New CySEC Investor Compensation Fund changes and expectations

March 14, 2019, | AtoZ Markets - Cyprus Securities and Exchange Commission (CySEC) has introduced a new ICF directive that will apply to all Cypriot investment firms (CIF) that provide investments or any ancillary services.

CySEC Investor Compensation Fund changes aimed to decrease financial loses

Today, Cysec agreed on the final set of reforms of the legal framework governing the activities of the Investor Compensation Fund or ICF. The updated rules reflect the more stringent approach of the Cypriot regulator, as it tries to find solutions in response to the loss of customer funds observed in recent years.

Cysec Investor Compensation Fund changes controversy

The Cyprus Regulator Initiative came into force almost two years after the organization issued a number of proposals to change how the investor compensation fund is paid in April 2017. One of the cases when the ICF was utilized goes back to 2016, when clients of Falcon boker received compensations up to €20,000. This proves again that a trader should do their due dilligence and only deposit with regulated Forex brokers. The final result of CySEC may be exactly what many industry participants had hoped for in expanding the ICF contribution base. Nevertheless, some of the consequences of a new reform may be less favorable for brokers regulated by Cyprus.

As the Cyprus regulator reports, if audited reports or financial instruments are not submitted on time, the annual contribution rate will be increased to 130,000 euros or one percent (1%) of eligible funds, depending on what amount is the highest. Perhaps some brokers this item seems rather arbitrary and ambiguous.

A regulated CIF previously terminated its payments to the ICF if its total contributions reached a limit of 0.5%. But according to the updated rules, they will continue to increase contributions each year, even if the assets of their retail customers remain unchanged. However, they can now take advantage of the discounts offered if their business and accounting issues remain compatible.

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Cysec Investor Compensation Fund changes in brief

Changes made by the regulator will take effect immediately, with all CIFs required to fulfill the following mandatory provisions. To cover the administrative and operational expenses of the ICF, the new directive introduces annual fees of 700 euros for firms owning clients' assets and 100 euros per year for members who do not have acceptable means.

It is reported that CySEC will not return ICF contributions at any stage, including when their permission is withdrawn for any reason. The new rule will only apply to new entrants since funds raised prior to the adoption of the new directive will continue to be saved as an asset to its payers.

As a result, CySEC changed the maximum compensation for valid claims from the current 100% with a maximum of 20,000 euros so that it constitutes either 90% of the total covered claims or 20,000 euros, whichever is lower. Therefore, coverage = Min. (90% Χ declared amount, € 20.000). This means that an investor who has 50,000 euros in a CIF who has problems and cannot pay will receive 20,000 euros from the ICF. However, if the claim amount is EUR 10,000, coverage will be only 90% or EUR 9,000, not 100% as previously calculated.

Cysec Investor Compensation Fund charges will change

In order to more accurately assess the company's riskiness and the likelihood that its customers apply to the Compensation Fund, CySEC changed the method of calculating the annual contribution to take into account other specific risks. The regulator will charge 0.5 percent (five per thousand) of the total CIF client assets each year. In accordance with the CySEC plan, it is likely that those companies that consider the risk to be lower will be entitled to discounts on their ICF fees. The regulator offers an 80% discount on annual fees if the company complies with all deadlines, and its external auditors have expressed an “unchanging opinion”.

Cysec Investor Compensation Fund additional features

The new document also contains a provision allowing CySEC to calculate unplanned contributions for each category or subcategory of members, rather than on a single basis for all members. Also, to ensure a minimum liquidity limit for immediate payment, CySEC requires members to keep a minimum cash buffer of 3 per thousand assets of their clients in a separate bank account. The CIF will begin to provide evidence of the existence of such contingency reserves from 2020 onwards.

The regulator is also considering forcing retail investors to exercise due caution when choosing their brokers or service providers. This is obvious in order to curb the use of the compensation scheme as a first line of defense if the company collapses, and not as support.

Experts opinions on Cysec investor compensation fund changes

Commenting on the new rules, CySEC chairman Demetra Kalogeru said: “The modernized regulatory framework governing the Investor Compensation Fund provides a balanced, proportionate and risk-based approach to determining the level of contributions required by member firms. The reliability of the ICF is fundamental to maintaining investor confidence and, ultimately, investor protection. Our extensive consultations and related changes will help ensure that this is a well-funded and sustainable mechanism to support compensation to eligible investors in the event of market failure as a last resort. ”

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