The Cyprus Securities and Exchange Commission (CySEC) is taking another step in its efforts to make the financial services providers under its supervision more strictly adhere to its guidance. The watchdog has been gradually becoming more stringent in its requirements of Cyprus Investment Firms.
Late last year CySEC mandated a default in leverage for clients of Cypriot brokers to 1:50 and banned the provision of bonuses that are tied to deposits or trading. The latest batch of regulatory changes recently published by CySEC address the business conduct of brokers and more specifically their outsourcing operations.
CySEC regulated brokers are required by the regulator to operate their sales and marketing divisions from the broker’s head office or from another EU-member country. The change appears to be directed towards Israeli brokers and companies that have been outsourcing activities to the Far East in their efforts to target clients from the region.
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CySEC states that brokers under its supervision will have a hard time supplying the regulator with enough data to prove that their outsourced departments are not violating business conduct practices.
Such practices include cold calling and hot sales tactics that have been popular for many brokers, particularly in the binary options industry.
In addition, under the new EU-wide requirements of MiFID II set to begin in January 2018, companies will have to keep records of all communication with all clients for up to 7 years.
Conditions that CySEC is classifying as “unlikely” to be met include several points. Firstly, CySEC demands that the CIF and its staff continually comply with all regulations. CySEC is not likely to have any legal means to supervise employees that are situated outside of the European Union.
The other concerns which CySEC has highlighted include the provisions that CIFs must at all times be effectively supervising their outsourced activities, and that CySEC needs to have effective access to the premises of every broker.
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Regulated Brokers Must Give Up Call Centers in Israel
The cooperation between the Israeli and Cypriot financial supervision authorities appears to have strengthened in recent months. The latest changes come after a meeting between the Israeli Securities Authority (ISA) chief Prof. Hauser and Demetra Kalogerou earlier this year.
The financial supervisors are committed to tackling major issues for financial services providers and specifically binary options brokers. The latter came under increased scrutiny throughout 2016. Many companies that have been operating in the European Union have dramatically downsized their operations.
As a result brokers have moved from the regulated side of the industry into the unregulated realm. Finance Magnates has reached out for comment from the ISA and will update this article when a response is received.
At the beginning of the year, Hauser revealed that the Israeli government is drafting legislation that will ban the marketing of binary options outside of the country. As Finance Magnates alluded to at the time, the aforementioned meeting between the financial supervisors was to synchronise their approach towards certain companies.
In an exclusive interview with Finance Magnates last year, the CySEC head hinted that she was on board with the ISA’s tougher approach: “Based on CySEC’s experience so far and having identified deficiencies in the monitoring of these call centers, CySEC is considering to require the CIFs to only perform these activities internally from their offices in Cyprus or only through a branch, tied agent or regulated entity based in another jurisdiction.”
The stringent staff requirements which CySEC has imposed on companies with the distribution of its latest circular are aiming to ensure compliance on all levels.
CySEC Brokers Costs Rise
With the new regulations on outsourcing and the level of broker staff education, CySEC brokers will have to commit additional resources towards training their staff. This means increased costs, even if a brokerage does not have any staff in Cyprus.
With the rising requirements for staff working at brokerages on the island, more training and more competition for an increased number of EU-based personnel, some brokers may consider rescinding their regulation with CySEC.
Ultimately this is what the regulator is looking for, since ESMA has applied continuous pressure on the Cypriot regulator to bring its house in order. CySEC might lose a number of CIFs, but the Cypriot industry as a whole may come out of this storm stronger than ever.