It appears that CySEC is well on its way to implementing its expressly stated objective of exercising more stringent controls on the investment firms under its supervision. In an announcement circulated to all Cyprus Investment Firms and also posted on the regulator’s website on 22nd January 2014, the Commission addresses the common practice which exists among CIFs to be offering trading benefits, such as bonuses, to their clients subject to certain conditions. CySEC points out to CIFs that associating such bonuses to the funds that clients deposit in their trading accounts is only permitted if the clients are free to withdraw their funds at any time.
The Commission remarks that is has observed that this rule is not always upheld, because there have been cases where clients who have been granted a bonus are then restricted from withdrawing funds from their account unless they previously reach a specific trading volume determined by the CIF.
CySEC draws the CIFs’ attention to the fact that such restrictions placed on the clients’ ability to withdraw their funds is unacceptable and in breach of the relevant provisions of the Investment Services and Activities and Regulated Markets Law, as well as the European Commission’s Directive DI144-2007-01 of 2012. Pointing out that curbing the right of clients to withdraw their funds until they have achieved a specific trading volumes and therefore forcing them to conduct more trades is unacceptable as fair and good practice towards clients, CySEC then refers to the specific articles of the relevant law which are breached. These are Section 18(2)(j), which states that a CIF, when holding funds belonging to clients must take every possible measure to safeguard clients’ rights and Section 36(1), according to which CIFs must act honestly, fairly and professionally when providing investment services to their clients. It is also noted that this practice contravenes with the EU Directive regarding the provisions for the safeguarding of clients’ funds.
Therefore, CySEC clarifies to all CIFs under its supervision that if they are to continue granting monetary benefits, such as bonuses to their clients, then they must ensure that they are also providing “accurate, clear and not misleading information, when advertising such a scheme.” Moreover, there should be a detailed description of exactly how the scheme works and what its terms and conditions are, provided to all clients. CIFs must also ensure that they are always to separate the actual funds belonging to the clients from the monetary bonus granted to a client, while CIFs are also responsible to safeguard, through monitoring an appropriate measures, that their capital adequacy is not affected by the granting of monetary benefits.
In a nutshell, CySEC warns CIFs that it is aware that some of them are breaking the law and are offering bonuses in exchange for larger trading volumes, which however keep the traders’ own funds as hostage, since no withdrawal is permitted until the trading volume target is reached. The regulator is sending the clear message that such a practice should stop and also tells CIFs that if they are to be offering such bonus schemes, these should not interfere with the clients’ right to withdraw funds whenever they want. Through this circular, early in the year, CySEC is perhaps paving the way to be able to impose sanctions on those CIFs who will ignore this warning and continue this practice, thus breaching the relevant legal provisions.