Cyprus Investment Firms have been told they cannot retain interest generated on client funds held with banks, after Cyprus Securities and Exchange Commission (CySEC) adopted a new European supervisory position and withdrew its previous guidance with immediate effect.

In a circular issued this week, the CySEC drew firms’ attention to a newly published ESMA Q&A on the safeguarding of client assets.

The issue concerns whether investment firms covered by MiFID II may earn interest on client money deposited in savings accounts with credit institutions.

The European Commission’s answer, published by ESMA on September 21, was unequivocal ‘no’. It said MiFID II rules preventing firms from using client funds for their own account also mean they cannot retain interest accrued on those funds.

CySEC has now incorporated that position into its supervisory approach, telling Cyprus Investment Firms, or CIFs, to review their arrangements “without delay”.

The regulator also withdrew its earlier Circular with immediate effect, saying the position contained in that document no longer reflects its supervisory expectations and should no longer be relied upon by firms.

Under the new approach, CIFs must ensure their handling of interest generated on client funds complies with Article 17(9) of Law 87(I)/2017 and the ESMA Q&A. They should also be able to show that their arrangements have been properly assessed and documented and that clients’ rights and interests have been taken into account.

The move follows the Commission’s interpretation of Article 16(9) of MiFID II, which requires investment firms holding client money to put adequate safeguards in place and prevents them from using those funds for their own account. ESMA’s published answer states that this prohibition extends to any interest generated while the money is deposited with a credit institution.

CySEC is also placing responsibility firmly on senior management. The regulator said management should oversee the measures taken in response to the new position and ensure they are implemented in a timely and effective manner.

Compliance officers, internal auditors and external auditors are likewise expected to take the development into account in their reviews, with any relevant findings reflected in reports submitted to CySEC.

The regulator warned that it may ask CIFs during supervisory reviews to demonstrate compliance with both the Cypriot legislation and ESMA Q&A 2785.

The circular, C801, was issued on September 29 and signed by CySEC chairman George Karatzias.