Vice Chairman of the Cyprus Securities and Exchange Commission (CySEC) George Karatzias on Thursday reaffirmed the commission’s support for the country’s collective investment sector, outlining a number of institutional changes at the European and local levels.
“We are in a period of significant regulatory changes in the European investment funds sector,” Karatzias said, noting that the sector has been significantly affected by international geopolitical and economic developments in recent years.
“In Cyprus, the assets of the Collective Investment and Asset Management sector showed a slowdown in the third quarter of 2023, mainly due to the completion of the life cycle of a large investment fund,” he added, saying that “this impact is expected to be temporary”.
Karatzias explained that based on the latest available data, as of December 2023, CySEC supervised 314 Collective Investment Management Companies and Collective Investment Organisations out of a total of 837 supervised entities, with managed assets amounting to €8.6 billion.
In addition, over the past two years, CySEC has licensed a total of 87 Management Companies and Collective Investment Organisations, while another 16 organisations of various types in the sector are under examination from a total of 101 applications for licensing.
He also mentioned that all pending applications are assigned to officers and are at various stages of evaluation, while, by the end of January 2024, five new Alternative Investment Organisations were licensed.
“As the Securities and Exchange Commission, we continue to attach great importance to the further promotion and development of the collective investment sector through the continuous upgrading and modernisation of the institutional framework governing it,” Karatzias said.
AIFMD II
“At the European level, within the framework of the revision of the European Directive for Alternative Investment Fund Managers (AIFMs), AIFMD II, as it is known, has essentially been completed, and among other things,” the CySEC vice chairman said.
The revised directive is expected to include rules for managers managing Alternative Investment Funds (AIFs) that grant loans, known as loan origination funds; the introduction of provisions regulating the delegation of functions by AIFMs to Third Parties; a revision of the custody regime to ensure equal treatment of entities providing custody services; as well as rules aiming to enhance cross-border access to custody services.
“Specifically, to enhance market efficiency, the European Commission has advocated the establishment of rules under which, under certain conditions, the appointment of a custodian located in a member state other than the one in which the AIF is established would be allowed,” Karatzias said.
“This “derogation” will be possible following the approval of the Competent Supervisory Authority, in this case meaning the Cyprus Securities and Exchange Commission, which will be evaluated on a case-by-case basis and based on the investment policy of the AIF, considering whether there is a lack of specific custody services in the particular member state,” he added.
He noted that this directive is expected to be implemented 24 months after its publication.
“This development paves the way for attracting mainly multinational investment managers to Cyprus,” he said.
Furthermore, he continued, in the context of harmonising the institutional framework of the Republic of Cyprus with the revised provisions of AIFMD II, CySEC will proceed with the reassessment of National Rules governing the operation of Alternative Investment Funds, including the Categorisation Directive of 2014 and the Alternative Investment Funds Law of 2018.
He explained that this involves making necessary changes to achieve harmonisation and upgrade provisions where improvement is needed. As part of the process, relevant consultation documents will be issued.
Administrative Services
The CySEC vice chairman also said that before the House of Representatives is also the draft law governing the establishment and operation of Cypriot Companies for the Administration of Collective Investment Organisations.
“With its approval as a law, companies undertaking such tasks will now be required to be licensed and supervised by CySEC,” he said.
“Existing companies in the sector will have 24 months from the day of the new law’s publication to ensure their licensing,” he added.
He also said that CySEC is ready to issue a consultation paper to determine the fees and charges for the operation of such companies.
Policy Statement
Karatzias stated that CySEC will soon issue a policy statement on the use of regulatory technology in the context of taking due care measures regarding the use of solutions for remote customer and investor identification in AIFs.
Specifically, the policy statement will address the obligation of supervised entities to implement and adhere to specific policies and procedures for their compliance in cases of remote customer identification through the use of technological solutions.
“These policies and procedures should provide measures commensurate with the level of risk after an assessment of the risks of money laundering and terrorist financing,” the CySEC vice chairman said.
Supervision
In 2023, as part of the Joint Supervisory Action with ESMA on Sustainability Risks and Disclosures in the Investment Management sector, CySEC completed the first stage of supervisory action focusing on investor deception in green investments, known as greenwashing.
“From regulatory checks, it became apparent that Cypriot Investment Managers are informed about the relevant legislative framework,” Karatzias said.
“However, it is essential to enhance awareness among both investment managers and all participants in the capital market that greenwashing and sustainability issues concern everyone to varying degrees, and their handling requires the dedication of capital, time, human resources, or specialised consultants,” he added.
Karatzias noted that the second stage of supervisory action on sustainability risks is expected to be completed by 2024, involving a deeper analysis of the practices of managers in carrying out their activities.
The CySEC vice chairman ended by saying that “the Cyprus Securities and Exchange Commission is open to discussing all matters related to the sector, contributing to the efforts to establish Cyprus as a preferred location for the establishment and management of Investment Funds“.
“The commission remains committed to the healthy growth of the sector and is ready to support all efforts contributing in this direction,” he concluded.
