Intro - Need for a Licensed Insurance Brokerage

Investing in financial markets including Forex Trading have been steadily increasing year on year. Due to the increase of the volume of the retail clients during the last years, a significant increase has been observed in the need for regulated forex companies, called Investment Firms or "Brokerage Houses". Retail clients are individual traders who invest funds from their own wealth and savings and usually this constitutes an extra income for them.

Both retail clients and financial institutions usually chose an investment firm to invest the funds on their behalf, as it is easier to rely on a fully regulated entity with the necessary experience and knowledge to trade, rather than spending time and money (mostly for the financial institutions who must have the appropriate workforce) to trade on their own. EU regulated entities, being strictly regulated and monitored, follow specific measures, policies and procedures for which the main aim is to keep the clients, and their funds protected. This regulatory safety net to retail and institutional deposits is very appealing to the European traders and financial institutions as the responsibility for the safekeeping of the funds is transferred to the service provider (the regulated entity). The EU regulated investment firms submit reports to their regulators on a monthly, quarterly and annual basis so that they meet all the EU laws and regulations (MIFID II) demanded by the regulator at all times.

It is important to mention that there is an obligation for all EU Investment Firms / Brokerages to keep funds (calculated on a percentage of the client’s funds) known as the compensation fund. This fund is used in case the company bankrupts and hence it is not in the financial position to pay over its client’s assets. In fact, the investment firm must compensate its retail clients using funds which it takes from the compensation fund. Through all these measures, a bond of trust is created between the client (retail or financial institution) and the service provider (EU regulated investment firm).

 

Cyprus Investment Firms

In Cyprus, Cyprus Investment Firms (CIFs) are legal entities which are fully licensed to provide various services to its clients, depending on the type of license that they will apply for. Most common services which are provided are portfolio management, provision of investment advisory, execution of orders, reception and transmission of orders and assets and wealth management.

As already mentioned above, a Cyprus Investment Firm must first apply to the CySEC (Cyprus Securities and Exchange Commission) in order to obtain a license and hence to be entitled to provide such services. Licenses are splitted under three categories:
1. Simple License
2. STP License
3. Market Maker

 

The Simple License demands a capital introduction of Euro 50,000. By obtaining a simple license, a CIF is eligible to provide portfolio management and investment advisory, but it cannot manage clients’ funds. This is the main difference between the simple and the STP license, where having the STP license a CIF is allowed to keep clients funds and provide assets and wealth management services as well. The requirement for the capital introduction increases to Euro 150,000. Regarding the Market Maker license, which is the highest license a CIF can obtain, the CIF can provide all the services mentioned above, as well as dealing of own account, underwriting of financial instruments, placing of financial instruments without a firm commitment basis and operation of an MTF (Margin Trading Facility). The capital introduction raises up to Euro 750,000.

 

The type of the license a CIF intends to obtain is the first decision which should be made as it affects the company’s activities and in general all its operations and obligations. Let’s analyse below the most common mistakes that are observed during the application to CySEC regarding the obtain of the license:

Determination for the provision of services:

One of the first aspects to be discussed when deciding to incorporate a Cyprus Investment Firm, is the type of services that it will be providing. In order to decide this, the applicant must be aware of the main difference between the 3 types of licenses (as indicated above) and which are the relevant requirements that must be met. The most common license to apply for is Type 2; the STP license.

Many applicants usually think that the simple license is the same as the STP license and therefore they are giving misleading instructions to the service provider who will submit the application on their behalf (or they use misleading information in case they will apply for a license on their own). This mistake is usually detected when we compare the requirement for the introduced capital and the services that the CIF will be providing. The most common indication for this mistake is to hold of client’s funds versus a capital introduction of Euro 50,000.

By not being aware of such differences between the type of licenses, the whole application is misleading as both the organizational structure, and the supporting documents and reports are affected. This will be analysed in detail below. Fortunately, this mistake is usually detected before the application is submitted to CySEC.

 

Organizational structure and personnel

As each case is different, the relevant requirements must be fulfilled based on the needs of the Cyprus Investment Firms. The board of the directors as well as the necessity of the personnel is one of the most important factors to be taken into consideration. For all type of licenses, there is a minimum requirement of two executive and two non-executive directors. The executive directors should be local (i.e. they must live in Cyprus) where at least one of the non- executive directors must be local. In case the company decides to assign more directors, it is important to keep in mind that the majority of the directors should be local. This requirement applies to all the types of licenses. However, the determination of the personnel is affected by the type of license and hence by the services that the CIF will be providing.

Regarding the personnel, the assignment of the positions as well as the selection of the employees should be based on the type of license and the type of services that the CIF indents to provide. Many applicants omit to take into consideration that each individual is able to fulfil specific roles, based on their position in the company and their relevant experience. For example, the compliance officer cannot be someone who is a member of the board of directors. In addition, there are cases (this usually applies to the simple license) where the compliance officer can be outsourced, depending on the needs of the company. The applicant is usually not aware of all the requirements which must be met and hence the assignment of each employee/individual is made incorrectly. This leads to have reports which include wrong information or reports with missing information. For example, for each department the relevant employee/s should be included. In case the applicant omits to include a department, the Internal Operations Manual is affected as well as the Policies & Procedures and the Business Plan report and forecast calculations.

In addition, the experience and qualifications of each individual should be the main factor to be taken into consideration as each position should be supported by the relevant suitable and capable employee. It is important to mention that during the examination and evaluation of the application, interviews take place by the examiner in order to evaluate the future members of the board of directors and the employees of the company.

Conclusively, by not being aware of which main organisational criteria are needed, the whole application is affected as forms, policies, reports and supporting documents do not represent the objective of the application. This is one of the main reasons the application may be rejected.

 

Underestimating the severity of the application

In order for the licensing process to be smooth, the applicant must ensure that the significant importance will be given. Usually, the applicants do not pay the necessary attention to the application, as they are in a hurry of obtaining the license in order to start having activities. However, this works against them as it ends up having a draft and hastily prepared application and hence the possibilities of getting rejected by CySEC are significantly increased.

In many cases, it is observed that applicants use existing templates (usually found on the internet) which most of the times lead to misunderstandings, wrong and inaccurate information and confusion to the examiner. It is important to have in mind that each case is difference and hence no examples can replace any application. However, they can be used as an indication of the information which must be included in the application.

In addition, many times the quality of the prepared reports is poor due to the significance the applicant gives to the application. Except of the usage of existing examples, a common mistake the applicants make is the inconsistency in the provided information. For example, the Internal Operations Manual may refer to market maker whereas the application forms concern a request for an STP license. The poor quality of the forms and the supporting documents guarantees a rejection of the application to obtain a license by CySEC.

 

Supporting documents

As already mentioned, in the determination of the provided services based on the needs of the company, the relevant factors should be taken into consideration and hence the relevant documentation should be provided. Common mistakes the applicants do is the provision of poor-quality documentation or in many cases inappropriate documentation. Examples such as the provision of weak CVs with missing or non-detailed information, unsigned certificates, documents which are not translated in English or Greek language and documents which have not been included in the application at all, constitutes the most common mistakes regarding the provision of the supporting documentation.

 

Timeframe

CySEC examines the application within the first 2 months from the date it receives it and it always replies in formal letters, informing the applicant that clarifications and missing information should be provided within the relevant deadline which is given by CySEC. In addition, there are cases that CySEC draws the attention to the applicant regarding directives and circulars that should be taken into consideration when preparing or revising the application.

However, the time to prepare the reports and obtain the relevant documentation depends mostly on the complexity of the group structure and the type of license.

In general, in the most cases the time frame is around 8 months so as the license is obtained. However, there are cases that may take longer, the reasons vary.

 

Closing Remarks

There are many factors to be taken into consideration when applying for a license to the CySEC, the best way to eliminate such errors is to seek for the assistance of an expert who will assist and guide the applicant through the whole process until the license is finally obtained. Outsourcing such function ensures that the expected timeframe, decreases significantly. Our team of consultants as well as management has been actively being involved with regulated markets as well as assisting its clients with licesing for more than a decate with great suceess and we would be offcourse, more than happy to assist you as well.

 

CYAUSE AUDIT SERVICES

About Us

CYAUSE Audit Services Ltd is performing Statutory compliance services to Cyprus Investment Firms and Funds on a continuous basis in its capacity as an external adviser. Such services include compliance advisory work (ICARA, Capital Adequacy PII Reporting), external or internal audit functions as well as the provision of ongoing accounting, payroll and tax support.

Whether an investment firm regulated by the Cyprus Securities and Exchange Commissions (CySEC) or a Fund we can perform compliance services and ad hoc engagements tailored to your needs.

CYAUSE Audit Services is an Audit & Assurance firm with offices in Nicosia and Limassol. During 2015 we have been awarded by I.C.P.A.C and the A.C.C.A (local and international association of Chartered Certified Accountants) for the Quality of our Audit Services and our Office's Procedures.

Being a Truly International Audit & Assurance firm, we have associates from all over the world and we are constantly looking for new associates to expand our network further. At present, CYAUSE Audit Services operates internationally as Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience.

Our network covers almost 40 jurisdictions with over 2,000 professionals, it supports more than 10,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and processes at least 170,000 payslips globally.

CYAUSE Audit Services Ltd is also a member of the 3E Accounting Network, an international accounting network which originates from Hong Kong and has more than 80 members from all over the world.

Contact Us

If you would like us to assist you with your investment firm or fund please contact us at kt@cyprusaccountants.com.cy or call us at +357 22 336 321.

Learn More about Cyprus Corporate Environment

Information about CYAUSE Audit Services and the Cyprus Corporate & Tax System can be obtained from our Website or our YouTube channel which provides valuable information about the Corporate & Tax Environment of Cyprus.