## cr06347

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### Overview
- The financial system in Cyprus is undergoing reform driven by liberalization and the regulation associated with accession to the European Union (EU).
- Restrictions on the scope of domestic operations and fiscal differences between domestic and internationally-oriented institutions were eliminated at the end of 2005.
- Commitments from EU accession have strained supervisory resources across sectors, requiring enhanced skills and training.
- The Republic of Cyprus joined the EU in May 2004; the government-controlled area had a population of 796,000 and per capita income of $16,602 in 2003.
- Financial intermediation contributed 5.7 percent to real GDP in 2003; the group “real estate, rentals and business activities” was 14.1 percent of total output in 2003.
- Real growth was expected to average 3.5 percent in 2004–05; Cypriot pound de facto central parity is €1.7086: £C 1 with a formal fluctuation margin of ±15 percent.
- Corporate tax rate of 10 percent was in place; the 2005 MONEYVAL mutual evaluation found AML/CFT provisions and supervisory arrangements “quite satisfactory” though indicating areas for improvement.

### Supervision and regulatory capacity — cross-sector findings
- Banking supervision
  - Central bank independence and technical supervisory rules have been improved; independence enshrined via Central Bank Law amendments (July 2002) and constitutional provisions.
  - Additional qualified/specialized supervision staff required for:
    - validation and monitoring of banks’ internal risk systems and models;
    - financial stability analysis;
    - meeting commitments towards EU institutions;
    - expanded cross-border supervision arising from bank expansion.
  - CBC “aims at taking all necessary steps to strengthen its Banking Supervision and Regulation Division” to meet increased demands.
  - CBC issued the Capital Adequacy Directive (CAD) and a directive setting 90 days in arrears as the criteria for classification of credit as nonperforming effective January 1, 2006.
- Cooperative credit institutions (CCIs)
  - EU credit directives transposed into cooperative credit laws; secondary legislation and guidelines are in process.
  - Parliament approved enhancement of the Cooperative Societies’ Supervision and Development Authority (CSSDA) (Official Gazette July 2005), providing for 17 additional staff and upgrading salary levels; 14 of the additional staff will reinforce supervisory staff, “tripling the present supervisory resources.”
  - Changes during the transitional period are managed through cooperation among CSSDA, the Cooperative Central Bank, the Pancyprian Cooperative Confederation, and the Audit Office of Cooperative Societies.
  - CCIs face transitional conformity requirements by end-2007 on organization, internal controls and audit systems, corporate governance, and prudential ratios.
- Insurance supervision
  - Insurance Services Law implemented; little secondary legislation or guidance available.
  - Draft prudential regulations and guidelines recommended as a starting point.
  - Authorities will “expedite” recruitment of appropriate qualified staff and outsource legal services for EU harmonization and implementation needs.
  - ICCS staffing: nine skilled personnel and seven support staff; ICCS budget forms part of the Ministry of Finance’s budget.
- Securities supervision
  - CySEC is well-staffed with requisite skills (skilled staff of 40) and has adopted EU directives; CySEC’s budget for 2006 provides for a 29% increase in the budget allocated for staff costs.
  - Legal constraints limit cooperation with foreign regulators when CySEC does not have an independent interest in the matter under investigation.
  - Difficulty accessing information on beneficial owners of shares registered in the names of lawyers acting as nominees; CySEC finalizing a bill to remove obstacles and to give clear authority to secure beneficial owner information; enactment of amendments expected in 2006.
  - Planned amendment to the Stock Exchange Act was enacted in September 2005, clarifying CySEC’s regulatory role.

### Key recommendations (summary)
- Banking
  - Substantially increase resources and specialized staff for the CBC’s Banking Supervision and Regulation Division.
  - Recruit and staff the four existing vacancies at the CBC supervisory department at an early date.
  - Hire additional qualified/specialized supervision staff for validation and monitoring of internal models, financial stability analysis, engagement with EU institutions, and monitoring overseas expansion.
  - Develop and circulate a comprehensive framework of guidelines regarding country and market risk.
  - Finalize implementation of more stringent criteria for suspension of recognition of interest on problem loans.
- Cooperative credit institutions
  - Substantially increase supervisory resources, inclusive of training.
  - Develop an overarching change committee to manage transitional changes and avoid duplication and prudential gaps.
  - Issue regulatory decisions defining permissible activities and investment criteria; mandate semi-annual reporting on compliance with capital requirements.
  - Strengthen on-site and off-site supervision, accelerate connection to centralized reporting, and design automated analytical monitoring and early-warning systems.
- Insurance
  - Draft prudential regulations and guidelines; review skills in the insurance supervision division and recruit or outsource where necessary.
  - Grant ICCS budgetary autonomy and increase staffing; upgrade the market report to annual publication; develop corporate-governance rules in coordination with other supervisors.
  - Require solvency capital to be reported quarterly and ensure assets admissible for solvency are properly recognized.
- Securities
  - Ensure forthcoming legislation removes constraints on cross-border cooperation and access to beneficial ownership information.
  - Introduce legislation to allow effective supervision of the Exchange and clarify respective roles of CySEC and the Exchange (Stock Exchange Act amendment enacted September 2005).
  - CySEC to finalize UCITS valuation rules before authorizing any schemes and to increase skilled staff.

### Financial institutions and market structure — selected statistics (exact figures preserved)
- Commercial banks — number of institutions: 2000: 12; 2001: 12; 2002: 14; 2003: 14; 2004: 14; 2005: 14
- Cooperative credit institutions — number: 2000: 360; 2001: 363; 2002: 363; 2003: 361; 2004: 358; 2005: 348
- International Banking Units — number: 2000: 27; 2001: 24; 2002: 28; 2003: 28; 2004: 29; 2005: 28
- Commercial banks — total assets (C£ millions): 2000: 12,776; 2001: 14,936; 2002: 15,565; 2003: 16,621; 2004: 17,818; 2005: 22,008
- International Banking Units — total assets (US$ million): 2000: 10,545; 2001: 10,150; 2002: 8,139; 2003: 9,036; 2004: 12,531; 2005: 17,081
- Commercial banks — advances and loans (C£ millions): 2000: 6,766; 2001: 7,652; 2002: 8,283; 2003: 8,683; 2004: 9,332; 2005: 9,972
- Commercial banks — total deposits (C£ millions): 2000: 9,995; 2001: 11,474; 2002: 11,999; 2003: 12,193; 2004: 13,102; 2005: 16,024
- Commercial banks — non-resident deposits (C£ millions): 2000: 3,759; 2001: 4,396; 2002: 4,209; 2003: 4,133; 2004: 4,610; 2005: 6,649
- Commercial banks — return on assets: 2000: 1/1.5; 2001: 0.6; 2002: -0.1; 2003: -0.1; 2004: 0.3; 2005: 0.6
- Stock market capitalization (C£ millions): 2000: 8,296; 2001: 5,578; 2002: 4,374; 2003: 4,442; 2004: 4,506; 2005: 6,242
- Cyprus pounds per US dollar (end period): 2000: 0.62; 2001: 0.65; 2002: 0.55; 2003: 0.46; 2004: 0.43; 2005: 0.48

### Banking sector structure and supervision details
- Sector components: (i) commercial banks; (ii) cooperative credit institutions; (iii) international banking units.
- Domestic credit institutions: 14 commercial banks (including 3 specialized institutions) and 358 cooperative credit institutions.
- Domestic commercial banking dominated by three locally owned banks holding about 70 percent of system assets excluding cooperatives, and about half of system assets including cooperatives.
- IBUs: 29 licensed (26 in operation); IBUs’ headquarters origins include Austria, Ireland, France, the United Kingdom, Lebanon (eight), Jordan (four), and Russia (three); IBUs staff size varies from 4–5 employees to up to 60.
- On-site examinations: annually for domestic banks and subsidiaries of foreign banks; every two years for branches of foreign banks.
- CBC conducts on-site examinations at branches and subsidiaries located overseas and practices consolidated supervision globally.
- Prudential implementation timeline: CBC Directive imposing the “90 days” rule for classification as nonperforming came into force on January 1, 2006; EU Capital Requirements Directive to come into force on January 1, 2007 (relevant to validation/testing of internal systems/models).

### AML/CFT — legal framework and supervisory practice
- The Prevention and Suppression of Money Laundering Activities Law (PSMLAL) covers credit institutions, investment firms, life insurance companies (domestic and international), nonlife insurance companies operating outside Cyprus, lawyers (in respect of financing business) and accountants/auditors.
- PSMLAL criminalizes money laundering with predicate offenses covering "all crimes subject to a maximum sentence of 12 months or more"; provides for confiscation, freezing and restraint orders; requires customer identification, record keeping, internal control, staff training and suspicious transaction reporting.
- The financial intelligence unit (FIU) is a multidisciplinary unit with 14 staff; as Chair of the Advisory Authority, it leads strategic AML/CFT policy making.
- MONEYVAL findings (mission April 3 to 9, 2005; draft executive summary considered February 2006): criminalization of money laundering meets relevant criteria in all respects; criminalization of terrorist financing should be expanded to include collection of funds; Cyprus law does not provide for civil forfeiture, but confiscation is actively pursued in criminal cases.
- Sectoral AML/CFT supervisory strengths and vulnerabilities:
  - Supervision of commercial banks “particularly strong.”
  - Supervision of CCIs and insurance “requires enhancement.”
  - CySEC laws provide cooperation provisions but cannot adequately cooperate with foreign regulators when CySEC lacks an independent interest.
  - Recommendation: guidance notes should deal explicitly with terrorist financing; SI should recruit additional staff and conduct on-site inspections.
- CBC AML measures: Guidance Note dated September 17, 2001 and supplement dated November 26, 2001 require banks opening accounts for trusts and nominees to ascertain identity of all settlors and true beneficiaries; guidance observance is legally mandatory and sanctionable.
- CBC issued a Guidance Note dated January 20, 2003 listing “non-cooperative” countries and a November 2004 Guidance Note on ordering customer identity for incoming fund transfers.
- FIU characterized as efficient and effective in all aspects of its work.

### Insurance sector — market structure, trends, and supervisory concerns (exact figures)
- At end-2004, of the 43 companies writing insurance: Life 11; Composite 4; Non-Life 28 (including international companies, excluding EU branches).
- Number of companies by business type (2004): Life 11; Composite 4; Non-Life 28; Total 43.
- Gross premiums (C£ millions) 2004: Life 200.4; Non-life 292.2.
- Net premiums (C£ millions) 2004: Life 179.4; Non-life 216.5.
- Insurance companies investment (C£ millions) (2003 data): Life 129.8; Non-life 4.3.
- Bank-controlled companies (number) 2004: 9.
- Net premiums (C£ millions) for bank-controlled companies 2004: 432.1.
- Market share (percent) for bank-controlled companies 2004: 39.9.
- Density of insurance (total premiums per capita) 2004: 668.4.
- Ratios to GDP (percent) 2004: Total insurance premiums to GDP 6.8; Total investment to GDP 17.8.
- Leading three life insurance companies have 80 percent of the whole market; these three are owned by the leading banks.
- Reserving and solvency concerns:
  - Reserving levels not satisfactory for a number of companies; reserving techniques recently introduced lead to higher reserving requirements.
  - Existing capital positions of 14 companies are below minimum EU Solvency I requirements.
  - At the time of assessment, five insurance companies operated with suboptimal reserving levels.
- Insurance supervisory resource concerns:
  - ICCS staffing inadequate to respond to major systematic shocks; level of skills and resources provided to the SI is suboptimal.
  - Recommended actions include defining supervisory objectives/measures, granting ICCS financial autonomy, standardizing internal procedures, digitizing company data, contracting third parties for on-site inspection, and requiring quarterly solvency reporting.

### Securities market — structure, regulatory observations, and planned legislative changes
- Cyprus Stock Exchange indices: CSE General index at end of year 2005 = 110.0; FTSE CySE20 at end of year 2005 = 576.9.
- Number of listed issuers 2005: 144. Number of listed securities 2005: 235.
- Total market capitalization (in millions of pounds) 2005: 6,242.
- Turnover (millions of Euros) 2005: 396.
- Turnover was in the region of $500,000 daily at end-April 2005; it averaged $1.8 million in the first 75 trading days of 2005.
- Market concentration: some 50 percent of market capitalization represented by the three largest banks; 67 percent by 10 companies.
- Market intermediaries: 47 authorized market intermediaries: 32 serve almost exclusively nonresidents; 15 offer services locally.
- Collective investment schemes: retail UCITS legislation transposed but no UCITS authorized to date; about 15 international collective investment schemes authorized with total net asset value of approximately $400 million.
- Regulatory findings and actions:
  - CySEC appears to have adequate staff resources and competence; medium-term challenge to retain and increase staff as responsibilities grow.
  - Legal/constitutional limitations impede CySEC’s effective supervision of the Stock Exchange (a public administrative body); Law N. 115(I)/2005 (enacted 9 September 2005) amends the Stock Exchange Law to clarify responsibilities of the Cyprus Stock Exchange and CySEC.
  - Laws N. 114(I)/2005 and N. 116(I)/2005 enacted to transpose the EU Prospectus Directive and the EU Market Abuse Directives.
  - CySEC committed to finalizing bills to revoke requirement to provide information to the Minister of Finance and to remove obstacles to sharing information and investigations on behalf of foreign regulators; enactment expected in 2006.
  - CySEC committed to proposed amendments to secure beneficial owner information where shares are registered in names of lawyers acting as nominees; enactment expected in 2006.
  - CySEC plans to have UCITS valuation rules in place before authorizing any schemes and to increase skilled staff (2006 staff cost budget increase planned).

### Cross-sectoral and group-wide supervision
- Four supervisory authorities:
  - Central Bank of Cyprus (CBC): supervision of domestic banks and IBUs.
  - Cooperative Societies Supervision and Development Authority (CSSDA): supervises cooperative credit institutions.
  - Superintendent for Insurance Control (SI), supported by the Insurance Company Control Service (ICCS): supervises insurance companies.
  - Cyprus Securities and Exchange Commission (CySEC): regulates the Exchange, collective investment schemes, and a range of market intermediaries.
- A domestic MOU signed in 2002 by CBC, CySEC, and SI; signed by CSSDA in November 2003 allows mutual notification of cross-border provision of activity, exchange of supervisory information, and cross-sectoral cooperation related to AML enforcement; MOU explicitly excuses CBC and CSSDA from sharing information on individual deposit accounts.
- Arrangements among supervisors to oversee dominant financial groups would benefit from elaboration and formalization; sectoral supervisors meet regularly to share information.
- CBC developing comprehensive corporate governance regulation for banks, intended to supplement the 2001 regulation on internal control systems; expected issuance by September 2005.
- Extending corporate governance guidance to all financial firms, including small, family-owned firms, recommended to improve decision making and monitoring.

*Source: IMF Country Report CR06347.*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview
- The financial system in Cyprus is undergoing reform driven by liberalization and the regulation associated with accession to the European Union (EU).
- Restrictions on the scope of domestic operations and fiscal differences between domestic and internationally-oriented institutions were eliminated at the end of 2005.
- The commitments from EU accession have strained supervisory resources across sectors, requiring enhanced skills and training.

### Key findings on supervision and regulatory capacity
- Banking supervision:
  - Central bank independence and technical supervisory rules have been improved.
  - Additional qualified/specialized supervision staff is required, especially for:
    - (a) the supervision of banks’ internal risk systems and models;
    - (b) financial stability analysis;
    - (c) meeting commitments towards EU institutions;
    - (d) expanded cross-border supervision arising from bank expansion.
  - The Central Bank of Cyprus (CBC) “aims at taking all necessary steps to strengthen its Banking Supervision and Regulation Division” to meet increased demands.
- Cooperative credit institutions:
  - EU credit directives have been transposed into cooperative credit laws, but secondary legislation and guidelines are in process.
  - Parliament approved enhancement of the Cooperative Societies’ Supervision and Development Authority (CSSDA) (Official Gazette July 2005), providing for 17 additional staff and upgrading salary levels.
  - Fourteen of the additional staff will reinforce supervisory staff, “tripling the present supervisory resources.” Further training will be undertaken.
  - Changes during the transitional period are managed through cooperation among CSSDA, the Cooperative Central Bank, the Pancyprian Cooperative Confederation, and the Audit Office of Cooperative Societies.
- Insurance supervision:
  - The Insurance Services Law was implemented, but little secondary legislation or guidance is available.
  - Draft prudential regulations and guidelines are recommended as a starting point.
  - Authorities will “expedite” recruitment of appropriate qualified staff and outsource legal services for EU harmonization and implementation needs.
- Securities supervision:
  - The securities supervision authority is well-staffed with requisite skills.
  - Legal constraints limit cooperation with foreign regulators when the Cypriot regulator does not have an independent interest in the matter under investigation.
  - Difficulty has arisen accessing information on beneficial owners of shares registered in the names of lawyers acting as nominees.
  - CySEC is finalizing a bill to remove obstacles to sharing information and to give clear authority to secure beneficial owner information; enactment of amendments is expected to take place in 2006.
  - The planned amendment to the Stock Exchange Act was enacted in September 2005, clarifying CySEC’s regulatory role.

### Key recommendations (summary drawn from Table 1)
- Banking:
  - Substantially increase resources and specialized staff for the CBC’s Banking Supervision and Regulation Division.
- Cooperative credit institutions:
  - Substantially increase resources allocated to supervision, inclusive of training, and develop an overarching change committee to avoid duplication and prudential gaps.
- Insurance:
  - Draft prudential regulations and guidelines; review skills in the insurance supervision division and recruit or outsource where necessary.
- Securities:
  - Ensure forthcoming legislation removes constraints on cross-border cooperation and access to beneficial ownership information.
  - Introduce legislation to allow effective supervision of the Exchange and clarify respective roles of CySEC and the Exchange (Stock Exchange Act amendment enacted September 2005).

### Financial System Overview — Background (selected facts and figures)
- The Republic of Cyprus joined the EU in May 2004.
- The government-controlled area had a population of 796,000 and per capita income of $16,602 in 2003.
- Financial intermediation contributed 5.7 percent to real GDP in 2003.
- The group “real estate, rentals and business activities” was 14.1 percent of total output in 2003.
- Real growth was expected to average 3.5 percent in 2004–05.
- The Cypriot pound is pegged to the Euro with a formal fluctuation margin of ±15 percent; the de facto central parity is €1.7086: £C 1.
- Low corporate tax rates historically attracted international companies; corporate tax rate of 10 percent was in place.
- The 2005 MONEYVAL mutual evaluation found legal provisions and supervisory arrangements for AML/CFT to be “quite satisfactory” though indicating areas for improvement.

### Financial Institutions and Markets — Selected structural points and statistics
- Cyprus has three classes of credit institution, an active insurance market, and a developing securities market.
- The market is dominated by three groups active in banking, insurance, and securities.
- Cooperative sector provides effective competition in retail banking due to lower operating costs and nonprofit goals.
- Stock market volatility at the end of the 1990s led banks to recognize losses and increase provisions; bank results were recovering in 2004.

Key quantitative indicators (from Tables 2 and 3)
- Commercial banks — number of institutions:
  - 2000: 12; 2001: 12; 2002: 14; 2003: 14; 2004: 14; 2005: 14
- Cooperative credit institutions — number:
  - 2000: 360; 2001: 363; 2002: 363; 2003: 361; 2004: 358; 2005: 348
- International Banking Units — number:
  - 2000: 27; 2001: 24; 2002: 28; 2003: 28; 2004: 29; 2005: 28
- Commercial banks — total assets (C£ millions):
  - 2000: 12,776; 2001: 14,936; 2002: 15,565; 2003: 16,621; 2004: 17,818; 2005: 22,008
- International Banking Units — total assets (US$ million):
  - 2000: 10,545; 2001: 10,150; 2002: 8,139; 2003: 9,036; 2004: 12,531; 2005: 17,081
- Commercial banks — advances and loans (C£ millions):
  - 2000: 6,766; 2001: 7,652; 2002: 8,283; 2003: 8,683; 2004: 9,332; 2005: 9,972
- Commercial banks — total deposits (C£ millions):
  - 2000: 9,995; 2001: 11,474; 2002: 11,999; 2003: 12,193; 2004: 13,102; 2005: 16,024
- Commercial banks — non-resident deposits (C£ millions):
  - 2000: 3,759; 2001: 4,396; 2002: 4,209; 2003: 4,133; 2004: 4,610; 2005: 6,649
- Commercial banks — return on assets:
  - 2000: 1/1.5; 2001: 0.6; 2002: -0.1; 2003: -0.1; 2004: 0.3; 2005: 0.6
- Stock market capitalization (C£ millions):
  - 2000: 8,296; 2001: 5,578; 2002: 4,374; 2003: 4,442; 2004: 4,506; 2005: 6,242
- Cyprus pounds per US dollar (end period):
  - 2000: 0.62; 2001: 0.65; 2002: 0.55; 2003: 0.46; 2004: 0.43; 2005: 0.48

### Summary of changes resulting from EU membership (selected entries from Box 1)
- Capital account liberalization:
  - With EU entry on May 1, 2004, the abolition of the Exchange Control Law came into effect through the Capital Movement Law of 2003, removing all restrictions on capital movements and payments.
- Financial regulation highlights and dates:
  - January 2001: Legal ceiling of 9 percent on lending rates removed.
  - March and October 2002: New guidance notes under the money laundering law issued.
  - July 2002: Central Bank of Cyprus Law and constitution amended to make the central bank independent.
  - December 2002: CBC issued directive harmonizing capital adequacy with the EU directive.
  - January 2003: Start of the five-year transition period for cooperative credit institutions to prepare for conformity with EU credit institution directives by end 2007; implementation of the Insurance Services Law.
  - July 2003: Banking Law amendment establishing the “single passport” for EU cross-border banking.
  - July 2003: Deposit Protection Scheme extended to cover deposits in all EU currencies.
  - July 2003: Anti-money laundering act amended to transpose the EU directive on money laundering.
  - January 2003–January 2005: Criteria for suspension of interest recognition on loans became increasingly stringent, reducing the time period to 90 days.
  - April 2004: UCITS law harmonizing CIS regime came into force.
  - September 2005: Laws harmonizing listing, prospectus information, insider dealing, and market manipulation/abuse came into force.
- Taxation:
  - July 2002: A single corporate tax rate of 10 percent was introduced from January 1, 2003.
  - International Business Enterprises operative in Cyprus at December 31, 2001 were given the option to be taxed at 10 percent from January 1, 2003 and cater to Cypriot residents, or at the original 4.25 percent and restricted to doing business with nonresidents until December 31, 2005.
  - January 1, 2006: All IBUs are subject to tax at the new corporate tax rate and restrictions on business with Cypriots are removed.

*International Monetary Fund staff*

### 8.      The Cypriot banking sector has three distinct components although differences

### 8. The Cypriot banking sector has three distinct components although differences are diminishing with the obligations of EU accession

### Structure of the financial sector
- The sector comprises three components: (i) commercial banks; (ii) cooperative credit institutions (together forming the domestic banking system); and (iii) international banking units.
- Domestic credit institutions: 14 commercial banks, including 3 specialized institutions with commercial banking licenses, and 358 cooperative credit institutions.
- Domestic commercial banking is dominated by three locally owned banks which together hold about 70 percent of system assets excluding the cooperative banks, and about half of system assets including the cooperatives.
- There are 29 licensed international banking units, although only 26 are in operation; two of these belong to companies which also have operations in the domestic banking sector. There is one representative bank office.
- International banks’ headquarters origins include Austria, Ireland, France, and the United Kingdom; Lebanon is the home country for eight, Jordan for four, and Russia for three. International IBUs vary in staff size from 4–5 employees to up to 60.

### Commercial banks and cooperative credit institutions
- In 2003, the government-controlled area of Cyprus had 65 bank branches per 100,000 residents versus an average of 49 in the 15 members of the EU prior to the last accessions.
- Interest rates were controlled at 9 percent until the end of 2000.
- Deposits at cooperative credit institutions represented about one third of total deposits in local currency in all credit institutions at end-2004.
- Cooperatives benefit from nonprofit orientation, lower regulatory costs (to date), and exemption from tax on profits generated by operations with members.
- The Cooperative Central Bank Ltd is the only cooperative credit institution supervised by the CBC; it accepts cooperatives’ surpluses as deposits, lends to them as necessary, and acts as their clearing agent.

### International banking units and tax environment
- Domestic profit tax rate on these banks was 4.5 percent until end-2005 when all were made subject to a 10 percent tax rate.
- Cyprus has a network of over 30 double taxation treaties.
- International banks located in Cyprus due to geographic location, preferential corporate tax rates, and historic treaties (e.g., double taxation treaty with the former Soviet Union signed in 1962).
- It is considered probable that the change to a 10 percent tax rate will have little effect on the sector.

### Insurance sector: structure and trends
- Domestic market: 31 licensed companies operate in the domestic market, two of which are foreign undertakings; 14 international insurers or reinsurers (two captives).
- At end-2004, of the 43 companies writing insurance: 11 were life, 4 composite, and 28 non-life (these numbers include international companies, but do not include EU branches).
- The life market is highly concentrated: the four largest companies control three quarters of premium income. The largest three nonlife companies controlled 36 percent of premium income.
- Companies’ investments were mainly in debt securities, bank deposits, and money market instruments, with less than 20 percent in equity at end-2003.
- Of the 26 nonlife companies exiting the market as a result of EU entry, ten were international, mainly captive, insurers.
- In 2004, most international insurance business was reinsurance (72 percent) and life business (22 percent).

### Insurance industry indicators (selected figures)
- Number of companies by business type (2004): Life 11; Composite 4; Non-Life 28; Total 43.
- Gross premiums (C£ millions) 2004: Life 200.4; Non-life 292.2.
- Net premiums (C£ millions) 2004: Life 179.4; Non-life 216.5.
- Insurance companies investment (C£ millions) (2003 data): Life 129.8; Non-life 4.3.
- Bank-controlled companies (number) 2004: 9.
- Net premiums (C£ millions) for bank-controlled companies 2004: 432.1.
- Market share (percent) for bank-controlled companies 2004: 39.9.
- Density of insurance (total premiums per capita) 2004: 668.4.
- Ratios to GDP (percent) 2004: Total insurance premiums to GDP 6.8; Total investment to GDP 17.8.

### Securities market and stock exchange
- Cyprus Stock Exchange indices: CSE General index at end of year 2005 = 110.0; FTSE CySE20 at end of year 2005 = 576.9.
- Number of listed issuers 2005: 144. Number of listed securities 2005: 235.
- Total market capitalization (in millions of pounds) 2005: 6,242.
- Turnover (millions of Euros) 2005: 396.
- The Stock Exchange is state owned and had about 155 listed companies overall.
- Turnover was in the region of $500,000 daily at end-April 2005; it averaged $1.8 million in the first 75 trading days of 2005.
- Market concentration: some 50 percent of market capitalization represented by the three largest banks; 67 percent by 10 companies.
- Exchange issuer classes: bond market, investment companies market, and three equity issuers (main, parallel, and alternative). Main market listings: 18; in Q1 2005, the main market’s average daily turnover was approximately 70 percent of total turnover.
- Supplementary markets at end-April 2005: parallel market 20 listings; alternative market 89 listings; investment funds’ market 28 listings.
- Historical note: In 1999/2000 the Exchange index fell from about 800 to 80 points over about one and a half years.

### Market intermediaries and collective investment schemes
- There are 47 authorized market intermediaries: 32 serve almost exclusively nonresidents; 15 offer services locally.
- International collective investment schemes authorized: 15 with total net asset value of approximately $400 million.
- About 40 international financial advisors operate, offering investment advice only; they do not execute orders or manage portfolios.
- Domestic collective investment schemes industry is in its infancy; Cyprus has transposed the EU UCITS Directives but has not licensed any schemes to date.

### Regulatory framework, oversight, and protection schemes
- Four supervisory authorities:
  - Central Bank of Cyprus (CBC): responsible for supervision of domestic banks and international banking units (IBUs).
  - Cooperative Societies Supervision and Development Authority (CSSDA): supervises cooperative credit institutions.
  - Superintendent for Insurance Control (SI), supported by the Insurance Company Control Service (ICCS): supervises insurance companies.
  - Cyprus Securities and Exchange Commission (CySEC): regulates the Exchange, collective investment schemes, and a range of market intermediaries.
- CBC remained supervisor for domestic banks and IBUs after tax changes and abolition of exchange controls; IBUs opting to be taxed at 10 percent may operate domestically; all IBUs treated similarly from end-2005.
- Cooperatives legislation amended in 2003 to transpose EU directives on credit institutions; cooperatives expected to conform to capital requirements and other prudential obligations of EU credit institutions. Smaller cooperatives can affiliate with the Cooperative Central Bank and meet consolidated prudential requirements.
- CSSDA governance and staffing: governing body consists of the commissioner and four members appointed by the Council of Ministers for five years; staff includes the commissioner, two senior officers, 36 officers and secretarial staff. The commissioner has powers including on-site inspections and off-site monitoring.
- Deposit protection schemes:
  - A Deposit Protection Scheme covering domestic banks introduced in September 2000 and brought into conformity with EU regulations on May 1, 2004, when the IBUs joined, with the exception of those incorporated in other EU member states.
  - An investment compensation scheme for clients of banks which offer investment services commenced operation in May 2004.
  - A deposit protection scheme for CCIs established by the Cooperative Societies (Establishment and Operation of the Deposit Guarantee Scheme) Rules for 2000 and 2004 has been in operation since 2000 and conforms to EU Directive 94/19/EC.
  - CSL provides that CSSDA, in cooperation with the Pancyprian Cooperative Confederation Ltd., can require establishment of a solidarity fund for CCIs; a preliminary regulation is in draft.
- Insurance supervision: SI authorized by the Law on Insurance Services and Other Related Issues, 2002; ICCS staff is governed by the Civil Service Law and its budget forms part of the Ministry of Finance’s budget; superintendent and deputy superintendent are appointed by the Council of Ministers. ICCS staffing: nine skilled personnel and seven support staff. Domestic and international companies are similarly regulated and supervised.
- Securities supervision: CySEC is chief regulator for the Exchange, collective investment schemes and a range of market intermediaries and has a skilled staff of 40. CBC retains responsibility for oversight of international financial advisors and non-retail collective investment schemes and has skilled and experienced securities regulation staff.

*Source: IMF Country Report CR06347.*

### 28.      The Prevention and Suppression of Money Laundering Activities Law of 1996–

### The Prevention and Suppression of Money Laundering Activities Law of 1996–

### Scope and key legal provisions of PSMLAL
- PSMLAL (1996–2004) covers credit institutions, investment firms, life insurance companies (domestic and international), and nonlife insurance companies operating outside of Cyprus, as well as lawyers (in respect of financing business) and accountants/auditors.  
- The financial regulators in these sectors and the professional bodies of lawyers and accountants/auditors are designated as the responsible supervisory authorities.  
- Each supervisor has issued guidance notes under the law for the relevant institutions.  
- PSMLAL criminalizes money laundering with predicate offenses covering "all crimes subject to a maximum sentence of 12 months or more."  
- PSMLAL provides for confiscation, freezing and restraint orders for proceeds.  
- PSMLAL requires customer identification, record keeping, internal control, staff training and suspicious transaction reporting.  
- The financial intelligence unit (FIU) is a multidisciplinary unit with 14 staff; as Chair of the Advisory Authority, it is currently the lead in strategic policy making on AML/CFT.

### Strengths and vulnerabilities in financial supervision (overview)
- Supervision of the commercial banks is identified as "particularly strong."  
- Supervision of cooperative credit institutions (CCIs) and insurance "requires enhancement."  
- Securities sector cooperation could be improved; regulatory framework and international cooperation show shortcomings.  
- Legal framework is in place for CCIs but implementation is "just beginning."  
- EU directives for the insurance sector have been transposed, but supervision still requires significant enhancement to be consistent with the EU framework.  
- Cypriot supervisors generally have a satisfactory legal framework and implementation record in cross-border cooperation, information exchange, and consolidated supervision, though clarity is required for the securities framework.

### Cross-border cooperation and information exchange
- Legal and formal arrangements exist to permit international information exchange by regulators in banking, cooperative and insurance sectors, with implementation reflecting each sector’s general supervision.  
- A domestic MOU was signed in 2002 by the three regulatory authorities—the CBC, CySEC, and the SI; in November 2003 it was also signed by the CSSDA.  
  - The MOU allows mutual notification of cross-border provision of activity and exchange of supervisory information.  
  - The MOU addresses the need for consolidated supervision information and explicitly allows for cross-sectoral cooperation where connected to enforcement of the AML law.  
  - The MOU explicitly excuses the CBC and the CSSDA from sharing information on individual deposit accounts, although informal gateways exist domestically and internationally for exchanging supervisory information without restrictions.  
- The CBC is authorized to share information with all competent authorities by Section 27(1) of the Banking Law; Section 27(4) requires CBC satisfaction that the receiving authority applies the same confidentiality as the CBC.  
- CBC operational programs include on-site visits and off-site monitoring of foreign branches/subsidiaries for which CBC is home supervisor; home supervisors of foreign banks located in Cyprus conduct on-site examinations in Cyprus and discuss results with the CBC.  
- CBC has signed MOUs in banking supervision with multiple foreign supervisory authorities (listed in source). MOUs in international financial services were also signed with several foreign supervisory authorities (listed in source).  
- CySEC is a signatory to the MOU sponsored by the EU Commission of European Securities Regulators (CESR), is working towards becoming a full signatory to the IOSCO Multilateral MOU (currently listed in Appendix B), and has signed MOUs with several state securities regulators while negotiating with non-EU regulators.  
- The insurance supervisor (ICCS) has joined EU protocols for home/host supervision but should adopt a more proactive stance toward EU companies operating under freedom of service (FoS) to contact their home supervisors and identify operations begun.  
- CySEC laws provide useful cooperation and information-exchange provisions, but two legislative shortcomings exist:  
  - Regulators cannot adequately cooperate with foreign regulators where CySEC has no independent interest in the investigated matter.  
  - CySEC has had difficulty obtaining information identifying beneficial owners of shares from lawyers acting as nominees for beneficial owners.  
- A forthcoming bill is expected to correct CySEC shortcomings.

### Sectoral findings — Banking
- Supervision of international banks and domestic commercial banks has progressed to "high standards" since 2001, though additional resources are recommended.  
- Independence of the central bank is now assured by changes in the central bank law and its enshrinement in the Constitution of the Republic.  
- Prudential oversight improved with internationally conforming standards for nonperforming loan classification; market risk supervision would improve with enhanced oversight of systems and specialized staff training.  
- Laws and regulatory structure for supervision of credit cooperatives are in place, but implementation is underway and will take time to complete. Authorities face a considerable challenge in developing appropriate affiliation (or merger) arrangements by end-2007.  
- Supervision of banks and cooperative credit institutions is carried out by separate supervisors (CBC and CSSDA); CSSDA is moving to adopt CBC supervisory policies and procedures. Separate supervisory bodies may duplicate functions and increase costs—an issue for longer-term planning.

### Sectoral findings — Insurance
- Legal framework for insurance supervision is largely in place and provides accountability and budgetary autonomy, but significant operational enhancement is required.  
- Institutional structure should provide greater independence and less reliance on a single individual (viz. the SI).  
- The supervision division lacks sufficient resources, particularly in skills, to guide the industry into the EU framework for solvency.

### Sectoral findings — Securities
- Regulators’ skills and governing rules are generally impressive, but critical shortcomings exist in information exchange:  
  - Regulators were unable to collect information and investigate on behalf of foreign authorities where CySEC had no independent regulatory interest.  
  - CySEC had difficulty accessing information identifying beneficial owners of shares registered in the names of lawyers acting as nominees.  
- The regulator is seeking legislative amendment to confirm access to such information and to remove restrictions on CySEC’s ability to cooperate with foreign authorities.  
- Clearer authority for CySEC in its role as supervisor of the stock exchange is necessary.  
- Note: a relevant amendment to the Stock Exchange Act was enacted in September 2005 and is expected to have clarified CySEC’s regulatory role.

### Cross-sectoral matters and corporate governance
- Arrangements among supervisors to oversee the financial groups dominating the market would benefit from elaboration and formalization.  
- Insurance companies are a relatively insignificant component of major banks’ balance sheets and incomes; bank supervisors insulate bank risk-assessed capital from insurance risk (insurance assets do not qualify as capital).  
- Sectoral supervisors meet regularly to share information; meetings could formally consider implications of insurance companies’ forthcoming compliance with the EU Solvency I directive.  
- The CBC is developing comprehensive corporate governance regulation for banks, intended to supplement the 2001 regulation on internal control systems; this regulation should be issued by September 2005.  
- Extending corporate governance guidance to all financial firms, including small, family-owned and -run firms, would improve decision making and monitoring in the financial sector.

### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- Summary reflects findings of the MONEYVAL mutual evaluation mission which visited Cyprus in the period April 3 to 9, 2005; description revised on the basis of the draft executive summary considered by the MONEYVAL plenary in February 2006.  
- Criminalization of money laundering meets the relevant criteria in all respects.  
- Criminalization of terrorist financing should be expanded to include collection of funds.  
- Powers to trace, freeze, and confiscate proceeds and associated investigative powers are well provided in law.  
- Cyprus law does not provide for civil forfeiture, but confiscation is actively pursued in criminal cases.  
- Criminalization of the financing of terrorism as defined in the UN Convention for the Suppression of the Financing of Terrorism is fully achieved and requirements for suspicious transaction reporting on terrorist financing are in place.  
- Recommendation: financing of terrorism crime should include the collection of funds in the knowledge that they are to be used by terrorist(s).

*Source: The Prevention and Suppression of Money Laundering Activities Law of 1996– (excerpt).*

### 45.      Supervision by the CBC, CSSDA, and CySEC is quite satisfactory, and these

### Supervision by the CBC, CSSDA, CySEC, and Related Authorities

### AML/CTF supervision and guidance
- Supervision by the CBC, CSSDA, and CySEC is described as "quite satisfactory", with these agencies, together with the SI, the Bar Association and the Institute of Certified Public Accountants, issuing guidance in line with the FATF 40+9.
- The CySEC and CSSDA are in the process of issuing revised Guidance Notes.
- The Bar Association is drafting a Guidance Note to be issued to its members.
- Recommendation: Guidance notes should deal explicitly with terrorist financing to provide information to reporting enterprises.
- The SI should recruit additional staff and conduct on-site inspections.
- Trust and company service providers are at present regulated only through the supervision of lawyers and accountants/auditors.
- Legislation is being drafted for regulation by the CBC of trust and company services provided by persons other than lawyers and accountants/auditors.
- The AML law and enforceable and sanctionable guidance notes were found to meet basic preventive obligations, but it was recommended that certain provisions currently in supervisory guidance should be in legislation.
- Formal review of measures covering nonprofit organizations would be beneficial.
- The FIU is characterized as efficient and effective in all aspects of its work.

### Follow-up and timing notes (authorities’ inputs)
- CSSDA advised that its guidance note was issued on May 16, 2005.
- Authorities informed that the Bar Association guidelines have been finalized and issued to the supervised entities/members concerned.

---

### Assessment of Banking Supervision and Follow-up on 2001 Recommendations

### Institutional independence, resources, and supervisory capacity
- The new CBC Law enacted in July 2002 stipulates that the Governor cannot be removed prior to the expiration of his term of office, unless he no longer fulfills required conditions or is guilty of serious misconduct.
- The new CBC Law does not state explicitly that reasons for removal of the Governor should be made public.
- There was a general need for additional capacity at the CBC to allow for the planned frequency of on-site inspections; four existing vacancies should be staffed at an early date.
- Supervisory capacity has been strengthened with the employment of two more employees and the frequency of on-site inspections has increased.
- Additional qualified/specialized supervision staff are required especially for:
  - validation and monitoring of banks’ internal risk systems and models;
  - financial stability;
  - commitment towards EU institutions;
  - satisfaction of additional demands from rapid expansion of banks overseas.

### Legal and supervisory powers, licensing, and corrective action
- The Banking Law was amended to remove the requirement that the CBC consult first with the Ministry for granting banking licenses and for remedial powers; licensing policy and remedial measures can now be determined without prior consultation with the minister of finance.
- The Banking Law was amended to require supervised institutions to report material adverse changes as early as possible (Section 24 of the 2003 Amendment Law).
- Recommendation reiterated: remove any need for consultation with the Ministry of Finance before corrective action is taken.

### Prudential rules, loan classification, and risk guidance
- As from January 1, 2003, banks were obliged to follow guidelines on the definition of nonperforming loans and regulations requiring suspension of interest when repayment is in arrears for more than nine months.
- The period for suspension of interest was reduced to six months on January 1, 2005.
- A CBC directive setting 90 days in arrears as the criteria for classification of credit as nonperforming, and defining procedures for suspension of interest and other income, came into force on January 1, 2006.
- The CBC has issued the Capital Adequacy Directive (CAD) to banks which sets capital requirements with respect to market risk.
- Banks submit a monthly return on their open position in foreign currency, including that of overseas subsidiaries or branches; and a quarterly return on interest risk exposures.
- The CBC has imposed limits on foreign currency open positions and regularly reviews and approves ALCO limits for each bank.
- Recommendation: CBC should consider establishing formal guidance on country risk and transfer risk management for banks to formulate specific limits.

### Anti–money laundering specific measures
- CBC Guidance Note (dated September 17, 2001) and supplement (dated November 26, 2001) require banks opening accounts for trusts and nominees to ascertain, without any exception, the identity of all the settlors and the true beneficiaries.
- The CBC Guidance Note sets out what constitutes satisfactory evidence of identity; observance of the guidance note by banks is legally mandatory and subject to sanctions and enforceable in a court of law.
- The CBC issued a Guidance Note (dated January 20, 2003) with a list of countries and territories considered “non-cooperative” in the fight against money laundering; banks were requested to exercise additional monitoring procedures for transactions with persons from countries on the list and to file suspicious transaction reports to the Unit of Combating Money Laundering when not satisfied as to transaction legitimacy.
- The November 2004 Guidance Note addressed the issue of satisfactory information on the identity of the ordering customer for incoming fund transfers and requires banks to educate and train employees.
- Recommendation: CBC should carry out more frequent on-site reviews of recognition and reporting procedures, especially for banks considered high risk.

---

### Banking Sector Structure, Macroeconomic Context, and Key Statistics

### Macroeconomic backdrop (post-2001 to accession)
- Cyprus accession to the European Union (EU) in May 2004 was the main event affecting the financial sector and its supervision since the 2001 assessment.
- Real growth was expected at 3.4 percent in 2004 and 3.8 percent in 2005.
- Following recovery led by consumption, sluggish tourist spending lowered the contribution of expanded arrivals.
- Unemployment remains low by European standards; inflation has crept up modestly on rising energy prices.

### Sectoral shares and performance
- The sector “finance, insurance, real estate” reflecting international services is 22 percent of GDP and is the single greatest contributor to real output.
- That sector had real growth of 2.7 percent in 2003.
- Tourism was 20 percent of real GDP in 2003 and declined by 0.4 percent in real terms in 2003.

### Banking system composition and market structure
- Domestic credit institutions consist of:
  - 11 commercial banks;
  - three specialized institutions;
  - 358 cooperative credit institutions.
- Domestic commercial banking is dominated by three banks which together hold about 70 percent of system assets, excluding the cooperative credit institutions but including the Cooperative Central Bank, and about half of system assets, including the cooperatives.
- The three largest banks are Bank of Cyprus, Cyprus Popular Bank (Laiki), and Hellenic Bank; all are locally owned and are international groups with operations in financial and nonfinancial areas.
- Three specialized institutions:
  - Mortgage Bank of Cyprus (subsidiary of Bank of Cyprus);
  - Cyprus Development Bank (publicly owned);
  - Housing Finance Corporation (publicly owned).
- Currently there are 26 international banking units (IBUs) operating in Cyprus, 2 of which also carry on domestic banking business (Arab Bank PLC and Société Générale).
- An additional three IBUs are licensed but non-operational.
- Tax law change in July 2002 introduced a uniform tax rate of 10 percent on all enterprises; foreign enterprises could elect, for a transitional period terminating at end-2005, to maintain the lower tax rate of 4.25 percent. As of January 1, 2003, privileged tax treatment of nonresidents was removed; IBUs who opted to be taxed at 10 percent may provide services to residents. All IBUs will be treated similarly at end-2005.
- Cooperative credit institutions hold about one quarter of system deposits. A licensed commercial bank, the Cooperative Central Bank Ltd., provides banking services to cooperatives.

---

### Main Findings and Policy Recommendations from the ROSC (BCP Assessment)

### Main findings
- Prudential regulations and powers for the Cypriot banking sector are strong and the supervisory process is, in general, effective.
- All core principles were considered to be compliant or largely compliant.
- No issues are predominant, but increased demands on supervisory staff related to EU accession and financial sector development require additional adequately trained and experienced staff.

### Key recommendations and priorities
- Recruit and staff the four existing vacancies at the CBC supervisory department at an early date.
- Hire additional qualified/specialized supervision staff for:
  - validation and monitoring of banks’ internal risk systems and models;
  - financial stability analysis;
  - engagement with EU institutions;
  - monitoring banks’ overseas expansion.
- Develop and circulate a comprehensive framework of guidelines regarding country and market risk.
- Finalize implementation of more stringent criteria for suspension of recognition of interest on problem loans.
- Ensure that certain supervisory guidance provisions are enshrined in legislation where appropriate, rather than remaining only in guidance.
- Conduct formal review of measures covering nonprofit organizations.
- SI to recruit additional staff and conduct on-site inspections to strengthen AML/CFT supervision.

*Source: Report on the Observance of Standards and Codes (ROSC) — Basel Core Principles assessment; mission to Cyprus March 28 to April 8, 2005.*

### 54.      The cooperative credit institutions are supervised by the Cooperative Societies’

### 54. The cooperative credit institutions are supervised by the Cooperative Societies’ Supervision and Development Authority (CSSDA)

### Supervision of cooperative credit institutions (CCIs) and transitional requirements
- The CSSDA supervises cooperative credit institutions.
- CCIs have been subject to fewer regulations historically; EU banking directives require all cooperative credit cooperatives to be compliant by end-2007 with numerous additional requirements pertaining to:
  - organization,
  - internal controls and audit systems,
  - corporate governance, and
  - sharp improvement of prudential ratios.
- Smaller and weaker CCIs may have to merge to meet requirements.
- CCIs unable to meet requirements individually have the option of affiliating with the Cooperative Central Bank and meeting prudential requirements on a consolidated basis.
- During a transitional period that will only end on December 31, 2007, CCIs are allowed to continue activities without having to comply with the international standards.

### Capacity, resources, and supervisory development (CCIs)
- The CSSDA must develop supervisory capacity, issue administrative rules, guidelines and best-practices papers, and encourage restructuring of predominantly small CCIs.
- The dramatically extended responsibilities and objectives assigned to the CSSDA will necessitate additional experienced staff and an appropriate salary system.
- The Parliament has approved enhancement of the CSSDA (Official Gazette July 2005) providing for 17 additional staff and upgrading of salary levels; 14 officers from additional staff will reinforce supervisory staff, tripling present supervisory resources.

### Principle-by-principle findings for banks — summary of key findings
- Objectives, autonomy, powers, and resources (CP 1)
  - Prudential regulations are sound.
  - The CBC is commended for actions to enhance Cyprus’ regulatory regime and its endeavor to meet international standards.
- Licensing and structure (CPs 2–5)
  - An effective licensing authority is in place with fair and equitable criteria to ensure a consistent approach to permissible activities and ownership.
- Prudential regulations and requirements (CPs 6–15)
  - CBC requires licensed banks to maintain capital commensurate with the nature and scale of risks.
  - In practice, all Cyprus’ banks are operating at capital adequacy levels in excess of the required minimum of 10 percent.
  - Cyprus will only gain full compliancy with the more stringent rules on the suspension of interest recognition at the end of the transition period on January 1, 2006.
  - CBC issued the “Directive on the suspension of interest and other income on nonperforming credit facilities” in December 2005; it imposed the 90-day rule for classification as nonperforming and came into force on January 1, 2006.
  - Market risks are currently limited; CBC should require banks to put in place systems and procedures to acknowledge the special nature of market risk and enhance its management.
- Methods of ongoing supervision (CPs 16–20)
  - No material differences between CBC’s supervision of domestic and international banks; a risk-focused on-site supervision program for international banks was established in January 2005.
  - On-site examinations: annually for domestic banks and subsidiaries of foreign banks; every two years for branches of foreign banks.
  - CBC conducts on-site examinations at branches and subsidiaries located overseas and promotes cooperative arrangements and exchanges of information with host country supervisors.
  - Off-site supervision reviews data from various returns with independent verification during on-site examinations; CBC supplements on-site work with annual tri-lateral meetings including senior management and external auditors.
- Information requirements (CP 21)
  - CBC has established requirements for adequate accounting, records, and internal control systems and determines whether each bank has satisfactory accounting processes and internal control systems.
- Formal powers of supervisors (CP 22)
  - CBC has extensive legal powers where a bank fails to comply with any provision of the banking law.
- Cross-border banking (CPs 23–25)
  - CBC practices consolidated supervision globally by undertaking on-site examinations of branches and subsidiaries located overseas.
  - Memoranda of understanding (MOUs) have been signed with a number of overseas supervisors.

### Banks: Recommended Action Plan to improve compliance with the Basel Core Principles (Table 1 — key entries)
- CP 1.2 Independence
  - Additional qualified supervision staff is needed to meet requirements for: i) validation and monitoring of banks’ risk systems and models; ii) commitments for work with EU institutions; iii) additional demands for cross-border supervision.
- CP 8 Loan Evaluating and Loan Loss Provisioning
  - Finalize implementation of the more stringent criteria for interest suspension.
- CP 11 Country Risk
  - Establish formal guidance for a framework for country and transfer risk.
- CP 12 Market Risks
  - Improve market risk expertise and supervision.

### CBC authorities’ response and planned actions (Banks)
- CBC welcomes recognition of the overall quality and effectiveness of Cyprus’s regulatory and supervisory framework and outlines actions:
  - CP 1.2 Independence: strengthen Banking Supervision and Regulation Division to meet increased demands from EU accession and sector development.
  - CP 8 Loan Evaluation and Loan Loss Provisioning: December 2005 Directive issued on suspension of recognition of interest and other income on non-performing credit facilities; it took effect on 1st January, 2006 applying the “90 days” rule in full conformity with international practice.
  - CP 11 Country Risk: CBC will draft guidelines for management of country and transfer risk.
  - CP 12 Market Risks: Enhance scope of supervision to ensure banks perform scenario analysis, stress testing and contingency planning; require periodic validation/testing of internal systems/models as provided in the EU Capital Requirements Directive, which shall come into force on the 1st January, 2007. Market risk expertise to be enhanced by training provided by the Financial Stability Institute and supervisory authorities of selected EU countries.

### Principle-by-principle findings for the Cooperative Credit Institutions (CCIs)
- Objectives, autonomy, powers, and resources (CP 1)
  - Prudential regulations have been adapted to the acquis communautaire.
  - During the transitional period ending December 31, 2007, CCIs are not required to comply immediately with international standards.
  - CSSDA must develop supervisory capacity, issue administrative rules, guidelines and best-practices papers, and encourage restructuring of small CCIs; additional experienced staff and appropriate salary system are necessary.
- Licensing and structure (CPs 2–5)
  - Effective licensing authority in place with fair and equitable criteria; however, permissible activities should be defined by regulatory decision.
- Prudential regulations and requirements (CPs 6–15)
  - During transitional period CCIs will not be subjected to mandatory new capital adequacy requirements.
  - Supervisor should enhance monitoring capabilities to allow timely action.
  - Enhanced prudential reporting should be installed regarding loans.
  - Increased supervisory capacity is needed to oversee large exposures and connected lending, new risk types, and internal control systems.
  - Updating of guidance notes on AML/CFT should be accelerated.
- Methods of ongoing supervision (CPs 16–20)
  - On-site and off-site supervision must be adapted and developed; additional experienced staff required.
- Information requirements (CP 21)
  - Regulative decisions are in place regarding establishment of accounts and their auditing according to international standards.
- Formal powers of supervisors (CP 22)
  - A range of remedial measures can be used where a CCI fails to comply with law.
- Cross-border banking (CPs 23–25)
  - No cross-border financial services are performed by CCIs.

### CCIs: Recommended Action Plan to improve compliance with the Basel Core Principles (Table 2 — key entries)
- CP 1.1 Objectives
  - Manage changes during the transitional period through a global change committee.
- CP 1.2 Independence
  - Full government support of supervisory strengthening capacity.
- CP 2 Permissible Activities
  - Finalize regulatory decision defining permissible services and activities.
- CP 5 Investment Criteria
  - Finalize regulatory decision regarding participation in other enterprises.
- CP 6 Capital Adequacy
  - Mandatory semi-annual reporting on each CCI’s compliance with capital requirements regime.
- CP 7 Credit Policies
  - Strengthen supervisory capacity; enhance supervisors’ capacity to evaluate loan policies.
- CP 8 Loan Evaluation
  - Strengthen supervisory capacity; provide for additional prudential reporting.
- CP 9 Large Exposure Limits
  - Strengthen supervisory capacity.
- CP 10 Connected Lending
  - Strengthen supervisory capacity; facilities to connected persons should not be granted on favorable terms.
- CP 12 Market Risks
  - Adjust and develop expertise to supervise new risks.
- CP 13 Other Risks
  - Strengthen supervisory capacity; organize accelerated access to centralized reporting system regarding interest rate risk.
- CP 14 Internal Controls
  - Strengthen supervisory capacity; undertake efforts to encourage mergers favoring critical mass and organizational capabilities of CCIs.
- CP 15 Money Laundering
  - Update guidance note.
- CP 16 On-site and Off-site Supervision
  - Strengthen supervisory capacity.
- CP 17 Bank Management Contact
  - Impose mandatory and timely communication of material changes in activities and adverse developments.
- CP 18 Off-site Supervision
  - Strengthen supervisory capacity; accelerate direct connection to central data server.
- CP 19 Validation of Supervisory Information
  - Strengthen supervisory capacity.

### Authorities’ response and planned actions (CCIs)
- CP 1.1 Objectives
  - Changes during the transitional period are managed through cooperation between the CSSDA, the Cooperative Central Bank, the Pancyprian Cooperative Confederation and the Audit Office of Cooperative Societies.
- CP 1.2 Independence
  - Parliament approved enhancement of CSSDA (Official Gazette July 2005): 17 additional staff, salary upgrades; 14 additional supervisory officers to reinforce supervisory staff.
- CP 2 Permissible Activities and CP 5 Investment Criteria
  - Regulatory Decisions will be issued as soon as possible; the term “Cooperative Credit Institution” or derivatives cannot be used without approval of the CSSDA.
- CP 6 Capital Adequacy
  - Committee approved a new Regulative Directive introducing CAD II; decision published in the Official Gazette in April 2005. A Commissioner’s Directive will be issued regarding mandatory semi-annual reporting on each CCI’s compliance with capital requirements.
- CP 7 Credit Policies; CP 16 On-site and Off-site Supervision; CP 19 Validation of Supervisory Information
  - Recruitment of additional staff (see CP 1.2) and further relevant training/continuous training.
- CP 8 Loan Evaluation
  - CSSDA is designing automated analytical monitoring and early-warning systems using information from CCIs connected to the Cooperative Computer Society central server; additional prudential reporting for loan loss provisions will be required.
- CP 9 Large Exposure Limits
  - CSSDA is revising and updating its return on large exposures; a Regulatory Decision will be issued as soon as possible.
- CP 10 Connected Lending
  - Amendment of the Law to explicitly prohibit favorable terms to connected persons will take place.
- CP 12 Market Risks; CP 13 Other Risks
  - Relevant training will be undertaken; accelerated access to centralized reporting on interest rate risk is planned and information is currently available to CCI management and will be available to CSSDA supervisors when prudential reporting project is completed.
- CP 14 Internal Controls
  - Efforts to encourage mergers have reduced number of CCIs from 358 to 348 in the first half of the year due to merger procedures.
- CP 15 Money Laundering
  - Guidance notes by CSSDA were finalized and issued on 16/05/2005.
- CP 17 Bank Management Contact
  - Relevant Regulatory Decision will be issued as soon as possible.
- CP 18 Off-site Supervision
  - CSSDA has accelerated direct connection to the central data server and will use information provided by CCIs connected through the central server of the Cooperative Computer Society.

### Insurance sector—assessment overview and key statistics (summary)
- The assessment of observance of the Insurance Core Principles was based on discussions with the Superintendent of Insurance and deputy, staff of the Insurance Company Control Service (ICCS), representatives from domestic insurance companies, the Insurance Association of Cyprus, an auditor, and the Association of Actuaries of Cyprus; and considered multiple laws, guidance notes, orders and reports.
- The assessment took account of annual returns and market trends at December 2003, with information updated for end 2004 following the mission.
- Market structure and rankings:
  - Approximately 44 companies supervised and approximately 1,600 agents active in distribution.
  - Market Rank (of 34 countries):
    - Total Market: World Market Rank 56; European Market Rank 28
    - Life Insurance: World Market Rank 51; European Market Rank 25
    - General Lines: World Market Rank 67; European Market Rank 31
- Insurance sector domestic financial variables by line of business (in thousands of Cyprus pounds)
  - Non-Life
    - 2003: Gross Written Premium 105,157; Net Earned Premium 59,386; Underwriting Reserve 199,226; Assets 57,934; Equity 109,221; Technical Result 1,996
    - 2004: Gross Written Premium 125,445; Net Earned Premium 74,272; Underwriting Reserve 228,566; Assets 67,045; Equity 126,425; Technical Result 9,048
  - Life
    - 2003: Gross Written Premium 151,418; Net Earned Premium 150,340; Underwriting Reserve 795,251; Assets 58,490; Equity 693,160; Technical Result 6,614
    - 2004: Gross Written Premium 151,578; Net Earned Premium 132,381; Underwriting Reserve 819,419; Assets 63,913; Equity 709,771; Technical Result 10,828
  - Composite
    - 2003: Gross Written Premium 29,948; Net Earned Premium 24,279; Underwriting Reserve 76,288; Assets 16,061; Equity 50,031; Technical Result -889
    - 2004: Gross Written Premium 32,979; Net Earned Premium 27,098; Underwriting Reserve 82,722; Assets 14,610; Equity 57,481; Technical Result -496
  - Total Market
    - 2003: Gross Written Premium 286,523; Net Earned Premium 234,005; Underwriting Reserve 1,070,765; Assets 132,485; Equity 852,412; Technical Result 7,721
    - 2004: Gross Written Premium 310,002; Net Earned Premium 233,751; Underwriting Reserve 1,130,707; Assets 145,568; Equity 893,677; Technical Result 19,380
- Insurance companies transacting business outside Cyprus (in thousands of Cyprus pounds)
  - Non-Life
    - 2003: Gross Written Premium 56,884; Net Earned Premium 29,523; Underwriting Reserve 104,237; Assets 52,213; Equity 36,981; Technical Result 4,362
    - 2004: Gross Written Premium 163,888; Net Earned Premium 140,211; Underwriting Reserve 197,843; Assets 92,320; Equity 108,474; Technical Result 32,393
  - Life
    - 2003: Gross Written Premium 68,050; Net Earned Premium 67,983; Underwriting Reserve 431,066; Assets 15,688; Equity 398,949; Technical Result -1,451
    - 2004: Gross Written Premium 48,851; Net Earned Premium 47,070; Underwriting Reserve 378,553; Assets 27,957; Equity 310,850; Technical Result 8,775
  - Composite
    - 2003: Gross Written Premium 4,239; Net Earned Premium 6,826; Underwriting Reserve 30,443; Assets 20,969; Equity 9,426; Technical Result 1,981
    - 2004: Gross Written Premium 9,156; Net Earned Premium 9,058; Underwriting Reserve 33,668; Assets 22,724; Equity 10,985; Technical Result 2,484
  - Total
    - 2003: Gross Written Premium 129,173; Net Earned Premium 104,332; Underwriting Reserve 565,746; Assets 88,870; Equity 445,356; Technical Result 4,892
    - 2004: Gross Written Premium 221,895; Net Earned Premium 196,339; Underwriting Reserve 610,064; Assets 143,001; Equity 430,309; Technical Result 43,652

*Source: IMF assessment and supervisory authorities as presented in the assessment.*

### 75.      The leading three life insurance companies have 80 percent of the whole market and

### cr06347 - 75.      The leading three life insurance companies have 80 percent of the whole market and 

### Market structure and concentration
- The leading three life insurance companies have 80 percent of the whole market.
- The leading three life insurance companies are owned by the leading banks of Cyprus.
- The general lines market comprised a total of 30 companies under supervision in 2004 (with only 28 writing business).
- Only five companies have GWPs of more than £C 10 million.
- Ten companies have market shares of less than 1 percent each.
- The market is described as very small and very fractured; it is unlikely that larger international insurance companies would enter the market.

### Scale, productivity, and distribution of agents/staff
- The 38 companies who are members of the Insurance Association of Cyprus employ 1,640 staff, implying a GWP of £C 250,000 per staff member.
- The number of agents is expected to drop from approximately 3,600 to 1,600 (the number currently active).
- That would still imply an average portfolio of approximately £C 190,000 per agent.
- Most companies are operating from a family-based platform; wide variation in company size implies significant variance in professionalism.

### Reserving, capital adequacy, and solvency concerns
- Reserving levels are not satisfactory for a number of companies.
- Reserving techniques recently introduced lead to higher reserving requirements.
- The existing capital positions of 14 companies are below the minimum requirements of the EU based on Solvency I.
- At the time of the assessment, there were five insurance companies operating in the market with suboptimal reserving levels.
- Assets not qualified as admissible to cover reserves should not be recognized for solvency purposes.
- Premium receivables should be depreciated and a strict aging structure should be requested to ensure that those assets can be materialized if needed.

### Capacity of supervision and systemic resilience
- Supervision currently takes a ring-fencing approach against total failure rather than seeking to establish a secure and stable financial infrastructure for the domestic market.
- With its current capacity, insurance supervision in Cyprus will not be able to respond adequately to major systematic shocks.
- The level of skills and resources provided to the SI is suboptimal; the level of regulation is not precise enough to set clear expectations for supervised companies.
- Adequate resources and skills are stated as absolutely essential to the performance of a supervisory authority.

### Main findings (condensed)
- The market is too segregated; the number of companies is not sustainable given current return levels.
- Further development requires a strong improvement in professionalism through strict application of EU standards.
- Operational procedures are very labor intensive.
- Whether all companies will be able to meet future capital requirements, even at a minimum level, needs to be assessed.

### Key recommended actions and supervisory improvements (by IAIS Insurance Core Principle reference)
- CP1 (Conditions for effective insurance supervision): Define regulations to set a supervisory framework and clear expectations.
- CP2 (Supervisory objectives): Define clear objectives and measures for the ICCS; report regularly and communicate how the LIS is to be applied.
- CP3 (Supervisory authority): Grant the SI a budget to perform LIS duties; produce annual priority plans; assess necessary composition of skills for the ICCS.
- CP4 (Supervisory process): Standardize internal procedures and make publications available to the public.
- CP5 (Supervisory cooperation and information sharing): Contact home supervisors to identify FoS companies actually operating (action planned for 2005).
- CP9 (Corporate governance): Develop governing rules for financial-sector undertakings jointly across the four supervisory authorities.
- CP10 (Internal control): Define standards on internal control and enforce through reporting and auditing requirements.
- CP11 (Market analysis): Identify necessary information for market analysis and define processes for collection and updating.
- CP12 (Reporting to supervisors and off-site monitoring): Store company data electronically; require signed hardcopies and electronic files in prescribed formats; implement plausibility testing.
- CP13 (On-site inspection): Obtain MoF agreement to contract third parties for on-site inspection; develop plan for regular inspections.
- CP14 (Preventive and corrective measures): Develop regulatory rules to prevent noncompliance and consider preventive measures to improve resource allocation.
- CP15 (Enforcement or sanctions): MoF should review whether the variety of cases permitting appeal could be reduced.
- CP16 (Winding-up and exit from the market): Maintain a shortlist of potential liquidators to expedite appointments under s157.
- CP17 (Group-wide supervision): Incorporate information exchange processes and coordinator terms of reference into the existing MOU.
- CP18 (Risk assessment and management): Begin risk management steps after internal control procedures (CP10) and other recommendations are implemented.
- CP19 (Insurance activity): Require supervised companies to provide risk profiles on new products, rating factors, and changes in risk attitude.
- CP20 (Liabilities): Ensure ICCS can contract external resources and recruit skilled staff to determine appropriate reserves (linked to CP1 and CP3 recommendations).
- CP21 (Investments): Require investment policy as part of each company’s risk profile; include internal control procedures and contingency plans.
- CP23 (Capital adequacy and solvency): Make verification of timely collection of cash premiums an essential internal control; require solvency capital to be reported quarterly; recognize that continuing operation while unable to meet minimum requirements is unacceptable.
- CP24 (Intermediaries): Review planned allocation of supervisory resources given the range of supervisory tasks.
- CP25 (Consumer protection): Publish frequency of complaints by company to incentivize improved customer protection (subject to legal remit and proposal for a Financial Ombudsman).
- CP26 (Information, disclosure & transparency): Improve content and frequency of the market report; upgrade the existing “Report in Insurance in Cyprus” to annual publication instead of once every two years.
- CP27 (Fraud): See ICP10 recommendations.
- CP28 (Anti-money laundering): Identify a common approach and provide resources to deal with STRs on an as-needs basis; note that sources of single premiums into unit-linked contracts had not led to STRs to the SI during the life market assessment.

### Authorities’ planned actions (selected timelines and commitments)
- Outsource legal services for EU harmonization purposes to support CP1 implementation.
- Upgrade the existing “Report in Insurance in Cyprus” to a more detailed report including ICCS and publish annually instead of once every two years (CP2, CP26).
- Consider granting the ICCS full financial autonomy from the Government; expedite recruitment of appropriately qualified ICCS staff (CP3).
- ICCS to send by the end of this year a letter to all EU home supervisory authorities to implement CP5.
- Corporate-governance rules discussed at meeting of heads of supervisory authorities on 11/10/2005; each supervisory authority to develop rules in close cooperation (CP9).
- Tender proposals for ICCS computerization under evaluation by a special committee; procedure expected to be completed by May 2006 (CP12).
- ICCS to submit proposals to MoF for funding to contract on-site inspection services; a plan for regular on-site inspections is being prepared (CP13).
- If ICCS staffing is upgraded within the next 2–3 years, implementation of CP14 preventive and corrective measures is expected in parallel.
- Group-wide supervision recommendation expected to be implemented within the first semester of next year (CP17).
- Letter to be addressed early next year to all insurance companies to implement CP23 actions on solvency reporting.
- Implementation of several actions (CP11, CP19, CP20, CP21, CP18) explicitly linked to adequate staffing and skills within the ICCS (CP3).

*Source: Offshore financial center assessment.*

### 89.      In addition to the above named laws, the assessment was based on the self

### Assessment of Cyprus Securities Regulation (paragraphs 89–119)

### Information and methodology used for assessment
- Assessment based on self-assessments completed by both CySEC and the Central Bank, supplemented by information provided by both authorities and data available on the website.
- Detailed discussions held with CySEC, the Central Bank, the Stock Exchange, relevant private sector companies, representative bodies, the accountancy supervisor, and accountancy firms.
- Cooperation was freely given by all concerned.

### Market structure and activity
- Stock Exchange: state owned; listings: 18 main and 137 supplementary listings.
- Turnover: in the region of $500,000 daily at the end of April 2005, down from $1.8 million in the first 75 trading days of the year.
- Historical price collapse: in 1999/2000 the exchange index fell from about 800 to 80 points in the course of a year and a half.
- Market intermediaries: 47 authorized market intermediaries.
  - 32 of these intermediaries offer their services almost exclusively to nonresidents.
  - 15 intermediaries offer their services locally; many are members of the Stock Exchange.
- Collective investment schemes:
  - Retail UCITS sector: just transposed EU UCITS Directives into national law; no schemes authorized to date.
  - Non-retail collective investment schemes: about 15 authorized, total net asset value of about $400 million.
  - About 40 international financial advisors.
- Supervision changes: supervision of certain entities will pass to CySEC in keeping with transposition of EU legislation; Central Bank’s remaining securities supervisory role is supervising non-retail collective investment schemes.

### Regulatory framework and preconditions
- Regulatory regime strongly influenced by EU membership; laws, supervisory regime, and regulations almost exclusively based on EU directives.
- Legal, accounting, company law, and taxation regimes heavily influenced by U.K. equivalents.
- Accounting: Cyprus has adopted International Financial Reporting Standards (IFRS); all statutorily based financial reporting must use the standards.
- Accounting and auditing systems appear to be well supervised.

### Principle-by-principle assessment — key findings
- General: legislative supervisory framework is comprehensive; Cyprus had adopted all relevant directives by accession in May 2004 and continues transposition as new EU securities directives are adopted.
- CySEC staffing:
  - At present, CySEC appears to have adequate staff resources; staff appear well trained and competent.
  - Medium-term challenge: retaining current staff and increasing staff numbers as CySEC assumes more responsibilities (e.g., implementation of significant new EU directives).
- Regulator (Principles 1–5):
  - Regulatory responsibilities of CySEC are generally clearly set down in legislation and appear applied consistently.
  - Clarity needed on respective roles of CySEC and the Stock Exchange in supervision of issuers (listed companies); CySEC’s competency recently questioned by the courts and an appeal is pending.
  - CySEC seeking amendment to the Stock Exchange Law to clarify regulatory role.
- Self-regulatory organizations (Principles 6–7): apart from a limited self-regulatory role of the Stock Exchange, there are no self-regulatory organizations in Cyprus.
- Inspections, investigations, and enforcement (Principles 8–10): CySEC has wide powers of inspection, investigation, and enforcement; constitutional/legal reasons limit its effective supervision of the Stock Exchange.
- Information sharing and cooperation (Principles 11–13):
  - Law provides for sharing information with domestic and foreign regulators.
  - CySEC cannot collect information or carry out investigations on behalf of foreign regulators unless it has an independent interest in the matter.
  - Difficulties obtaining beneficial owner information where shares are registered in names of lawyers acting as nominees; forthcoming bill expected to correct shortcomings.
- Issuers (Principles 14–16):
  - Public offering law, stock exchange law, and company law provide for accurate and timely disclosure and equitable treatment of shareholders.
  - Accounting and auditing standards aligned with best international practice (IFRSs adopted).
- Collective Investment Schemes (Principles 17–20):
  - Two regimes: (i) CySEC-supervised UCITS (retail market) — UCITS legislation adopted but no UCITS authorized to date; CySEC needs specific rules for valuing non-quoted assets held by UCITS and intends to have these rules in place before authorization; (ii) international collective investment schemes (non-retail, targeted at nonresidents) — about 15 authorized, net asset value about $400 million; two types: minimum investor subscription of $50,000 for those marketed to experienced investors, and private schemes restricting number of investors to 100.
  - International collective investment schemes supervised and regulated by the CBC under the International Collective Investment Schemes Law, 1999.
- Market intermediaries (Principles 21–24):
  - All market intermediaries except investment advisors must be authorized by CySEC.
  - Following transposition of the EU Markets in Financial Instruments Directive, investment advisors will be supervised by CySEC; none currently exist domestically.
  - 47 market intermediaries authorized by CySEC: 32 serve nonresidents almost exclusively (previously supervised by the Central Bank); 15 serve local market, many provide stock-broking services.
  - CBC continues to supervise international financial services companies that offer only investment advice until transposition; about 40 such firms.
  - Legislative regime for supervision of market intermediaries and implementation appears effective.
- Principles for the Secondary Market (Principles 25–30):
  - CySEC charged with supervision of the Stock Exchange but cannot effectively supervise another public administrative body due to constitutional status, limiting use of regulatory tools (e.g., imposition of conditions/restrictions, inspections).
  - CySEC could, in extreme circumstances, via the Council of Ministers, order temporary suspension of the exchange.
  - In practice CySEC and the exchange have a satisfactory relationship; CySEC monitors trading in real-time and daily.
  - Stock Exchange has exclusive rights to undertake stock market transactions in movable securities in Cyprus; Cyprus will need to establish exchange authorization criteria when the EU Markets in Financial Instruments Directive is transposed.

### Recommended actions (by Principle)
- Principle 26:
  - Introduce legislation urgently to allow CySEC to supervise effectively the Stock Exchange by revising the equal constitutional status preventing one public administrative body from supervising another.
- Principle 11:
  - Remove obstacle preventing CySEC from sharing information and carrying out investigations on behalf of foreign regulators when CySEC lacks an independent interest; forthcoming legislation noted.
- Principle 13:
  - Resolve legal uncertainty regarding CySEC’s ability to obtain beneficial owner information for shares registered in names of lawyers acting as nominees; CySEC seeking amendment in forthcoming legislation.
- Principle 1:
  - Address uncertainty surrounding respective responsibilities of CySEC and the Stock Exchange in supervision of issuers as a matter of urgency; appropriate amendment to the Stock Exchange Law noted as to be made.
- Principle 20:
  - For UCITS, CySEC should introduce specific rules for valuing assets other than shares in publicly quoted companies; such rules are currently being drafted.
- Principle 17:
  - Recommend Central Bank take a more proactive role (e.g., through inspection) to ensure no members of the public are investing in non-retail collective investment schemes (ICIS sold to experienced investors and private ICISs).
- Principle 2:
  - Revoke provision in the CySEC Law requiring CySEC to provide the Minister of Finance with any information he may deem necessary for public interest, to maintain operational independence of CySEC; noted this will be addressed in forthcoming legislation.
- Principle 3:
  - Anticipate and provide extra resources for CySEC to cope with expanding workload (e.g., implementation of new EU Directives).

### Authorities’ response — selected commitments and actions
- Laws enacted on 9 September 2005:
  - Law N. 115(I)/2005: significant amendments to the Stock Exchange Law to clearly designate responsibilities of the Cyprus Stock Exchange and CySEC regarding issuers and remove ambiguities/overlaps.
  - Law N. 114(I)/2005 and Law N. 116(I)/2005: transposition of the EU Prospectus Directive and the EU Market Abuse Directives respectively, harmonizing legal regime with the European acquis communautaire in those areas.
- CySEC legislative and operational commitments:
  - Finalizing a bill to amend the CySEC Law to revoke provision requiring CySEC to provide information to the Minister of Finance; expected enactment in 2006.
  - Finalizing a bill to remove obstacle to sharing information and carrying out investigations on behalf of foreign regulators where CySEC has no independent interest; expected enactment in 2006.
  - Proposed amendments to give CySEC clear authority to secure information on beneficial owners where shares are registered in names of lawyers acting as nominees; enactment expected in 2006.
  - Commitment that CySEC will have UCITS valuation rules in place before authorizing any schemes.
  - CySEC plans to significantly increase skilled staff numbers; budget for 2006 provides for a 29% increase in the budget allocated for staff costs.
  - CySEC to take steps so issue of supervising the Stock Exchange is addressed with transposition of the EU Directive on Markets in Financial Instruments and to be positioned to effectively supervise the Cyprus Stock Exchange.

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_Source: https://www.imf.org/-/media/files/publications/ofca/english/cr06347.pdf_