CySEC Issues New Guidelines Over Cross Border CIF Firms Activity

Cypriot CIFs now have a choice between two clear but different paths.

As CySEC’s attitude of adopting more stringent licensing guidelines and operating regulations becomes ever clearer, certain aspects of the rules and operations start to come into sharper focus. Among those is what the regulator calls the freedom to provide investment and ancillary services and/or perform investment activities in a third country.

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CySEC today sent a circular to its regulated brokers, in which it mentioned some basic rules that every broker has to obey, effective May 31, 2017.

According to the circular, onboarding overseas clients now requires a broader set of features and the presence of an active regulatory approval to ensure soundness of operating in another jurisdiction.

However, the Cypriot regulator has opened both doors – flexibility in its legal requirements as well as the ability to restrict the CIF’s access to provide investment activities in a third country.

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Back to the official announcement, the Cyprus Investment Firms (‘CIFs’) must now assess their existing third-country-passports and secure official documents to either confirm that they hold relevant authorisation, or to be granted relief from the obligation to hold such a licence in that territory.

In other words, once a regulatory equivalence has been established, that firm is subject to a ‘voluntary’ verification process. We describe it as voluntary since CIFs will not be obliged to submit any supporting evidence for the documents describing their regulatory status although they could be subject to inspection when CySEC deems necessary.

The second paragraph of CySEC’s circular is devoted entirely to explaining the exact steps of the process. It says:

CIFs must submit to CySEC, through CySEC’s web portal as a free text by the end of business on May 31, 2017, with title: «C204 – Freedom to provide investment and ancillary services and/or perform investment activities in a third country», the following:

  1. A confirmation letter signed by all board members with regard to the CIF’s compliance with paragraph 1.
  2. A list of third-countries that the CIF provides investment and ancillary services and/or performs investment activities, stating for each country whether a legal advice or letter/official document has been obtained.

So Cypriot CIFs now have a choice between two clear but different paths. If they already have a licence in another territory, they can become a full investment firm, with the ability to offer all services to all customers. They do, however, become subject to both jurisdictions’ rules, including those that are established by the host country, not just by CySEC.

The other option is to rely on what CySEC calls “appropriate legal advice, and/or letters/ official documents”, which drops a huge regulatory burden particularly for brokers operating in less strict jurisdictions. As such, they can offer their services in such regions without being subject to regulations different to those of their home regulator, CySEC.

In any event, we have yet another example of parochial regulation in a very global market. The end result will always be more expenses for brokerage firms and investment providers, and possibly lower quality service for overseas customers who were depending on the regulated operators on the tiny island.

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