CySEC agrees to beef up supervision as per ESMA recommendations
Pan European financial regulator oversight body The European Securities and Markets Authority (ESMA) has announced that Cyprus regulator CySEC has provided ESMA with a plan to implement a series of recommendations made back in March by ESMA.
CySEC – which oversees more Retail FX and CFD brokers than any other regulator worldwide – also included a timeline for the gradual recruitment of resources and the interim solution identified, and periodic statistics on some indicators identified in the recommendations. CySEC said it intends to comply with the recommendations by December 2023.
As we reported back in March, in a fairly rare move CySEC was chastised by ESMA, indeed the first time ESMA had issued a series of such recommendations to a National Competent Authority. The recommendations mainly apply in relation to the supervision of the cross-border activities targeting retail clients throughout the EU, carried out by firms licensed by CySEC.
The ESMA recommendations to CySEC refer to several aspects of the supervisory cycle, encompassing ongoing supervision, investigations and enforcement / sanctioning. The aim of these recommendations is to ensure that CySEC puts in place a fit-for-purpose organisational framework to monitor, promote and enforce compliance by authorised firms. This should help prevent illegal and harmful behaviour by the authorised firms providing the peer-reviewed activities in other Member States and put infringements to an end effectively, as well as promote sustainably compliant behaviours.
ESMA said that conducting effective ongoing supervision of cross-border activities is key to achieving an adequate level of investor protection and to the well-functioning of the single market.
In light of the issues observed in the peer review, ESMA said that CySEC should increase the resources directly dedicated to the entire supervisory cycle (authorisations, ongoing supervision and enforcement) of the peer-reviewed activities, to be closer to the average ratio of supervisory FTEs per supervised firms observed in the referenced peer review. This means that CySEC should enlarge its supervisory teams with around 30-40 new members.
Since firms can still provide activities while new supervisory resources are recruited, CySEC should endeavour to conclude the resources increase in a reasonable amount of time and implement interim solutions, including by considering the possibility to temporarily use staff from other non-strategic or less risky areas to strengthen this key area of CySEC supervision.
CySEC should also put in place a revised annual supervisory plan, spanning ongoing supervision, investigations and – as applicable – enforcement, to increase the supervisory work performed on firms providing the peer-reviewed activities and aiming to improve the effectiveness of CySEC’s supervision in addressing supervisory risks at an earlier stage and responding more forcefully to problems identified.
In particular, this supervisory plan should lay down a concrete strategy on firms’ peer-reviewed activities aimed at ensuring (i) intense supervision of all High and Medium-High risk firms carrying out those activities, as classified by CySEC; and (ii) sustainably compliant behaviour by the firms, with an increased focus on those firms perceived as particularly problematic, which could, where necessary, involve removing the authorisation of firms exhibiting aggressive behaviours.
The effectiveness of such a plan should be assessed over time against, inter alia, the following indicators in relation to firms’ peer-reviewed activities: (i) the number of complaints is significantly reduced; (ii) the number of requests received from host NCAs is significantly reduced; (iii) measures are taken taking into account the repetition or continuation over time as aggravating factors; (iv) remedial actions required from firms are effectively overseen by CySEC, not only based on observations from the firm’s internal or external auditor, but also based on own observations (e.g. review of revised firms’ files and agreements with third parties/clients, actual samples, follow-up on-site visits).