BRANCHING INTO NEW GROWTH
One of the areas identified in the Malta Financial Services Advisory Council’s strategy as having potential for the island’s financial services was family offices. Indeed, the MFSAC felt Malta could be a centre of excellence in this space, with only minor changes to regulation needed, while building on the existing legislative platform and jurisdictional proposition.
Indeed, this is not a new area for Malta: a sizeable number of family offices are already working through Malta, attracted in no small part by Malta’s proposition as an asset holding jurisdiction leveraging the features of Malta’s civil, corporate and trust law, but the MFSAC envisaged a thrust to attract to Malta more substantial activity by encouraging the location in Malta of the people, functions and assets required to perform some of the activities typically undertaken by family offices or by branches of family offices.
The chair of the MFSAC Working Group for family offices, Conrad Cassar Torregiani, put the potential into context on the basis of data published by the Deloitte 2024 global insight on family offices: there are some 8,000 family offices around the world at present, and the best guess estimate is that this number will be up by a third by 2030. And it is not just the number of offices that is impressive: so is the wealth that they represent. It was estimated in 2019 to be $3.3 trillion, going up to $9.5 trillion by 2030.
“It is being called the greatest transfer of wealth in history as the wealth generated and accumulated by the silent generation and baby-boomers, is transferred to younger generations. It is estimated that over $80 trillion will be passed over in the next 20 years.” he explained.
The expectation, he said, is that an increasing number of individuals will be looking to the establishment of family offices in the administration of their wealth.
“The activities of a family office may vary significantly and at the most basic level the family office may be established to perform concierge-like services, such as paying school fees, arranging flights and hotels, and ensuring that properties and other tangible assets are secure and available for use. But the larger family offices tend to go beyond that and will run the family’s investment portfolios in accordance with the objectives and risk appetite of the family. Family offices will also, at times, be tasked with the provision of venture capital to family members, as a way to allow them to pursue their own path and possibly also as a way to enable them to prove themselves in the real world before they are given a seat around the table.”
Where would Malta fit into this scenario? The island has always been an attractive proposition for high-net-worth individuals or families, who use Malta as a domicile through which to structure their holdings, maybe for asset protection or to manage risk through jurisdictional spread.
To supplement and enhance the Malta proposition, the MFSAC identified “some creases or wrinkles” which could be ironed out to make Malta more attractive as a family office location. One of these was the regulatory framework for investment services and trustees and the objective was to design what he described as “a fit for purpose” regulatory platform, building on the regime applicable to Professional Investor Funds and family trustees but appropriately calibrated for single family offices. Specifically, the objective is to enable a family to collectively qualify to make use of the regime for Notified Professional Investor Funds as regulated by the Malta Financial Services Authority (MFSA).
Agreement on the definition of the participants which a family office may service in order to be entitled to access the regulatory framework applicable to single family offices, based on that used in the USA, was an important step as this enabled agreement to be reached across the board on the line of demarcation between participants eligible to be regarded as a part of the collective family group which is serviced by a family office and third parties in receipt of services by third party service providers. In the latter case, the overriding need for prudential regulatory oversight prevents access to the regulatory platform available to single family offices. On the other hand, when the family office is set-up by the family for the benefit of the family, the regulatory platform recognises that the family is capable of safeguarding its own interests through the appointment of competent and appropriate people to run and administer their family office and the prudential regulatory overlay is significantly disengaged.
These changes reflect the risk-based approach adopted by multiple regulators across the jurisdiction. The bottom line – by no means unique to family offices – remains, however, ensuring that the financial system is not vulnerable to exploitation by criminals seeking to launder the proceeds of financial crime or to conduct illicit activity.
When asked to summarise what has been achieved so far, Dr Cassar Torregiani explained that through agreement on the definition of certain specific key terms we have created a uniform vocabulary that is now understood and agreed to by the MFSA, the Malta Tax & Customs Administration and the Financial Intelligence Analysis Unit and around which the jurisdiction’s risk appetite has been defined: “Over the past year we have reached agreement on the business the jurisdiction is willing to service in this space and on a regulatory framework, specifically the regulation of the investment vehicle the family may use for the collective investment of all, or part, of its wealth and the regulation of the family office as trustee of all, or part, of the family’s wealth, which those involved believe to be fit for the purpose of supporting family offices looking to establish themselves in Malta while mitigating risk for the jurisdiction.”
With this, it is hoped that the private sector, and especially the local banks, should become comfortable to offer their services to family offices looking to establish themselves, or a branch of their activities, in Malta on the basis that their operations fall within the risk appetite of the jurisdiction and comforted by the knowledge of the fact that, in terms of the specific regulatory platform for single family offices, an AML subject person has been built into the architecture of the family office structure charged to assume responsibility for ensuring compliance with local AML requirements.
In addition, the exercise which has sought to calibrate the existing frameworks to expressly accommodate the realities of single family offices should ensure that “the relevant stakeholders will know where they stand and, when communicating with the market, can collectively speak with confidence and certainty on the procedures to be followed, expected time lines and degree of complexity”, he said.
Another issue that had to be tackled by the regulator was the financial thresholds required to be eligible to access the regime. In order to access the regulatory regime for single family offices the family will be required to hold at least €50 million in net asset value and at least €5 million of assets must be under the management of the family office.
The MFSAC has been focussing on single family offices, rather than ones which represent the interests of multiple families. Although there is nothing to stop the promoters of multi-family office platforms from establishing themselves in Malta, the frame work designed for single family offices will not be available to them.
On the question of what to expect going forward, Dr Cassar Torregiani envisages a process of gradual expansion and organic growth.
“We are not suggesting that the ultimate beneficial owners – the High Net Worth Individuals and Ultra High Net Worth Individuals who are behind the family office – will relocate to and will live and spend their time in Malta. While this may happen, this is certainly not the objective of this exercise. We are aiming to host in Malta the family office, that is the enterprise set up for and entrusted with the administration of the family’s wealth.”
An important trend which is relevant for Malta is the reality that family offices are increasingly opening branches in countries other than their home countries, with one in ten of those surveyed saying they expected to open a branch over the next five years. The 2024 Deloitte report indicated that more than a quarter of family offices have multiple branches, located in one or more countries other than that in which the family is located. That percentage goes up to over 40% for family offices which have over $2 billion under management.
And opening of branches is not just about obtaining global geographical spread. Indeed, from the survey it results that European family offices tend to open branch offices in other European geographies. On the other hand, it results from the survey that, almost two-thirds of family offices in Asia Pacific are planning to establish a branch in another continent, whether Europe or North America.
“The drivers for the decision to stablish a branch may be varied. This could be about proximity to market, quality of life or it may be purely cost-driven, but there may of course be other reasons. Regulation, or tax considerations, might also play a significant part,” he said.
Dr Cassar Torregiani believes that this trend could open doors for Malta, which could initially position itself well to host branches of existing family offices, rather than attempting to compete with the more established jurisdictions.
“Malta offers a safe environment with a low crime rate, a Mediterranean climate and generally speaking a good quality of life, although there are admittedly some challenges. For key personnel moving to Malta to work in a family office eligibility to qualify for the tax rules applicable to highly qualified persons could also be a welcome benefit,” he said.
“For over 30 years, the financial services sector has benefitted from stable and consistent cross-party governmental policy without any significant shocks or U-turns. It has grown to be a high value-add sector for our economy while placing a relatively low burden on the local infrastructure. We are confident that the changes will help place Malta on the ‘family office’ map and will contribute to the growth and maturity of Malta’s financial services sector.”