The Upgraded Legal Framework of the Investor Compensation Fund

After a year of consultations, CySEC issued on the 13th of March 2019 the reformed legal framework governing the operation of the Investor Compensation Fund(ICF). The new framework is detailed in the new Directive DI87-07, Directive DI144-2007-15 and the PS-02-2019 policy statement.

The ultimate purpose of the ICF is to secure the claims of the clients of entities regulated by CySEC in the event of an adverse scenario and without disturbing the market’s stability. CIFs, AIFMs and UCITs management companies offering investment services and ancillary services are obliged to participate in the ICF.

In this article, we analyze the changes in the requirements, the costs and the additional regulation stemming from the updated ICF legal framework.

Requirements on the initial contribution – With the new directive, the applicant members of the ICF will be obliged to pay the initial contribution for their registration to the ICF, once (and not before) they have received the written direction on the final steps for authorization from CySEC. The initial contribution (excluding the costs of the transaction) is returned to the applicant only if the application was rejected by CySEC in light of new information. Worth mentioning that an existing member of the ICF will require to pay an additional initial contribution upon extension of its license.
With the new directive, the initial contribution made to the ICF will not be returned after the member renounces its license. Members entered into the ICF prior the issuance of the new directive, the funds will be kept under the members account and the unutilized balance will be returned upon the member renounces its license and after resolution of any pending claims.

Requirements on the external auditor’s opinion within the new directive. The auditors must include the materiality level as determined by their audit, while the opinions must be  classified as one of the 4 below opinions and as per the template Form 87-07-06;
– “Unmodified Opinion”,
– “Modified Opinion – Except for Opinion”,
– “Modified Opinion – Adverse Opinion”,
– “Modified Opinion – Disclaimer of Opinion”.
The members of the ICF are obliged to send to the ICF the notified audited ‘statements of misstatements’ in relation to the eligible funds and financial instruments, along with a letter signed from the Board of Directors stating which of the misstatements have been corrected or uncorrected and the total amount of uncorrected misstatements.
A written confirmation by the external auditor related to the consequences of the uncorrected misstatements and its summary must be sent to the ICF combined with the external auditors’ report and the statement of eligible funds and financial instruments.

The initial contribution is changing and the following applies to CIFs, AIFMs and UCITS;
– €35.000 for the safekeeping ancillary service,
– €2.000 per investment service.

The new directive proposes different calculation on the annual contributions and as follows;
– 5‰ of clients’ eligible funds and financial instruments with a discount of 80%, when all deadlines are met, the auditors’ opinion was “Unmodified Opinion” and there are no uncorrected misstatements.
– 6‰ of clients’ eligible funds and financial instruments, when all deadlines are met, the auditors’ opinion was “Unmodified Opinion” and there are misstatements which have not been corrected.
– €130.000 or 1% of clients’ eligible funds and financial instruments (whichever amount is the highest), when the audited statements of eligible funds and financial instruments accompanied by the external auditor’s opinion are not submitted on time or when the auditors’ opinion is not “Unmodified Opinion”.

An additional annual contribution is introduced to cover operational expenses of the ICF which is;
– €700 for members who hold eligible funds and clients’ financial instruments,
– €100 for members who do not hold eligible funds and clients’ financial instruments.
A temporary and additional contribution is allowed to be announced by the new directive and in cases where the ICF has additional operational expenses.

A new so-called extraordinary contribution is created to cover material excessive claims. Therefore, the new directive requires the ICF members to keep in a separate bank account an independently audited minimum cash buffer of 3‰ of their clients’ eligible funds and financial instruments as at the previous year. Now, the members of the ICF are obliged to submit the confirmation form 87-07-05 signed by the Board of Directors and the internal auditor, that attests to the fulfillment of the obligation.

Worth mentioning that members of the ICF that DO not hold funds or client’s financial instruments are only exempted from the annual and the extraordinary contributions.

The below table summarizes the amendments of the ICF deadlines and introduces the new reporting obligations;

Month

Investment Compensation Fund Obligations Deadlines

Deadline

May

The audited statements of eligible funds and financial instruments.

10th of May

(previously

31st of March)

Confirmation form 87-07-05

(shall be submitted for the first time in 2020)

15th – 20th of May

June

The annual contribution shall be notified in writing to the members of the ICF.

10th June

(previously

30th of April)

July

The annual contribution must be made to the ICF if a discount can be granted.

10th of July

(previously

15th of May)

August

The annual contribution must be made to the ICF.

10th of August

(previously

31st of May)

Other

The deadline for the additional annual contribution will come into force one month after the official announcement of the new legislation.

Lastly, the new legislation sets a maximum limit of compensation coverage and equal to the minimum between €20,000 or 90% of the covered investor’s claim and emphasize that the maximum coverage for join investment business is treated as a single investor.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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