As of November 2007, Cyprus has been fully compliant with the Markets in (Financial Instruments Directive), known as MIFID. The legislation passed on 25 November 2007 and published in the Cyprus Gazette on 26 November 2007. The new law replaces the Investment Firm Law of 2002.
The European Union is aiming, via MIFID, to facilitate the integration of Europe’s financial markets.
All of the enterprises that are involved with the provision and performance of investment services, activities and the operation of regulated markets must be licensed by the Cyprus Securities and Exchange Commission.
According to section 4(2) of the new law 144(1)2007, which came into force on 1 November 2007, the persons who are entitled to provide investment services are (a) Cyprus investment companies authorised to operate under S. 6 (2) of the law, (b) investment companies of member states according to section 77(1) and S.80(1) (c) Third County investment companies under S.78(1) and banks under S.118 and co-ops.
The authorities which are authorised to regulate the operation of the investment companies under the provisions of this law are the Central Bank, the authority for the supervision and development of co-op societies and the Cyprus Securities and Exchange Commission.
Under the law, no-one is entitled to receive payment for services unless they have a licence to provide investment services and if they do so without one, this amounts to a criminal offence.
The criminal court has the jurisdiction to stay the activities of any person who is charged for any offence under the provisions of this law.
If he finds the accused guilty of an offence under the law, the judge can not only punish him with a fine and by imposing imprisonment, but he can also order him not to provide any investment services regulated by the law for a 5-year period.
Terms such as “investment services”, “investment activities”, “regulated market”, “stock exchange”, financial services, “stock broking services”, broker or any other similar words in any language may not be used by anyone unless he is licensed according to the provisions of this law.
Under section 6(5) of the law, the licence to operate investment companies is valid in all member states, either through a branch or by simply providing services or activities in any of the member states.
According to the new law, the company is entitled to provide the services indicated in their licence and in order to avoid changing their memorandum and articles of association every time they want to expand their services, they are required to include in their memorandum and articles of association a clause providing that the company will provide the investment services specified in their memorandum of incorporation.
Requirements for granting the licence
The requirements for granting licence for an investment company to operate may be summarised as follows:
1. Initial share capital
(a) In cases of reception, transmission, execution, portfolio management and investment advice 200,000
(b) For reception, transmission, investment advice without handling any clients’ funds/instruments 80,000 or 40,000 and professional indemnity insurance with coverage in all member state countries for at least 1,000,000 for each loss and a total of 1,500,000 annually for all losses due to negligence
(c) for own account, underwriting and operation of Multilateral Trading Facilities MTF 1,000,000
(d) reception, transmission, investment advice without handling client funds/instruments and insurance intermediary 40,000 or 20,000 and professional indemnity insurance with coverage for all member states for at least 500,000 for each loss and 750,000 for all losses for each year.
2. In the memorandum of association, it must be mentioned that the company is operating as an investment company and provides the services provided in their licence, which was granted to them by the Commission.
3. The people who direct the company must have the required good standards of integrity and experience and the company must be managed by at least 2 such people.
4. The names of the shareholders or the ultimate beneficial owners must be disclosed and the shares they hold in the company. If the shareholders are not considered suitable, the Commission may refuse authorisation.
5. The persons employed by the company must have such integrity, good repute, skills, knowledge and expertise so that they can carry out their duties properly.
6. The company’s head offices must be located in Cyprus.
7. The company must be a member of the investor compensation fund.
According to the law, the Commission will not arrange authorisation if according to the laws, regulations or administrative provisions of a third country, the effective exercise of the supervisory functions of the Commission are prevented.
Organisational requirements
Many of the provisions of the law aim to protect the customers’ best interests by imposing organisational requirements. The organisational requirements may be summarised as follows:
The company must have certain policies and procedures to facilitate compliance with the legislation, rules for personal transactions, measures for protecting clients from any conflict of interest, to maintain continuous and regular performance of services, activities, outsourcing of functions, services, activities to third parties in such a way that it will not influence the internal control and efficiency of the investment company when complying with their obligations, maintaining proper governance with transparency. Use of efficient administrative accounting procedures and internal audit mechanisms, risk management procedures and arrangements for information processing systems, good recording of services and activities, prevention of money laundering (separate directive will be issued), policies, arrangements for the safeguarding of ownership/interests and prevention of the use of clients’ instruments/funds.
There are some additional requirements in cases of Multilateral Trading Facilities (MTF). The company must also use in this case the rules and procedures for trading and criteria for the execution of orders and for determining the instruments, provision of publicly available information and access to such information, rules governing access to the MTF and provide information to users for their responsibilities for the settlement of transactions and maintain procedures to facilitate the settlement of transactions:
The investment company must have an internal procedure’s manual which includes all of the policies, procedures, regulations and mechanisms and the employees must acknowledge its existence and be aware of its context.
The procedures and mechanisms to be implemented must be proportionate to the nature and complexity of the business activities of each investment company.
The Commission is entitled to issue a separate directive concerning what they consider necessary in order to clarify, specify or add things.
Application
According to S.21(1), enterprises which are interested in applying for a permit must file an application using the prescribed forms from the Commission.
Under S.22, the Commission must decide on the outcome of the application within 6 months of the moment the application is completed. It is considered to be complete if it contains all of the information provided by article 21.
Conclusion
The new law and the directives afford better protection to the interests of clients of providers of investment services. It will improve transparency since under the law, the investment institutions are obliged to provide their clients with more information with regard to their transactions, activities and their product as well as warning them about various risks that the products that they offer might entail.
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