As well as raising regulatory and operational issues, the Alternative Investment Fund Managers Directive (AIFMD) has had significant impact on traditional asset management structures.
The need for the Alternative Investment Fund (AIF) to appoint the Alternative Investment Fund Manager (AIFM) has resulted in many regulated businesses having to consider their structures and contractual fee flows to ensure compliance with AIFMD requirements. Those multi-jurisdictional managers who haven’t already done so need to make a decision as to which entity should be the AIFM and ensure it has sufficient substance to fulfil that role. Those managers that are not multi jurisdictional may consider whether for operational, regulatory or tax reasons a new AIFM would be beneficial to their business.
Most jurisdictions have released their AIFMD enacting legislation and guidance. The Maltese Financial Services Authority (MFSA) issued their guidance on 27 June which provides clarity as to the characteristics required by a Maltese AIFM. In accordance with the directive they will permit delegation of portfolio management and risk management or partial delegation of both activities. Accordingly, they will require governance of both functions at the Maltese AIFM level and sufficient expertise and power must exist to manage the outsourcing arrangements. The extent of delegation permitted will be assessed by the MFSA on the basis of each applicant’s structure, strategy and processes.
In the UK, we are still waiting to see if the Financial Conduct Authority (FCA) will publish guidance on aspects of the remuneration rules under the AIFMD and ESMA’s guidelines, with the FCA saying that they may provide guidance following feedback from their current consultation. Coupled with HMRC’s current review of the taxation of LLPs, there is great uncertainty about how both the requirements to defer and pay non-cash consideration will be accomplished without negative tax consequences for UK AIFMs structured as LLPs. The big benefit of Malta is that the approach adopted by the MFSA does not require entities to which portfolio management or risk management activities have been delegated to be subject to similar remuneration requirements as the AIFM, hence removing the uncertainty at the UK level.
As a result, if a Maltese AIFM delegates to a UK manager authorized under MiFID, the UK manager will continue to be subject to CRD remuneration guidelines and proportionality but, importantly, the MFSA will not require the UK manager to be subject to the AIFMD remuneration provisions including deferral, non cash consideration and claw back. This does not mean the remuneration requirements of the AIFMD are avoided as they will have full application at the Malta AIFM level.
So, setting the regulatory position aside, what makes Malta so appealing to those based in the UK? The longstanding relationship between Malta and the UK and their shared history gives Malta a decidedly British feel about it. The main business language is English, and Maltese company law is primarily based on English company law and conforms to EU directives. This means the process for redomiciliation and establishment of asset management businesses with a UK part in the structure is relatively familiar to regulators and service providers. In terms of personnel it has a skilled EU workforce, the ability for EU residents to reside in Malta without visa restrictions, a beneficial expat rate designed for investment professionals, and the proximity to UK and Europe means that creating and maintaining an appropriate level of substance is relatively straightforward. It has a headline corporate tax rate of 35% but operates an imputation regime such that non-Maltese shareholders will suffer tax on profits retained at the Malta level at 5%. There is also no withholding tax on dividends, no capital gains tax and no additional tax on distributions received from subsidiaries. Combined with the Mediterranean climate, the all-round package has been enough to draw some of London’s brightest and best.
Faced with the inevitable costs of tinkering with their structure at a UK level to meet the AIFMD requirements, UK managers should consider what structural approach will provide best value for money in the long term. A Malta-UK structure provides a strong tried and tested platform for London based managers that are seeking certainty about how to implement the AIFMD proposals whilst also providing an efficient framework within which to operate.
Those prepared to commit and make the appropriate investment in Malta reap the benefits. The MFSA is accepting applications from potential AIFMs with the process from submission to certification taking on average 10-12 weeks.
Kinetic Partners have over eight years of experience establishing Malta-UK structures for new and existing managers. If you would like to discuss the merits of Malta as a jurisdiction for your AIFM, please do not hesitate to contact our team.