Malta Brexit Solutions

The Business Implications Of Brexit

Brexit & Malta

The UK’s decision to exit the European Union is one of the most significant and unforeseen political events for Europe of the first quarter of the 21st century.  The process by which the UK will seize to be a member of the European Union is a highly uncertain one, with the outcome being even more uncertain. Brexit presents a significant challenge to the European asset management industry, particularly for UK-based asset managers whose access to the EU market has been left in a highly ambiguous state. Amidst this uncertainty, Malta’s financial services industry stands as an ever-growing, lucrative, yet secure jurisdiction for asset managers seeking to achieve their cross-border distribution goals.

Aiding Fund Managers & Other Industry Players

Although Brexit has significantly increased the volatility of the market and the general political landscape, the needs of fund managers remain essentially unchanged. Whilst stability remains a driving factor that saw businesses worth billions of pounds move out of the UK, fund managers still look out for:

  • the ability to expand their cross-border goals in a way that provides for further growth and increases the possibility to attain Passporting rights for their products and services;
  • utilise and  benefit from EU-regulated national legislation and tax regimes including MT Tax Benefits for corporates' as well as for individuals;
  • specialised knowledge and skills from a vast selection of providers which cover a full range of investment strategies and asset classes;
  • a jurisdiction where one operate easily without technical restrictions such as language barriers, rigid legal systems and overly expensive operational costs.

Malta has fostered a pro-business environment that ticks all the right boxes. It is now considered as a European domicile of choice for hedge fund managers and in 2017, it was awarded the International Finance Centre- Editor’s Award at the WealthBriefing Swiss Awards.

Our financial services lawyers and specialists have an extensive breadth of experience in assisting managers to set up their operations as well funds in Malta and provide advantageous solutions which are tailored to the needs of the client.

Malta-UK Relationship

The Maltese asset management, MiFID companies as well as fund industry thrives on two main pillars; Malta’s full EU membership which allows us to provide seamless access to the main financial services passports, and the innovative spirit of the regulator together with a degree of flexibility which give an advantageous edge to the fund manager, whilst still being fully regulated and EU-approved. Through the creation of innovative products such as the Notified Alternate Investment Fund, Malta’s fund industry can now offer a product which increases the efficiency of the industry and allows investors to benefit even from the most time-sensitive opportunities since it only imposes a minimal 10-day notification period.

The Malta Financial Services Authority, the sole regulator for financial services in Malta, has been a crucial driving force behind Malta’s success as a financial services hub. It maintains an open door policy which allows asset managers to have informal talks with the regulator which offers sound advice about setting up in Malta. Additionally, whilst ensuring a robust regulatory framework that ensures stability in the local fund market, the regulatory regime remains flexible enough to incentivise those who wish to do business.

Additionally, Malta has excellent relations both with its European neighbours as well as with the UK. As a former British colony, Malta has adopted English as one of its official languages which is widely spoken among the Maltese work force. Our legal system also reflects remnants of our chequered history of colonisation. Quintessential common law elements dating back to Malta’s status as a British colony can be found in our legal system, and they co-exist harmoniously with civil law elements. The mixed nature of the Maltese legal system allows us to offer the best of each system and makes us an ideal domicile for both British and continental asset managers.

Thus, while Brexit will spell out the end of the UK’s relationship with the EU, the Malta-UK relation continues to thrive thanks to bilateral agreements which have created a special bond between the two countries. As mounting uncertainty forces UK asset managers to look elsewhere, they will feel at home in Malta.

Beyond-Brexit: Industry Areas 

Brexit has added a new dimension which the European fund industry will have to get accustomed to. Key players in the sector will need to rethink their strategy with respect to products and services, clients, markets, delivery mechanisms, operating models and business structures vis-à-vis this slowly emerging reality which we cannot fully comprehend until a concrete agreement, if any, is in place.

Going forward, sector specialists will need to focus on the following areas:

  • Access to the EU market post-Brexit for Management Companies ("ManCos") – talks of a hard Brexit or a soft Brexit are significant in a financial services context, particularly for management companies. A moderate approach would see management companies retain limited access to the market through what is being referred to as an equivalence regime which would formally designate that the UK and the EU’s regulatory regimes are identical. On the other hand, a hard Brexit would see management companies lose their MiFID passports, which would necessitate the establishing of an EU entity and it would also cast doubt on the continued access of the UK market through the use of EU UCITS funds. ManCos are showing an interest in establishing Maltese UCITS and Maltese ManCos since their product would retain its EU passport, as well as for UK AIFMs to preserve their EU marketing rights by establishing Maltese AIFMs;
  • Segregated mandate options under the MiFID - a solution will need to be found for when EU-based clients who want to contract with EU-based providers of services;
  • Access to the European Banking System; and
  • EU Insurance Regulation/Solvency II Directive – the onerous liquidity requirements imposed on the insurance sector have created concerns for key players. It is yet to be seen whether funds or fund units can be a part of the solution.

What’s next?

The UK has always been considered as the largest financial centre in Europe, attracting numerous global financial institutions and financial services providers, as well as the preferred gateway for several non-EU financial institutions using the UK as a hub to access clients and markets across the EU through the highly advantageous Passporting rights.

Brexit has significantly dampened this sterling reputation as several non-EU and UK-based financial institutions can no longer take access to EU markets as a given.

An EU fund domicile might be the only such companies will have access to the EU market if the Brexit agreement turns sour. As things stand, the MiFID seeks to provide third country access for wholesale business, however, the current EU bank regulatory framework (CRD) does not.

There is the possibility that Brexit will reshape the regulatory structure of the funds market. MiFID provides cross-border access to exchanges, clearing houses and depositories. The Member States must ensure that firms based in other states are permitted to access regulated markets, central counterparties, and clearing and settlement systems established in their jurisdiction. It is in the best interest of the UK authorities to ensure an arrangement is reached whereby financial institutions will continue to enjoy such access.

The applicability of the EMIR, the EU regulation on derivatives, central counterparties and trade repositories, to UK-based financial institutions following Brexit will also be a significant point to consider. Under the EMIR, central counterparties authorised in any Member State are treated as authorised across the EU. Thus, if the EMIR will no longer apply for UK financial institutions, the UK Government would need to consider whether it will be possible to negotiate ‘grandfathering’ provisions and/or seek ‘recognition’ under EMIR.

Why Malta?

Despite its size, Malta has managed to style itself as a financial services hub that rivals established centres such as Ireland and Luxembourg thanks to its innovate fund structures and the benefits which it offers asset managers seeking to set up in a cost effective jurisdiction with a competitive edge. 

Besides offering cost-effective set-up and operational costs, Malta has an advantageous tax regime which allows companies to benefit from the full imputation system, as well as a tax refund system when a company’s shareholders are not resident in Malta. Under the Tax Refund System, companies can benefit from 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%.

Moreover, Maltese funds are generally not taxable unless they are investing more than a certain percentage of assets in Malta. They are also exempt from capital gains on shares and withholding taxes.

The Team - Malta Brexit Solutions for the Financial Services Industry

Irrespective of what future agreements hold for the UK, our financial services experts and lawyers at Chetcuti Cauchi are geared up to tackle any eventuality and assist asset managers seeking a lucrative, yet save jurisdiction to invest. Our extensive on-the-ground knowledge allows us to advise clients and pre-licensing and licensing stages, as well as assisting them to maintain ongoing compliance. The multi-disciplinary nature of the firm allows us to offer a seamless service that fully caters for the needs of our clients. 

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