ESMA Requires CySEC to Improve Supervision of Cross-Border Activities

The European Securities and Markets Authority (ESMA) has published its peer review report on the supervision of cross-border activities of investment firms, where the EU's securities markets regulator issued two specific recommendations to the Cyprus Securities and Exchange Commission (CySEC) under Article 16 of the ESMA Regulation requiring it to make every effort to comply.

These recommendations aim to increase the human resources dedicated to the supervision of cross-border services of Cypriot investment firms, and to strengthen CySEC's supervisory activities to effectively monitor, promote and enforce compliance by authorised firms. It is the first time ESMA has issued such recommendations to a National Competent Authority (NCA).

Following the Article 16 recommendations, CySEC has two months to inform ESMA whether it complies/intends to comply with the recommendations. In addition, the recommendations foresee ad-hoc and periodic updates that CySEC should provide to ESMA to assess that the recommendations are effectively addressed.

The peer review assessed how NCAs supervise the investment services that investment firms and credit institutions provide to retail clients on a cross-border basis using a MiFID II passport. This exercise focused on the AFM (Netherlands), BaFin (Germany), CNB (Czech Republic), CSSF (Luxembourg), CySEC (Cyprus) and MFSA (Malta) in light of the significance of their domestic firms' cross-border activities.

ESMA, based on the peer review findings, identified that home NCAs' supervision is not sufficiently effective when it comes to their firms' cross-border activities:

• NCAs covered by the peer review did not specifically, adequately and structurally consider firms' cross-border activities in their supervision. In particular, NCAs did not sufficiently identify, assess and monitor the risks related to firms' cross-border activities or take supervisory actions to effectively address those risks;

• Out of the six jurisdictions covered in the peer review, Cyprus had the highest level of outgoing cross-border activities, and by far the highest number of complaints relating to firms' cross-border activities and of requests from other NCAs relating to Cypriot firms' cross-border activities. A large number of Cypriot firms pose a high risk of investor detriment, due to the frequent provision of services involving speculative products, with aggressive marketing behaviour. ESMA identified that CySEC's supervisory activities have overall proven insufficient at addressing the risks posed by Cypriot firms' cross-border services.

ESMA identified that overall, home NCAs appear to have established adequate processes in relation to the passport notifications and – with some areas for improvements – in the context of cooperation.

The peer review also revealed satisfactory results on the activities carried out by host NCAs.

ESMA expects to carry out a follow-up assessment in two years to review the level of improvements achieved considering the findings and recommendations of the peer review report.