New directives will ‘enhance’ Malta’s domicile proposition

Malta has an opportunity to win more funds business now that a single distribution platform has been created with the implementation of new directives which seek to standardise the industry.

London-based Bill Scrimgeour, HSBC’s global head of regulatory and industry affairs, told The Sunday Times that Malta’s domicile proposition had all the right attributes, which would be further en­hanced by its compliance with the impending Alternative Investment Fund Managers Directive (AIFMD) and the fourth-generation Undertakings for Collective Investment in Transferable Securities (UCITS IV).

The AIFMD, which the European Commission deems a key part of its regulatory foundations to make the financial system more secure, seeks to enhance investor protection, increase managers’ transparency and accountability, and strengthen the common market. Managers must be authorised and compliant by 2013.

It applies to a wide range of investment funds not regulated by the retail funds-oriented UCITS framework, like hedge funds, private equity funds, real estate funds and institutional funds.

Malta will have implemented UCITS IV by the time it comes into effect in July, giving it a headstart on most other domiciles.

This latest version of the directive will eliminate barriers standing in the way of funds marketed from their home countries to the EU’s 26 other member states.

It builds on the measures adopted by UCITS III which sought to streamline single market access by reducing differences in regulation across the bloc.

Mr Scrimgeour, who was in Malta last week as a guest speaker at the first two-day Maltese fund-servicing conference organised by Management Global Information in partnership with the Maltese regulator, said the international funds industry was seeing growth after two challenging years.

“There is a correction in line with the equities markets but there is a certain ‘stickiness’ in funds and we are already seeing a net inflow,” he said.

“After a correction we always see fresh growth. Malta can take part in that growth once there is a single distribution platform in place.

“The island should demand a better slice of the cake from Europe which until now has largely been enjoyed by Ireland and Luxembourg.”

The AIFMD brings into play greater liability, operational procedures, and cost of compliance. It will introduce a new entity – the depositary – to alternative funds, a well-known concept in regulated retail funds. The depositary will be liable for replacing assets lost in the custody chain.

According to Mr Scrimgeour, depositaries are still unaware of the full extent of their liability but it is certain to be strict.

Industry associations are currently in talks with the drafting teams in Brussels about some parameters: the meaning of ‘lost’ versus ‘temporarily unavailable’ and whether it applied to events outside the control of the depositary.

The depositary will be responsible for replacing lost assets and the oversight of the fund.

The oversight, Mr Scrimgeour pointed out, meant that some processes and procedures would have to be more robust to meet the requirements of the new regime.

The AIFMD will see the compliance benchmark raised significantly: the conformity of sophisticated hedge fund structures and investment strategies with the new regulations will be far more wide-reaching than the sector had experienced until now.

As the key principles of the new regulations have been outlined, the Brussels teams now move into ‘Phase Two’ to map out the details of the measures and to provide the industry with the necessary clarifications.

Mr Scrimgeour said HSBC had been “instrumental” in working with important associations like the Association of Global Custodians and the Association of Finance Markets in Europe, to bring in legal drafting and commercial expertise into the talks so that there was focused debate.

“The industry has moved from the initial shock-horror to trying to mediate and come up with a more balanced viewpoint that would be more acceptable,” he added.

“The industry generally encourages this type of standardisation. For too long across Europe we have had a mishmash of regulation – having a standard of this nature under these directives is to be welcomed by the industry, but it is important we strike the right balance.

“Any benefits must be realised cost-effectively. If it is going to cost too much, there might be some players who would deem the risks and liabilities too high and choose not to be in this business.”

Mr Scrimgeour conceded there was a real risk of the European industry losing fund managers as private equity sought better returns in other markets.

However, there were managers who had a genuine European investor base: In order to meet the demand of their institutional investors who would ask for AIFMD-compliant vehicles, managers would increasingly seek to move their domiciles into Europe.

He envisaged US managers maintaining their attraction to European institutional investors.

Many American managers already used the UCITS vehicle, not only because they could win investment from retail investment in Europe, but also because UCITS was a recognised global brand. They were using international UCITS structures to market to investors in Asia and Latin America.

Under UCITS IV, managers who have obtained authorisation from the regulator in their home market will simply have to request access to other member states’ markets.

Host regulators have two weeks to accept or decline.

UCITS IV will also make procedures to break funds down or merge funds more straightforward as a way to reduce the vast numbers of small funds in Europe.

Mr Scrimgeour said the collection of openings awaiting the island with the coming into effect of UCITS IV included the opportunity for a ‘Malta passport’.

“If a fund manager came to Malta to market a fund in 10 different countries within the following two months, how would that play with the island’s regulators and industry service providers?” he offered.

“Could a ‘wrapper’ be placed around that and marketed as a passport? There is enough room for Malta to play alongside Luxembourg and Ireland, especially if fund managers were looking to re-domicile their funds. That would be the time to attract them.”