Malta’s legal services sector continues to expand. More firms are looking at the merits of specialisation while there are hints of foreign law firms interested in moving into the hedge fund jurisdiction.

Maltese law firms are acting in a very un-Maltese way. Traditional law firms based in the jurisdiction have provided the full gamut of services for clients. Now, however, with the significant increase in the financial services sector, legal firms are beginning to specialise and the old guard is not happy.

While the ‘youngsters’ – including some of the top advocates in the leading financial services law firms like Ganado, MAMO TCV and Fenech & Fenech – want to see changes to the university courses and give students more of a chance to gain specialist knowledge of financial services and alternative funds work, the older lawyers are digging in their heels.

It is, however, probably only a matter of time before they lose the battle. Malta has now firmly established itself as a major hedge funds jurisdiction within Europe and legal firms based there are reaping the rewards.

One firm that decided from the start to specialise is David Griscti & Associates. Under the leadership of partner David Griscti the firm specialises in financial services law now counting three partners and 22 staff in all.

“Essentially we are not a typical law firm. We are highly focused in securities law. That’s all we do,” says Griscti. “This is one of the fastest-growing sectors for financial services in Malta. Time has proven us right.”

Griscti likes the fact he is able to provide a more personalised service, too. “We meet face to face at our offices, asset and fund managers, fund promoters,” he adds.

He supports initiatives aimed at giving students more specialised education and applauds initiatives such as Ganado’s institute. “It is excellent. There are a number of others who are also helping to train the talent. It is quite clear the result will be the strengthening of special training in this sector, building up manpower, expertise and focus.”

At present Griscti is focusing on small to medium-sized managers. He says the firm has been looking at a mixture of funds, most with typical hedge fund strategies. There is no indication, notes Griscti, if one area will grow more than others.

Griscti’s uniqueness among Malta’s law community may not last for long, however. Several other law firms are quickly developing large financial services practices. Another is James Azzopardi, a partner at Muscat Azzopardi and Associates. It is particularly focused on marine law as well as general corporate.

“We’re seeing an interest in Malta as on onshore jurisdiction inside the European Union, says Azzopardi. “Before Malta was not an automatic choice. Now, however, we’re seeing more funds coming along and considering Malta. It is a relatively small world, the funds industry. People talk, so once one fund comes to Malta, the manager flies home and talks about it.”

Azzopardi’s model has moved towards a broader base. The firm includes not just lawyers but also accountants and fund administrators.

Looking to the future he says it is not easy to predict what will happen in Malta. “It depends more on our response time as a fund jurisdiction than on Ucits III or even IV or doing drastic legislative changes. It is about response time,” he comments.

On the subject of foreign interest in Maltese law firms, Azzopardi reveals that twice two big international firms have approached his firm. “Up to now it makes no sense for us to partner with anyone. We work with international law firms. We will evaluate the options. It’s not just about examining, it’s about finding a cultural fit and a reason that will benefit clients,” he concludes.

The firm most associated with the funds industry in Malta remains Ganado. With partner Max Ganado leading the funds practice, there is no doubt where he thinks Malta is heading. The firm has been expanding with new staff as well as physically, taking over more office space in the heart of the old city of Valletta. “We don’t want to and we won’t poach people,” declares Ganado, “but if someone is ready to move on, we are open to the suggestion.” This is in response to the need to find people with more experience and knowledge of the alternatives sector. One fairly recent addition to the staff was James Farrugia, previously employed by the Maltese Financial Services Authority (MFSA). Ganado thinks having someone from the regulator helps speed up processes and gives the firm an insight into how the MFSA thinks and views proposals. “We only take critical issues to the MFSA now. We go to them with new ideas to discuss. Our conversations are focused on issues,” says Ganado. “Having James on the team is useful. He know the MFSA, he understands it, its structures and wish list when we come with a proposal.”

Ganado now wants Malta’s law firms and the regulator to be more creative. “We need creativity and to extend the learning and understanding of this area. We are usually the firm that comes first, trying out something, bringing up untested issues for the MFSA.” Ganado’s keenness in this area reflects the fact that Malta is now seeing a much broader range of fund strategies, rather than the plain vanilla fund structures that have so far worked.

“Over the last two years, there have been a hell of a lot of challenges presented. The jurisdiction is used to dealing with vanilla fund structures. But we’re seeing such a lot of unexpected issues and structures popping up. So we’re seeing everything in the fund industry, all their novelty,” declares Ganado.

He notes that the jurisdiction has been good at attracting small fund management companies. “I’d say 80% of the management companies have three to four people to start. There are different models.” But he expects this to start to change as more substantial operations are opened in Malta. A good example, he says, is Liongate’s presence in the jurisdiction.

Ganado also agrees that Malta is entering a new phase in the development of its financial services sector. “We are starting to see speciality and new service areas. This is all engaging. From the legal perspective we’re also beginning to see fund litigation. This is providing some work for firms but we have not yet created case law. Nothing has gone to court yet but it won’t be long before we have some of the same problems they have had in other jurisdictions,” predicts Ganado.

Joseph Ghio, a partner at Fenech & Fenech, has also seen business pick up in 2010. “We’re bullish about growing the financial services sector up to 25% of gross national product. We just need the human resources to back it up,” he says.

Like others he says the funds sector is booming with increased registrations of service providers as well as new funds, redomiciliations and the licensing of managers and management companies. “People are coming here because we offer a more tax-efficient environment but are still within a well-regulated EU country. We’re seeing some expats moving back, too.”

While many think the uncertainty over the AIFM directive pushed funds to hedge their bets and move onshore, Ghio thinks the change in attitude could be permanent, at least for European fund managers. This will help boost Malta as well as the good publicity the jurisdiction is receiving from satisfied fund managers and promoters. “You’d be surprised how quickly word of mouth travels.  People talk about the country and their experience here. They relate that to their peers.”

Ghio makes no apologies for the fact his law firm is a full-service one. However, since 2009 “our drive has been to increase our activities in the financial services practice area”. He does not expect the firm as one of the oldest and largest in Malta to specialise just in financial services in future, however. “We will offer a full spectrum of services,” he says. Nevertheless, the financial services side of the firm has grown. “We now have two partners and four lawyers in the team out of 25 lawyers.”

Looking to the future he believes “we need to take Malta to the next level”. Whether that means opening the country’s law firms to internationalisation, he says, remains to be seen. “The more specialised a firm becomes, the more compelling the reasons for the practitioners to join a bigger practice. I can see that happening in future but traditionally staff have been very loyal to firms and we have had stability.”

At the law firm Simon Tortell and Associates, Simon Tortell is equally upbeat about Malta’s growth vis-à-vis the funds sector. He, however, contradicts perceived wisdom. He says fund managers and companies are choosing Malta purely because of tax. He points out that the increase in both personal and corporate tax rates in London, where the vast majority of Europe’s hedge fund manager community operate, is driving many decisions. “I think people are also looking at Malta as a gateway into Europe.”

While he concedes Luxembourg and Ireland are “bigger brands” he thinks Malta is more flexible and will be more attractive to managers. “I think we have a really good chance to take a slice of the cake,” he concludes. He also believes Malta is well placed to also attract managers based in China and India looking for a marketing platform for Europe. “If you want European money, you will have to be in Europe. Hong Kong wants to offer to European investors. I see this as a development,” he says.

At MAMO TCV work is also hectic. Daniéle Cop is seeing steady growth in the professional investor fund (PIF) segment of the market, the fund structure of choice for hedge funds. “In addition to the PIFs, we’ve seen all sorts of structures more focused on the ‘flavours of the month’,” she says. “Predominately it is the PIFs that are keeping us busy – and I am not complaining.”

She agrees with others that until Malta attracts a wider base of custodians to chose from, the use of Ucits structures by the alternatives industry would be stymied. “The appeal of Malta as a Ucits domicile is limited due to the lack of competitive custodians. We definitely think that Ucits should pick up in 2011, particularly as Ucits IV comes into effect. This will give Malta a push as it is not just about funds but also about management companies. We think the directive will lead to the growth of master/feeder structures. From the MFSA’s perspective they are looking to find the best way to implement this structure while being as flexible as possible,” she explains.

While Cop continues to see mostly small fund managers setting up in Malta, she is hopeful that in 2011 Malta will be able to attract larger fund companies. “What we have seen are small managers setting up with a handful of people. These are flexible and easy to move to Malta,” she concludes.

Compliance becomes big business in Malta

DFF Advocates, established in 1993, practices financial services law with a special emphasis on funds and fund management, taxation law and company law.

According to Frank Chetcui Dimech, the firm is doing well. “Basically we’ve seen big trends in 2010. In terms of volume we’ve seen a real improvement over 2009 in three main areas: hedge funds, Ucits hedge funds and a mix of retail. For the first time we are seeing redomiciliation or conversion into Ucits,” he says.

He reports seeing an increase in new applications and in compliance managers. “Apart from setting up funds we provide ongoing corporate services to funds. This work has increased by around 20% a year and we expect it to double in two to three years,” notes Chetcui Dimech.

“I know most people say we’ll be inundated with work because of the alternative investment fund managers (AIFM) directive. I am slightly sceptical that will happen,” he admits.

One of the surprises of the year has been the influx of fund managers and management companies. “I think this will continue. We are seeing not only fund managers but foreign exchange brokers and others in financial services setting up in Malta,” he remarks. He believes as more and more companies open in Malta, his work on the corporate side, in particularly on compliance and anti-money laundering (AML), will increase.

“We provide ongoing compliance services,” he explains. For smaller clients it is possible to combine the compliance, AML and board directorship into one person. As smaller fund management companies grow, they can split out the functions. Malta law requires at least one local director and someone looking after AML and compliance functions. For the smaller funds, combining these functions into one is not unusual, says Chetcui Dimech.

“We have the resources and time to dedicate to these functions. Having a director also doing compliance and AML covers quite a few issues,” says Chetcui Dimech, pointing out that the arrangement can often strengthen corporate governance. “The way we’re approaching it put us in a position to have full access to information. We can use all three functions to provide an independent director role with a hands on approach.”

Kevin Vella, director and CEO of ITL Advisory Services, also reports a rise in providing corporate services to the funds industry. The principal function of his company is to provide corporate, trustee and supplementary services to Simon Tortell & Associates. ITL provides advice on company formation and establishment and administration of trusts and foundations and licensing of collective investment schemes as well as other services for the financial services sector.

He believes financial services as a percentage of work in the company will increase. The two main pillars of this offering are providing compliance and an AML officer. “We have seen significant growth over the last 12 months. My motto is ‘slowly but surely’. We have four people dedicated full time and some part-time staff. I think the future is very bright. It is not easy to find people with the intricate knowledge to safely act as a director,” he concludes.