Malta - Using Innovation to its Advantage

By David Borg, Partner,Capstone Group and Director, Momentum Pensions Malta Limited (01/07/2014)

The Maltese economy has, in a relatively short period of time, transformed itself from what was practically an absolute reliance on tourism to the diversified mix we have today.

Tourism is and will remain an important factor, however, a significant contribution is also being made from within the financial services sector. This industry continues to record growth year after year, sometimes in complete defiance to international trends and today generates around 12 per cent of the national economy, providing around 10,000 jobs. There are a number of reasons behind Malta’s emergence as a jurisdiction of repute and which continue to fuel its growth and development.

The usual key considerations include:

-          Reputation – Malta enjoys an excellent reputation having managed the transition from offshore to onshore in a seamless and efficient manner. The island embarked on a clear strategy to harmonise and update its legislation with a view to providing the necessary framework for well regulated financial services to flourish.

-          EU membership – Malta has enjoyed full EU membership since 2004 and this has further contributed towards the island’s visibility as a nation with a sound legislative and regulatory framework;

-          Infrastructure and connectivity – Significant investment has been made in developing Malta’s telecommunications backbone and the island enjoys a high degree of internet and mobile telephony usage. Apart from that the island is well served both by scheduled flights as well as regular service by leading shipping lines to the major cities in Europe and North Africa as well as major international hubs such as Dubai.

-          Stability – Malta is and remains socially, politically and economically stable and the prospects for the future remain positive.

-          Workforce – Governments, present and past, have invested heavily in education. The island has one of the highest number of students which have a tertiary level of education. As a consequence, Malta has a workforce made up of highly skilled and educated persons who are flexible and eager to learn and adapt to new skills and industries.

Another key factor in the continued development of our so called ‘knowledge economy’ is the ability for professional to think outside the box and work hand in hand with regulators and legislators to develop a robust yet reasonably light framework for exciting and innovative regulated activity.

Malta has had notable success in creating an entire new business segment such as remote gaming. Malta was indeed one of the first jurisdictions to regulate remote gaming.  A clear regulatory framework, the right degree of protection at consumer level and a clear fiscal policy have seen this sector develop in the face of adverse conditions. Today, Malta has embraced the industry and has developed competences across the board. This success is evidenced by the continued presence on the island of some of the major players in the industry who continue to invest and expand their activity here.

A similar success story is the MFSA’s ability to regulate persons ahead of some of its more direct competition. Today, Malta is clearly one of the premier jurisdictions for QROPS and in a relatively brief period of time pension assets administered and/or managed by Malta-based trustees comfortably surpassed the £1 billion mark.

Professionals particularly within the legal, financial and economic sectors have a role to play in sustaining Malta’s innovative and competitive edge. The key is to identify opportunities to sustain the ongoing development and diversification of our jurisdiction, which requires that they adopt an entrepreneurial approach and remain constantly aware of what is happening globally, particularly in the more mature, sophisticated markets.

One such opportunity that is generating significant interest, particularly following the recent international banking crisis, is ‘alternative funding’. Funding is the fuel, the life-blood that businesses need to grow and develop. Without funding, start-ups simply do not start up and businesses falter or fail to deliver to their potential.

Following the recent financial meltdown, banks have become increasingly more risk averse and, because of liquidity constraints, property used as collateral is often not sufficient or no longer welcome. This has created a gap in the market, which companies such as ‘Kick-Start’ have quickly moved in to fill.

The concept of crowd funding is a fairly simple with concept: matching an investment opportunity with a relatively large number of investors, each of which will invest a relatively small amount of money.

With the advent of internet and technology the possibilities are indeed endless. An investment opportunity presented on a crowd funding platform becomes visible to the millions of internet users. It also opens up a completely new type of asset class to a wider investor profile.

Crowd funding sites in the UK such as Crowdcube and Seedrs have raised millions for SMEs in equity finance, whilst the ‘debt platform’ Funding Circle has provided loans and over £70 million to SMEs.

The ‘crowd’ phenomenon has also spread to asset finance. Companies can now go online and auction invoices. Some 150 companies had raised over £40 million last year by using ‘Marketinvoice’ as a platform for auctioning invoices.

Crowd funding will continue to grow for a number of reasons. Investors are struggling to get a decent return whilst crown funding websites have on the whole generated significantly more generous returns. The process involved is quick and efficient when compared to traditional bank finance or the IPO route. Finally, the market out there is endless thanks to the worldwide web. Millions of individual investors can now connect with investment opportunities at the touch of a button.

Regulation at present is light and for all intents and purposes the crowd is self-regulating. Despite this, crowd regulation remains a hot topic. In the UK, platform operators are lobbying government to work with them to develop a suitable regulatory environment. The SEC is also considering a suitable framework to manage this phenomenon.

Maybe this is the time for Malta to once again take the initiative and be amongst the first jurisdictions to regulate crowd funding.