Exclusive: Investors aren't 'Doing their Homework', Says CySEC Chair

Tuesday, 18/07/2023 | 09:32 GMT by Yam Yehoshua
  • Dr. George Theocharides talks regulatory action, financial literacy and the future of CFDs.
  • Though the potential lies in a different sector, with €10b under management.
Dr George Theocharides, Chair at CySEC and Chair of the Risk Standing Committee at ESMA
Dr George Theocharides, Chair at CySEC and Chair of the Risk Standing Committee at ESMA

When Dr. George Theocharides assumed his role as Chairman of CySEC in September 2021, he adorned his office with a captivating painting by the Cypriot artist, Marina Olympios. The artwork's colors, injecting life into the otherwise austere atmosphere of CySEC headquarters in Nicosia, are made from minerals that represent the geological formation and evolution of the island.

As it hung above us, in more than an hour-long conversation, Dr. Theocharides broke down the very different formation and evolution of the island as an emerging hub for financial services. ‘It has grown and matured,’ he says in this exclusive interview with Finance Magnates, ‘and has become a much more scrutinized environment.’

‘Not the Right Compliance Culture’

One of the first topics that came up was CySEC's growing importance as a global player. All in all, the watchdog is 'satisfied' with CySEC mission and vision, to protect investors in Cyprus and abroad.

‘The market has grown, and the requirements have grown as well,"he says, sharing that he is hiring. 'We regulate and supervise about 840 entities. A total of 32 new staff members have joined CySEC since October 2021, and many have supervisory duties. We are in the process of hiring an additional 42 staff to enhance CySEC’s supervision departments.’

The market may get bigger, but many brokers are shutting down or consolidating.

‘It's not something we’re seeing in any significant way. Some firms joined the industry, some are exiting, It's the trend that we see. There was substantial growth in the investment firm sector in Cyprus after 2013. We have reached a stable level of around 240 CIFs. The latest data was 247, at the end of 2022 it was 248, at the end of 2021 it was 243.’

Why would a firm want to exit the industry?

‘For multiple reasons. Some are not able to meet the new requirements from MiFID II, the Anti-Money Laundering and Financing Terrorism Law, or the measures imposed either by the European Securities and Markets Authority or CySEC.’

Do you help firms reach that understanding?

‘We might sit down with the firm and tell them, 'Look, we feel that you don't have the right compliance culture, and it's best for you to withdraw your license.'

Some of them voluntarily withdraw. In other cases, they might not have enough customers; it might not be profitable for them. There are also cases where they obtain a CIF license but do not proceed with activation for their own reasons. Setting up an investment firm these days is very expensive. This is why we see a trend of consolidation in the industry.’

Do you encourage that as a regulator?

‘We're certainly not against it. I believe it's good for the market to reach a state of consolidation where you have bigger players with the financial capacity to maintain the appropriate compliance culture. Acquisitions and consolidations are needed.’

Dr. Theocharides at his office with the painting by the Cypriot artist, Marina Olympios
Dr. Theocharides at his office with the painting by the Cypriot artist, Marina Olympios

What is the ideal number of active investment firms in Cyprus?

‘I don't think there should be one, mainly because the market is not here. A MiFID license gives the firm the freedom to passport their services across the European Union - a market of 350 million people. Luxembourg is smaller than Cyprus and has the second biggest funds industry in the world, after the United States. And it's the number one in terms of cross-bordering, with almost 6 trillion of assets under management. So I can't put a number on what I feel should be the ideal figure.’

Theocharides sees growth potential in the funds sector. ‘CySEC has led efforts to modernize the regulatory framework for investment funds’, he says, ‘aiming to enhance Cyprus's appeal while maintaining investor protection and corporate governance.

As a result, Cyprus's collective investment funds industry has experienced healthy growth, with over 330 entities and a 200% increase in assets under management since 2016. The sector currently manages close to €10 billion, showcasing significant growth potential and positioning Cyprus as a potential regional hub for funds.’

‘No Tolerance to Aggressive Marketing’

According to data disclosed by trading platforms, less than 25% of retail traders make money trading forex & CFDs with regulated brokers. A survey of 28 of the most popular CFD providers found that the percentage of losing accounts ranged between 54% and 83%, with the average being 76% in the red. ‘The percentage depends on what type of speculative product it is,’ Theocharides says, ‘Retail clients invest also in traditional assets, bonds, and stocks. It's very, very different.’

So it's the Investors' responsibility?

‘Although the law is designed to protect investors, and investor protection is at the heart of what we do as a regulator, investors have a key responsibility for the investments they make. If they want to invest, they have to make an effort to at least learn about what they're doing and improve their financial literacy.

‘CySEC has placed financial literacy and promoting awareness of investor education among its key strategic objectives. We conducted a survey in the UK, France, Germany, and Cyprus with over 200 retail respondents.

And we have some important findings: a lot of investors are not doing their homework, are not at least finding out if the entity is actually properly regulated or not.’

What is the regulator's role in promoting financial literacy?

‘We actively engage through media, articles, social media, and initiatives like the National Strategy for Financial Education in Cyprus, and we support European and global awareness campaigns for financial literacy, such as the IOSCO's World Investor Week.

We recognize that technological evolution is drawing new and inexperienced investors to financial markets and so we have launched a multi-channel campaign to enhance financial literacy as a first line of defense against investment scams and mis-selling of investment products.

‘Late last year, CySEC released a short online quiz for the public to evaluate and test their knowledge on basic financial matters. So far, the quiz has reached over 10,000 individuals. It is crucial that when we are developing new tools and strategies to enhance the protection of investors, we take these issues into account.’

What about the information that is conveyed to investors by brokers?

‘We have a responsibility to ensure that the information given to investors by regulated entities is accurate. We take action where there's any misinformation or misguidance. The rise of digital and the use of social media to promote investments has made it more difficult. One of the ways CySEC is addressing this is through the acquisition of a specialized system that analyzes and monitors firms' online marketing materials and social media activities.

The system detects all related mentions from any source globally, including social media, news sites, forums, blogs, video sites, and ad networks. We do not tolerate aggressive marketing behavior or the provision of misleading information to investors or other abusive practices.’

Do you think Finfluencers should be regulated?

‘There are already more restrictions in terms of the information that these people can actually provide to the market. There are a lot of regulatory developments on the marketing practices for digital assets right now. For example, in Spain, there is a decision for the prohibition of any marketing of CFDs or other speculative products to the mass public.

So, there are a lot more restrictions on the way. At CySEC, we work hard to ensure CIFs fully comply with their regulatory obligations, with an emphasis on strengthening their compliance function and reevaluating the competence of their staff, and this includes personnel within their sales and marketing functions.’

finfluencers

Chasing Board Members

CySEC has been criticized in the past for being too lenient on firms regarding compliance with regulations, and Cyprus was regarded as an easy way into Europe. Theocharides is of course aware of the stigma but insists that the present is a different story. ‘I am satisfied with the mission and vision of CySEC to protect investors in Cyprus and abroad. There has been a lot of transformation in terms of our policies, procedures, and actions in the last decade’, he insists, ‘I am satisfied with the mission and vision of CySEC to protect investors in Cyprus and abroad.

'CySEC has a strong commitment to the responsible growth of the investment sector, growth that is underpinned by rigorous supervision to safeguard investor protection. We view any misconduct by supervised entities seriously and we are determined to bring non-compliant operations to a halt in order to enhance investor protection and the responsible growth of the investment sector’.

How is this declaration translated into action?

‘Over the last ten years, CySEC has imposed fines amounting to 35.3 million euros, of which 14.3 million euros were imposed on Cyprus investment firms. CySEC has also revoked the license of supervised entities in 17 cases. That's the ultimate sanction. In addition, we have banned some individuals from operating in the sector for up to ten years.

'In the last 12 months alone, we suspended more than 65 investment firms and ordered them to take corrective measures to improve their internal procedures and practices to fully comply with their legal obligations.

In some cases, information is sent to the Attorney General to investigate potential criminal offenses. Recently we imposed a million Euro fine on iTrade, a Cyprus Investment Firm, for infringement of multiple provisions of the Investment Services and Activities and Regulated Markets Law of 2017.’

In what cases do you tend to settle?

‘When we see that this is the first time that we are observing certain potential violations, although even then the settlement comes with a number of corrective measures that the entity has to take, and this is monitored and reviewed by us. Firms that do not comply or show continuing weaknesses are subject to fines and other sanctions. The settlement is an agreement that cannot be disputed in court.’

How do you calculate the fines?

‘It's based on the violations or the potential violations. We have a range. In more serious cases, we have gone after the members of the board and imposed fines directly on them.’

It was published lately that CySEC representatives visit brokers' premises.

‘We have on-site visits at the authorization stage and for ongoing entities as well. If it's a supervisory visit, we look closely at platforms. If it's a CIF that uses MT4 or MT5, we will download data and communications. We will go into the back-office documents, the CRM. If it's an investigation, a specific matter, then we will be looking at it specifically.’

Is it a coordinated visit or a surprise?

‘If it's for authorization, we will inform them. If it's an investigation, depending on the type of the investigation they can be scheduled or unexpected visits. They might be surprised, but for us, it doesn't matter. The important thing is for them to cooperate.’

I've been reading a lot about brokers offering their licenses for sale. How does it look from your side?

‘There's a lot of reasons why people want to exit the industry. So, they might have a license which has some value and wish to sell. For us, a new application triggers a robust process to ensure that the entity can meet its obligations under the law and contribute to strong investor protections. The process includes stringent due diligence on the owners. This process takes months where we will contact foreign regulators.

‘If there are any organizational structures - let's say they want to change the board - we have to interview all the new board members and the key function holders. Sometimes they might decide to acquire an entity but also to change the business model. For example, instead of targeting retail clients, to become a business-to-business entity. So, then we have to examine the business model as well.’

Can you share what the future holds for the offshore registries? Will it be like the St. Vincent and Grenadines case?

'The groups in this industry don't hold one license but multiple licenses because regulation is fragmented. It's very important and a must for us to have a clear separation. What are the markets? How do you identify the different entities within the group? They need to have separate records, separate people, separate boards, separate domain names. We don't have powers over the entity in the third country because there's a different regulator there.

‘However, if we feel that somehow the group is trying to utilize the MiFID license to potentially circumvent any European clients to any third country entities, we will take severe action. We can exert pressure on them. We can look at the suitability of the UBOs (Ultimate Beneficial Ownership) of the group. Regulation is not uniform across the globe. Hopefully, one day we'll get there, but it's not in the near future.’

To wrap up this part of the interview, what is your vision for the future of the forex and CFDs industry in Cyprus?

‘My view is that the enhanced regulatory requirements being imposed will probably lead to more consolidation. There will be more product intervention measures for the CFDs, and that will be decided at the European level. It's a good thing because I believe that firms that have a strong compliance culture can survive within this intense regulatory environment. The ones that cannot survive might find a home in another industry, maybe gaming.’

In the second part of the interview, CySEC Chief talks AI, fintech, and the FTX saga.

When Dr. George Theocharides assumed his role as Chairman of CySEC in September 2021, he adorned his office with a captivating painting by the Cypriot artist, Marina Olympios. The artwork's colors, injecting life into the otherwise austere atmosphere of CySEC headquarters in Nicosia, are made from minerals that represent the geological formation and evolution of the island.

As it hung above us, in more than an hour-long conversation, Dr. Theocharides broke down the very different formation and evolution of the island as an emerging hub for financial services. ‘It has grown and matured,’ he says in this exclusive interview with Finance Magnates, ‘and has become a much more scrutinized environment.’

‘Not the Right Compliance Culture’

One of the first topics that came up was CySEC's growing importance as a global player. All in all, the watchdog is 'satisfied' with CySEC mission and vision, to protect investors in Cyprus and abroad.

‘The market has grown, and the requirements have grown as well,"he says, sharing that he is hiring. 'We regulate and supervise about 840 entities. A total of 32 new staff members have joined CySEC since October 2021, and many have supervisory duties. We are in the process of hiring an additional 42 staff to enhance CySEC’s supervision departments.’

The market may get bigger, but many brokers are shutting down or consolidating.

‘It's not something we’re seeing in any significant way. Some firms joined the industry, some are exiting, It's the trend that we see. There was substantial growth in the investment firm sector in Cyprus after 2013. We have reached a stable level of around 240 CIFs. The latest data was 247, at the end of 2022 it was 248, at the end of 2021 it was 243.’

Why would a firm want to exit the industry?

‘For multiple reasons. Some are not able to meet the new requirements from MiFID II, the Anti-Money Laundering and Financing Terrorism Law, or the measures imposed either by the European Securities and Markets Authority or CySEC.’

Do you help firms reach that understanding?

‘We might sit down with the firm and tell them, 'Look, we feel that you don't have the right compliance culture, and it's best for you to withdraw your license.'

Some of them voluntarily withdraw. In other cases, they might not have enough customers; it might not be profitable for them. There are also cases where they obtain a CIF license but do not proceed with activation for their own reasons. Setting up an investment firm these days is very expensive. This is why we see a trend of consolidation in the industry.’

Do you encourage that as a regulator?

‘We're certainly not against it. I believe it's good for the market to reach a state of consolidation where you have bigger players with the financial capacity to maintain the appropriate compliance culture. Acquisitions and consolidations are needed.’

Dr. Theocharides at his office with the painting by the Cypriot artist, Marina Olympios
Dr. Theocharides at his office with the painting by the Cypriot artist, Marina Olympios

What is the ideal number of active investment firms in Cyprus?

‘I don't think there should be one, mainly because the market is not here. A MiFID license gives the firm the freedom to passport their services across the European Union - a market of 350 million people. Luxembourg is smaller than Cyprus and has the second biggest funds industry in the world, after the United States. And it's the number one in terms of cross-bordering, with almost 6 trillion of assets under management. So I can't put a number on what I feel should be the ideal figure.’

Theocharides sees growth potential in the funds sector. ‘CySEC has led efforts to modernize the regulatory framework for investment funds’, he says, ‘aiming to enhance Cyprus's appeal while maintaining investor protection and corporate governance.

As a result, Cyprus's collective investment funds industry has experienced healthy growth, with over 330 entities and a 200% increase in assets under management since 2016. The sector currently manages close to €10 billion, showcasing significant growth potential and positioning Cyprus as a potential regional hub for funds.’

‘No Tolerance to Aggressive Marketing’

According to data disclosed by trading platforms, less than 25% of retail traders make money trading forex & CFDs with regulated brokers. A survey of 28 of the most popular CFD providers found that the percentage of losing accounts ranged between 54% and 83%, with the average being 76% in the red. ‘The percentage depends on what type of speculative product it is,’ Theocharides says, ‘Retail clients invest also in traditional assets, bonds, and stocks. It's very, very different.’

So it's the Investors' responsibility?

‘Although the law is designed to protect investors, and investor protection is at the heart of what we do as a regulator, investors have a key responsibility for the investments they make. If they want to invest, they have to make an effort to at least learn about what they're doing and improve their financial literacy.

‘CySEC has placed financial literacy and promoting awareness of investor education among its key strategic objectives. We conducted a survey in the UK, France, Germany, and Cyprus with over 200 retail respondents.

And we have some important findings: a lot of investors are not doing their homework, are not at least finding out if the entity is actually properly regulated or not.’

What is the regulator's role in promoting financial literacy?

‘We actively engage through media, articles, social media, and initiatives like the National Strategy for Financial Education in Cyprus, and we support European and global awareness campaigns for financial literacy, such as the IOSCO's World Investor Week.

We recognize that technological evolution is drawing new and inexperienced investors to financial markets and so we have launched a multi-channel campaign to enhance financial literacy as a first line of defense against investment scams and mis-selling of investment products.

‘Late last year, CySEC released a short online quiz for the public to evaluate and test their knowledge on basic financial matters. So far, the quiz has reached over 10,000 individuals. It is crucial that when we are developing new tools and strategies to enhance the protection of investors, we take these issues into account.’

What about the information that is conveyed to investors by brokers?

‘We have a responsibility to ensure that the information given to investors by regulated entities is accurate. We take action where there's any misinformation or misguidance. The rise of digital and the use of social media to promote investments has made it more difficult. One of the ways CySEC is addressing this is through the acquisition of a specialized system that analyzes and monitors firms' online marketing materials and social media activities.

The system detects all related mentions from any source globally, including social media, news sites, forums, blogs, video sites, and ad networks. We do not tolerate aggressive marketing behavior or the provision of misleading information to investors or other abusive practices.’

Do you think Finfluencers should be regulated?

‘There are already more restrictions in terms of the information that these people can actually provide to the market. There are a lot of regulatory developments on the marketing practices for digital assets right now. For example, in Spain, there is a decision for the prohibition of any marketing of CFDs or other speculative products to the mass public.

So, there are a lot more restrictions on the way. At CySEC, we work hard to ensure CIFs fully comply with their regulatory obligations, with an emphasis on strengthening their compliance function and reevaluating the competence of their staff, and this includes personnel within their sales and marketing functions.’

finfluencers

Chasing Board Members

CySEC has been criticized in the past for being too lenient on firms regarding compliance with regulations, and Cyprus was regarded as an easy way into Europe. Theocharides is of course aware of the stigma but insists that the present is a different story. ‘I am satisfied with the mission and vision of CySEC to protect investors in Cyprus and abroad. There has been a lot of transformation in terms of our policies, procedures, and actions in the last decade’, he insists, ‘I am satisfied with the mission and vision of CySEC to protect investors in Cyprus and abroad.

'CySEC has a strong commitment to the responsible growth of the investment sector, growth that is underpinned by rigorous supervision to safeguard investor protection. We view any misconduct by supervised entities seriously and we are determined to bring non-compliant operations to a halt in order to enhance investor protection and the responsible growth of the investment sector’.

How is this declaration translated into action?

‘Over the last ten years, CySEC has imposed fines amounting to 35.3 million euros, of which 14.3 million euros were imposed on Cyprus investment firms. CySEC has also revoked the license of supervised entities in 17 cases. That's the ultimate sanction. In addition, we have banned some individuals from operating in the sector for up to ten years.

'In the last 12 months alone, we suspended more than 65 investment firms and ordered them to take corrective measures to improve their internal procedures and practices to fully comply with their legal obligations.

In some cases, information is sent to the Attorney General to investigate potential criminal offenses. Recently we imposed a million Euro fine on iTrade, a Cyprus Investment Firm, for infringement of multiple provisions of the Investment Services and Activities and Regulated Markets Law of 2017.’

In what cases do you tend to settle?

‘When we see that this is the first time that we are observing certain potential violations, although even then the settlement comes with a number of corrective measures that the entity has to take, and this is monitored and reviewed by us. Firms that do not comply or show continuing weaknesses are subject to fines and other sanctions. The settlement is an agreement that cannot be disputed in court.’

How do you calculate the fines?

‘It's based on the violations or the potential violations. We have a range. In more serious cases, we have gone after the members of the board and imposed fines directly on them.’

It was published lately that CySEC representatives visit brokers' premises.

‘We have on-site visits at the authorization stage and for ongoing entities as well. If it's a supervisory visit, we look closely at platforms. If it's a CIF that uses MT4 or MT5, we will download data and communications. We will go into the back-office documents, the CRM. If it's an investigation, a specific matter, then we will be looking at it specifically.’

Is it a coordinated visit or a surprise?

‘If it's for authorization, we will inform them. If it's an investigation, depending on the type of the investigation they can be scheduled or unexpected visits. They might be surprised, but for us, it doesn't matter. The important thing is for them to cooperate.’

I've been reading a lot about brokers offering their licenses for sale. How does it look from your side?

‘There's a lot of reasons why people want to exit the industry. So, they might have a license which has some value and wish to sell. For us, a new application triggers a robust process to ensure that the entity can meet its obligations under the law and contribute to strong investor protections. The process includes stringent due diligence on the owners. This process takes months where we will contact foreign regulators.

‘If there are any organizational structures - let's say they want to change the board - we have to interview all the new board members and the key function holders. Sometimes they might decide to acquire an entity but also to change the business model. For example, instead of targeting retail clients, to become a business-to-business entity. So, then we have to examine the business model as well.’

Can you share what the future holds for the offshore registries? Will it be like the St. Vincent and Grenadines case?

'The groups in this industry don't hold one license but multiple licenses because regulation is fragmented. It's very important and a must for us to have a clear separation. What are the markets? How do you identify the different entities within the group? They need to have separate records, separate people, separate boards, separate domain names. We don't have powers over the entity in the third country because there's a different regulator there.

‘However, if we feel that somehow the group is trying to utilize the MiFID license to potentially circumvent any European clients to any third country entities, we will take severe action. We can exert pressure on them. We can look at the suitability of the UBOs (Ultimate Beneficial Ownership) of the group. Regulation is not uniform across the globe. Hopefully, one day we'll get there, but it's not in the near future.’

To wrap up this part of the interview, what is your vision for the future of the forex and CFDs industry in Cyprus?

‘My view is that the enhanced regulatory requirements being imposed will probably lead to more consolidation. There will be more product intervention measures for the CFDs, and that will be decided at the European level. It's a good thing because I believe that firms that have a strong compliance culture can survive within this intense regulatory environment. The ones that cannot survive might find a home in another industry, maybe gaming.’

In the second part of the interview, CySEC Chief talks AI, fintech, and the FTX saga.

About the Author: Yam Yehoshua
Yam Yehoshua
  • 18 Articles
  • 5 Followers
About the Author: Yam Yehoshua
Editor-in-chief | Finance Magnates
  • 18 Articles
  • 5 Followers

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