ManCos whilst UK AIFMs are opting to  establish Maltese AIFMs to safeguard their EU marketing rights;
  • Segregated mandate options under the MiFID to cater for situations when EU-based clients contract with EU-based service providers;
  • Access to the European Banking System and
  • The EU Insurance Regulation / Solvency II Directive – given the burdensome liquidity requirements that the insurance sector have been subjected to, a solution which could include the funds or fund units needs to be found.

Going forward

Presumably the largest financial services hub in Europe, the UK has throughout the years attracted various international financial institutions and financial service providers due to its beneficial Passporting rights, which make the UK an ideal entryway for non-EU financial institutions to have access to the EU market.

Since the commencement of the Brexit negotiations, the fear of an unfavourable outcome has tarnished Britain’s reputations as the ideal gateway to the EU, given that UK-based financial institutions are afraid of a ‘hard’ Brexit, which would terminate their access to the European market.  

In default of a mutually beneficial compromise, such institutions might be left with an EU fund domicile as their only access to the EU market. Currently, the MiFID strives to give third country access for wholesale business, however, the CRD (i.e. the current EU bank regulatory framework) does not.

The possibility of a regulatory restructure of the funds market is not excluded, following the Brexit negotiations. MiFID provides cross-border access to exchanges, clearing houses and depositories. Whilst Member States seek to provide non-EU based firms access to regulated markets, central counterparties and clearing and settlement systems established in their jurisdiction, it is up to the UK to ensure that a compromise is reached, so that financial can continue to access the EU market.

Another option for the UK to consider is the applicability of the EU regulation on derivatives, central counterparties and trade repositories (EMIR) to financial institutions that are domiciled in the EU. By virtue of the EMIR, central counterparties that are authorised by any Member State is deemed to be authorised in all Member States and hence, the UK Government must strive to negotiate an agreement to possibly seek recognition under EMIR.

Malta Brexit Solutions

Over the years, Malta has reached exceptional milestones despite its size, competing with international leaders such as Ireland and Luxembourg, due to its innovative fund structures, cost effective jurisdiction and efficient tax system from which asset managers can benefit.

With regards to its tax regime, Malta employs the full imputation system for companies as well as a tax refund system for company shareholders who do not reside in Malta. Under the latter, companies can enjoy up to a 6/7ths refund of the tax paid on distributed profits, effectively reducing the tax paid to 5% from the standard corporate tax rate of 35%.

In addition, funds arising in Malta are generally not taxed, unless the company invests more than a certain percentage of assets in Malta. Non-dom individuals are also exempt from capital gains on shares and withholding taxes.

Why Chetcuti Cauchi?

Regardless of what Brexit could spell out for UK-based financial institutions, here at Checuti Cauchi, our expert financial services lawyers and advisors are prepared to tackle any eventuality and committed to help asset managers achieve their targets. With 15 years of experience under our belt, we are able to assist you throughout all the licensing stages whilst offering advice to maintain ongoing compliance. Our commitment is to provide a seamless service and a solution that is tailored to the needs of our clients.

Contact Us