Contact: RSM Cyprus
Understanding and adhering to regulatory requirements isn’t solely the responsibility of regulated entities; it’s also imperative for clients to comprehend how their interests are protected when trading through a regulated entity.
The Investor Compensation Fund provides a safety net for the clients of the regulated entities of the island, and its role and mechanism are analysed herein.
CySEC
The Cyprus Securities and Exchange Commission, commonly referred to as ‘CySEC,’ serves as the independent public authority in the Republic of Cyprus responsible for overseeing the investment services market. Tasked with the mission to ‘exercise effective supervision for investor protection and robust growth of the securities market’ on the island, CySEC fulfils key roles and responsibilities. These include the assessment of applications, issuance of operating licenses, potential suspension or revocation of such licenses, regulation of licensed entities and their transactions, monitoring compliance with applicable laws and regulations, imposition of sanctions, and the issuance of Directives and Decisions.
Why ICF Matters?
The main focus of the Investor Compensation Fund (hereinafter “ICF”) is to safeguard investors in case of a Fund’s member failure. It serves as a safety measure for covered investors, ensuring they are reimbursed for any losses caused by a Fund’s member’s inability to fulfil its financial obligations. This crucial mechanism plays a critical role in promoting reliability and assurance in the Cypriot financial markets, making the island an attractive destination for both local and global investors.
ICF or Fund members
Every Cyprus Investment Firm, Alternative Investment Fund Manager (‘AIFM’), and management company overseeing Undertakings for Collective Investment in Transferable Securities (‘UCITs’), licensed to provide investment and ancillary services, are obligated to join the ICF. Membership in the ICF is not solely a legal mandate but also signifies a firm’s dedication to upholding financial integrity and safeguarding the interests of its clients.
Covered clients
The coverage extends to any client of a Fund member for claims arising from the investment operations offered by the Fund member. However, institutional or professional clients, including other Investment Firms, credit institutions, and professional clients, are excluded from this coverage.
Eligible funds and financial instruments
Eligible funds and financial instruments are those of covered clients held directly or indirectly by the Fund Member. The valuation of the eligible financial instruments is carried out on the basis of their market value. If the combined total of funds and financial instruments per client surpasses EUR 20,000, the surplus amount is not considered when calculating eligible funds.
How much are the initial contribution fees?
Members are required to make an initial contribution to the Fund as follows:
- EUR2,000 per investment service to be rendered,
- EUR35,000 for the safekeeping ancillary service.
These contributions will be refunded only in the event of an unsuccessful authorisation application.
What annual fees does an ICF Member pay?
- Annual Fee
ICF Members with eligible funds and clients’ financial instruments are charged a fixed fee of EUR700 per annum. Those ICF Members without eligible funds and clients’ financial instruments are subject to an annual fee of EUR100.
- Regular Annual Contribution
ICF Members must annually provide the ICF with their audited “Statement of Eligible Funds and Financial Instruments” for the preceding year, no later than May 10 following the year-end.
- If the submission is delayed or the auditor’s opinion is modified, the ICF Member’s contribution is calculated as 1 per thousand of their Eligible Funds and Financial Instruments, or EUR130,000, whichever amount is the highest.
- If the submission is made by the deadline and there are no uncorrected misstatements, the ICF Member’s contribution is calculated as 5 per thousand of their Eligible Funds and Financial Instruments. In case when uncorrected misstatements exist, the ICF
Member’s contribution is calculated as 6 per thousand of their Eligible Funds and Financial Instruments. Should this payment be completed before July 10 each year, an 80% discount is applied.
What is the “Extraordinary Contribution” or “Buffer”?
Every ICF Member must maintain a minimum cash buffer equivalent to 3 per thousand of the eligible funds and financial instruments of their clients from the preceding year. This buffer must be held in a separate bank account within an EU banking institution, exclusively designated for this purpose. Members are obligated to provide a standardised confirmation, signed by their Internal Auditor, verifying compliance with the aforementioned requirement.
How are the payments to the ICF treated on the Members’ financial statements?
Until the effective date of the new ICF Directive (March 2019), the total net capital collected by the ICF is fully refundable to ICF members if their license is renounced and no claims against them crystallise. These amounts are categorised as assets in the ICF Members’ Statement of Financial Position. However, any funds contributed to the ICF by its members from that specific date onward are non-refundable. As a result, they are treated as expenses in the income statement and are not capitalised as assets.
Ensuring compliance with the constantly increasing regulatory updates and staying informed is of utmost importance. Get in touch with us for any concerns or questions you may have about any of the topics covered in this article. Our team of professionals is available to assist and advise you as you navigate the world of regulatory compliance.
