Cyprus: Investment Firms At The Coalface - A Practice Note On The Implementation Of MiFID In Cyprus

Entry Into Force

Cyprus has now taken the necessary steps to implement the Markets in Financial Instrument Directive (MiFID) into Cyprus legislation. The Investment Services and Activities and Regulated Markets Law, N.144(I)/2007 ("Investment Services Law"), implementing MiFID and the Level 2 directive, took effect from 1 November 2007, replacing the previous legal regime established with the implementation of the Investment Services Directive.

The competent authorities

In contrast with the major EU Member States, such as the UK and Germany, and other European financial centres such as Ireland and Luxemburg, which have a single authority governing all aspects of financial services, Cyprus has exercised the discretion allowed by MiFID to designate more than one competent authority and has continued the previous regime established by the Investment Services Directive. The Cyprus Securities and Exchange Commission ("CySEC") continues to be the primary regulator of firms providing investment services and activities in Cyprus. The provision of these services and activities by credit institutions and by insurance companies remains under the supervision of the Central Bank of Cyprus and the Superintendent of Insurance respectively.

The main tasks performed by the CySEC are the supervision and control of all aspects of the regulatory regime governing the provision of services and activities in relation to MiFID financial instruments by Investment Firms ("IF"), their employees and their tied agents, the issue and withdrawal of Cyprus Investment Firm ("CIF") licenses and the supervision of their operation and their conformity with the continuing obligations imposed by the new regulatory regime.

Transitional provisions

Transition has not been difficult in Cyprus in relation to the authorization requirement. The Investment Services Law provides that all authorizations that were granted under the previous regime are to be deemed as having been granted under the new MiFID regime. Companies whose sole activity at the date the Investment Services Law came into force was the provision of investment advice were allowed a transitional period of two months to submit an application to CySEC for a CIF authorization pursuant to the new legal regime.

"Advice-only" companies which failed to submit an application within the time limit or whose application was rejected by CySEC were obliged to stop providing investment advice immediately and to settle all obligations with regard to third parties arising from the provision of investment advice within one month after the deadline set out above expired.

The use of the other options and the discretions provided by MiFID

Cyprus has exercised its discretion not to impose requirements additional to MiFID in its implementation.

Furthermore, it is important for CIFs to note that Cyprus has not implemented all of the options and discretions provided by MiFID, such as the optional exemption of Article 3 of MiFID. Consequently, firms or persons providing investment advice or merely receiving and transmitting orders are obliged to apply for a CIF authorization.

There are, however, a number of other options and discretions provided for in MiFID that have been incorporated into Cyprus law, such as the discretion to accept the appointment of tied agents and the discretion to recognize clients as eligible counterparties.

Firstly, Cyprus has adopted the tied agent concept established by MiFID. A "tied agent" for the purposes of the Investment Services Law means a person established in a Member State, who, acting under the full and unconditional responsibility of only one IF of a Member State, on whose behalf it acts, (i) promotes investment, ancillary services or both; (ii) attracts clients or prospective clients; (iii) receives and transmits client orders in respect of investment services and financial instruments; (iv) places orders or (v) provides advice to clients or prospective clients in respect of those financial instruments. CySEC maintains a register of tied agents who are authorized to on behalf of a particular CIF or IF. Cyprus legislation does not recognize tied agents established in a third country, nor does it permits a tied agent to hold clients' money.

Secondly, the eligible counterparties regime has been incorporated in Cyprus. Undertakings established in either a Member State or a third country meeting pre-determined proportionate requirements, including quantitative thresholds, are recognized as eligible counterparties. The eligible counterparty regime, however, is available only in relation to the investment services and activities of reception and transmission of orders, execution of orders and dealing on own account. No other investment service or activity may be provided within the eligible counterparty regime.

MiFID in practice

The relevant authorities have adopted a more communicative and corrective approach towards regulated persons providing investment services and activities to investors, rather than a more reactive and punitive one. The main aim of the IS Law is investor protection and, through sound supervision, the guidance of the regulated businesses and persons. This should not however be misinterpreted. Providers of investment services and activities are given enough guidance and information by the relevant authorities so as to not be in breach of the IS law. Where such breach does occur, administrative fines are imposed on the person in breach and, if appropriate, authorization may be revoked.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.