Exclusive: Investors aren't 'Doing their Homework', Says CySEC Chair

<p>When<a href="https://www.financemagnates.com/executives/moves/cysec-appoints-dr-george-theocharides-as-new-chair/"> Dr. George
Theocharides assumed his role as Chairman of CySEC</a> in September 2021, he
adorned his office with a captivating painting by the Cypriot artist, Marina
Olympios. The artwork's colors, injecting life into the
otherwise austere atmosphere of CySEC headquarters in Nicosia, are made from minerals that represent the geological formation and evolution of the island. </p><p>As it hung above us, in more than an hour-long conversation, Dr. Theocharides broke down the very different formation and evolution of the island as an emerging hub for financial services. ‘It has grown
and matured,’ he says in this exclusive interview with <a href="https://www.financemagnates.com/">Finance Magnates</a>, ‘and
has become a much more scrutinized environment.’</p><p>‘Not the Right
Compliance Culture’</p><p>One of the first topics that came up was CySEC's growing importance as a global player. All in all, the watchdog is 'satisfied' with <a href="https://www.financemagnates.com/tag/cysec/">CySEC</a> mission and vision, to protect
investors in Cyprus and abroad. </p><p>‘The market has grown, and the requirements have grown as
well,"he says, sharing that he is hiring. 'We regulate and
supervise about 840 entities. A total of 32 new staff members have joined CySEC since October
2021, and many have supervisory duties. We are in the
process of hiring an additional 42 staff to enhance CySEC’s supervision
departments.’</p><blockquote><p lang="en" dir="ltr">The <a href="https://twitter.com/hashtag/CySEC?src=hash&amp;ref_src=twsrc%5Etfw">#CySEC</a> family is growing. The new recruits are undergoing a three day introductory and orientation process, which includes learning about the organization and its structure, culture, vision, mission and values. <a href="https://t.co/6JcLOzYGfk">pic.twitter.com/6JcLOzYGfk</a></p>— CySEC (@CySEC_official) <a href="https://twitter.com/CySEC_official/status/1676250729412018176?ref_src=twsrc%5Etfw">July 4, 2023</a></blockquote><p>The market may get
bigger, but many brokers are shutting down or consolidating.</p><p> ‘It's not
something we’re seeing in any significant way. Some firms joined the industry,
some are exiting, It's the trend that we see. There was substantial growth in
the investment firm sector in Cyprus after 2013. We have reached a <a href="https://www.financemagnates.com/forex/exclusive-cysec-offers-140000-for-investigating-cypriot-investment-firms/">stable level
of around 240 CIFs</a>. The latest data was 247, at the end of 2022 it was 248, at
the end of 2021 it was 243.’</p><p>Why would a firm want
to exit the industry?</p><p> ‘For multiple reasons. Some are not able to meet the new
requirements from <a href="https://www.financemagnates.com/forex/analysis/mifid-ii-more-harm-than-good/">MiFID II</a>, the Anti-Money Laundering and Financing Terrorism
Law, or the measures imposed either by the European Securities and Markets
Authority or CySEC.’</p><p>Do you help firms
reach that understanding?</p><p> ‘We might sit down with the firm and tell them,
'Look, we feel that you don't have the right compliance culture, and it's best
for you to withdraw your license.' </p><p>Some of them voluntarily withdraw. In other
cases, they might not have enough customers; it might not be profitable for
them. There are also cases where they obtain a <a href="https://www.financemagnates.com/forex/cysec-withdraws-cif-license-of-fxcfds-broker-trilt/">CIF license </a>but do not proceed
with activation for their own reasons. Setting up an investment firm these days
is very expensive. This is why we see a trend of consolidation in the industry.’</p><p>Do you encourage that
as a regulator?</p><p> ‘We're certainly not against it. I believe it's good for the
market to reach a state of consolidation where you have bigger players with the
financial capacity to maintain the appropriate compliance culture. Acquisitions
and consolidations are needed.’</p><p>What is the ideal
number of active investment firms in Cyprus?</p><p> ‘I don't think there should be
one, mainly because the market is not here. A MiFID license gives the firm the
freedom to passport their services across the European Union – a market of 350
million people. Luxembourg is smaller than <a href="https://www.financemagnates.com/fintech/with-new-rules-in-place-vanuatu-wants-to-become-the-next-cyprus/">Cyprus</a> and has the second biggest
funds industry in the world, after the United States. And it's the number one
in terms of cross-bordering, with almost 6 trillion of assets under management.
So I can't put a number on what I feel should be the ideal figure.’</p><p>Theocharides sees
growth potential in the funds sector. ‘CySEC has led efforts to modernize the regulatory framework for investment funds’, he says, ‘aiming to
enhance Cyprus's appeal while maintaining investor protection and corporate
governance. </p><p>As a result, Cyprus's collective investment funds industry has
experienced healthy growth, with over 330 entities and a 200% increase in
assets under management since 2016. The sector currently manages close to €10
billion, showcasing significant growth potential and positioning Cyprus as a
potential regional hub for funds.’</p><p>‘No Tolerance to Aggressive
Marketing’</p><p>According to data
disclosed by trading platforms, less than 25% of retail traders make money
trading <a href="https://www.financemagnates.com/forex/education-centre/the-rise-of-cfd-trading-exploring-its-popularity-and-growth/">forex &amp; CFDs </a>with regulated brokers. A survey of 28 of the most
popular CFD providers found that the percentage of losing accounts ranged
between 54% and 83%, with the average being 76% in the red. ‘The percentage
depends on what type of speculative product it is,’ Theocharides says, ‘Retail
clients invest also in traditional assets, bonds, and stocks. It's very, very
different.’</p><p>So it's the Investors'
responsibility?</p><p>‘Although the law is designed to protect investors, and
investor protection is at the heart of what we do as a regulator, investors
have a key responsibility for the investments they make. If they want to
invest, they have to make an effort to at least learn about what they're doing
and improve their financial literacy. </p><p>‘CySEC has placed financial literacy and
promoting awareness of investor education among its key strategic objectives.
We conducted a survey in the UK, France, Germany, and Cyprus with over 200
retail respondents. </p><p>And we have some important findings: a lot of investors are
not doing their homework, are not at least finding out if the entity is
actually properly regulated or not.’</p><blockquote><p lang="en" dir="ltr">Don’t invest more than you can afford to lose.Read more on our survey on retail investor behaviours and habits: <a href="https://t.co/bKdcacWQSg">https://t.co/bKdcacWQSg</a><a href="https://twitter.com/hashtag/ThinkBeforeYouInvest?src=hash&amp;ref_src=twsrc%5Etfw">#ThinkBeforeYouInvest</a> <a href="https://twitter.com/hashtag/investorprotection?src=hash&amp;ref_src=twsrc%5Etfw">#investorprotection</a> <a href="https://twitter.com/hashtag/financialliteracy?src=hash&amp;ref_src=twsrc%5Etfw">#financialliteracy</a> <a href="https://twitter.com/hashtag/financialeducation?src=hash&amp;ref_src=twsrc%5Etfw">#financialeducation</a> <a href="https://t.co/EoAbefAr4s">pic.twitter.com/EoAbefAr4s</a></p>— CySEC (@CySEC_official) <a href="https://twitter.com/CySEC_official/status/1620693131254722562?ref_src=twsrc%5Etfw">February 1, 2023</a></blockquote><p>What is the
regulator's role in promoting financial literacy?</p><p>‘We actively engage through
media, articles, social media, and initiatives like the National Strategy for
Financial Education in Cyprus, and we support European and global awareness
campaigns for financial literacy, such as the IOSCO's World Investor Week. </p><p>We
recognize that technological evolution is drawing new and inexperienced
investors to financial markets and so we have launched a multi-channel campaign
to enhance financial literacy as a first <a href="https://www.financemagnates.com/forex/cysec-finds-31-of-retail-investors-rely-on-finfluencers/">line of defense against investment
scams </a>and mis-selling of investment products.</p><p> ‘Late last year, CySEC released a
short online quiz for the public to evaluate and test their knowledge on basic
financial matters. So far, the quiz has reached over 10,000 individuals. It is
crucial that when we are developing new tools and strategies to enhance the
protection of investors, we take these issues into account.’</p><p>What about the
information that is conveyed to investors by brokers?</p><p>‘We have a responsibility
to ensure that the information given to investors by regulated entities is
accurate. We take action where there's any misinformation or misguidance. The
rise of digital and the use of social media to promote investments has made it
more difficult. One of the ways CySEC is addressing this is through the
acquisition of a specialized system that analyzes and monitors firms' online
marketing materials and social media activities. </p><p>The system detects all related
mentions from any source globally, including social media, news sites, forums,
blogs, video sites, and ad networks. We do not tolerate aggressive marketing
behavior or the provision of misleading information to investors or other
abusive practices.’</p><p>Do you think
Finfluencers should be regulated?</p><p>‘There are already more restrictions in
terms of the information that <a href="https://www.financemagnates.com/forex/finfluencers-had-a-good-run-but-the-party-may-fizzle-out/">these people </a>can actually provide to the market. There are a lot of regulatory developments on the marketing practices for digital
assets right now. For example, in Spain, there is a decision for the
prohibition of any marketing of CFDs or other speculative products to the mass
public. </p><p>So, there are a lot more restrictions on the way. At CySEC, we work
hard to ensure CIFs fully comply with their regulatory obligations, with an
emphasis on strengthening their compliance function and reevaluating the
competence of their staff, and this includes personnel within their sales and
marketing functions.’</p><p>Chasing Board Members</p><p>CySEC has been
criticized in the past for being too lenient on firms regarding compliance with
regulations, and Cyprus was regarded as an easy way into Europe. Theocharides
is of course aware of the stigma but insists that the present is a different
story. ‘I am satisfied with the mission and vision of CySEC to protect
investors in Cyprus and abroad. There has been a lot of transformation in terms
of our policies, procedures, and actions in the last decade’, he insists, ‘I am
satisfied with the mission and vision of CySEC to protect investors in Cyprus
and abroad.</p><p>'CySEC has a strong commitment to the responsible growth of the
investment sector, growth that is underpinned by rigorous supervision to
safeguard investor protection. We view any misconduct by supervised entities
seriously and we are determined to bring non-compliant operations to a halt in
order to enhance investor protection and the responsible growth of the
investment sector’.</p><p>How is this
declaration translated into action?</p><p> ‘Over the last ten years, CySEC has imposed
fines amounting to 35.3 million euros, of which 14.3 million euros were imposed
on Cyprus investment firms. CySEC has also revoked the license of supervised
entities in 17 cases. That's the ultimate sanction. In addition, we have banned
some individuals from operating in the sector for up to ten years.</p><p>'In the last
12 months alone, we suspended more than 65 investment firms and ordered them to
take corrective measures to improve their internal procedures and practices to
fully comply with their legal obligations. </p><p>In some cases, information is sent
to the Attorney General to <a href="https://www.financemagnates.com/forex/cysec-finds-31-of-retail-investors-rely-on-finfluencers/">investigate potential criminal offenses</a>. Recently we
imposed a million Euro fine on iTrade, a Cyprus Investment Firm, for
infringement of multiple provisions of the Investment Services and Activities
and Regulated Markets Law of 2017.’</p><p>In what cases do you
tend to settle?</p><p>‘When we see that this is the first time that we are observing
certain potential violations, although even then the settlement comes with a
number of corrective measures that the entity has to take, and this is
monitored and reviewed by us. Firms that do not comply or show continuing
weaknesses are subject to fines and other sanctions. The settlement is an
agreement that cannot be disputed in court.’</p><p>How do you calculate
the fines?</p><p>‘It's based on the violations or the potential violations. We have a
range. In more serious cases, we have gone after the members of the board and
imposed fines directly on them.’</p><p>It was published
lately that CySEC representatives visit brokers' premises.</p><p>‘We have on-site
visits at the authorization stage and for ongoing entities as well. If it's a
supervisory visit, we look closely at platforms. If it's a CIF that uses <a href="https://www.financemagnates.com/forex/metatrader-4-or-5-which-one-is-the-king-of-forex-trading/">MT4 or
MT5</a>, we will download data and communications. We will go into the back-office
documents, the CRM. If it's an investigation, a specific matter, then we will
be looking at it specifically.’</p><p>Is it a coordinated
visit or a surprise?</p><p>‘If it's for authorization, we will inform them. If it's
an investigation, depending on the type of the investigation they can be
scheduled or unexpected visits. They might be surprised, but for us, it doesn't
matter. The important thing is for them to cooperate.’</p><p>I've been reading a
lot about brokers offering their licenses for sale. How does it look from your
side?</p><p>‘There's a lot of reasons why people want to exit the industry. So, they
might have a license which has some value and wish to sell. For us, a new
application triggers a robust process to ensure that the entity can meet its
obligations under the law and contribute to strong investor protections. The
process includes stringent due diligence on the owners. This process takes
months where we will contact foreign regulators. </p><p>‘If there are any
organizational structures – let's say they want to change the board – we have
to interview all the new board members and the key function holders. Sometimes
they might decide to acquire an entity but also to change the business model.
For example, instead of targeting retail clients, to become a
business-to-business entity. So, then we have to examine the business model as
well.’</p><p>Can you share what the
future holds for the offshore registries? Will it be like the St. Vincent and
Grenadines case?</p><p>'The groups in this industry don't hold one license but
<a href="https://www.financemagnates.com/forex/can-new-offshore-brokers-adapt-as-metaquotes-tightens-white-label-policy/">multiple licenses </a>because regulation is fragmented. It's very important and a
must for us to have a clear separation. What are the markets? How do you
identify the different entities within the group? They need to have separate
records, separate people, separate boards, separate domain names. We don't have
powers over the entity in the third country because there's a different
regulator there. </p><p>‘However, if we feel that somehow the group is trying to
utilize the MiFID license to potentially circumvent any European clients to any
third country entities, we will take severe action. We can exert pressure on
them. We can look at the suitability of the UBOs (Ultimate Beneficial
Ownership) of the group. Regulation is not uniform across the globe. Hopefully,
one day we'll get there, but it's not in the near future.’</p><p>To wrap up this part
of the interview, what is your vision for the future of the forex and CFDs
industry in Cyprus?</p><p> ‘My view is that the enhanced regulatory requirements being
imposed will probably lead to more consolidation. There will be more <a href="https://www.financemagnates.com/forex/regulation/cysec-warns-cfds-brokers-to-improve-practices-or-face-action/">product
intervention measures for the CFDs</a>, and that will be decided at the European
level. It's a good thing because I believe that firms that have a strong
compliance culture can survive within this intense regulatory environment. The
ones that cannot survive might find a home in another industry, maybe gaming.’</p><p>In the second part of
the interview, CySEC Chief talks AI, fintech, and the FTX saga.</p>

This article was written by Yam Yehoshua at www.financemagnates.com.