Kenneth Farrugia
Chairman of FinanceMalta
FinanceMalta is a public-private initiative set up to promote Malta as a financial services hub. Kenneth Farrugia, its chairman, talks to The Report Company about opportunities post-Brexit and the island's thriving fintech start-up space.
The Report Company: What does Malta's financial services sector look like today?
Kenneth Farrugia: Just 25 years ago, Malta was an offshore jurisdiction, so clearly our proposition was permeated with a tax regime which was driven by tax incentives, tax holidays and the likes. In the late 1980s, the government decided that Malta should initiate a process to embark on a journey to join the EU. This meant that we had to overhaul the way that our regulatory structure and legal structure was moulded, which took five years. This spearheaded the Investment Services Act, which is very similar to what you find in the UK.

For the first 10 years, the industry was very much driven by the domestic market. Local institutions, banks predominantly and financial intermediaries, started exploiting the new framework and introducing new services in Malta. There were a lot of asset management companies, private banking and insurance operators, and a stock exchange was introduced, but it was all focussed on the domestic market.

Once EU membership came in 2004, this was the catalyst for a paradigm shift for the industry. It started opening up to mainland Europe, because membership opened up this reality for us. And we started seeing traction. When we joined the EU, we were in effect given the seal of approval insofar of the standing of our legal and regulatory framework and the standing of our tax framework, so operators started coming here.

FinanceMalta was set up a couple of years later because we felt at the time that there was a need to set up a body to promote Malta's financial sector outside of our shores.

Today, we have achieved a lot. In the 1990s, the contribution to GDP by the financial sector was just three percent. Today, it's well over 12 percent, and employs around 2,000 people. Looking at the factors that contributed to the traction that we've achieved so far, I think one is having a single regulatory body in Malta, so it's a one-stop shop. If you want a licence, if you want to be listed, it's the Financial Services Authority. We have one single regulator. And the regulatory body is meticulous but accessible. They have a pro-business mindset. They prefer to meet applicants before actually licensing them. They want to meet the business people. They want to understand the business model. It's a relationship-based regulatory approach, which is distinct from what you experience in London.

Time to market is very competitive. It normally takes you about two to three months to license a fund, which is quite fast. We have come up with various innovations in the fund space which speed things up. In the insurance sector, we have introduced protected cell structures. We are the only EU jurisdiction to have that. We saw what worked in the Channel Islands, and we looked at it, we proved it, and introduced it within our framework.

There are the benefits to operating in Malta, such as the cost of resources here compared to other jurisdictions, the cost of running an operation here in terms of office space, low utility costs, and so on.
TRC: How would you appraise Malta's human resources capacity?
KF: The cost of human resources has gone up but it is still highly competitive. A salary for a recent finance graduate is €20,000 per annum. And remember that here, education is not only free of charge, but we actually pay students to go to university. The government has invested significantly in the intellectual capability of students and they are encouraged very strongly to go to university. The government also finances Masters programmes. In Malta, if you don't have a degree, you are not going to go anywhere. A degree is a basic standard today.

Because our economy is growing at record levels, we have practically zero unemployment. We are actually importing labour. We have a population of 420,000. We have a workforce of 170,000. We have 31,000 foreigners living and working here, which is a big number in percentage terms. And it keeps increasing. Malta is accustomed to different cultures, because we have been conquered by so many over these last hundreds of years that for us, having foreigners around is no big deal.

TRC: Who is FinanceMalta currently targeting to bring to Malta?
KF: We are currently holding events addressing asset management, insurance, and private wealth. We think Malta is attractive for operators in the US that want to target Europe, and who want to start with a small operation to come here and get incorporated quickly, as time to market here is relatively very competitive compared to other EU member states.
TRC: What opportunities arise for Malta post-Brexit as operators look at options other than London?
KF: You can still operate naturally from the UK and maintain the passporting into Europe by setting up a lean mirror operation in another EU member state. That is what we are putting on the table. Operators can set up in our regime; it will be low-cost, so the margin will not be significant. They don't need to disrupt all of their operations in London. They retain what they have and create a passporting company into Europe from Malta. In effect, they can retain their actual existing operations, but structure a model which will enable them to sustain their servicing into Europe by passporting.
TRC: What kind of operators can Malta attract?
KF: We know that we have our limitations in terms of attracting big multinationals to come here. We do have big companies, for example the largest exporter of microchips in Europe. We have Baxter, which is an American company in the medical sphere. We have quite a big number of pharmaceutical companies as well. So we have attracted big companies, but we have a limitation insofar as the resources that they can recruit in Malta.
TRC: What opportunities are there to build closer ties with UK institutions?

KF: The UK will remain central to all of our initiatives going forward. We are part of Europe, so wherever there is low hanging fruit we will be there. I think we have become visible in Europe over the last 10 years in our activities marketing Malta as a financial centre. We've seen a number of European operators choosing Malta as their base of operations.

Brexit opens up a new reality. It was shocking for many that the UK voted to leave the European Union. I think strategically it is too early to take a fair position and start marketing very actively in the UK to attract operators to come to Malta. I don't think we should take that approach. We are being very careful. We are putting on the table structuring solutions, because I think boards of companies in the UK really should start looking at alternatives. Ultimately, they will start planning now. The way that the UK will interact with Europe from an economic stance is yet to be determined.
Brexit opens up a new reality. We are putting on the table structuring solutions, because I think boards of companies in the UK really should start looking at alternatives.
Kenneth Farrugia, Chairman of FinanceMalta
TRC: Does Brexit present an opportunity for Malta?
KF: It presents an opportunity to disseminate information on the options, but not to go for a hard sell, because if for some reason, the EU grants the same passporting rights to operators in the UK as well as the EU member states, then all our strategic positioning would be worthless.

What we are telling the operators is to start planning and start informing themselves on the options of retaining their business in the UK but still retaining their activities within the European Union by structuring a service organisation for their products. This is what we put on the table. You don't need to move really to Malta. You can retain your operation in the UK, set up a company in Malta, delegate that from UK, and you can passport through Malta.

We are receiving British delegations because they want to explore what can be established in Malta. I think these mirror structures are very interesting.
TRC: What is your outlook over the coming years, particularly with respect to the growth of the start-up sector in financial services?
KF: It's not just start-ups. It's across the board that we are seeing growth in financial services. We have about 40 fintechs now operating in Malta, and we are seeing this cluster formation. This is driven by the fact that apart from having the regulatory framework to accommodate start-ups through the financial institutions act, we also are very strong in the ICT space, and we have a lot of intellectual capability there, and we are now seeing financial services and IT fusing together. These companies come to Malta and they can find a good suite of resources which are very knowledgeable on the financial services side, and then couple that with the IT capabilities, because Malta gave a very strong push 15 years ago to strengthen the ICT sector.

The government has announced a very significant tax credit of €250,000 in the accelerator space to make Malta an attractive jurisdiction for start-ups. We give them support, we give them incubation facilities, and we give them all the know-how on the professional side. That's where our edge lies. We want to attract acorns, because we believe that some of them will become oak trees.
We want to attract acorns, because we believe that some of them will become oak trees

Kenneth Farrugia, Chairman of FinanceMalta
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