George Karatzias, vice-chairman of the Cyprus Securities and Exchange Commission (CySEC), explains why the island’s funds industry is experiencing the highest growth rate in Europe.
Cyprus is widely considered a promising and emerging jurisdiction for fund managers and fund structures within the EU. As the regulator, CySEC has worked to overhaul and modernise Cyprus’s investment funds regulatory framework, enhancing its appeal to fund managers and undertakings for collective investments without sacrificing investor protection and corporate governance in the process.
The island’s proximity to the Middle East and Africa, access to the EU markets and the relatively efficient costs of setting up a business are amongst the other key reasons fund managers are now considering Cyprus as their jurisdiction of choice.
As a result, Cyprus experienced the highest net asset value (NAV) growth rate in all fund categories in Europe during the fourth quarter of 2020, according to the European Fund and Asset Management Association (Efama).
Today, CySEC has 289 management companies and Undertakings of Collective Investments (UCIs) under its supervision, compared to 102 in 2016, an increase of more than 183%. By the end of June 2021, the total assets under management in UCIs recorded a 295% increase since the end of 2016 and a 24% increase compared with the end of 2020, despite the challenges of the last two financial years.
As an indication of the investments held by CySEC-regulated alternative investment funds, these include private equity funds (36,7%), hedge funds (14,9%) and real estate (12%), and sectors of the economy like energy, shipping, sustainable finance and fintech are benefiting. At the same time, the majority of Ucits strategies are concentrated in transferable securities (86.4%), as expected.
A key milestone to this emergence was the modernisation of the Alternative Investment Funds Law in 2018 through which Cyprus has encouraged the structuring of alternative assets in sectors where the island already has a strong global presence such in shipping, real estate as well as in emerging sectors such as energy, sustainable investments and fintech.
Mini-managers
The national legal framework governing collective investments has been further enriched in recent years. This includes a new national regulatory category relating to so-called mini-managers, those fund managers that manage alternative investment funds falling under the AIFM thresholds.
A necessary complement to the previous enactment of the Registered Alternative Investment Funds (Raif), the introduction of the mini-manager allows smaller managers to operate within a regulatory framework commensurate to the size of their operation, whilst at the same time ensuring they adhere to the best practice standards for investor protection and investment risk management.
Also in 2020, we saw investment-based crowdfunding services carved into the investment services law (transposing MiFID, the Markets in Financial Instruments Directive) in Cyprus, and the first application is in the process of being granted a license. The rules will soon be replaced by the European Union’s Crowdfunding Regulation, which comes into effect on November 10.
In terms of upcoming legislation, CySEC is particularly interested in the AIFM Directive consultation process and is keen to support policy initiatives that aim to enhance investor protection. In this context, we welcome the introduction of tools that are able to offer greater investor protection and limiting market fragmentation, such as the introduction of the passporting of depository licences throughout the EU.
Our policy for any new European directive is to ensure that it becomes part of national legislation as soon as possible. In my new role as vice-chair of CySEC, I am keen to ensure that CySEC stays ahead of sustainable finance trends, particularly when it comes to risks related to ESG factors that may have an impact on the financial system, and the mitigation of these risks through appropriate governance.
In the local regulatory environment, CySEC is introducing a legal framework regulating the fund administration function. Fund administration plays a pivotal role in the industry and it is essential that fund administrators have a structured regulatory framework to guide their activities. Currently CySEC is assessing the responses received from the industry from the consultation paper.
CySEC is also reviewing the permissible investment strategies for fund managers focusing on the area of loan origination and loan participation. In particular, we expect a revised directive to be released in the near future enabling the strategy for Raif structures.
In terms of available legal forms, a proposed legislation is currently with parliament pending its enactment, introducing a new version of partnership for funds. The limited liability partnership is enabling many aspects previously unavailable for Cyprus partnerships such as the introduction of compartments as well as the concept of the separate legal personality while maintaining its tax-transparent nature.
In addition, CySEC has commenced research on the possibility of introducing a new legislation for crypto funds, which is at a very early stage at the moment.
Healthy growth
The funds industry is constantly evolving, as is regulation, and CySEC is committed to ensuring that market participants maintain a comprehensive understanding of relevant and applicable regulation. We believe that the substantial regulatory improvements made by CySEC, along with those already in process and the advantages offered in Cyprus to fund managers and funds, are creating all the necessary preconditions for the healthy growth of the collective investment sector within an investor-protecting environment.
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