By Dimitris Papoutsis
THE storyline in the narrative of literary works or films is commonly built around a raging battle between ‘good’ and ‘evil’ in the face of the fictional characters and the situations or historic background they live in. The dream of Lennie Small, in Steinbeck’s novel ‘Of Mice and Men’ (1937), to ‘live off the fatta the land’ was crushed amid the circumstances of the Great Depression in 1930s. On the other hand, we will never find out what impact the Great Depression might have had on the estate of Jay Gatsby, the main character in Fitzgerald’s ‘The Great Gatsby’ (1925), placed in the luxurious environment of early 1920s.
The Great Depression has been a measure of comparison to all subsequent financial crises as regards the impact in the global or local economy and society. This comparison was also made for the Global Financial Crisis of 2007- 2008. Writers used this historic occurrence for works and films with huge success such as Belfort’s ‘The Wolf of Wall Street’ (2007), adopted in film and directed by Scorsese in 2013 and Lewis’ “The Big Short: Inside the Doomsday Machine’ (2010), which was released as a film in 2015 with a number of film stars in main roles, assigning roles of ‘good’ and ‘evil’ to the respective characters against the historic background of that financial crisis, and its causes.
In the context of the ongoing Covid-19 global health crisis, an inevitable comparison with the Great Depression and the Global Financial Crisis as regards its financial, social and political impact is also taking place. From a legal perspective, both the Great Depression and the Global Financial Crisis brought enormous changes to the financial services law
The Great Depression gave rise to an unprecedented growth in the importance of financial assets and financial markets and laid the foundations which form the modern financial services law. In the USA, as part of the New Deal, the Securities Act of 1933 was introduced shaping the landscape for the offering of securities and inspiring numerous national laws on this matter around the world. Undoubtedly, each subsequent major event had an impact on financial markets and each recession cycle had a resounding and long-term consequence in the laws and in general the regulation of the financial services law. Relevant examples would be the collapse of the Bretton Woods system of fixed exchange rates in 1973, the fall of communism in late 1980s, the Asian crisis in 1998, the failure of Enron in 2001 (having as immediate effect the US Sarbanes-Oxley Act in 2002 and respective EU legislation).
From the perspective of EU law, which Cyprus follows and abides by, directly or after adoption of the relevant directives at a local law perspective, the lessons learnt from, or the mistakes that lead to, the Global Financial Crisis together with the resulting European sovereign debt crisis that hit Cyprus in 2013 resulted in new or updated laws. Relevant examples are:
- the Banking Recovery and Resolution Directive (BRRD), dealing with the matters of the risks of failing credit institutions and investment firms with the aim to enable the relevant authorities to use certain tools in order to maintain the stability of the financial system and viability of parts of parts of the credit institution;
- the Alternative Investment Fund Managers Directive (AIFMD), providing for the rights and obligations of managers of alternative investment schemes addressed to various types of investors in the EU;
- the Market Abuse Regulation (MAR), providing for a sound and transparent regime to prevent and punish abusive behaviors in financial markets that may lead to market manipulation or insider trading, harming the market integrity, confidence and proper functioning;
- the European Market Infrastructure Regulation (EMIR), introducing reporting requirements in order to increase transparency in over-the-counter (OTC) transactions of counterparties over derivatives; and
- the European Central Securities Depositories Regulation (CSDR), aiming to increase the safety and enhance the efficiency of securities’ settlement, a process which follows after a trading has taken place in capital markets within the EU.
Currently, Covid-19 is forecast to bring the world and Cyprus economy into another cycle of recession, under the fancy title the “Great Lockdown”, or whatever other name history will assign to this period. Its potential effect, as regards financial services law, may be viewed and analysed with reference to the driving forces, aims and effects of the financial markets, their players and participants and other stakeholders, such as the state and regulators. In this regard, key concepts in financial services law may be summarized as follows:
- Financial markets play a pivotal role in trading between and the gathering of the required financing and capital for individuals and entities with activities in the primary, manufacturing or services sector of economy, commerce, business or what can be termed as “real economy” or states and other corporate bodies. Moreover, it is the primary source of investment from various types of investors. A financial market is the “place” where lenders meet borrowers and sellers meet purchasers, directly or through intermediaries, in the traditional way that commercial transactions were conducted since ancient times, but now take place electronically. They can be regulated (by varying level of regulation) or be completely unregulated and two or more parties can participate.
- Depending on the financial assets (or “financial instruments” in the terminology of the Cyprus investment services law) financial markets may be divided into the following categories with numerous other different categorizations depending on specific characteristics, assets, participants or other criteria:
- Money markets, in which classes of instruments such as treasury bills, certificates of deposit and commercial papers are traded.
- Securities and capital markets, through which issuers of equity, debt and other types of instruments gather finance and in which listing and trading of such instruments takes place for interested investors,
- Derivatives markets, in which instruments such as futures, options, forwards and other types of contracts with value deriving from an underlying asset are traded;
- Commodity markets, in which agricultural products, metals or energy are traded; and
- Foreign exchange markets, which is a global decentralized or over-the-counter (OTC) market for the buying, selling and generally trading of currencies.
- The above financial instruments are distinct from money. This is because money may be used as a means of payment or in exchange for goods or services but can also be a store of value for the future (when deposited with a bank or e-money institution if in electronic form). Sovereign states reserve for themselves the ability to ‘regulate’ the flow (and use in certain cases) of money. In order to ensure that money in the form of savings is adequately protected against the risks of non-repayment or misappropriation and fraud by persons collecting money from the public to be repaid at a future point in time and against an interest in the meantime, the Cyprus banking legislation reserves the right to accept money as deposits from the public and to on-lend this to borrowers, in a business capacity, only to entities (and not individuals) which have been authorised by the Central Bank of Cyprus to operate as a credit institution (or by a similar authority abroad, in the EU or in another third country, subject to specific conditions). Capital reserve requirements, prudential supervision of their ability to repay the deposits, detailed plans for the event of their insolvency or inability to meet their financial obligations and deposit guarantee schemes in case of their failure compose the framework for the provision of banking services.
- Financial assets are subject to risks, unpredictable factors, market conditions, motives and personal views of a number of participants and entail a lesser or greater risk of loss of their value. The persons investing or otherwise acquiring or selling such financial instruments may or may not have the knowledge and experience, or the necessary understanding or information, to properly evaluate such risks. Therefore, varying level of protection is afforded to persons by the financial services law depending on their categorization as professional or retail client or investor, or their risk appetite. Accordingly, services and certain activities over financial instruments (such as the reception and transmission of orders or the execution of trading orders on behalf of clients in financial markets, the management of a portfolio of financial assets, the provision of investment advice, the operation of certain financial markets or activities on the underwriting or the safekeeping of such financial instruments (investment services and activities in Cyprus law), can only be provided or carried out by persons which (just like in the case of banks) have been licensed by regulators to offer such services to client. These persons (investment firms in Cyprus law) must meet certain regulatory, capital, organization and operational requirements.
- In Cyprus, the role of the securities and capital markets regulator is assigned to the Cyprus Securities and Exchange Commission (CySEC), which authorises the operation, supervises, regulates and monitors the activities of investment firms and collective investment undertakings (such as UCITS as well as alternative investment funds and their managers, gathering money from investors for the purpose of pooling them together and proceeding with collective investments in accordance with a pre-defined investment strategy and objective). But the role of CySEC is not limited to the above, and extends to the supervisory role also over regulated entities, issuers of transferable securities and other financial instruments as well as financial markets that operate in Cyprus, to ensure the proper functioning and full disclosure and transparency of events and information that may impact on the financial markets and the prices of financial instruments, in form of standard documents such as prospectuses or on-going information on their activities.
Amidst the ongoing Great Lockdown, it would be elusive to predict how the financial services law will be further developed, other than that financial markets have a role to play in tackling this recession. Even greater uncertainty would entail to identify the roles of ‘good’ and ‘evil’ in the interaction of events that lead to the February and March 2020 stock market crash. Any such attempt would be subject to personal political, economic and social views.
Arguably, this task is better suited for policy makers and regulators, market players, future historians or academics of law and finance, who will view the unfolding events under the objectivity of time and cause-effect relationships. More interestingly, in the meantime, here’s hoping that the history-in-the-making of Coronavirus crisis, its impact on the financial services law and its further development will be dramatized by writers and filmmakers in immortalized situations and characters.
Dimitris Papoutsis is a legal consultant in the Financial Services and Regulation department of Elias Neocleous & Co LLC.