Preparing for a CySEC inspection in 2021

The Cyprus Securities and Exchange Commission (CySEC) published its recent compliance review for Investment Firms, Investment Fund Managers, and UCITs. We expect the reported deficiencies as well as good practices to form the basis of inspections for the year 2021. This is in line with the aim of CySEC, which is to effectively supervise the regulated firms and ensure robust investors’ protection, safeguard investors’ best interests and support the healthy development of the securities market.

CySEC Supervisory Priorities for 2021

Backing the regulator’s primary goal to support the regulated firms in complying with their regulatory obligations, CySEC has outlined its main priorities and supervisory activities for 2021. The Commission remains committed to continue providing guidance to the regulated entities and assisting them in achieving a high level of compliance while praising the identified best practices.

This guidance and support by CySEC is being achieved through the issuance of

  1. Circulars, where CySEC provides guidance and Q&As to assist firms in complying with the applicable legislation.
  2. Thematic reviews, where CySEC provides findings and weaknesses identified from inspections, as well as best practices that are considered acceptable.

In this commentary, the Risk and Compliance specialist team at SALVUS summarizes CySEC’s key priorities and supervisory activities for 2021, and furthermore, we provide compliance tips and insights through our previously authored articles.

CySEC Priority Plans for Cyprus Investment Firms (CIFs)

  1. Continuous monitoring of the compliance of high risk and medium-high risk CIFs with all their regulatory obligations which govern their operations.

SALVUS Tips: If you are, or work for, a high or medium-high CIF,

  1. Monitoring the compliance of medium-to-low and low-risk CIFs, focusing on regulatory areas that entail significant risks to investors or market stability.

SALVUS Tips: Highly important for medium-to-low and low-risk CIFs to conduct appropriate suitability assessment, identify their target market and negative target market and produce the pre-trade Key Information Documents (KIDs/PRIIPs).

  1. Monitoring the compliance of CIFs with their reporting requirements as required under the
    • Markets in Financial Instruments Regulation (MiFIR),
    • European Market Infrastructure Regulation (EMIR),
    • Central Securities Depositories Regulation (CSDR),
    • Securities Financing Transaction Regulation (STFR) and
    • Securitisation Regulations.

SALVUS Tips:Enhance your practices on Transaction reporting by appointing a responsible person within the CIF to oversee the reporting in a timely manner, perform reconciliations and rectify any mismatches or rejections.

  1. Concerning the prudential framework, emphasis will be given to safeguarding of clients’ assets, risk management procedures, capital adequacy requirements (Pillar I, Pillar II, and Pillar III requirements). In addition, as is mentioned in section A above, CySEC will focus its activities on the smooth transition of the Cyprus Investment Firms from the existing prudential framework (CRD/CRR) to the new one, which consists of the Directive (EU) 2019/2034 (IFD) and the Regulation (EU) 2019/2033 (IFR)) and will enter into force on 26th June 2021.

SALVUS Tips:Design & implement an effective & sound Internal Capital Adequacy Assessment Process (ICAAP) and get prepared for the Supervisory Review and Evaluation Process (SREP) by CySEC.

  1. Analysis of current events related to each sector as a whole and investigating potential drivers of poor outcomes for investors and market stability. Such topics are
    • product governance requirements;
    • obligations to provide certain information to clients or potential clients, including marketing communications;
    • appropriateness and suitability assessment requirements;
    • obligations in regard to the national product intervention measures in relation to the marketing, distribution or sale of CFDs and Binary Options;
    • transparency requirements;
    • cost and charges requirements;
    • governance requirements;
    • clients’ funds requirements; and
    • enhancing the quality of data for the various reporting regimes.

SALVUS Tips:Become familiar with the suitability and Client appropriateness assessment, enhance your product governance, and ex-post information on costs and charges as per MiFID II.

CySEC Priority Plans for Investment Fund Managers and UCITs

  1. Monitoring the compliance with their regulatory obligations, with emphasis given on the below regulatory requirements:
    • UCITS liquidity risk management requirements;
    • UCITS cost and fees requirements focusing on ongoing charges;
    • AIF valuation policies and procedures requirements; and
    • AIF requirement of raising of minimum capital from investors.

SALVUS Tips:The new regulatory framework on liquidity stress testing (LST) and its requirements came into force only on the 30th of September 2020, with the SALVUS team implementing several projects in this area. SALVUS authored an article on liquidity stress testing (LST) that can provide AIFMs and UCITs Companies more insights on how to implement sound liquidity stress test policies and models.

  1. Monitoring their compliance with the requirements for reporting the information as referred to in the AIFM Directive (2011/61/EU) and the European Commission Regulation (2013/231).

SALVUS Tips:As per the latestCyprus Investment Funds Statistics – December 2020, the Alternative Investment Funds (AIFs, RAIFs, AIFLNPs) sector accelerated its increase, in terms of total assets under management and the number of reporting entities. Therefore, it is expected that the responsibilities and requirements for the AIFMs will be enhanced. An earlier authored article provides more details of the responsibilities and requirements of the AIFMs and the AIFs and the AIFMs Risk Management Framework.

Conclusion

All CySEC regulated entities should consider the issues raised in circulars and thematic reviews, in order to enhance their policies and arrangements and to ensure compliance with the applicable legislation. Entities shall get prepared in advance for inspections by CySEC, especially on the topics mentioned in the regulator’s supervisory review.

SALVUS is continuously engaged to support firms enhance their practices and ensure compliance with their regulatory obligations and even more so, we have taken part in real inspections by CySEC successfully for our clients and partners.

We will be glad to help you with

  • a gap analysis,
  • consultation on any of the items within this article,
  • audits and
  • getting you prepared for an anticipated inspection.

We remain at your disposal and should you have any questions, please contact us at [email protected].

#StayAhead.

If you are interested in reading more on other regulatory topics, please visit the selected articles below:

1 Our team was the first and only team to submit on time for the then newly introduced EMIR in 2014 and then again for MiFIR in 2018.

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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