ESMA: Cyprus Regulatory Supervision “Insufficient”
Posted by Colin Lambert. Last updated: March 14, 2022
In its latest peer review report into selected European regulatory regimes, the European Securities and Markets Authority (ESMA) has singled out Cyprus for special attention, issuing recommendations to the Cyprus Securities and Exchange Commission (CySEC) – the first time it has issued such directives to a National Competent Authority (NCA).
The peer review assessed how NCAs supervise the investment services that investment firms and credit institutions provide to retail clients on a cross-border basis using a MiFID II passport. This exercise focused on the AFM (Netherlands), BaFin (Germany), CNB (Czech Republic), CSSF (Luxembourg), CySEC and MFSA (Malta) in light of what ESMA says is “the significance of their domestic firms’ cross-border activities”.
The two specific recommendations to CySEC under Article 16 of the ESMA Regulation require it to make every effort to comply and aim to increase the human resources dedicated to the supervision of cross-border services of Cypriot investment firms, as well as to strengthen CySEC’s supervisory activities to effectively monitor, promote and enforce compliance by authorised firms.
ESMA says Cyprus had the highest level of outgoing cross-border activities, and “by far the highest number of complaints relating to firms’ cross-border activities and of requests from other NCAs relating to Cypriot firms’ cross-border activities”.
It adds, “A large number of Cypriot firms pose a high risk of investor detriment, due to the frequent provision of services involving speculative products, with aggressive marketing behaviour,” ESMA says.
The Full FX View
Perhaps the only real surprise in the ESMA release is that it took so long in coming. There have long been questions over the strictness and robustness of the Cypriot regulatory regime – if it was on a par with the rest of the EU would so many retail-orientated firms have flocked there? It’s not as though the island is a major financial centre with a deep pool of talent to fill the roles required to run a business.
It has long been though, and is now “official”, that Cyprus is seen as a “soft touch” – in reality too many firms touting the centre as their home regulator are there because their activities would not be tolerated elsewhere, for example in the US. It will be interesting to see – assuming Cyprus does respond to the ESMA and tighten the regime – how many firms suddenly decide they are better off elsewhere, Micronesia or Labuan perhaps, both centres that have a large number of retail “brokers” holding licences there?
Although this is very much a retail brokerage industry issue, a tougher Cypriot regime would be good for FX overall because the lines are blurred between retail and institutional in FX, and the wholesale market has too many touch points with retail to list. If another centre gets tougher on behaviour of some of these firms, that increases confidence further up the chain.
The Authority further says it identified that CySEC’s supervisory activities have overall proven insufficient at addressing the risks posed by Cypriot firms’ cross-border services.
CySEC has two months to inform ESMA whether it complies/intends to comply with the recommendations. In addition, the recommendations foresee ad-hoc and periodic updates that CySEC should provide to ESMA to assess that the recommendations are effectively addressed.