Cyprus’ financial services sector has reformed and transformed itself into a key pillar of the economy, and despite the global Covid-19 crisis, the island continues to see new business. Fintech and digital finance in particular are fast developing into thriving segments of Cyprus’ finance sector and could provide solutions to the many challenges the industry is facing.
How would you describe the current level of activity within Cyprus’ financial services sector?
There is a considerable amount of interest from local and foreign entrepreneurs and investors in setting up businesses in Cyprus to provide investment services. Indicatively, 98 applications for new entities are currently under examination by CySEC.
We believe that the flow of applications continues because Cyprus combines many features that makes it 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 complimented by a reassurance that regulated businesses in Cyprus are required to maintain high standards of investor protection. Further, the national securities market legal framework has been fully harmonised 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.
How important is the financial services industry to the Cypriot economy today?
The financial services sector is a significant contributor to the Cypriot economy and has maintained its status as one of the most consistent growth sectors – rising on average by 6.5% per year between 2016 and 2018 and contributing 20% to Gross Value Added (GVA) in 2018. There is now a much stronger national banking sector in Cyprus, thanks to the dedication of the supervisory authorities and the banks themselves in undertaking post-crisis reforms. Even though challenges remain, and there is still work to be done in certain areas, many of the issues that plagued the Cypriot banking system have now been resolved.
What impact do you expect the coronavirus outbreak will have on the finance industry in Cyprus?
In view of the international outlook of the Cypriot finance industry and of the fact that the pandemic is still evolving and is affecting different areas across the world, it is difficult to anticipate the impact of the coronavirus outbreak.
Based on a review performed by CySEC in March, Cypriot Investment Firms (CIFs) encountered dramatically increased and prolonged volatility in the markets. The unprecedented market activity has thrown investor protection into sharp scrutiny, as CIFs have had to provide for big intra-day movements, often increased trading volumes and in some cases liquidity concerns. Robust systems, adequate technology and prudent risk management are very important during such turbulent periods. All CIFs have implemented plans for the continuation of their business activity. Their employees are working safely and remotely.
In terms of the market itself, across FX and Contracts for Difference (CFDs), which constitute a large part of CIFs business activities, there were financial instruments related to European and US shares and indices that have suffered from low liquidity, exacerbated by European and US trading halts. Traders are trying to navigate the unpredictable market; CIFs are seeing CFD spreads on indices and commodities increasing due to low liquidity. Spreads in FX have not witnessed the same extreme variations.
Can you provide a brief overview of the nature of business flowing into Cyprus and the entities CySEC supervises?
Our supervisory remit has widened substantially in recent years to include new groups of supervised firms and products; including collective investment schemes, fund managers, and administrative service providers. Today, we regulate 763 entities, who currently employ over 19,500 people. These include 238 Investment Firms licensed under the MiFID II regime. Many Cypriot investment firms are part of the ‘fintech’ or financial technology ecosystem that has enhanced economic growth and employment in Cyprus.
Moreover, CySEC supervises 236 Alternative Investment Funds, Collective Investment Funds in Transferable Securities and their Management Companies. Fund management is a new area to which CySEC has dedicated time and effort in order to create a robust regulatory framework that can facilitate a productive and alternative way of financing the real economy. By the end of 2019, total assets under management amounted to €8.3billion, recording a 32% increase compared with 2018.
There are also 148 Administrative Services Providers active in corporate services, which CySEC oversees solely on Anti-Money Laundering. CySEC also oversees the Cyprus Stock Exchange (CSE) which operates a regulated market and a Multilateral Trading Facility (MTF), as well as the 63 Issuers of securities traded on the CSE and the 63 Issuers which have securities listed on the MTF. Further, CySEC supervises an additional 13 Issuers listed on other regulated markets abroad, in terms of their compliance with the laws on transparency, prospectuses and takeover bids.
Fintech is becoming an important part of the global financial services industry. What can you tell us about the Innovation Hub that you launched in 2018?
CySEC’s Innovation Hub serves to provide regulatory guidance for innovative start-ups or for regulated entities relying on innovative technologies, and as a monitoring tool of the innovative technologies that are available in the market. The role of the Hub is in accordance with CySEC’s mandate to ensure investor protection and the responsible growth of the capital market.
The Hub reviewed and provided non-binding feedback on the contemplated launch of Artificial Intelligence (‘AI’) and Big Data Regtech tools and on the offering of Crypto-assets in the form of financial instruments. The intended projects comprised Big Data for MiFID best execution, AI for MiFID client onboarding purposes, contactless selfies for AML client identity verification purposes, and real-estate backed security tokens up to the intended operation of a multilateral trading facility operating on the basis of DLT.
In the context of the activities of the Innovation Hub, CySEC also proactively engaged with Crypto Assets businesses in order to help them build a compliance culture, so that they are prepared for application of the 5th AML Directive which brings such activities under the scope of the EU AML legislation. Through this proactive engagement, CySEC clearly communicated its expectations to such firms, which in our view could contribute in alleviating the risks involved if they ultimately become a regulated entity.
Beyond the Innovation hub, what else is Cyprus doing to position itself as a hub for fintech firms and innovative finance start-ups?
Additional initiatives are taking place at the level of the government starting with the establishment of the Office of the Junior Minister for Innovation. In addition, expert groups entrusted with the task of introducing amendments to the existing legislative framework in order to address issues related with the use of innovative technologies, in particular DLT have been created.
Furthermore, CySEC applies a ‘technology-neutral approach’ as to the innovative projects or tools presented to it, which means that no technology is excluded in advance, provided that the innovative technology used can ensure compliance with the applicable regulatory framework. This way, CySEC and Cyprus open up to innovative technology companies that wish to offer their products and services to the markets without distinguishing between technologies or preferring certain technologies over others.
Cyprus has long been a popular hub for corporate structuring, forex, wealth management and increasingly investment funds. Are there any particular sectors that might gain in importance in the coming years?
We have observed an increasing number of firms which are innovating in the area of fintech and regtech and provide alternative investment opportunities or develop solutions that can strengthen the compliance of regulated entities with the rules and regulations. I also believe the fund industry will continue to evolve.
Finding new ways of investment will be crucial as we pursue a balanced economic recovery post-Covid. The crowdfunding regime, which has been recently introduced, will facilitate capital raising up to €5 million without requiring a prospectus. This opens a meaningful alternative to traditional bank finance for SMEs and allows public investors to have an active stake in business’ future.
However, the financial markets right now are at a point of change as it can be observed that financial products that incorporate environmental social and governance (ESG) factors are gaining attention. This changing environment has implications to all securities regulators including CySEC to respond to these new challenges and additional responsibilities in relation to sustainable finance. At EU level, the focus is on integrating sustainability in the development of a single rulebook. We are actively engaged in the discussions concerning impact disclosures at both the entity and product level to help enhanced firms’ obligations for transparent communication concerning ESG factors. This is key to prevent mislabelling products as ESG compliant also known as greenwashing. These will be progressed under three legislative priorities, which includes disclosures, benchmarks and taxonomy. We will also actively support firms and entrepreneurs who are developing green fintech solutions that seek to automate and enhance the analytical capabilities of firms to handle ESG information under our innovation hub.
You just mentioned Cyprus’ new investment-based crowdfunding rules. Why did you feel the need to bring in these rules and what information would you like to share with the international investment community about them?
In terms of the big picture, crowdfunding forms part of the EU’s Capital Markets Union and serves as an additional liquidity channel for the financing of start-ups and of small-medium sized enterprises, which is a necessity not only for Cyprus but for the EU as a whole. Investment-based crowdfunding may provide alternative financing opportunities to small and medium-sized enterprises and start-ups, where banks are unwilling to offer traditional funding.
Since 2017, CySEC has received several queries on its approach to crowdfunding. As a consequence of the risks involved, CySEC did not encourage the commencement of the provision of crowdfunding services by CIFs, until the introduction of bespoke rules which clarify the application of the provisions of the CIF Law, specifically in the context of the provision of crowdfunding services. The introduction of these rules now ensures that CIFs will be able to offer an additional service to their clients within the scope of their existing licence, whilst appropriate safeguards are in place ensuring that investors’ protection is not put at risk. The recently adopted crowdfunding rules have been integrated into the existing MiFID II framework in order to provide for state-of-the-art safeguards as regards investor protection and conduct of business standards, given the retail nature of most crowdfunding investors.
What are the biggest challenges and opportunities going forward for the Cypriot financial services sector?
Not only CySEC but all regulators in Europe and abroad face more or less the same challenges. One of the biggest challenges is the fight against financial crime. The fifth Anti-Money Laundering Directive (5AMLD) brings more transparency to improve the fight against money laundering and financing terrorism. This is significant for firms wishing to engage in crypto-asset activities, which we see driving significant interest through the Innovation Hub.
Financial technology and innovations such as blockchain and cryptocurrency are other challenges. Regulators recognise the potentially disruptive force of fintech and are actively pursuing regulatory oversight. CySEC, as a member of the European Securities and Markets Authority (ESMA), participates in its special committee, the Financial Innovation Standing Committee, as part of efforts to achieve a coordinated approach on the regulatory and supervisory treatment of new or innovative financial activities that may undermine investor protection, give rise to financial instability or threaten market integrity, while at the same time recognising that financial innovation can also beneficially contribute to the economy.
We believe the regulatory landscape needs to evolve more quickly if it is to meet the emerging challenges posed to users by newer technology globally. At CySEC, we are committed to promoting innovation and the benefits it generates, whilst simultaneously maintaining investor protection. In fact, we believe appropriate and proportionate regulation can improve demand for innovative services by increasing consumer trust and confidence in those services and the businesses that provide them. In part, that is why CySEC has established the Innovation Hub.
A big challenge is also the shift to sustainable investments that is one of the EU's major goals and CySEC’s. Our goal is raising the awareness of these new regulations and highlighting the prospects to the firms and ultimately to investors.
Fighting financial crime has become a top priority of finance centres worldwide. How would you gauge Cyprus’ performance in this field?
Money laundering and financial crime has no place in Cyprus. That is why the services sector in the last years has been transforming and adopting additional changes in its business model in order to ensure that only legitimate businesses are operating through Cyprus. Further steps were taken to ensure that only entities who have legitimate substance operate through Cyprus following all the regulations concerning AML.
The key findings of Mutual Evaluation Report of Cyprus, by the MONEYVAL Committee of the Council of Europe issued in February demonstrate the progress the Republic of Cyprus has made in implementing an enhanced AML/CFT regime as it supports the international community’s fight against money laundering and terrorist financing. MONEYVAL assessed the effectiveness and levels of technical compliance of all Cypriot authorities, including CySEC, in overseeing the AML/CFT regime.
Out of 98 countries which have undergone this demanding assessment by MONEYVAL, the Republic of Cyprus is one of 25 countries assessed which has not recorded low evaluation grades in any of the 11 pillars composing the effectiveness assessment. As it comes to technical compliance, Cyprus has achieved compliant or largely compliant ratings in most of the 40 parameters, with only 2 partially compliant ratings. Zero non-compliant ratings were recorded. Our efforts to this end are ongoing, and we will continue focusing resources on tackling money laundering and financial crime.
How do you expect Cyprus’ financial services sector to develop in the next three to five years?
Our mandate has steadily evolved as we implement the wave of post-crisis regulation coming from new EU Directives and handle the specific supervisory challenges posed by the firms we regulate in Cyprus. We don’t know if the cost of accommodating all this regulation will benefit the smaller firms established here. We have a lot of start-ups that need three to four years to grow and new regulation – especially under MiFID II – makes it hard for them. That's why we are in favour of firms investing in technology to be more effective in regulatory compliance. There are good IT systems that can be used for AML purposes, for example, or other reporting requirements.
I expect to see some mergers and acquisitions within the sector, and I certainly see further growth in the Cyprus-based funds industry. We are going to be seeing more of fintech, blockchain technology, crowdfunding and other technology-based innovation in Cyprus and we need to ensure that we keep track of and monitor all this interest with an intelligent approach.
What are CySEC’s plans and priorities for the coming 12 to 24 months?
CySEC will continue focusing on establishing good corporate governance in supervised entities which reflects the core principles of integrity, transparency and accountability. While at the same time we are committed to fostering responsible growth in the area of financial services and financial technology and innovation. Fintech is fundamentally transforming the global financial industry, ensuring that more diverse financial products and services reach more diverse geographies and sectors. Whilst the global financial industry is faced with many challenges and increased turmoil, financial technology can have a meaningful contribution to economic growth.
In addition, CySEC intends to further facilitate the incorporation of innovative technologies in the client on-boarding process. This need was further enhanced in view of the COVID-19 pandemic that has increased the number of non-face-to-face interaction. Furthermore, we intend to further enhance the supervision of firms with emphasis given to our key areas of priority: proactive supervision; event-driven and reactive supervision; as well as products supervision. We are looking at the entire spectrum to ensure that Cyprus’ financial sector remains in good shape with investor protection being our top priority.