access to a diverse pool of investors, European Stock Exchanges provide companies with the appropriate status for further European and international expansion.
Capital markets in Europe have become more open and liquid. The cost of raising finance has significantly decreased. Companies registered in Cyprus, for example, can conduct public offers in other EU member states or have their shares admitted to trading on an EU Exchange Regulated Market. Companies can now take decisions on tax optimisation and cheap capital independently, thus optimising their results.
MiFID
The Markets in Financial Instruments Directive (MiFID) is a key criterion in the EU’s Financial Services Action Plan (FSAP) which is designed to create a single market financial services. It reinforces the unified concept of “Single EU Passport” – initiated by the Investment Services Directive – which allows investment firms to offer products and services across the EU, without restrictions of borders or protection from national regulatory regimes. It liberalises Europe’s capital markets by exposing them to pan European competition, while seeking to introduce common standards of regulation and investor protection.
In 2005 Cyprus harmonised the local legislative framework in line with the Prospectus Directive. It has also adopted MiFID which has strengthened the European capital market. It is one of the most significant pieces of EU legislation for financial services markets and investment intermediaries for a decade. Its impact is enormous, both for the industry as a whole and on individual institutions.
MiFID is a key plank to create a single market in financial services. It strengthens the “Single EU Passport” (first provided by the Investment Services Directive “ISD”) which allows investment firms to offer products and services across the EU without restrictions of borders or protectionist national regulatory regimes. It liberalised Europe’s capital markets and also extends the scope of investment services and activities covered. It has created a revised regulatory framework which reflects developments in financial services and markets since the ISD was implemented.
Most of the focus of MiFID deals with the tactical and operational changes to ensure compliance. This is a much greater challenge than initially anticipated, mainly due to the number of changes that must be managed.
To summarise MiFID’s requirements, we set-out these as follows:
Scope
MiFID broadens the range of services regulated in the EU. For example, the following securities were not covered by the ISD but are included in the scope of MiFID: derivatives, commodity derivatives, credit derivatives and
financial contracts. In addition, certain investment services that were not covered by the ISD are now regulated by MiFID. Further to the receipt and transmission of orders in relation to financial instruments and the execution of orders on behalf of clients, MiFID also includes investment advice and the operation of Multilateral Trading Facilities (MTF).
Conduct of business
The list of areas covered by the conduct of business rules is fairly wide and extends from client classification to the provision of advice, tests of suitability and appropriateness for trades on behalf of clients, rules around best execution and maintaining proof thereof to rules around financial promotions and transaction reporting. The requirements have led to changes in both the flow of information within businesses but also the set-up of
information technology systems so as to be able to maintain data and prove compliance over time.
Organisational requirements
MiFID set out new and tougher requirements relating to the organisation of business in regulated firms, particularly in the areas of compliance, internal audit, risk management, outsourcing, systems and controls and record keeping. For example, firms falling under the MiFID regulation are required to set up full-time compliance, internal audit and risk management functions.
Market and transparency
MiFID also significantly increases the requirements for pre- and post- trade price transparency, especially for firms that frequently and systematically deal on their own account. The challenge of MiFID is to bring together
compliance, information technology departments and the front, middle and back office of financial markets in such a way as to benefit from the new requirements within the tight time frame.
CySEC
The Cyprus Securities and Exchange Commission (CySEC) is the regulatory authority in Cyprus. It was established in accordance with section 5 of the Cyprus Securities and Exchange Commission Law of 2001 as a public
corporate body.
CySEC has the following responsibilities:
- to supervise and control the operation of the Cypriot Stock Exchange and the transactions carried out therein
- to supervise and control the issuers of securities listed on the Stock Exchange, licensed Investment Services Companies as well as Collective Investment Schemes
- to carry out inspections over companies the securities of which are listed on the Stock Exchange, brokers and brokerage firms, investment consultants and mutual fund management companies
- to request and collect information necessary for the exercise of its responsibilities, to demand in writing the provision of information from all natural or legal persons and organisations that are considered to be in a position to provide such information
- to grant operation licences to investment firms including investment consultants, brokerage firms and brokers
- to recall operation licences for special reasons, as it is more specifically determined in regulations that are published in accordance with the Law of Establishment of CySEC
- to impose administrative sanctions and disciplinary penalties to brokers, brokerage firms, investment consultants as well as to in any other legal or natural person whom fall under the provisions of the Stock Market legislation
With its entry into the EU in May 2004, Cyprus has become one of the most attractive countries to set up and conduct investment and financial services activities.
The Investment Firms Law
The Cyprus Investment Firms Law 144 (I) 2007 (the “Law”) provides the legal framework for the provision of investment services as well as for the registration, regulation of operations and supervision of Cypriot Investment Firms (CIF). Under the provisions of the Law, the following entities may provide investment services on a professional basis:
- CIF: investment firms operating within Cyprus, excluding credit institutions, provided that the CIF has obtained the appropriate authorisation from the Cyprus Securities and Exchange Commission (CySEC)
- credit institutions established in Cyprus: provided that the credit institutions have received an authorisation from the Central Bank of Cyprus (CBC) in accordance with the provisions of the Banking Acts 1997 to 2000 for the provision of investment and ancillary services
- investment firms with their registered offices outside Cyprus: whether rendering investment or ancillary services through a branch or operating on a cross border basis without a branch, provided they have been granted a licence from the regulators of an EU member state
Investment Services
Investment services include any of the following services:
- reception and transmission of orders in relation to one or more financial instruments
- execution of orders on behalf of clients
- dealing on own account
- portfolio management
- investment advice
- underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
- placing of financial instruments without a firm commitment basis
- operation of Multilateral Trading Facilities (MTF)
Ancillary Services
- safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management
- granting credits or loans to an investor to allow to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction
- advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertaking
- foreign exchange services where these are connected to the provision of investment services
- investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments.
- services related to underwriting
Minimum Share Capital
An initial capital of at least two hundred thousand euro (€200.000) is required if a CIF provides one or more of the following investment services and holds clients’ money and/or clients’ financial instruments:
(a) reception and transmission of orders in relation to financial instruments
(b) execution of orders on behalf of clients
(c) portfolio management
(d) provision of investment advice
A CIF that provides investment services as stated above but does not hold clients’ money and/or clients’ financial instruments, and which for that reason may not at any time place themselves in debt with their clients, may have an initial capital of:
(a) eighty thousand euro (€80.000) or
(b) forty thousand euro (€40.000) and professional indemnity insurance covering EU member states or some other comparable guarantee against liability arising from professional negligence, that it enters into with an insurance undertaking representing an amount of at least one million euro (€1.000.000)
An initial capital of at least one million euro (€1.000.000) is required if a CIF provides one or more of the following investment services and/or performs the following investment activities:
(a) dealing on own account
(b) underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
(c) placing of financial instruments without a firm commitment basis
(d) operation of a Multilateral Trading Facility (MTF)
A CIF that is also registered under the Insurance Services Law to provide insurance intermediary services in the insurance sector must comply with the requirements of the Law, and in addition must have an initial capital of:
(a) forty thousand euro (€40.000) or
(b) twenty thousand euro (€20.000) and professional indemnity insurance covering EU member states or some other comparable guarantee against liability arising from professional negligence, that it enters into with an insurance undertaking, representing an amount of at least five hundred thousand euro (€500.000)
Procedure for Licensing
The business objective of a CIF should be the provision of those investment and ancillary investment services for which it has received a licence by CySEC. A CIF must be licenced by CySEC, which is the relevant regulatory and supervisory authority. In this respect, a written application to CySEC must be submitted and accompanied by a number of documents including:
(a) a business plan, which should include a description of the operations, the organisational structure, forecasts for the first two financial years and the names of at least two experienced and reliable persons who shall run the business
(b) draft Memorandum and Articles of Association and such as they are expected to be formulated after the granting of the CIF authorisation
(c) excerpt of the criminal record, certificates of non-bankruptcy and resumes of the members of the board of directors, the executives and shareholders possessing a qualifying holding, as well as their answers to a questionnaire issued by the CySEC
(d) draft internal regulations (Operations Manual) depending on the investment and ancillary services which the company proposes to provide
(e) draft organisational structure of the applicant company
(f) description of the applicant’s computer network and electronic infrastructure
(g) draft regulation in accordance with acceptable practices for the prevention of the legalisation of the proceeds of criminal activities CySEC reserves the right to request the submission, together with the application, of any additional documents not listed above.
If the shareholders possessing a qualified holding in the applicant company (10 percent or more) are legal entities, then CySEC will also require the details for all natural persons – ultimate beneficial shareholders.
CySEC will reach a decision within 4 months following the submission of a duly completed application, on either granting a CIF authorisation or refusing the application.
During this 4 month period CySEC may request additional information or clarifications regarding the application submitted.
CySEC must be satisfied with the paperwork submitted including:
- content of the manuals
- due diligence information provided for legal and physical shareholders and personnel
- sufficiency in quantity and quality of the staff to be employed
The main shareholders, managerial staff and internal auditors may be called for personal interviews with the Chairman of CySEC.
Criteria for Successful Application
In general, in order to grant a CIF authorisation CySEC must be satisfied that the applicant company has and maintains throughout its operation:
- the minimum capital required under the Law
- shareholders possessing a qualifying holding or otherwise capable of exercising an influence over the management and business strategy must be fit to ensure the sound and prudent running of the company
- two experienced and reliable persons* to manage its business, and that the said persons are capable to fulfill their duties. One of these two executives should be employed by the company on a full time basis and live in Cyprus. They should both be accessible and available to appear before the Commission with reasonable notice
- adequate technical and financial resources
- appropriate control and safeguarding arrangements for electronic data processing and adequate internal control mechanisms
- reliability, experience, professional skill and professional diligence of the persons who direct its business
- adequate structures and mechanisms in order to guarantee the protection of investors’ assets and eliminate any conflict of interest that may arise between the company or the staff and clients’ interests
- full-fledged office with established telecommunication and PC network, staffed with employees on a full time/part time basis as described in the applicant’s organisational chart
- heads of the core services departments must possess relevant professional competence certificates from the Ministry of Finance of Cyprus. CIF has a 12 month period subsequent to the issue of the licence to comply with the above requirement
After the granting of the authorisation, CIF must comply with the on-going obligations provided by the law and the relevant CySEC directives.
* Experienced and reliable persons* to be appointed as directors of CIF are not defined in the Law. However, a manager will need to have the following qualities:
1. experience of at least three years in the financial services sector in the market(s) where the company will be operating
2. he/she will need to possess adequate academic background and practical experience
3. he/she should be in a position to appreciate the nature of the business which the applicant plans to undertake and duly comprehend the nature of the tasks undertaken
4. he/she should also know at least another European language, English is a must in most circumstances
CIF Branch Abroad
A CIF may provide investment and ancillary services and perform investment activities through the establishment of a branch in another EU member state or a third country provided that these services and activities are covered by the authorisation granted to the CIF. Ancillary services may only be provided together with an investment service.
A CIF wishing to establish a branch in another EU member state or a third country, notifies the CySEC accordingly and submits the following information:
- EU member state or the third country in which it plans to establish a branch
- address details of the branch
- names of those responsible for the management of the branch as well as its organisational structure
- programme of operations setting out, especially the investment and ancillary services that it intends to provide and the investment activities it shall perform
- in the case of the establishment of a branch in another EU member state, whether the CIF intends to use tied agents in the host member state. In the case of a tied agent established in an EU member state other than Cyprus, the tied agent shall be assimilated to a branch and shall be subject to the provisions of the Cypriot Investment Law relating to branches
CySEC, after taking into account the services and investment activities that the branch of CIF intends to provide, will within 3 months from receiving the information allow its establishment. This assumes that there is no reason to doubt the adequacy of the administrative structure and the financial situation of CIF.
If the branch is to be established in an EU member state, CySEC announces the said information to the regulatory authority of the host member state. For CIF branches established in a third country, CySEC announces its decision to the regulatory authority of the third country at the latter’s request.
The branch of CIF may commence business in the host EU member state on receipt of a communication from the competent authority of the host member state or 2 months after from the date of transmission of the communication to the regulatory authority.
IF Branch in Cyprus from EU member states
An Investment Firm (IF) that is authorised and supervised by the competent authority of another EU member state may provide investment and ancillary services through the establishment of a branch in Cyprus, provided that these services and activities are covered by the authorisation granted to theIF. Ancillary services may only be provided together with an investment service.
The regulatory authority of the IF host member state shall communicate the following information to CySEC:
- address of the branch
- names of the managers of the branch and its organisational structure
- envisaged operations setting out, in particular, the investment and ancillary services that it intends to provide
- whether the IF intends to use tied agents Cyprus. In case of a tied agent established in Cyprus, the said tied agent is obliged to assimilate to a branch and shall be subject to the provisions of the Cypriot Investment Law relating to branches
The branch of the IF may be established and commence business in Cyprus on receipt of authorisation from CySEC or 2 months after from the date of transmission of the communication from the regulatory authority of the home member state.
IF must ensure that all services provided and transactions undertaken by its branch in Cyprus are recorded in a way which enables CySEC to monitor its compliance with all its obligations in respect of its clients or potential clients. This obligation is enforced without prejudice to the possibility of the regulatory authority of the home member state to have direct access to the relevant records.
IF must compile and send to CySEC within 4 months after the end of every financial year, for statistical purposes, a report in relation to the activities of the branch during the previous financial year in terms of providing investment and ancillary services.
IF Branch in Cyprus from non-EU countries
IF that has been authorised and supervised by the authority of a third country may provide investment and ancillary services and perform investment activities in CySEC through the establishment of a branch provided prior authorisation is granted by CySEC.
In order to receive the accreditation, IF shall submit an application to CySEC, the content of which and the information to be provided through it, the details and documents that will accompany it are proportional to those required for granting a CIF authorisation and which are defined by way of directives issued by the regulatory authorities.
CySEC may request additional information and details to be submitted where this is considered necessary for assessing the relevant application.
CySEC shall grant authorisation to IF provided that:
- the branch in Cyprus complies with the provisions of the Cypriot Investment Law
- IF complies with operational conditions and obligations equivalent to those provided by the Cypriot Investment Law
The branch of IF stated during its operation in Cyprus must comply with all the conditions and obligations imposed upon a CIF.