CySEC Proposes Tighter Supervision of Financial Sector in 2022, Chairman George Theocharides Says

The Cyprus Securities and Exchange Commission aims to strengthen in-depth supervisory controls in 2022, says its chairman, George Theocharides.

The significant changes expected in the relevant regulatory framework, including the broadening of the supervisory scope to cover crypto assets, are expected to contribute to the achievement of this goal.

In an interview, Theocharides outlines the upcoming changes to the regulatory framework governing the financial sector, through changes being promoted at both the national and European level.

He stresses that in 2022, the Securities and Exchange Commission will put emphasis on staffing issues in supervisory departments, which is in line with the priority the CySEC intends to give to strengthening in-depth supervisory controls, especially for higher risk entities, which he includes, as an example, online trading platforms.

According to Theocharides, emphasis will be placed on monitoring marketing practices implemented by supervised entities, especially CIFs, as well as on the further development of alternative forms of financing.

Among other things, Theocharides says that legislation is in the pipeline to implement further safeguards to mitigate cyber-attacks and other operational risks, changes for Alternative Investment Fund Managers, as well as discussion of a package of legislative proposals in relation to challenges related to technological innovation.

Theocharides also refers to the reasons why a CIF's licence may be suspended, noting that the sector is showing good growth.

1. What are the objectives of the Securities and Exchange Commission for 2022 and which issues will you prioritise?

The primary objective of the CySEC is to continue to act as a shield of protection for investors by exercising effective supervision and guiding the sound development of the investment services sector. In addition to staffing supervisory departments with additional personnel, emphasis will be placed on strengthening in-depth supervisory controls, especially with regard to entities that pose the highest risk, such as online trading platforms. Emphasis will also be placed on monitoring the marketing practices of supervised entities, especially CIFs, in promoting their products to investors. The CySEC has put in place a specialised online system, which is an additional tool to collect, analyse and monitor the marketing policies of CIFs. Also, in 2022 we intend to review the rules relating to client money.

In 2022, we will also launch the registration of express trusts and similar legal arrangements in the Beneficial Ownership Register, which will include accurate and updated information on beneficial owners. This is a very important project for CySEC, but also for our country, as it is another tool to enhance transparency and efforts to combat money laundering and terrorist financing.

The CySEC will introduce new examinations later this year, which will apply to CIFs' financial information providers who come into contact with investors. Our aim is to ensure that only professionals with knowledge of the relevant regulatory framework are certified for employment in the investment services sector. At the same time, in 2022, the national strategy to address financial illiteracy will be adopted and gradually implemented. CySEC participates in the ad hoc committee to define the national strategy to address financial illiteracy and through its implementation we will continue to give importance to investor education and training through a series of actions.  

Furthermore, having received funding approval from the the Recovery and Resilience Facility (RRF), we will proceed with the transformation of the Innovation Hub into a Regulatory Sandbox. In this controlled environment, start-ups, technology companies and other entities will be able to test their innovative products or services in real-life conditions under the supervision of the regulator.

In addition, the CySEC will also focus on the further development of alternative forms of financing, with an emphasis on sustainable investments, which is a key objective of the EU to become climate neutral by 2050, as well as on participatory finance. As CySEC, we had proceeded in early 2020 with the adoption of the Directive on the Provision of Participatory Securities Financing Services, as this is an important inclusive form of financing for SMEs or start-ups. In 2022, we will also promote the European Regulation, which also covers equity financing by lending. These are alternative ways of financing the real economy, beyond the banking sector.

Also, the registration and activities of crypto-asset service providers is another sector, which we expect to see growth in 2022.

2. What are the major changes expected in the relevant regulatory framework in 2022?

In 2022 we expect to see a number of new legislative and regulatory developments as a result of legislative initiatives at the European Union level. 

One of these is the proposed European regulation on digitalisation and operational resilience in the financial sector, known as the Digital Operational Resilience Act (DORA). DORA aims to ensure that all participants in the financial system, for example CIFs, AIFMs, UCITS management companies, have the necessary safeguards in place to mitigate cyber-attacks and other operational risks. The proposed legislation would require regulated entities to ensure that they can withstand all types of operational disruptions and threats related to Information and Communication Technologies (ICT).

In addition, the amendment of the Markets in Financial Instruments Regulation ((EU) 600/2014) (MiFIR) is expected to be discussed early this year as part of the Capital Market Union (CMU) action plan. The primary aim will be to improve the transparency and availability of market data as well as a level playing field between order execution infrastructures. It will also ensure that the European Union's market infrastructures remain competitive at an international level.  Furthermore, again in the context of the Capital Markets Union Action Plan, and in particular with regard to fund management, amendments to the Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD) are expected. The main changes relate to the management of liquidity risk through the legislative introduction of liquidity management tools, the possibility to appoint a depositary in a Member State other than the Member State where the AIFM is established and the further regulation of the outsourcing process. In the context of alternative investment funds, the rules of the European Long-Term Investment Fund are also expected to be amended. EMEKs are standardised AIFs for the financing of infrastructure projects, including energy projects, of interest to Cyprus. 

Another change expected to be discussed in the context of the Capital Markets Union Action Plan is the creation of a European Single Access Point that will provide centralised access to publicly available information on financial services and sustainability. This portal is expected to be operational around the end of 2024.

Legislative activity at EU level also extends to the regulation of financial products through the use of distributed ledger technology (DLT). In particular, the proposed European Markets in Crypto-Assets Regulation (MiCA) will regulate the initial offering, trading and service provision of crypto-assets, including so-called 'stablecoins'. Further, the proposed European Regulation known as the DLT Pilot Regime will regulate, on a pilot basis and for a limited period of time, the trading (secondary market) of certain financial instruments issued using DLT. The aim is to draw conclusions for definitive future regulation.

3. Are legislative changes also expected in relation to the issues of anti-money laundering and combating the financing of terrorism?

As regards the fight against money laundering and the financing of terrorism, the package of four legislative proposals proposed by the European Commission last July, which takes into account new and emerging challenges linked to technological innovation, is expected to be discussed in 2022. The aim is to create a new and more coherent regulatory and institutional framework within the EU.

In particular, the package includes a proposal for a European Anti-Money Laundering and Counter-Terrorism Financing Authority. The AML Authority (AMLA), as it will be called, will directly supervise and have decision-making power over those financial sector entities exposed to the highest risk of such transactions. The Authority will have the power to impose administrative sanctions on legal entities up to a maximum of 10% of turnover or €10 million, whichever is higher. In addition, it will exercise indirect supervision through the coordination and oversight of national supervisory authorities, including self-regulatory bodies in certain Member States for certain non-financial obligated entities.

It is also proposed to adopt the 6th Directive on AML/CFT (AMLD 6) which contains provisions to be transposed into the national law of each Member State. Among the substantive changes that are expected to occur with its adoption are the interconnection of bank account registers and the introduction of requirements for the processing of certain categories of personal data.

A Regulation will also be discussed concerning directly applicable rules in areas such as customer due diligence and beneficial ownership. In particular, with a view to mitigating new and emerging risks, the list of liable entities is extended to include cryptocurrency service providers and other sectors such as equity finance platforms. Also, to ensure consistent application of the rules across the internal market, requirements regarding internal policies, controls and procedures, including in the case of groups, are clarified, while customer due diligence measures are further elaborated, with clearer requirements depending on the level of risk of the customer. Furthermore, the requirements relating to third countries are reviewed to ensure that enhanced due diligence measures are applied to countries that pose a threat to the financial system of the European Union.

The last of the four legislative proposals provides for the existing rules on fund transfer services to be extended to crypto-asset transactions. This means that all information on the sender and beneficiary of such transactions will have to be recorded by cryptocurrency service providers.

4. Where does the CySEC focus its supervisory controls? And what supervisory tools do you have at your disposal?  

Market practices, governance and risk management processes, customer attraction, suitability requirements, as well as anti-money laundering issues are among the issues that come under close scrutiny. In particular, on-site audits are carried out to verify compliance of the supervised entities and remote audits, i.e. on a series of documents, the main findings of which are published on CySEC's website. In cases where non-compliance or weaknesses and/or omissions are identified by the audits, CySEC imposes administrative fines and instructs the supervised entities to take a series of measures to correct their internal procedures, arrangements and practices in order to fully comply with the legal and regulatory requirements. Supervisors must adopt these measures within the time limit set by the CySEC, at the end of which the CySEC will re-examine their compliance. Towards this end, a total of more than €4.22 million in administrative sanctions have been imposed in the last two years, of which €3 million were imposed on CIFs for breaching the legislation governing investment services known as MiFID II.  Over the last nine years, fines in excess of €31 million have been imposed. The CySEC has also proceeded to revoke and suspend the authorisation of a significant number of CIFs and has banned a number of individuals from operating in the sector for a period of up to 10 years, depending on the case.

In addition to the additional supervisory tools I have mentioned above, a milestone in strengthening CySEC's supervisory role was the formulation of the Risk Based Supervision Framework, which has been implemented since 2015. Based on this framework, there is a focus of supervision on the market sectors, but also on the supervised entities that pose the most significant risks.

In 2021, the Securities and Exchange Commission started in 2021 and will also continue in 2022 to design and develop processes and methodologies focused on data supervision in relation to the implementation of the EMIR, MIFIR and SFTR Regulations as well as the incorporation of other European Regulations expected to be issued in the future. Already, we have received preliminary approval for technical and financial assistance from the European Commission (EC) under the Emergency European Recovery Instrument, known as the Next Generation EU, which is aimed at recovering from the coronavirus crisis and shielding the EU economies in the long term. Data-driven supervision will allow the Securities and Markets Commission through advanced technology (artificial intelligence) to monitor in a timely manner and identify at an early stage any irregularities and risks involved in the market.

Furthermore, in addition to the Supervision, Investigations and Issuers Departments, the Commission has also proceeded to create a specialised Department, which closely monitors the compliance of supervised entities with their obligations in relation to anti-money laundering.

Our aim is for the CySEC to act proactively, anticipating any risks and fairly, to ensure the proper functioning of the market and that the weight of its decisions reflects the importance it attaches to investor protection and the credibility of the sector.

5. What is the outlook for the CIF sector in particular, for 2022?

The CIF sector is showing good growth. There are 244 licenced CIFs employing around 6,000 professionals. In addition, hundreds of new jobs have been created in similar sectors providing support services to CIFs, such as internal and external audit services by auditors, compliance services and legal services. There are currently 35 applications for CIFs' licences under examination. The review of these applications will continue this year and those that have submitted complete information and meet the criteria will secure a licence in 2022.   

6. How many CIF licences are currently under suspension by CySEC decision?

4 CIFs have had their licence suspended by CySEC decision.

7. What are the main reasons why CIFs' licences are suspended?

EKK suspends the licence of a CIF if there are suspicions of possible non-compliance with the provisions of the relevant law. In such cases, the CIF is given a short period of time to comply. When the investigation is re-investigated and it is found that the company has complied, a re-activation licence is granted. If, depending on the facts, the company continues to fail to comply, CySEC will either grant a new extension of compliance or proceed with the complete withdrawal of the business. In cases where serious breaches of the legislation are identified, CySEC will proceed directly to the full withdrawal of the CIF's licence.  

8. Are there companies that decide to terminate their activities after a suspension of their licence due to compliance difficulties?

Yes, there have been such cases. 

9. In addition to licence suspension, in how many cases over time has the CySEC revoked CIF licences?

From 2015 to date, the CySEC has revoked the licence of CIFs 17 times.

10. Do you occasionally receive information about mass closures of CIFs and, if so, how do you deal with them?

All licenced CIFs are in constant communication with the Hellenic Capital Market Commission on any issue concerning them. From time to time, some CIFs decide on their own and inform the Commission of the suspension of their operations. This is due to various reasons. Some may not be able to comply with new legislative and other requirements arising from the legislative framework governing them, such as the Investment Services Act (MiFID II), the Prevention of Money Laundering and Terrorist Financing (AML) Act, or measures imposed by either the European Securities and Markets Authority (ESMA) or the CySEC through circulars to regulated entities. Others may be acquired or merged with another CIF. Also, in some cases they may not have enough clients. There are also cases where, after obtaining a CIF licence from the CySEC, they do not proceed with its activation for their own reasons, such as not being able to meet the requirements governing their operation or changing their business plans, leading them to withdraw from it. This is not something we have seen happen en masse. This can be seen from the stable number of licenced CIFs in recent years. Based on the latest available statistics, in November 2021, there were 244 licenced CIFs, at the end of 2020 there were 242 and in 2019 there were 240.

11. What is the role of the CySEC with regard to unlicenced CIFs? Is there scope for control?

​The provision of investment services as a regular occupation or activity can only be legally carried out by Investment Service Companies (ISPs) authorised by the CySEC or by a competent supervisory authority of an EU Member State. Therefore, any entities presenting themselves as Investment Firms and offering such services without having obtained a licence from the CySEC or a competent supervisory authority of another EU Member State, which has notified the CySEC to this effect, are in breach of the law and are subject to administrative sanctions. For the protection and convenience of the investing public, the CySEC maintains on its website a public register of authorised CIFs and investment firms of other EU Member States for which the CySEC has been notified by their respective supervisory authority that they wish to provide investment services in the Republic. Therefore, investors are urged to be particularly cautious and to always check whether the company with which they are in contact is authorised to provide investment services in the Republic. Further, on a regular basis, as CySEC we also make announcements - warnings to the investing public about websites that are not owned by entities that are licenced to provide investment services and/or perform investment activities.  

(Source:Stockwatch)