CySEC Makes Amendments to Investor Compensation Fund
The Cyprus Securities and Exchange Commission (CySEC) announced on Wednesday that it had decided to make a series of changes in the legal framework that relates to the operation of the Investor Compensation Fund (ICF). The reforms are listed in the final Policy Statement (“PS-02-2019”), issued on March 13, 2019. Thus, all Cyprus Investment Firms (CIF) that offer investments services will have to consider the new changes, which talk about a tougher stance by the CySEC as it wants to address the losses of customer funds.
On April 12, 2017, the Cypriot regulator released a consultation paper (“CP 2017-02”) with the intention to hear feedback from market participants on the proposed changes on how the ICF works.
How Are The Changes Affecting Brokers?
In general, the amendments related to the ICF operations are in line with what market participants were expecting. However, CySEC-regulated brokers might not be happy about some of the changes.
To cover ICF’s expenses, the new framework requires an annual fee of 700 euro for companies holding customers’ assets and 100 euro per year for the firms that don’t hold funds.
More importantly, the regulator won’t return their contributions to the ICF at any point, including when their license is withdrawn. Nonetheless, this amendment refers to new CIFs only, as the funds accumulated before the directive will still be held as an asset of its payers.
To assess the risk profile of a firm, the regulated change the method it applies to measure the annual contribution to touch upon more potential risks. Thus, the CySEC is going to charge 0.5% of the company’s total eligible customer assets per year. There is a high probability that CIFs with lower risk would be able to get discounts. Specifically, there is an 80% reduction on the annual fees for the firms that meet all deadlines. On the other hand, companies that fail to submit audited statements or financial instruments according to deadlines, the annual fee will be increased to 1% of eligible assets or 130,000 euro. This is the change that some brokers might find problematic.
Demetra Kalogerou, chair of CySEC, commented on the new regulations:
The upgraded regulatory framework governing the Investor Compensation Fund provides for a balanced, proportionate and risk-based approach to determining the level of contributions required by member firms. The robustness of the ICF is fundamental to maintaining investor confidence, and ultimately investor protection. Our thorough consultation and resulting changes will help ensure it is a well-funded and resilient mechanism to support the compensation of eligible investors in the event of last-resort market failure.
The new policy statement says that the regulator will calculate the contribution based on the category of members rather than on a single basis for all CIFs. Also, to make sure that there are enough funds for immediate payment, the CySEC obliges members to hold a cash bugger of 0.3% of the clients’ funds in a separate bank account.
Investors Are Asked to be More Cautious
When it comes to clients, the CySEC might require retail investors to do their homework when picking a broker or service provider. Also, the regulated modified the maximum compensation for valid claims from clients from 100% or 20,000 euro (whichever is higher) to 90% of the cumulative covered claims or 20,000 euro (whichever is lower).
The regulator explained:
This means that, if the claim is for €50.000, the coverage will be €20.000, due to the fact that 90% of this claim, equals to €45.000. However, if the claim is for €10.000, the coverage will be €9.000 (Min (€10.000 Χ 90%, €20.000) = €9.000).
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