Establishing an Investment Firm in 2022 in CyprusSalvus Team
An Investment Firm (IF) is considered any legal person whose regular occupation or business, is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. In this respect, a Cyprus Investment Firm (CIF) is an IF established in the Republic of Cyprus and licensed by the Cyprus Securities and Exchange Commission (CySEC).
Within the last two decades, Cyprus has evolved into an international investment, payment and crypto-assets services centre. Following CySEC’s press release in February 2022, the investment services sector in the jurisdiction is steadily expanding. The increasing number of licensed entities subject to CySEC’s supervision and the high number of entities currently applying for a CIF authorisation attest to that.
In this commentary the SALVUS Licensing team guides you through the necessary information for establishing a Cyprus Investment Firm under CySEC, as follows:
1. Why establish a CIF in Cyprus?
One of the main reasons for the significant growth of the investment services sector in Cyprus is the unique combination of memberships that the Republic holds. Cyprus is among the 27 European Union (EU) member states, the 19 members of the Eurozone and a member of the Council of Europe, the United Nations, the World Bank, the World Trade Organization, the International Monetary Fund, and the British Commonwealth. In addition to these, being a signatory in many international conventions and its proximity to 3 continents, have led Cyprus to become a hub of globally oriented businesses.
Safeguarded by modern legislation and utilizing the abovementioned memberships, a CIF can provide its investment services within the European Economic Area (EEA) through the EU passporting framework without having to obtain any additional licenses in the EEA. In the same context, the CIF can establish EU branches and employ tied agents within the EEA.
Another significant reason business owners consider the establishment of a CIF, is the attractive tax regime that the island applies to corporations, which is one of the lowest in comparison to other EU member states. The accumulation of more than 60 double tax treaties is complementing the already appealing tax regime.
Additionally, from a cost perspective, establishing a CIF can be generally cost-efficient compared to most of the other EU member states taking into consideration all the administration, operating expenses and cost of living. As per the legal framework’s provisions and as per each CIF’s business model, a variety of services can be outsourced, offering flexibility on the number and skillset of employees required. Furthermore, the fast-evolving sectors of payment and crypto services, have joined the investment services businesses in developing a workforce of multicultural, well-educated, and highly trained professionals, ready to grasp new challenges and opportunities.
2. What is the applicable Regulatory Framework?
Establishing a Cyprus Investment Firm means that the firm must comply with the EU Directive 2014/65/EU, broadly known as the Markets in Financial Instruments Directive II (MiFID II). MiFID II is thus the Regulatory Framework for CIF and came into force in 2018, aiming to address the weaknesses of the earliest MiFID introduced in 2007. For that purpose, MiFID II proposed radical amendments to the existing landscape of investment services by addressing the following areas:
- Enhanced product governance,
- Suitability and appropriateness assessment,
- New investor protection requirements,
- Improved pre-trade and post-trade transparency,
- Greater consolidation of market data for best execution,
- Extensive transaction pricing,
- Enhanced regulation of algorithmic and high-frequency trading,
- A new framework for non-EEA firms to access the EU market.
Furthermore, MiFID II provided the European Securities and Markets Authority (ESMA) wider powers to protect investors. As such, ESMA works closely with the European national competent authorities (NCA) for transposing pan-European directives into national legislation. CySEC is the Cypriot designated NCA, responsible for the supervision of investment services, investment funds, and the 2021 introduced Crypto-Asset Services Providers (CASP). In this respect, all CIF are subject to Law 87(I)/2017, which transposed MiFID II into national legislation.
3. What are the authorisation requirements?
A CySEC license allows a potential CIF to apply for the provision of all 9 investment services and 7 ancillary services prescribed in MiFID, choosing from a list of 11 categories of financial instruments as indicated by MiFID II. Therefore, each license granted by the competent authority can be a different combination of investment and ancillary services offered for different financial instruments, based on the business plan and objectives of each company.
Taking into consideration the investment and ancillary services combination that an investment firm wishes to be authorised for, there are certain governance, organizational, and capital requirements that the company needs to fulfil. Some of the governance requirements that the company is required to have in place concern, among others, the following:
- Head offices situated in the Republic,
- Board of Directors (BoD) repute and competence to perform its duties,
- The number of directorships that may be held by a member of the BoD,
- Adequate human and financial resources for the induction and training of the BoD members,
- Implementation of strategic objectives and risk prevention strategy,
- The integrity of the accounting and financial reporting systems,
- Effective supervision of senior management.
Additionally, the organisational requirements, include but are not limited to the below:
- Adequate policies and procedures which ensure compliance of the entity with Law 87(I)/2017,
- Appropriate rules governing personal transactions of the company’s managers, employees and tied agents,
- Effective organisational and administrative arrangements to avoid any conflict of interests with its clients,
- Reasonable measures concerning systems, resources and procedures which ensure continuity and regularity for the performance of the investment services and activities,
- Sound administrative and accounting procedures and appropriate internal controls for risk assessment, as well as effective arrangements for information processing systems,
- Sufficient arrangements for record-keeping of all services, activities and transactions undertaken, including communication with clients and reception, transmission, and execution of client orders,
- Adequate arrangements for safeguarding client funds and rights.
Regarding the CIF capital requirements, these are subject to the newly introduced regulatory framework known as the Investment Firms Regulation and Investment Firms Directive (IFR/IFD), and they vary based on the investment and/or ancillary services that an entity is applying or is authorised to provide. The New Capital Requirements per Type of CIF as per authorised Investment Services are shown in the table below and more details can be found in this IFR/IFD dedicated article.
|Type of CIF as per authorised investment services||Capital Requirements|
|"Portfolio Management or Investment Advisory CIF", without holding client funds.|
Offer any of the below services:
1. Reception and transmission of orders in relation to one or more financial instruments,
2. Execution of orders on behalf of clients,
4. Portfolio management,
5. Investment advice,
7. Placing of financial instruments without a firm commitment basis
|"STP CIF" holding client funds.|
Offer any of the above investment services plus holding client funds
|"Market Maker or DOA CIF" holding client funds.|
Offer any of the above investment services plus any of the below:
3. Dealing on own account
4. Underwriting an/or placing on a firm commitment basis
In the light of the prudential framework IFR/IFD, the aforementioned requirements may further entail a limitation on directorships held by the members of the BoD and the establishment of a nomination, a remuneration, and a risk committee, depending on whether the CIF can be described as “significant”. Under the provisions of Law 87(I)/2017 and Circular C487, a CIF shall be considered “significant” when its on and off-balance sheet assets are on average higher than 100 million Euros, considering the immediately preceding four-year period of the given financial year. If a CIF has been in business for less than four years, it shall take into account the on and off-balance sheet assets of the periods available, for determining whether it falls under the obligations of a “significant” CIF.
4. How can SALVUS assist your Cyprus Investment Firm licensing?
The SALVUS Investment Firms Licensing team has acquired a unique and extensive experience in obtaining investment services licenses under CySEC, by applying its knowledge and expertise in dealing with a variety of different business models and objectives.
The project management approach we employ provides for the custom selection of investment services that effectively suits your business model and vision. We assist you throughout the entire licensing process by collecting and submitting all the necessary documentation to CySEC on your behalf – acting as a reliable link between the supervisory authority and your applying investment firm. Once your CIF license has been successfully granted, our Compliance team is ready to support you in all regulatory obligations, offering a complete range of post-licensing services.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.