CySEC introduces changes to Investor Compensation Fund framework

Maria Nikolova

Under the new requirements, ICF members will have to keep an independently audited and client-segregated minimum cash buffer of 3‰ of their clients’ eligible funds and financial instruments.

The Cyprus Securities and Exchange Commission (CySEC) today issues its final Policy Statement which sets forth the legal framework governing the operation of the Cyprus Investor Compensation Fund (ICF). The publication of this Policy Statement happens nearly two years after the Cypriot regulator issued a consultation paper on the proposed amendments to this legal framework.

The reforms aim to ensure the ICF secures the claims of covered clients of regulated entities who are fully registered members of the ICF in the event of an adverse scenario without disturbing market stability. The obligation to participate in the ICF applies to all entities providing investment services and ancillary custody services irrespective of whether clients’ funds and financial instruments are held. This means that participation in the ICF is compulsory for Cyprus Investment Firms (CIFs) too.

The reforms envisage calculating members’ annual ICF contributions using a risk-based approach, which takes into account the reliability of statements of eligible funds and financial instruments, the amount of clients’ eligible funds and financial instruments of a respective member and the timing of the payment of the annual contribution.

Under the changes, any provisions in relation to limiting or refunding the contributions of the members that will be paid to the ICF pursuant to the New ICF Directive will be removed.

ICF members will be required to keep an independently audited and client-segregated minimum cash buffer of 3‰ (3 per 1,000) of their clients’ eligible funds and financial instruments.

There will be no limiting of potential extraordinary contributions by an ICF member in the event of an adverse scenario which requires the ICF to fund compensation due to investors, should the necessary requirements be met.

The new rules apply the discretion provided for in Directive 97/9/EC on the levels of investor compensation such that the maximum limit of compensation coverage equals €20,000 or 90% of the covered investor’s claim, whichever is lower.

Furthermore, the payment of initial contributions will have to be made by candidate members or existing members prior to obtaining an authorisation to operate and/or prior to extending their authorisation to operate – but only after the core criteria for granting authorization by CySEC has been examined and upon receiving relevant approval instructions by CySEC.

Under the revised legal framework, an annual registration fee for ICF members to cover the nominal cost of the ICF’s operation will be introduced, so that the ICF is in a position to cover contingent expenses that may surface, such as the cost incurred for the collecting, recording and assessing the claims of covered investors, in the event that the compensation procedure for a large member (e.g. a member with thousands of investors) is activated.

It would be interesting to see whether the ICF would actually help investors. Certain Cypriot institutions that formally aim to help clients of financial services companies have been pretty clumsy. Navigating the website of the Cypriot Financial Ombudsman, for instance, is a task suitable solely for those who like labyrinths.

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