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New watchdog for provident funds on the cards

A new oversight authority will be set up by the government in order to monitor insurance companies and provident funds, Finance Minister Harris Georgiades told lawmakers on Monday.

Addressing the House labour committee, Georgiades said that on the recommendation of Cyprus’ international lenders, the government plans to create an “independent, well-staffed oversight agency to strengthen monitoring and security”.

“Oversight of provident funds is an obligation of the state, since it has an absolute duty to create the proper monitoring framework for the operation of funds that manage people’s pensions,” he said.

According to the finance minister, as part of plans to overhaul the public sector, an initial study of structures and oversight authorities was conducted, which led to the tentative conclusion that the Cyprus Securities and Exchange Commission (CySEC) could, in addition to investment firms, take over oversight of insurance companies and provident funds.

“The advice we got was that the CySEC is already snowed under, and we shouldn’t burden it further with the oversight of funds,” Georgiades told the committee.

“The most appropriate solution, we were told, was to adopt the triple-oversight model of other countries, meaning the Central Bank of Cyprus for banks, the CySEC for the investment sector, and a new, independent oversight body for funds and insurances.”

But, Georgiades was told by committee chairman Andreas Fakondis, stakeholders have complained that the move is being sought without prior consultation with them.

“Discussion is only preliminary at this point,” the finance minister assured him.

“There will certainly be discussion with all involved. A second study has been commissioned and delivered to the government recently, but we certainly want to discuss the issue. That is our goal, not to cause alarm.”

The finance minister noted that, when it comes to provident funds, “things are not good”, as in real terms Cyprus has the largest number of funds in Europe.

Meanwhile, Georgiades assured the committee that the government will make good on its pledge of paying back roughly half of provident funds, which were deposited in either Laiki Bank or Bank of Cyprus, that were seized in the March 2013 ‘haircut’.

The government had promised to keep losses of all provident funds to 25 per cent of the sum total of each, which means it will have to cough up 22.5 per cent of provident-fund deposits seized, in order to supplement the 52.5 per cent that was salvaged post-haircut.

“We can consider this in the immediate future,” Georgiades said.

“I would say the effort can be undertaken once the Cyprus economy reaches investment-grade rating, so that we can draw money at low interest, instead of the current 4 per cent.”

Cyprus’ sovereign debt is currently rated BB- by Standard & Poor’s, B1 by Moody’s, and B+ by Fitch, all non-investment grade, or junk, ratings, three designations below investment-grade status.

This drew goalpost-moving charges from Fakondis, who claimed the government’s original pledge was that provident funds would be partly restored upon Cyprus’ exit from the economic adjustment programme, scheduled for next month, irrespective of the economy’s rating targets.

Georgiades blamed the Troika for the delay, saying the government initially planned to use funds from the bailout to pay back provident funds, which was not accepted by the lenders because “provident funds are institutional investors, and they were sufficiently accommodated”.

“This is exactly why our new position is that the plan has been pushed back until after the country has exited the programme, when we can plan and regulate funding to restore provident funds,” Georgiades countered.

According to the finance minister, salvaging 52.5 per cent of provident funds deposited at Laiki Bank – on par with deposit seizures at Bank of Cyprus – had cost some €300 million, which utilised programme funds. Salvaging an additional 22.5 per cent, which would enable the government to make good on its promise, will require a further €140 million.

In contrast, money seized from provident funds at the Bank of Cyprus was exchanged with one share per euro seized, with BoC shares now trading below this value.

“Exiting the programme is a positive development, but it is not going to rain money just because the programme is over,” Georgiades warned.

“I can’t promise quick solutions, but I can say that once we exit the adjustment programme we will consider this matter.”

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