Over the years, the Cyprus Securities and Exchange Commission (CySEC) has been under considerable pressure. A number of firms, individuals and European institutions have criticized the regulator and pushed it to make more effort to rein in parts of the Cypriot financial services industry – in particular, retail brokers.
The tarnished reputation of the regulator has not stopped several hundred companies from becoming licensed and starting operations on the island, nor did it stop a number of those companies from violating rules and regulations to rip off their clients.
I am not going to get into details as to who is right and who is wrong and which companies did adhere to honest practices and which didn’t. Lately, CySEC has been issuing fines to the best of its ability, but the legislative framework that is in place in Cyprus is not protecting investors in the best possible way.
While the bankruptcy of Alpari UK for example resulted in timely compensation of investors from the UK Financial Services Compensation Scheme (FSCS), the Cypriot ICF (Investor Compensation Fund) is far less agile.
Recent efforts by CySEC to better exercise control over the industry on the island have been welcomed by the European Securities Markets Authority (ESMA). That said, the institution recently outlined some concerns that it still has about the supervisory efforts conducted by Cypriot authorities.
The Industry Should Support the Regulator
A number of companies on the island have been intertwined in discussions with CySEC over the years. Some firms have expressed dissatisfaction with the ways of the regulator and others have been critical to the point of making it seem as if the institution has no actual role in the business of Cypriot brokers.
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As much as some industry participants would like that, it is certainly not the case. CySEC is in fact instrumental to the survival of the Cypriot industry and the quicker it fully enforces European regulation, the better the future will be for the industry.
Firms that are committed to adhering to best practices for clients could actually assist the regulator in its difficult task. Self-regulation has been used across the financial industry for decades and in contrast to the US, where broker-dealers and exchanges are dominating the Financial Industry Regulatory Authority (FINRA), in Cyprus foreign exchange and CFDs brokers could better synchronize amongst themselves to enforce best practices.
Different Times, Different Measures
The creation of a self-regulatory organization (SRO) when there is no legislative requirement to have one becomes the responsibility of brokers which are committed to the future. The long-term viability and success of the retail trading industry in Cyprus hinges on appropriate conduct and in order to assist the regulator, firms should commit to unquestionable adherence to all European regulations.
CySEC has made its job much tougher as it has started licensing binary options providers. The proposition looked attractive at first, but a large number of companies that have been licensed have been withholding withdrawals and making life difficult for their clients. The main failure of the regulator on this front is the slow realization that policing these entities has become all but impossible.
In recent months, binary options companies have started to wind down their operations substantially. Very few have remained in the business after the ban on bonuses and hot sales, leading to a much more friendly environment for the remainder of the brokers in Cyprus.
CySEC has limited staff and the industry in Cyprus is very big. Questionable marketing practices, bonus promotions and withdrawal withholdings have gone unnoticed and became very popular for a number of industry participants.
Brokers committed to the future of their businesses as EU-regulated entities can steer the ship in the right direction. However the window for action is now limited, as the regulatory backlash against the entire industry has already begun at the highest levels of European regulators.