Cyprus New Financial Services Law

 On 29 July 2002 the Financial Services Law 148(I)/2002 (the "Law") was enacted regulating the provision of financial services from within Cyprus. This legislation has an impact on both existing and proposed International Financial Companies ("IFCs"), which are currently under the supervision of the Central Bank of Cyprus.

Under the Law, any business which provides financial services from within Cyprus in relation to financial instruments requires the prior permission of the Cyprus Securities and Exchange Commission ("CySEC") which is the body entrusted with the supervision of all financial service companies, including IFCs.

Even though the Law has come into operation with immediate effect, the authorities, recognizing the peculiarities of the international sector, are in the process of proposing amendments to the House of Representatives to extent a transitory period during which existing IFCs may continue to offer financial services under their existing regulatory regime while, meanwhile, they are given time to apply to the CySEC for a relevant license.

The Law is consistent with the relevant European Union Directive and it is envisaged that, with the accession of Cyprus to the European Union, financial service companies which are licensed by CySEC, will have a "passport" to any other European Union country.

In view of the fact that the Law deals with a totally new field of regulation for Cyprus, its actually application and interpretation is unclear in many respects. Nevertheless, the following is a summary of what may be considered the basic provisions of this legislation.

(A) As provided by Part I of the First Appendix to the Law, the following activities are deemed to be financial services:

1.      (i) The receipt and transmission on behalf of third parties of instructions for the conclusion of transactions regarding one or more financial instruments.
(ii) The carrying out of instructions set out in Paragraph (i) above on behalf of third parties. 

2.      The negotiation and buying and selling for one's own account of financial instruments. 

3.      The management of investment portfolios of clients within the mandate of the latter provided the portfolios include one or more financial instruments. 

4.      The underwriting of the issuance or disposition of one or more financial instruments set out in Part II of the present Appendix. 

(B) As provided by Part II of the First Appendix to the Law, the following activities are deemed to be financial instruments:

1.      (a) Transferable securities.
(b) Units in collective investment undertakings.

2.      Money-market instruments.

3.      Financial-futures contracts, including equivalent cash-settled instruments.

4.      Forward interest-rate agreements (FRAs).

5.      Interest-rate, currency and equity swaps.

6.      Options to acquire or dispose of any instruments falling within this section of the Appendix, including equivalent cash-settled instruments. This category includes in particular options on currency and on interest rates.

(C) A licensed financial service company may also apply to provide ancillary services, which, according to Part III of the First Appendix to the Law, include the following:

1.      The custody and administration of one or more financial instruments. 

2.      The leasing of safe deposit boxes. 

3.      The provision of credit or loans to third parties (clients) to carry out transactions in financial instruments provided the enterprise which provides the credit or loan is a party to such transactions.

4.      The provision of advice to enterprises in relation to the structuring of their capital, the formation of their business strategy, for any matter which relates to their business activities, as well as the provision of advice and services in the area of mergers and acquisitions. 

5.      Services relating to underwriting, as, for example, issue advisory services. 

6.      The provision of investment advice in relation to one or more financial instruments. 

Foreign currency services provided they are connected to the provision of financial services.

A party providing only ancillary services is not deemed to be a financial service company and, as such, is not regulated. There is an exception to this provision in relation to ancillary service number 6 (investment advice) which cannot be provided without the prior approval of CySEC.

(D) The basic requirements which a proposed financial service company must satisfy in order to be granted a relevant permit are the following:

1.      A proposed financial services company should present to CySEC a business plan showing its ability to carry out its proposed activities.

2.      It should have at its disposal at least two experienced and reliable persons to manage same. 

3.      It should possess all necessary financial and organizational means to carry out its activities. This, in turn, implies the following: 
(a) Minimum Capital: 
If the company will only provide the service of transmission of orders (brokerage services) and will not act as principal the minimum capitalization is £125.000. If the company will provide fund management services, the minimum capital is £150.000. If the company will trade as principal or act as an underwriter the minimum capital is £600.000.
(b) Internal organization:
The company will need to present to CySEC:
     (i) a viable business plan;
     (ii) internal regulations concerning internal audit and risk management; and 
     (iii) a description of its computer systems. 

4.      The main shareholders of the company should be fit and proper persons to own a financial services company. 

According to a recent circular of CySEC it is clarified that it will consider on an ad hoc basis the possibility for a financial service company to subcontract any of its business, as well as the possibility for the two managers (requirement number 2 above) and the internal auditor not to be full time employees of the company. 

It is clarified, finally, that, as regards the place of residence of the various employees and the place of management of the company, there is flexibility balancing the business needs of each company with the requirements for effective regulation.