With the goring number of brokers relocating offshore, the Cyprus Securities and Exchange Commission (CySEC) is vigilant over the practices of regulated firms in this respect. The watchdog has sent out a circular to all Cyprus Investment Firms (CIFs) this morning, reminding them that they need to report details about all of their subsidiaries globally.
The information which the regulator is requesting pertains to various aspects of a broker’s business. Starting with the name and the geographic location, the firms also need to provide the nature of the activities of the related company.
Brokers also need to supply the CySEC with their turnover, the number of full-time employees, profits and losses before taxed and the supplementing tax arrangements in the jurisdiction. CIFs also need to inform the Cypriot regulator whether they are receiving certain subsidies.
Scope of Subsidiaries
There are three categories of associated companies which the firms have to submit in their reports – direct subsidiaries, branches, and any other relevant entities via which the CIF has an established physical presence in other countries.
Tied agents are also considered as branches and need to be reported to the CySEC under the regulatory requirements. Representative offices are excluded from the requirement.
The CySEC is obviously reminding all regulated firms that they need to confirm the existence of subsidiaries regulated in other jurisdictions, including offshore. Due to the rapid development of the industry outside of traditional regulatory jurisdictions in Europe, the next point of attention for supervisory authorities is outside of the EU.
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While some companies have retained their ability to onboard clients in the EU via regulated subsidiaries in the EU and the UK, they are actively using offshore locations to onboard clients, especially outside of the EU.
Early in the days after the ESMA’s restrictions came into force, many firms were discreetly offering to their clients to move offshore. Despite the fact that EU regulations have been prohibiting proactive encouragement from moving to other subsidiaries, many brokers did not fully comply.
While there is no clear evidence of the following, the CySEC could be aiming to ensure that brands which have been built using EU-regulated subsidiaries do not onboard EU clients into those. While many companies are using foreign subsidiaries, they are rarely using different brand names for their operations outside of the EU.
Australia has been the best example of how firms are actively diversifying their operations to be able to reach clients with a more attractive offering in terms of leverage and bonus promotions. That said, the days of heavy bonus promotions appear to have receded in recent years.
Long gone are the aggressive tactics, where brokers are offering 100% deposit bonuses to clients that open an account with them. This “wild west” tactic was at the core of binary options operators and some controversial retail forex and CFDs brokers.
For the time being, CySEC regulated firms will need to mind the regulatory recommendations as the local regulator is increasingly committed to ensuring regulatory compliance for all the firms it supervises.