Regulatory (FX, BO, EMI, PI, AIFs)
Briefing on the CySEC Meeting (04.04.2017)
On the 04.04.2017, the Head of the Cyprus Securities and Exchange Commission, Mrs. Demetra Kalogirou had an invite-only meeting with CIFs representatives, compliance officers and other senior executives.
At the meeting with the Chairwoman of the Cyprus Securities and Exchange Commission, Mrs. Demetra Kalogirou gave a speech on future developments of the forex and binary options industry.
Mrs Kalogirou stressed out the fact that aggressive marketing is being used and recalled brokers to “stop aggressive selling techniques and cold calling”. “Overseas regulators have noticed you using aggressive marketing. A number of countries have introduced a number of measures, not limited to bans but also to marketing restrictions. Belgium, France, Holland, Germany, Denmark and Spain have been instrumental leaders in this. Additionally, measures have been taken in Ireland, Germany and the UK. 10 out of 27 regulators are already taking measures against retail electronic trading in that these products are not appropriate for retail investors”, she said.
“It is not only CySec but foreign regulators that are scrutinizing your marketing material. There is a regulatory body that makes mystery shopping checks. It came to my attention that a regulator came to Cyprus recently to make checks on CIFs that were marketing their products in their territory. The mystery shoppers came to me and reported their findings. I hope you make progress from 2014 from 2017 today because what was reported to me was appalling”, she added.
Mrs Kalogirou urges CIFs to minimise the number of complaints to zero. She further stressed that she shall not accept as an excuse that the complaints received are coming from the “unregulated” company of the group. As she said “a complaint is a complaint” no matter where it is coming from. She further indicated that she shall not allow the Republic of Cyprus to be presented in the media as the “convenient” jurisdiction to obtain license.
Regarding passporting to third countries, Mrs Kalogirou warned that CySEC will close down “problematic companies” which do not get approval from third countries first. “This is a warning, and I will close down problematic companies which have many complaints. I will need to get approval from third countries first or a legal opinion and I will not allow mirror companies in offshore jurisdictions to offer products to non EU countries under the same shareholders and get complaints from the offshore regulator such as Belize Bahamas, or the Cayman Islands. Additionally I will ban the shareholders as not fit and proper” she stated.
She further explained that MiFID II, effective as of January 2018, does not regulate the provision of services to third countries, therefore CIFs have about 9 months to take any necessary steps.
Mrs Kalogirou also expressed her concerns about the offering of speculative products to investors and the inadequate application of appropriateness tests by CIFs. “There are real concerns that products are not appropriate and are too risky for retail investors who are unable to understand the risks of the products being offered. For example, in 2016, 90% of binary clients lost their money. 70-80% are losing money on FX. These percentages are too high. These should be brought down”, she said. Brokers should stop targeting only retail clients who are more vulnerable while also considering whether to offer less complex products. A comprehensive appropriates test should be applied and if scoring of the test is not satisfactory, the broker should consider not allowing the investor to proceed, she explained.
Mrs Kalogirou expressly emphasised that she does “not like” IBs because brokers cannot control their actions. “IBS are NOT WELCOME! I do not like IBs. They do not do their job properly. I cannot stand call centers. Especially those which are not regulated!”, she stated.
Mrs Kalogirou further advised that it would be better for CIFs to appoint tied agents or establish a branch in the countries where they mostly operate.
Emphasis was also given at the leverage ratio which must be at all times be set at 1:50 by default. In the event that a client wishes to higher the Leverage, CIFs must apply the appropriateness test and if the score is successful then CIF may consider higher leverage. In any case clients’ interests is of paramount importance and leverage should not be excessive.
Mrs. Kalogirou advised that CIF employees must possess necessary qualifications, as per recent issuance of Circular C181. She further mentioned that new CySEC exams will soon be ready for sales staff of CIFs.
She also stated that all CIFs must have internal compliance function comprised by a team of compliance officers; however in case their compliance team is not adequately experienced, CIFs can outsource compliance support for some time.
Mrs Kalogirou closed her speech stating that the application procedure for granting a CIF authorisation has been amended and called promoters to comply with the recent CySEC Circulars which outline the new application requirements; otherwise, as she said, CySEC will be reluctant to accept any additional applications from that promoter.