MGR: Comparing with other competing jurisdictions, how well regulated is the Financial Services sector of Cyprus, and more specifically, the Investment Funds and Asset Management market?
CySEC: EU financial regulation applies uniformly to all EU Member States, save for certain minor Member State discretions provided for in the respective EU legislation. The EU licensing process aims to ensure that the applicant complies with the European regulatory framework, which is designed to ensure adequate protection of investors’ rights. Firms that apply for a CySEC license to offer services in relation to investment funds and asset management must take several steps. The initial application stage includes an assessment of the company’s shareholders and a detailed description of the company that outlines its business model, and its organizational and capital structure. These are critical pillars of investor protection legislation. For the application to progress, companies must provide extensive documentation ranging from their shareholding structure, certificate of registration, an organizational chart with names of directors and records of non-bankruptcy and criminal record clearance checks for all board members and shareholders up to the ultimate beneficial owners (the UBOs). We require firms to provide two years of audited financial statements, as well as a reference from the firm’s independent auditor. Firms need to outline their procedures and policies to prevent money laundering and terrorist financing, and indeed sign a specific declaration that they have completed and provide evidence of how they maintain all the relevant checks and balances in this regard. Lastly, we require company executives and owners to complete a thorough personal vetting, so we are comfortable that we have a complete understanding of all key management and supervisory roles in the provision of asset management services.
CySEC applies a risk-based approach to supervision that includes data points and qualitative assessments on assets under management, investment strategies, leverage and liquidity considerations, in order to determine our supervisory priorities. In addition, we provide guidance and clarifications as to the interpretation of the applicable regulatory framework and on ad-hoc issues, including in relation to the incorporation of financial innovation/technology into their operations.
The Funds industry is constantly evolving, as is regulation, and CySEC is committed to ensuring that market participants maintain a comprehensive understanding of relevant and applicable regulation. CySEC’s regular seminars provide clarity on the applicable framework and discuss practical issues related with its implementation.
Today, CySEC has under its supervision a total of 266 Management Companies and Undertakings of Collective Investments in Transferable Securities (UCITs) compared to 102 in 2016, an increase of more than 160%. By the end of 2020, the total Assets under Management stood at approximately €8,6 billion, compared with the same period in 2019 of €6.8 billion.
Demetra Kalogerou
MGR: Israel and Cyprus economic relations are growing year by year and the Investment Funds sector has great potential for further cooperation. In what ways can Israeli Funds and Investors benefit by doing business in Cyprus? What is the outlook for the Investment Fund industry in 2021, and beyond?
CySEC: Cyprus combines many features that make the country a robust investment destination. We have at our disposal a highly sophisticated pool of talent in financial and professional services, which combined with a competitive tax framework and a low-cost Mediterranean lifestyle give Cyprus a prime position for foreign investors outside the EU to access the region’s deep capital markets. This is complemented by a reassurance that regulated businesses in Cyprus are required to maintain high standards of investor protection. Furthermore, the national securities market legal framework has been fully harmonized with all the latest EU Directives and Regulations so that the regulatory and supervisory landscape mirrors that of the rest of the EU, meaning any company or investor working with a Cypriot-licensed entity must comply with the full regulatory standards that apply across the EU. Specifically, Cypriot Fund Management Companies can manage Israeli Funds by submitting the relevant application to CySEC. In addition, Israeli funds can be marketed to professional investors in Cyprus following submission of the relevant notification and obtaining necessary marketing authorization. During the marketing process, the funds shall need to abide by the rules of the Cypriot legislative framework in order to ensure investor protection. Israeli investors may subscribe in Cypriot funds and take advantage of the enhanced protection measures that Cypriot funds are required to apply, in accordance with the EU Directives as well as the national legal framework. Furthermore, Israeli investors who wish to set up their own funds may utilize the variety of different types of funds that can be established in Cyprus, including UCITS, Alternative Investment Funds (AIFs), Alternative Investment Funds with limited number of persons (AIFLNPs) as well as the latest type, Registered Alternative Investment Funds (RAIFs). The said types of investment funds, once managed by regulated Cypriot Fund Management Companies (AIFMs and UCITS Management Companies) can utilize the European passport and market their units to professional investors across the European Union.
I believe that we have developed and grown an established collective investment funds industry over the last 9 years. At its core, the priority is to channel capital to finance the Cyprus economy, whilst at the same time we have developed a regulatory framework with the highest compliance standards.
Today, CySEC has under its supervision a total of 266 Management Companies and Undertakings of Collective Investments in Transferable Securities (UCITs) compared to 102 in 2016, an increase of more than 160%. By the end of 2020, the total Assets under Management stood at approximately €8,6 billion, compared with the same period in 2019 of €6.8 billion. There continues to be strong interest in the setup and authorization by CySEC of alternative investment funds, and currently there are 50 applications for licenses in different fund structures.
The enrichment of the legal framework with the inclusion of a new category of supervised entities, the Registered Alternative Investment Funds, or RAIFs, have contributed to the further development of the Fund Industry. Specifically, in 2018, we have enacted new amendments of the Alternative Investment Fund Law in order to streamline the process for RAIFs, which are not regulated by CySEC, though monitored by the big managers. Today there are 61 RAIFs. On 3 July 2020, we introduced a new national regulatory category of the so-called ‘Mini-Managers’ that can manage alternative funds under the threshold of €100million. These managers will have less burdensome rules compared to the big managers, though not at the expense of the protection of the investor. The first application is currently under examination. In addition, CySEC is making additional refinements to the legal framework concerning the fund administrators. Within the new regulatory framework, fund managers will have the right to delegate the administration of Alternative Investment Funds to third-party Fund Administrators, who will be regulated and supervised by CySEC. We hope that we will have this paper available for general consultation shortly.
CySEC is currently reviewing the permissible investment strategies for fund managers and the applicable rules, focusing on the area of Loan Origination and Loan Participation.
Our policy for any new European directive is to ensure that it is part of national legislation as soon as possible. For example, the new European regulation facilitating cross-border distribution of collective investment funds in Europe. In addition, in line with the EU action plan for financing sustainable growth, CySEC has confirmed its commitment to fostering compliance with sustainable finance standards. In preparation for the new Sustainable Finance Disclosures Regulation (EU) 2019/2088 (“SFDR”), which became applicable 10 March 2021, CySEC has created a dedicated section on its website on sustainable finance, which also provides information on SFDR. SFDR provides more transparency on sustainability within the financial markets and is expected to affect a large proportion of the financial services industry in Cyprus.
MGR: What is your final message to our Israeli readers regarding Cyprus as an Asset Management and Fund Hosting jurisdiction?
CySEC: Cyprus is now one of the fastest-growing centers of investment funds in Europe due to the continuous development of its legal and financial regulatory framework. Even in these turbulent times, the country is flourishing as a location of choice for many investors and fund managers. CySEC is committed to creating all the necessary preconditions for the further responsible growth of the collective investment sector underpinned by strong supervision to safeguard investor protection.
