## Assessment of Financial Sector Supervision and Regulation (AFSSR) for the Republic of Cyprus — Preface and Key Findings ## Source details **Canonical URL:** [Assessment of Financial Sector Supervision and Regulation (AFSSR) for the Republic of Cyprus — Preface and Key Findings](https://www.imf.org/-/media/files/publications/ofca/english/cr06376.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr06376.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr06376.pdf.json) --- ### Overview and mission - Assessments covered: Basel Core Principles for Effective Banking Supervision (BCP); IAIS Insurance Core Principles; IOSCO’s Objectives and Principles of Securities Regulation; AML/CFT mutual evaluation (MONEYVAL) summarized in AFSSR information (government-controlled areas only). - Mission timing and composition: - Banking, insurance, securities mission: March 28 to April 8, 2005. - MONEYVAL field visit: April 3 to 9, 2005. - Banking/financial supervision mission chief: Ms. Mary G. Zephirin; team included Mr. Ahmed Zorome, Ms. Bärbel Bernhardt, Marcel Maes, Timothy Sullivan, Henning Goebel, Michael Deasy. - Methodology: - Core Principles Methodology in OFC Assessment Program. - Qualitative five-part rating: compliant; largely compliant; materially noncompliant; noncompliant; not applicable. - Assessments based on laws, regulations, guidelines, discussions with CBC, CSSDA, AOCS, CCB, financial institutions, professional associations, external auditors. *Source: Assessment of Financial Sector Supervision and Regulation (AFSSR) for the Republic of Cyprus (IMF).* ### Institutional, legal, and macroprudential context - European Union accession: Cyprus entered the EU in May 2004; accession led to liberalization and tightening of prudential regulation. - Capital account and exchange-control milestones: - January 1, 2001: nine percent ceiling on interest rates removed. - May 1, 2004: Capital Movement Law repealed Exchange Control Law. - January 1999: Cypriot pound pegged to the Euro; August 2001: fluctuation margins widened to ±15 percent. - Authorities pursuing Euro-adoption strategy. - Inflation and standards: - Inflation averaging about three percent a year over the past four years; expected to remain subdued. - Cyprus adopted International Accounting Standards (IAS) in 1981. - Macro-prudential participation: - CBC participates in the Banking Supervision Committee of the European System of Central Banks and related Working Groups and the “Coordinated Compilation Exercise for Financial Soundness Indicators.” ### Market structure and key statistics - Banking industry segments: - Domestic commercial banks: 11 commercial banks with three specialized institutions (each holding a commercial banking license). - Cooperative credit institutions: some 358 cooperative credit institutions. - International banking units (IBUs): 26 IBUs. - Concentration and shares: - Three largest domestic banks hold about 70 percent of system assets (excluding cooperatives) and about half of system assets including cooperatives. - Cooperative credit institutions’ deposits represented 32 percent of total deposits in local currency at end-2004. - At end-2004, IBU assets of $12.5 billion represented 30 percent of domestic banking assets (excluding cooperatives). - Ownership and IBUs origin: - Largest domestic banks are locally owned international groups; largest numbers of IBUs from Lebanon (8), Jordan (4), Russia (3). - Deposit protection and solidarity: - Deposit protection (since September 2000): compensation set at 90 percent of total deposits of each depositor up to a maximum of EUR 20,000. - CSSDA may require establishment of a solidarity fund for cooperative credit institutions (preliminary regulation in draft). ### Banking sector performance, asset quality, and capital (CBC findings) - Profitability and asset quality: - Return on equity (ROE): 2002 negative 11.1 percent; 2003 negative 4.7 percent; mid-2004 positive 4.3 percent. - Non-performing loans (NPLs) to total gross loans: 11.7 percent at mid-2004. - Reported NPL ratio may deteriorate when calculation aligned with EU requirements at start-2006. - Capital and provisioning: - Overall risk-weighted capital roughly 13 percent in 2004. - Required capital adequacy ratio stood at 10 percent; average sector ratio exceeds 14 percent. - CBC directives and Basel-based directives issued for capital computation and market risks. - Interest-suspension policy changes: - January 2004: suspension period reduced from nine months to six months in certain cases. - December 2004: period further reduced to ninety days, effective January 1, 2006. - CBC plans to require suspension of interest irrespective of tangible security in line with international practice. ### CBC institutional framework, powers, and resources - Statutory responsibilities (excerpt): - CBC tasks include monetary policy, exchange-rate policy and reserve management, supervision of banks, payments and settlement oversight, and acting as banker/financial agent of the Government. - All responsibilities for banking supervision rest solely with the CBC (Banking Law N°66(1) of 1997; Central Bank of Cyprus Law N. 138(1) 2002). - Supervisory powers and enforcement: - Section 26(2): unfettered access to institution’s records and books. - Section 27(1): cooperation and information exchange with other supervisory authorities, subject to confidentiality. - Section 30(1): broad remedial powers including requiring corrective measures and revoking licenses; CBC must invite comments at least three days before remedial action in some cases. - Section 20: CBC may increase capital requirements to address shortfalls. - Independence and governance: - Section 7: CBC and decision-making bodies shall not seek or take instructions from the government or any other body. - Governor appointed for renewable five-year term by the president; legal protection from civil liability except for not-in-good-faith or gross negligence; defense provided by Office of the Attorney General. - Staffing and resources: - Domestic Banks Supervision Department: 32 staff members. - Supervision of International Banks, Regulation and Financial Stability Department: 19 staff members. - CBC authorized to charge fees for supervision/inspection expenses; supervisory budget part of CBC overall budget. - Training sources include FSI, Bank of England, Deutsche Bundesbank, Banque de France, Nederlandsche Bank, U.S. FDIC, U.S. Federal Reserve. ### Supervisory approach, on-site and off-site practices (Principal assessments) - On-site examination frequency policy: - Annually for domestic banks; - Annually for subsidiaries of foreign banks; - Every two years for branches of foreign banks. - Off-site reporting and monitoring: - CBC collects monthly balance sheet and other prudential returns; quarterly information on provisioning, NPLs, and suspended interest; semi-annual returns on concentrations and exposures. - On-site examinations verify more than 50 percent of balance sheet value of bank credit exposures (sample biased toward large/problem loans). - Validation and risk-based supervision: - CBC uses risk maps (Business Risks and Control Risks) for international banks; designing risk-based supervision methodology for domestic banks. - Principle assessments highlights: - Principle 1.1: Compliant; Principle 1.2: Largely Compliant (need for additional qualified staff); many other principles assessed Compliant or Largely Compliant; selected recommendations identified (see Recommended Action Plan). ### Key prudential limits and directives - Large exposures: - Individual borrower/group limit: 25 percent of bank’s capital base (Sections 11(1) and (2)). - Aggregate large exposures (exposures > 10 percent of capital base): limited to 800 percent of capital base. - Foreign-currency open position limits: - Overall open position: 6 percent of capital base (previously 15 percent). - Open position in each currency: 3 percent of capital base (previously 10 percent). - Intra-day limits also apply. - Liquidity and interest-rate rules: - Directive #11: time-band liquidity analysis; daily monitoring and quarterly liquidity return. - Directive #10: minimum liquidity ratio for liabilities in foreign currencies currently set at 75 percent. ### AML/CFT supervisory measures (CBC) - Legal framework: Prevention and Suppression of Money Laundering Activities Laws (PSMLAL) 1996–2004. - CBC Guidance Note (consolidated November 2004) requires banks to implement customer due diligence, record keeping, internal controls, appointment of Money Laundering Compliance Officer, reporting to MOKAS, and prohibitions on secret/anonymous accounts. - Specific limits and timelines: - Banks required to put in place management information systems for ongoing monitoring by June 30, 2005. - Prohibition on acceptance of cash deposits in foreign currency notes in excess of $100.000 (one hundred thousand U.S. Dollars) per calendar year from any person or group without prior CBC approval. - Reporting statistics to FIU (June 1998 to June 2004): - Total suspicious transactions reported: 375; - 2002: 75; 2003: 99; 2004: 77. - Enforcement under PSMLAL: - Section 58(2)(a): CBC can impose administrative fines up to ₤C3,000 for failures to take prescribed preventive measures. ### Cooperative credit institutions (CSSDA and CCB): structure, transition, and supervisory gaps - Sector structure: - CCIs: 358 cooperative credit institutions; 104 non-credit limited liability cooperatives. - CCB acts as clearing agent and a licensed commercial bank; CCB serves as the Central Body under EU affiliation arrangements. - Legal and supervisory framework: - Cooperative Societies Laws (CSL) 1985–2004 govern CCIs; CSSDA supervises CCIs (Section 41D of CSL). - Part VI A of CSL sets minimum prudential standards: licensing, minimum capital, capital adequacy, organizational/management requirements, exposure restrictions, connected lending limits, reporting, on-site exams, sanctions, remedial measures. - Transitional arrangements and timing: - Five-year transitional period from January 1, 2003 for CCIs to comply with Banking Directives; transitional period expires December 31, 2007. - Assessment: Materially Noncompliant due to transitional arrangements and limited supervisory enforcement capacity. - CSSDA capacity and plans: - Operational staffing: Supervision Department: 7 staff; Development Department: 33 staff. - Transition plan provides for 17 additional staff; fourteen of the 17 to reinforce supervisory staff, “tripling the present supervisory resources.” - Planned total CSSDA staff: 57; initially 21 to the Supervision Division. - On-site program: 16 examinations since inception (4 with CBC assistance); examined CCIs account for 17 percent of total loan portfolio. - Key supervisory numeric facts for CCIs: - CCIs connected to Cooperative Computer Society central server: 220 CCIs (including all larger institutions). - Minimum liquidity ratio for CCIs: 25 percent. - Capital minimum ratio under CSSDA Directive: 8 percent (compared to 10 percent for banking sector). - Sample coverage in on-site credit review: at least 30 percent of balance sheet value of CSI credit exposures. - Major supervisory assessments for CCIs (selected): - Principle 1.2 (operational independence and resources): Materially Noncompliant. - Principles 7 and 8 (credit policies and loan evaluation): Materially Noncompliant. - Principle 9 (large exposures): Materially Noncompliant. - Principle 10 (connected lending): Materially Noncompliant. - Principle 14 (internal control): Largely Compliant. - Principle 15 (AML): Largely Compliant. - Principles 16 and 18 (on-site and off-site supervision): Materially Noncompliant. - Principle 19 (validation of supervisory information): Largely Compliant. - Recommended supervisory priorities for CCIs (selected): - Accelerate affiliation of non-conforming CCIs with CCB; start pilot projects. - Complete Regulatory Decision defining permissible services/activities and update returns on large exposures. - Require semi-annual reporting on capital ratios and additional reporting on credit classifications, NPLs, provisioning, and suspended interest. - Accelerate direct access to Cooperative Computer Society central server to improve timely off-site monitoring. ### Insurance sector assessment (IAIS): market structure, solvency, and supervisory recommendations - Market size and supervised entities: - 44 companies supervised under SI powers. - Total gross written premiums (GWP) of those companies: £C 415.7 million (figures based on December 2003; annual returns at Dec 2004 not returned at mission time). - Selected aggregate numeric series (in thousands of Cyprus pounds) — Domestic totals (2003 vs 2004): - Total Market GrossPremium: 2003 286,523; 2004 310,002. - Total Market NetPremium: 2003 234,005; 2004 233,751. - Total Market Assets: 2003 852,412; 2004 893,677. - Total Market Equity: 2003 7,721; 2004 19,380. - Life market dynamics: - Unit-linked life insurance products account for approximately 75 percent of the Cypriot life market’s product mix. - Life GWP: 2003 151,418; 2004 151,578. - Non-life market trends: - Domestic Non-Life GWP: 2003 105,157; 2004 125,445. - International Non-Life GWP: 2003 56,884; 2004 163,888. - Supervisory capacity and recommendations: - SI/ICCS staffing and resources insufficient; ICCS has no independent budget and procurement/recruitment delays noted (vacancies took more than 1.5 years). - Key assessments: - Conditions for effective supervision: Largely observed. - Supervisory authority and process: Partially observed / Largely observed for many principles. - On-site inspections: Not observed (rare in practice; four inspections in last 24 months). - Solvency I implementation: existing businesses given until March 2007 to meet Solvency I; at assessment at least four companies unable to meet existing capital requirements. - Principal recommended actions (selected): - Grant SI a budget and budgetary control; recruit actuarial and technical expertise. - Issue detailed regulations/“sound insurance principles” covering internal control, governance, reserving, risk management, and disclosure. - Implement regular/random on-site inspections; enable contracting third-party experts for reserving reviews. - Require quarterly solvency capital reporting and strengthen AML/CFT resourcing for STR processing. ### Securities market assessment (IOSCO): CySEC, Stock Exchange, and intermediaries - Institutional responsibilities: - CySEC established 2001; Stock Exchange established 1996; Central Bank retains supervision over certain international financial services companies and ICIS. - Exchange Control Law abolished May 2004. - Market scale and structure: - Stock Exchange listings: 18 main and 137 supplementary listings. - Stock Exchange turnover: in the region of $500,000 daily at end-April 2005; in the region of $1.8 million in the first 75 trading days of 2005. - Market intermediaries authorized by CySEC: 47 (32 serve almost exclusively nonresidents; 15 serve locally). - Collective investment schemes: domestic UCITS legislation adopted but no Cyprus UCITS authorized to date. - Key legal and supervisory findings: - CySEC faces constitutional/legislative constraint: it cannot effectively supervise the Stock Exchange as one public administrative body cannot supervise another; a September 2005 amendment package (including Market Abuse and Prospectus Directives) was enacted to clarify roles. - Principle assessments’ summary (selected): - Implemented/fully implemented: wide range of principles (listed in source). - Not implemented: Principle 11 (authority to share information on behalf of foreign regulators) and Principle 26 (ability to supervise the Stock Exchange effectively) — among others. - Funding and resources: - CySEC receives a fixed government contribution of £C1.0 million; Stock Exchange pays £C 75,000 per annum; variable government payments noted (2005 £C500,000; 2006 £C 1.020 million referenced). - CySEC planning staff increases; 2006 budget provides for a 29 percent increase in staff-cost budget. - Market conduct and infrastructure: - Real-time market monitoring in place; CySEC connected to exchange trading system and Central Depository/Central Registry to identify investors. - Market abuse law (No. 116(I)/2005) tightens criminal sanctions and allows administrative fines. - Settlement cycle: rolling T+3; settlement bank: Bank of Cyprus; settlement in Cyprus pounds only. - Recommended actions (selected): - Urgently resolve legal/constitutional obstacle preventing CySEC from effective supervision of the Stock Exchange (MiFID transposition and legislative amendments noted). - Revoke CySEC Law provision requiring CySEC to provide the Minister of Finance with any information he may deem necessary to preserve independence. - Remove obstacles preventing CySEC from sharing information and conducting investigations on behalf of foreign regulators where appropriate. - Ensure rules for UCITS valuation of non-quoted assets before authorizing any Cyprus UCITS. ### Cross-cutting Recommended Action Plans (selected consolidated items) - Banking (CBC): - CP 1.2 Independence: provide additional qualified supervision staff to meet EU accession demands. - CP 8 Loan Evaluation: finalize and implement more stringent criteria for suspension of interest (90-days rule effective January 1, 2006). - CP 11 Country Risk: establish formal guidance on country and transfer risk management. - CP 12 Market Risks: develop expertise to ensure banks perform scenario analysis, stress testing, contingency planning; prepare for EU Capital Requirements Directive (effective January 1, 2007). - Cooperative sector (CSSDA/CCIs): - CP 1.2: execute plans to strengthen CSSDA supervisory capacity (recruit 17 additional staff; upgrade salaries). - CP 2 / CP 5: finalize Regulatory Decision defining permissible services/activities and participation limits. - CP 6: institute mandatory semi-annual reporting on capital compliance. - CP 8 / CP 9 / CP 10 / CP 16–19: accelerate on-site program, increase supervisory staff, improve off-site returns, accelerate central-server access, require additional prudential reporting. - Transitional deadline: December 31, 2007 for full compliance with EU Banking Directives. - Insurance (ICCS / SI): - Grant SI budgetary autonomy; recruit actuarial and technical staff. - Finalize Orders/Regulations on prudential standards, internal control, governance, and reserving. - Require quarterly solvency reporting and conduct regular on-site inspections; prepare Solvency I implementation plan for March 2007 deadline. - Securities (CySEC / Stock Exchange): - Resolve constitutional/legislative impediments to CySEC’s supervision of the Stock Exchange (MiFID transposition and Stock Exchange Law amendments enacted/seeking clarification). - Amend CySEC Law to remove ministerial information clause and permit information sharing/cooperation with foreign regulators and ability to act on their behalf where appropriate. - Ensure UCITS valuation rules for non-quoted assets prior to authorizing schemes. *Source: IMF Assessment of Financial Sector Supervision and Regulation (AFSSR) for the Republic of Cyprus, including CBC, CSSDA, SI/ICCS, and CySEC assessments.* ### Preface................................................................................................................. ### Preface ### Overview - The report covers assessments of financial supervision and regulation in the government-controlled areas of the Republic of Cyprus. - Assessments were conducted against the Basel Core Principles for Effective Banking Supervision (BCP), the IAIS Insurance Core Principles, and IOSCO’s Objectives and Principles of Securities Regulation. - The banking supervision assessment updates the 2001 assessment for the international banking sector and assesses supervision of domestic banks. - The Assessment of Financial Sector Supervision and Regulation (AFSSR) for the Republic of Cyprus summarizes key findings of the AML/CFT assessment (AFSSR information refers only to the government-controlled areas). ### Mission dates and team - Banking, insurance, and securities assessments: mission from March 28 to April 8, 2005. - AML/CFT mutual evaluation (MONEYVAL): field visit from April 3 to 9, 2005. - Assessment mission members for banking/financial supervision: Ms. Mary G. Zephirin (Mission Chief), Mr. Ahmed Zorome (Economist), Ms. Bärbel Bernhardt (Assistant) (all MFD), Marcel Maes (Consultant, Banking Supervision), Timothy Sullivan (Consultant, Banking Supervision), Henning Goebel (Insurance supervision expert, German Federal Financial Supervisory Authority, BaFin), Michael Deasy (Securities regulation expert, Irish Financial Services Regulatory Authority). - The assessment team received excellent cooperation from the authorities and market participants; factual updates, including laws passed since the assessment mission, have been included. ### Assessment scope and methodology - The CBC and the CSSDA agreed to assessments of compliance with the Basel Core Principles using the Core Principles Methodology in the context of the Offshore Financial Center (OFC) Assessment Program. - The domestic and offshore banking sectors were not subject to individual assessments because they are covered by the same legislation and similarly supervised by the Banking Supervision and Regulation Division (BSD) of the Central Bank of Cyprus (CBC). - The CSSDA assessment took account of its program to substantially expand and enhance supervisory capacity and of the transition period for credit cooperative institutions to meet prudential standards or affiliate with the Cooperative Central Bank (Central Body) as part of EU accession arrangements. - The assessment used a qualitative five-part rating system: compliant; largely compliant; materially noncompliant; noncompliant; and not applicable. - To be “compliant”, all “essential” criteria generally must be met without significant deficiencies. - “Largely compliant” indicates only minor shortcomings. - “Materially noncompliant” indicates shortcomings sufficient to raise doubts about the authority’s ability to achieve compliance, but with substantive progress. - “Noncompliant” indicates little or no substantive progress. - “Not applicable” is used when a principle is deemed irrelevant by the assessors. - The assessment was based on review of applicable laws, regulations, prudential guidelines, and discussions with CBC and CSSDA staff, AOCS, Cooperative Central Bank, financial institutions, professional associations, and external auditors. The CSSDA assessment was affected by the absence of English-language translations of many documents. Both CBC and CSSDA prepared formal self-assessments prior to the mission. ### Institutional, legal, and macroprudential context - Cyprus accession to the European Union: Cyprus entered the EU in May 2004; accession led to liberalization and tightening of prudential regulation. - Capital account liberalization and exchange controls: - On January 1, 2001, a nine percent ceiling on interest rates that had been in place since 1944 was removed. - A three-phase process of exchange control relaxation was completed on accession on May 1, 2004, when the Capital Movement Law repealed the Exchange Control Law. - The Cypriot pound central rate has been pegged to the Euro since January 1999; fluctuation margins were widened to ±15 percent in August 2001. - Authorities are pursuing a Euro-adoption strategy. - Inflation: averaging about three percent a year over the past four years; expected to remain subdued. - Accounting standards and profession: - Cyprus adopted International Accounting Standards (IAS) in 1981. - A large professional body of accountants and a strong association of certified accountants with disciplinary powers exist; the big four accounting firms are represented. - Macro-prudential work: - The CBC participates in the Banking Supervision Committee of the European System of Central Banks, its Working Group on Macro-prudential Analysis, and the “Coordinated Compilation Exercise for Financial Soundness Indicators,” providing a basis for developing macro-prudential surveillance and analysis. ### Market structure and key statistics - Banking industry segments: - Domestic commercial banks: 11 commercial banks with three specialized institutions (each holding a commercial banking license). - Cooperative credit institutions: some 358 cooperative credit institutions. - International banking units (IBUs): 26 IBUs. - Market concentration and shares: - Domestic commercial banking is dominated by three banks which together hold about 70 percent of system assets, excluding the cooperative banks, and about half of system assets, including the cooperatives. - Cooperative credit institutions’ deposits represented 32 percent of total deposits in local currency at end-2004. - At end-2004, IBU assets of $12.5 billion represented 30 percent of domestic banking assets (excluding the cooperatives). - International groups and ownership: - The three largest domestic banks are locally owned international groups with major insurance companies as subsidiaries. - The three specialized institutions include a mortgage bank (a subsidiary of the largest commercial bank), the Cyprus Development Bank (publicly owned), and the Housing Finance Corporation (publicly owned), though total assets of the three are a small portion of the banking system. - Remaining domestic banks include 3 small local banks and foreign-owned branches (2) and subsidiaries (3). - The largest number of IBUs are from Lebanon (8), Jordan (4), and Russia (3). - Cooperative sector: - Cooperative credit institutions have maintained a strong role due to nonprofit status, lower operating costs, and lower regulatory costs, enabling competition with commercial banks. - Most Cypriots continue to deposit with their local cooperatives. - The Cooperative Central Bank serves as their clearing agent and is a licensed commercial bank. ### Deposit protection and special arrangements - Deposit protection schemes established in September 2000 for banks and cooperative societies: - Compensation set at 90 percent of total deposits of each depositor up to a maximum of EUR 20,000. - Cooperative sector solidarity fund: - The Cooperative Societies Laws (CSL) provide that the CSSDA, in cooperation with the Pancyprian Cooperative Confederation Ltd., can issue a legally binding regulation requiring establishment of a solidarity fund with mandatory participation by cooperative credit institutions. - The solidarity fund would be used to address liquidity or solvency issues before the deposit protection scheme; a preliminary regulation is in draft. *Source: Preface to the Assessment of Financial Sector Supervision and Regulation (AFSSR) for the Republic of Cyprus.* ### 15. The economy of government-controlled Cyprus is heavily banked. As a result, the ### The economy of government-controlled Cyprus is heavily banked ### Banking sector overview and cross-border expansion - Larger banks are expanding by establishing branches and subsidiaries in overseas markets with important Greek communities. ### Bank performance, asset quality, and capital - 2002: negative return on equity of 11.1 percent. - 2003: negative return on equity of 4.7 percent. - 2004 (mid-2004): positive 4.3 percent ROE. - Non-performing loans to total gross loans were 11.7 percent at mid-2004. - Reported NPL ratio may deteriorate when the calculation is brought fully into line with EU requirements at start-2006. - Overall risk-weighted capital remains adequate at roughly 13 percent in 2004. - The central bank has begun to require the suspension of interest on non-performing loans by the banks. - Despite improved collections, the reported NPL ratio may be affected by forthcoming EU-aligned calculation changes. ### General preconditions for effective supervision - No macroeconomic vulnerabilities and risks that could have implications for the effectiveness of prudential safeguards or the stability of the financial system. - Public infrastructure fosters honoring and enforcement of financial contracts. - Comprehensive set of laws governs the financial sector, supported by a body of professional lawyers and judges; the court system is efficient. - Cyprus has adopted International Accounting Standards and International Auditing Standards. - Supervision of other financial sectors and markets is generally efficient. - No evidence of government efforts to influence lending operations. - Deposit insurance program is in place. - Financial services regulators have a process in place to address distressed financial institutions. ### Institutional framework and supervisory responsibilities - Central Bank of Cyprus (the CBC) is responsible for the supervision of banks (Banking Law N°66(1) of 1997; Central Bank of Cyprus Law N. 138(1) 2002). - Main tasks of the CBC include: - The definition and implementation of monetary policy; - The conduct of the exchange-rate policy and the management of the official foreign reserves of the Republic; - The supervision of banks in the Republic; - The promotion, regulation, and oversight of the smooth operation of payments and settlements systems; - To act as banker and financial agent of the Government of the Republic. - All responsibilities for banking supervision rest solely and entirely with the CBC. - CBC decides when and how to effect the orderly resolution of a problem bank situation. - CBC publishes an Annual Report covering banking regulatory and supervisory activities and statistics on the banking industry. - All Cyprus incorporated banks are required to publish, within six months from the end of each financial year, the balance sheet and profit and loss account for that year together with the auditor’s report. - Cooperative Societies’ Supervision and Development Authority (CSSDA) supervises cooperative credit institutions (CCIs); CCIs are supervised separately from commercial banks. ### Minimum prudential standards and CBC directives - Minimum prudential standards that banks should meet: - Limitation of credit exposures; - Limitation on holdings of immovable property; - Limitation of shareholdings; - Prohibition of commercial trading; - Prohibition of dealing in own shares; - Prior approval for amalgamation; - Limitations on large shareholdings; - Persons disqualified to act as directors in banks; - Direction and management by at least two individuals (Four-eyes principle); - Minimum capital; - Capital adequacy ratio; - Computation of capital; - Minimum liquidity; - Compensation of depositors (Deposit Protection Scheme). - CBC-issued directives include: - Computation of prudential liquidity; - Computation of the capital base of banks; - Computation of banks’ capital adequacy ratio; - Capital adequacy; - Layout and contents of banks’ annual accounts; - Monitoring and control of credit facilities (large exposures); - Framework for the evaluation of internal control systems; - Foreign currency positions and exposures; - Employment of funds derived from foreign currency deposit liabilities; - Cross-border credit transfers; - Establishment and operation of the Deposit Protection Scheme; - Freedom of establishment and freedom to provide banking related activities by European Union authorized credit institutions. - CBC notice issued on relationship between the CBC and the external auditors of banks. - Regulations issued on Establishment and Operation of an Investor Compensation Fund for Clients of Banks. - Amendments for EU harmonization: Banking Amendment No. 2 Law enacted in April 2004 to harmonize with Directive 2001/24/EC (mutual recognition on reorganization measures or winding up proceedings). ### CBC powers, legal framework, and enforcement - CBC empowered to issue directives for implementing BL objectives; banks must comply with BL provisions and CBC directives. - Section 30(1) of the BL: CBC may take necessary measures when a bank fails to comply with any provision of the BL or with any regulations made under the BL, including imposing sanctions up to revocation of license. - Section 26 of the BL gives the CBC unfettered access to all of the institution’s records and books. - CBC may set prudential rules administratively for: - Bank capital base (BL Section 22); - Capital adequacy ratio (BL Section 21(1)); - Liquidity (BL Section 23(1)). - CBC may issue general or specific directives subject to the BL (BL Section 41(1)). - CBC required to act after taking into consideration international practice and EU directives and regulations when exercising discretion under the Banking Law. - Sections 24 and 25 of the BL require licensed banks to submit prudential returns; CBC determines contents and frequency. ### CBC independence, governance, resources, and staffing - Section 7 of the CBC Law: neither the Bank nor any member of its decision-making bodies shall seek or take instructions from the government or any other body. - CBC is independent; no evidence of government or industry interference in operational independence or resource deployment. - Governance: board of directors consists of the governor, the deputy governor, and five directors. - Appointment: governor and deputy governor are appointed by the president and the vice president of the Republic, respectively. - The Governor of the CBC is appointed for a renewable term of office of five years; may be relieved from office only if, in the opinion of the Council of Ministers, he no longer fulfills the conditions required for the performance of his duties or in the event of serious misconduct. - Legal protection: Neither the CBC nor any person who is a director or an officer of the CBC is liable for damages for anything done or omitted in discharge of functions under the BL unless shown to be not in good faith or the result of gross negligence; defense against lawsuits rests with the Office of the Attorney General and legal expenses are covered by the Cyprus government. - Banking Supervision and Regulation Division staffing: - Domestic Banks Supervision Department: 32 staff members. - Supervision of International Banks, Regulation and Financial Stability Department: 19 staff members. - Supervisory staff qualifications and training: - Senior managers promoted from the ranks, with long experience. - Staff possess academic/professional qualifications and considerable hands-on supervisory experience. - Salary levels of supervisory staff comparable to private banking industry for officers, administrative, and clerical staff; senior managers’ salaries remain below general managers in private banking sector. - Training programs include courses from the Financial Stability Institute (Bank for International Settlements), Bank of England, Deutsche Bundesbank, Banque de France, Nederlandsche Bank, U.S. FDIC, U.S. Federal Reserve System, other central banks/banking supervisory authorities, and private institutions. - CBC subscribes to "FSI Connect" service. - Emphasis on modern information technology infrastructure to support Banking Supervision and Regulation Division activities. - Budgeting and fees: - Budget for supervisory function forms part of CBC’s overall budget. - CBC authorized to charge fees in connection with expenses incurred for supervision and inspection of banks. ### Supervisory cooperation and information sharing - Memorandum of Understanding (MOU) signed between the CBC, the Cyprus Securities and Exchange Commission, the Insurance Companies’ Control Service, and the Cooperatives Societies Supervision and Development Authority (CSSDA); MOU came into effect on January 1, 2003. - The four parties meet at least quarterly; technical-level supervisors meet at least monthly and communicate as needed. - Section 27(1) allows competent supervisory authorities to cooperate and exchange information with other supervisory authorities in Cyprus or elsewhere, subject to confidentiality protections equivalent to those applying to the CBC. ### Cooperative Credit Institutions (CCIs) and EU harmonization - CCIs have been subject to fewer regulations historically; EU banking directives require all credit cooperatives to sharply improve prudential ratios by end-2007. - A number of CCIs will comply on an individual basis; remaining CCIs will comply by affiliating with the CCB and meeting prudential requirements on a consolidated basis. - Assessment evaluates supervision for commercial banks (domestic or international) separately from credit cooperatives. ### Principle-by-principle assessments (summary) - Principle 1 (Objectives, Autonomy, Powers, and Resources): - Principle 1(1) Assessment: Compliant. - Principle 1(2) Assessment: Largely Compliant. Comment: Increasing demands related to EU accession and other supervisory developments have interfered with execution of some supervisory tasks; authorities should ensure properly trained and experienced staff are provided in numbers that will assure timely and adequate fulfillment of CBC’s supervisory responsibilities. - Principle 1(3) Assessment: Compliant. - Principle 1(4) Assessment: Compliant. - Principle 1(5) Assessment: Compliant. - Principle 1(6) (information sharing and confidentiality): arrangements in place (MOU; confidentiality protections). *International Monetary Fund* ### Section 27(1) of the BL enables the CBC to provide to home country supervisory authorities ### Section 27(1) of the BL enables the CBC to provide to home country supervisory authorities ### Information sharing and limits - Section 27(1) of the BL enables the CBC to provide to home country supervisory authorities information which, in the opinion of the CBC, enables the home country supervisory authority to exercise consolidated supervision. - Information on individual deposit accounts is excluded. - In practice, excluded information can be passed by the affected subsidiary or branch to its parent or head office or the foreign regulator may choose to visit Cyprus to conduct an on-site review of the operations. - Information exchange between competent supervisory authorities is exclusively used in the discharge of their functions and responsibilities and is subject to confidentiality rules as applied to the supervisory authority which provides the information on the basis of legislation in force from time to time. - Confidential information exchanged on the basis of the legislation in force may not be disclosed without the express agreement of the competent supervisory authority which disclosed it and, where appropriate, solely for the purposes for which this authority gave its agreement. ### Memoranda of Understanding (MOUs) and supervisory cooperation - MOUs signed (largely on the initiative of the CBC) with overseas banking supervisory authorities: - Central Bank of the Russian Federation - Bulgarian National Bank - National Bank of the Republic of Belarus - National Bank of Ukraine - National Bank of Yugoslavia - National Bank of Romania - Financial and Capital Market Commission of the Republic of Latvia - National Bank of Slovakia - Bank of Tanzania - Central Bank of Jordan - Bank of Greece - Central Bank of the Lebanon - MOUs under negotiation with a number of overseas banking regulatory and supervisory authorities, including authorities in the United Kingdom and Ireland. - MOUs signed with overseas regulators in the field of international financial services: - Greek Capital Markets Commission - Federal Commission for the Securities Market of Russia - Czech Securities Commission - Lithuanian Securities Commission - A member of the CBC’s staff, appointed by the Governor of the CBC, participates on the Board of the Cyprus Securities and Exchange Commission; the person does not have the right to vote but has the right to raise issues, participate in discussions, and convey the opinion of the CBC during Board meetings. - The CBC has on-going contact and cooperation with: - the Official Receiver and Registrar of Companies - the Head of the Unit for Combating Money Laundering (the investigative and law enforcement authority for money laundering) - Role delineation: the Unit for Combating Money Laundering is the investigative and law enforcement authority for money laundering, whereas the CBC is the supervisory authority of the banking system in regard to anti-money laundering compliance. ### Confidentiality and staff secrecy - Every director, officer, or employee of the CBC is bound to secrecy. - The CBC’s governor, directors, officers, and employees take the oath of fidelity and secrecy before assuming their duties. ### Assessment - Assessment: Compliant. - Comments: None. ### Licensing, permissible activities, and related statistics (contextual material included in the same content unit) - Definition and scope: - The term "bank" is defined in the BL as a body corporate licensed to carry on banking business under the provisions of the BL. - "Banking business" is defined as business carried on in Cyprus or abroad from within Cyprus consisting of lending of funds acquired from the assumption of obligations to the public, whether in the form of deposits, securities or other evidence of debt. - Permissible activities for licensed banks (Section 13 of the BL) include, directly or through subsidiaries: - financial leasing, including hire purchase financing - money transmission services - issuing and administering means of payment including credit cards, travellers cheques and bankers drafts - guarantees and commitments - trading for own account or for account of customers in: - money market instruments including cheques, bills, CDs - foreign exchange - financial futures and options - exchange and interest rate instruments - securities - participation in securities issues and the provision of services related to such issues - advice to undertakings on capital structure, industrial strategy and related questions and advice and services relating to mergers and the purchase of undertakings - money broking - portfolio management and advice - safekeeping and management of securities - credit reference services - safe custody services - data processing services - nsurance brokerage services - any other activity which may be specified by the CBC - Use of the word "bank": - No person other than a bank shall use in any language the word "bank" or any grammatical variation thereof in connection with any trade or business carried on by him unless the CBC has granted its prior written approval and subject to any conditions which the CBC may consider proper to impose. - Licensing environment and statistics: - The CBC is both the licensing and supervisory authority for banks. - At present, 14 domestic banks, 26 IBUs, and 1 representative office of a foreign bank operate in Cyprus. - The term International Banking Unit (IBU) is a descriptive term denoting banks licensed to operate in and from within Cyprus, which are owned by nonresidents of Cyprus and which by the conditions attached to their banking licenses deal in currencies other than the Cyprus Pound and primarily with other nonresidents. - The category of IBUs is officially coming to an end when the transitional period allowed under the provisions of the Income Tax Law of 2002 expire on December 31, 2005. - Upon accession of Cyprus to the EU on May 1, 2004, all exchange control restrictions were abolished. - CBC Circular Letter of May 25, 2004 amended the range of permissible operations of the IBUs. - IBUs already subject to the ten percent tax rate that were licensed after December 31, 2001 or elected to be taxable at ten percent were free to offer all types of banking services to permanent residents of Cyprus, the only restriction being the acceptance of deposits in Cyprus pounds (to be abolished on Cyprus’ entry into the Euro zone). - IBUs licensed prior to December 31, 2001 that elected to continue generating their income exclusively outside Cyprus, paying a reduced rate of tax of 4.25 percent, are obliged to continue restricting their activities to transactions with nonresidents and in currencies other than the Cyprus pound until December 31, 2005. - Licensing authority powers and criteria: - The BL provides for one type of license. The CBC may, with an adequately reasoned decision, grant a license without any condition or impose conditions on the license or refuse to grant a license (Section 4 of the BL). - Principal licensing criteria: - At least two directors are required to participate and concur in the effective direction and management of the bank (Section 19 of the BL). - A bank incorporated in the Republic must have at all times a minimum capital of not less than £C 3 million or such other higher amount that the CBC might determine (Section 20 of the BL). - Directors, chief executives, and managers of the proposed bank must satisfy the CBC that they are fit-and-proper persons (Section 18.2). - Short history and business objectives of the applicant bank, including the reasons for wishing to establish a presence in Cyprus. - Detailed description of the proposed banking operations, including details of the banking services proposed to be offered and the proposed management structure of the applicant bank. - Feasibility study of the bank’s proposed banking operations incorporating projected financial statements for the first five years of its operation. - For foreign banking organizations, the CBC obtains the consent of the applicant bank’s home supervisory authority and an undertaking that it will exercise consolidated supervision over the global activities of the applicant bank, including operations proposed to be carried out in Cyprus. The CBC also obtains Letters of Comfort or Letters of Guarantee from the principal shareholders. - Upon accession of Cyprus to the EU on May 1, 2004, the BL was amended to allow freedom of establishment and cross-border provision of banking services by banks authorized in other member states of the EU; conversely, banks incorporated in Cyprus are free to establish branches in another member state and/or provide cross-border provision of services in member states of the EU. - The CBC issued in July 2004 a “Policy statement and Guidelines on the establishment and cross-border provision of services in the Republic of Cyprus by a credit institution incorporated in another member state of the EU,” which includes the terms and conditions and procedural details for conduct of banking business under those freedoms. - Licensing duration: - There is no time limit on banking licenses issued by the CBC. The CBC may, under the BL, impose conditions, grant without condition, or refuse to grant a license. *Source: IMF content unit cr06376 — Section 27(1) of the BL enables the CBC to provide to home country supervisory authorities* ### Section 30 of the Banking Law, revoke a banking license in circumstances where a bank’s ### Section 30 of the Banking Law, revoke a banking license in circumstances where a bank’s condition is irretrievably impaired ### Licensing, fit-and-proper, and revocation powers - CBC obtains information from applicants and third parties (home supervisory authority, correspondent banks) and conducts a judgmental assessment of the information received from the applicant. - A banking license is issued by the CBC only if all criteria are satisfied and the judgmental evaluation is positive. - Directors, chief executives and managers of licensed banks must satisfy the CBC that they are “fit-and-proper persons”; fitness and propriety are assessed by detailed questionnaires and, in certain circumstances, a police clearance certificate from country of origin. - All licensees must establish a real presence in Cyprus and operate as fully staffed units proportional to scale of operations (examples: at least one IBU with almost 100 persons; one fully staffed unit considered with three persons). - Applicant banks must submit a list of prospective shareholders with proposed percentage shareholding; major/controlling shareholders who are natural persons must provide a brief outline of financial standing and complete a "Personal Questionnaire"; corporate bodies must submit full particulars and latest audited accounts. - Major and/or controlling shareholders must be able to supply additional financial support if needed and are required to provide the CBC with appropriate “Letters of Comfort” or “Letters of Guarantee.” - CBC requires directors to have substantial experience and sound knowledge of all types of financial activities the bank intends to pursue. - CBC is empowered, under Section 30(1) of the BL, to revoke the licence of a bank if the decision to grant the licence was knowingly based on false information. - CBC policy for IBUs: discourage formal applications that do not meet eligibility criteria; require prior approval and support of home banking regulatory/supervisory authority before formal application; several prospective applicants discouraged from submitting applications in the last two years. - CBC policy on ownership/source of capital: license only branches or subsidiaries of existing international banks. ### Ongoing supervision and monitoring - CBC has a process of ongoing supervision and monitoring to determine whether licensing criteria continue to be met and whether the institution meets its business goals. - CBC is home supervisor for 16 banks (10 domestic and 6 IBUs); three domestic banks maintain branches/subsidiaries in foreign jurisdictions. - Once licensed, banking subsidiaries or branches are supervised through regular off-site monitoring and on-site examinations. - On-site examinations aim to assess: quality of bank’s assets; financial soundness; adequacy of liquidity; earning capacity; adequacy and quality of management; adequacy of internal control systems; implementation of prudent policies; compliance with licence conditions. ### Ownership, control, and change-of-control approvals (Principle 4) - Section 17(1) of the BL: no person shall, without prior written approval of the CBC, either alone or with an associate or associates, acquire or have control over any bank incorporated in Cyprus or its holding company. - "Control" defined in Section 2 of the BL as: - a) beneficial ownership carrying ten percent or more of voting power; or - b) ability to determine the election of a majority of directors. - CBC considers applications only from banks licensed in jurisdictions that exercise proper licensing and banking supervision; applicant banks should enjoy a good international reputation and established record of growth and profitable operation. - CBC does not grant licenses to "de novo" banks or banks ultimately beneficially owned/controlled by non-established, non-financial institutions. - Section 16 of the BL: prior written approval of the CBC required for sale or disposal of whole or part of a bank’s business in Cyprus (applies to banks incorporated in Cyprus and banks other than those incorporated in Cyprus). - Any increase above initially approved holding requires prior CBC approval; any decrease requires notification to the CBC [Section 17(1)]. - Section 17(2): if a holding is acquired despite CBC opposition, CBC may provide for suspension or nullity/annulment of corresponding voting rights. - In on-site examinations CBC obtains names and holdings of all significant shareholders. - Assessment: Compliant. ### Investment criteria and limits (Principle 5) - Section 13(1) of the BL: a bank shall not acquire or hold directly or indirectly more than ten percent of the share capital of any other company; for a bank incorporated in Cyprus, value of any share capital held in any other company shall not exceed ten percent and in aggregate for all companies shall not exceed 25 percent of the bank’s capital base. - Limits exclude investments in shares of insurance companies and companies carrying out banking business or functions integral/closely related to banking business provided such companies are incorporated in Cyprus. - Any bank investments exceeding the limits require prior written approval of the CBC. - CBC requires demonstration that acquisitions/investments do not expose the bank to undue risks or hinder effective supervision and that the bank has adequate financial and organizational resources from the outset. - Investments in non-consolidated subsidiaries are deducted from the bank’s capital base for consolidated supervision purposes. - Section 12 of the BL prohibits acquisition/purchase of immovable property by banks, except in certain cases as provided in Section 12. - Notification after acquisition/investment is sufficient for activities closely related to banking and small investments relative to bank’s capital. - EU Directive 2000/12/EC to be transposed limits individual participation to 15 percent of capital and aggregate participation to 60 percent. - Assessment: Compliant. ### Capital adequacy requirements (Principle 6) - Cyprus incorporated banks, including subsidiaries of foreign banks, are required to have a minimum capital and maintain capital adequacy ratios; branches of foreign incorporated banks are not required to have capital and do not maintain a capital adequacy ratio. - Minimum capital base for a bank incorporated in Cyprus: not less than £C 3 million (€5 million) or such other higher amount that the CBC might determine in line with EU requirements (Section 20). - Banks are required to maintain a capital adequacy ratio at such minimum level as may be determined by the CBC; ratio shall be uniform for all banks within the same class [Section 21(1)]. - Capital adequacy ratio is computed as mandatory maintenance of a capital base in relation to total assets including off-balance sheet exposures or to categories of assets specified by the CBC [Section 21(2)]. - At present, the required capital adequacy ratio stands at 10 percent. All banks comply with the ratio and the average ratio for the sector exceeds 14 percent. - CBC issued two directives (January 1999): - Directive on the computation of the capital adequacy ratio in relation to credit risk (excluding trading book risks); and - Capital adequacy directive in relation to a bank’s trading book business and in respect of foreign exchange and commodity derivatives risks. - Directives conform to Basel recommendations and use Basel risk weights and components of capital. - Capital adequacy ratios are calculated on both consolidated and solo basis; banks report ratios and components to the CBC on a semi-annual basis; ratios verified in on-site examinations. - Treatment of items for capital determination: - Off-balance sheet risks grouped into four categories with different risk conversion factors; adjusted values multiplied by risk weightings of counterparties. - Subordinated debt included in tier two capital and cannot exceed 50 percent of tier one capital; total tier two capital cannot exceed total tier one capital. - Revaluation gains credited to a revaluation reserve; balance included in tier two capital. - Unrealized losses debited to the revaluation reserve to extent covered by revaluation gains; any shortfall debited to Profit and Loss Account, which is included in tier one capital. - Under Section 30(1) of the BL, CBC has broad remedial powers, including requiring corrective action where capital ratios fall below limits. - Banks required to have an internal process for assessing overall capital adequacy relative to risk profile and to provide CBC with necessary information; adequacy of internal process evaluated in on-site examinations. - Expansion of banks abroad requires prior CBC approval; approval granted only if CBC satisfied bank has sufficient capital to support expansion. - Assessment: Compliant. ### Credit policies, large exposures, and supervisory review (Principle 7) - CBC requires banks to have established and well-documented credit and investment policies, practices, and procedures approved by Boards and implemented by management, including internal risk management and control systems and asset classification and provisioning requirements. - Section 11(1) of the BL prescribes limitations on large exposures and aggregate large exposures, and on credit facilities to directors and their interests. - CBC reviews compliance through off-site monitoring and on-site examination. - CBC requirements include policies on organization-wide credit and investment risk assessment, management, control and reporting systems; asset quality classification; large exposures; connected lending; ensuring credit approval free of inappropriate external pressure/conflict of interest. - Section 26(2) of the BL requires banks to provide all necessary information to the CBC. - Off-site monitoring: collection of detailed periodic returns including monthly balance sheet with detailed asset/liability breakdown; information on asset quality, non-performing loans and provisioning; large exposures; investments. - On-site examinations assess credit administration, credit control, credit risk evaluation, asset quality classification, provisioning adequacy, credit authorization and documentation systems, senior management oversight; exam results are reviewed with senior management and corrective action is required. - Assessment: Compliant. ### Loan evaluation, provisioning, and interest recognition (Principle 8) - On-site examinations assess the quality of banks’ assets, lending practices, credit granting standards, and level and adequacy of provisions. - Banks required to review individual credits, asset classifications, and provisioning (on- and off-balance sheet exposures) at least annually; external auditors review provisioning policies and adequacy when auditing financial statements. - CBC examiners review more than 50 percent of the balance sheet value of bank credit exposures (sample biased toward large/problem loans and includes on- and off-balance sheet exposures); each borrower selected is individually assessed by account, collateral, financial condition, and other factors. - CBC asset quality classification criteria: Pass, Special Mention, Substandard, and Doubtful (definitions comparable to those used by other competent supervisory authorities worldwide). - CBC reviews banks’ provisioning policies as approved by Boards and their implementation; CBC requires appropriate procedures and organizational resources for oversight of problem credits and identifying/collecting past due loans. - CBC meets twice yearly with each bank’s management to review provisioning policy/practices and progress in collection of past due loans; banks provide quarterly reports on provisioning, non-performing assets, and assets where interest has been suspended. - Interest recognition policy changes: - January 2004: time period beyond which interest will be suspended for problem-credit facilities reduced from nine months to six months (where in arrears or limits are in excess and no adequate tangible security). - December 2004: time period further reduced from six months to ninety days, to be effective from January 1, 2006. - CBC plans to further modify policy to require suspension of interest irrespective of existence of tangible security, in line with international practice and provisions of proposed EU Capital Adequacy Directive. - Assessment: Compliant. *Source: Central Bank of Cyprus (CBC) and provisions of the Banking Law (BL) as described in the assessment.* ### Section 30(1) of the BL empowers the CBC, when a bank fails to comply with any provision of ### Section 30(1) of the BL empowers the CBC, when a bank fails to comply with any provision of ### Enforcement powers and corrective actions - Section 30(1) of the BL empowers the CBC to require a bank to forthwith take such action as the CBC may consider to rectify matters where a bank: - fails to comply with any provision of law or regulations or the conditions of its license; or - the liquidity or character of its assets have been impaired. - Consequent powers the CBC may require include strengthening: - lending practices; - credit-granting standards; - level of provisions and reserves; - overall financial strength. - Section 20 of the Banking Act (BL) empowers the CBC to increase the capital requirement of a bank to deal with shortfalls in provisions. - Assessment: Largely Compliant. - Comments: Pending full completion of the ongoing implementation of the more stringent criteria for suspension of recognition of interest on problem facilities on January 1, 2006, Cyprus remains largely compliant with this Principle. ### Information collection, reporting, and supervisory review - The CBC collects from banks: - quarterly information on provisioning, non-performing loans, and assets where interest is suspended; - monthly information on foreign currency liquidity; - semi-annual provisioning information through meetings with banks; - annual tri-lateral meetings with banks and their external auditors. - On-site examinations require details on banks’ classification of assets and provisioning. - Banks submit semi-annual reporting on concentrations of lending and semi-annual reporting on exposures to directors and their interests. - On-site examinations review management information systems, monitoring systems, and accuracy of reporting to the CBC. ### Classification of nonperforming loans, provisioning, and collateral valuation - A CBC directive sets 90 days in arrears as the criteria for classification of credit as nonperforming and defines procedures for suspension of interest and other income; the directive came into force on January 1, 2006. - The CBC expects banks to have processes to continually identify, measure, analyze, and control credit portfolio risk, including: - assessing strength of guarantees and appraising collateral worth; - identifying and classifying impaired/problem credits. - CBC guidelines on collateral valuation require valuation to reflect net realizable value. - CBC directives provide that refinancing of loans that would otherwise fall into arrears does not improve classification. - Valuation, classification, and provisioning for large credit exposures must be conducted on an individual item basis. ### Large exposure limits (Principle 9) - Sections 11(1) and (2) of the BL generally limit exposures to individual borrowers and closely related groups to 25 percent of the bank’s capital base. - CBC discretionary power to grant very limited exceptions in cases of public interest or exceptionally low risk, provided exemptions are not in conflict with EU acts in force in Cyprus. - Aggregate of large exposures (exposures in excess of 10 percent of the bank’s capital base) is limited to 800 percent of the bank’s capital base. - The law empowers the CBC to establish lower limits as deemed necessary. - June 2004 re-issuance of Directive 7 requires monitoring exposures on a consolidated and non-consolidated basis, maintenance of accounting/administrative/internal control systems, and periodic reporting of exposures to the CBC. - Assessment: Compliant. - Comments: The CBC may wish to consider establishing a centralized registry of information on large credit exposures aggregated by the CBC for each borrower and made available to banks and other credit providers. ### Connected lending (Principle 10) - Section 11 provisions: - Section 11(1)(d): limits credit facilities extended to all of the bank’s directors together to 40 percent of the bank’s capital base. - Section 11(1)(e): limits unsecured credit exposure of each individual director to 5 percent of the bank’s capital base. - Section 11(c): requires approval of credit exposures to directors by a resolution of a minimum of two-thirds of the directors with the affected director not present, and that such exposures be on the same commercial conditions as any customer. - Section 11(3) and 11(4): establish criteria for “connected persons” and define credit exposure to include both on- and off-balance sheet exposures. - Section 22 would permit the CBC to deduct credit exposures to directors in the computation of capital base, although this has not been done. - Sections 42 and 43 provide authority for administrative fines and, where criminal prosecution is involved, fines and imprisonment. - June 2004 Directive 7 reiterates connected-lending definitions, monitoring, and reporting requirements. - Assessment: Compliant. - Comments: None. ### Country risk and transfer risk (Principle 11) - The CBC has not prescribed specific formal country risk limitations; country risk exposures are monitored through a monthly return filed by all internationally active banks. - Exposures of concern are addressed through direct communication with the bank. - Banks with material country risk exposure are expected to establish, monitor, and control internal country risk limitations tailored to their business. - Cyprus-incorporated banks have a physical presence in only three foreign developed countries; the CBC ensures activities/exposures in these countries are adequately supported by each bank’s capital base. - No mandated overall formal transfer risk limitations; CBC expects internationally-active banks to include transfer risk-related limitations in their risk management processes. - CBC established a limit for maximum allowable placements with each foreign bank of 20 percent of the depositing bank’s capital base. - Assessment: Largely Compliant. - Comments: The CBC should consider establishing formal guidance on a framework for country risk and transfer risk management to be used by all banks located in Cyprus. ### Market risk (Principle 12) - On-site examinations verify banks have information systems, risk management systems, and internal controls to measure, monitor, and control market risk. - CBC imposes open foreign currency position limits: - overall open position: 6 percent of capital base (coming down from 15 percent); - open position in each currency: 3 percent of capital base (coming down from 10 percent); - intra-day limits also apply. - Overall open foreign currency position is sum of net short positions or net long positions, whichever is greater. - Limits monitored through monthly prudential returns. - The CBC adopted, as from January 1, 2003, provisions of the EU Capital Adequacy Directive (CAD) (Council Directive 93/6/EEC dated March 15, 1993 as subsequently amended by Council Directives 98/31/EC and 98/31/33/EC dated June 22, 1998), thereby requiring a capital charge for market risk, including commodity derivatives position risk. - Section 20 of the BL enables the CBC to increase capital requirements if necessary. - No direct assumption by the CBC that banks’ systems capture all transactions timely and revalue positions frequently; CBC relies on banks’ internal and external auditors. - No formal supervisory requirements presently for scenario analysis, stress testing, and contingency planning, though market risk has been minimal to date. - Most banks have low market-activity complexity; CBC plans to develop expertise among supervisors via training and cooperation with consolidating/lead supervisory authorities for subsidiaries of EU banks. - CBC has allowed only one relatively active bank (subsidiary of an EU bank) to use sophisticated models to calculate regulatory capital. - Assessment: Largely Compliant. - CBC recommendations to achieve full compliance and prepare for future market activity expansion: - satisfy itself that systems and controls ensure all transactions are captured timely and positions are revalued frequently using reliable and prudent market data; - determine that banks perform scenario analysis, stress testing, and contingency planning as appropriate, and periodic validation/testing of systems used to measure market risk; - build up expertise to monitor complexity in market activities and acquire expertise to validate internal models of foreign subsidiaries for which the CBC is the home regulator. ### Other risks (Principle 13) - Section 23(1) of the BL empowers the CBC to establish a minimum ratio of liquefiable assets to be held by banks. - November 2001 Directive #11 on the Computation of Prudential Liquidity requires: - banks manage liquidity through time-band analysis and maintain maximum allowable maturity mismatches within limitations prescribed in Directive #11; - consideration of both on- and off-balance sheet assets and liabilities; - daily liquidity monitoring by banks and a quarterly liquidity return to the CBC. - Banks permitted to set internal interest-rate risk-related limitations for Cyprus pounds and foreign currencies, monitored using their own models; quarterly returns on interest rate risk exposure required. - Banks assess interest-rate risk exposures using gap-analysis with simple maturity/repricing schedules; CBC can request revision of a bank’s upper operating limit if excessively high. - To facilitate CBC monitoring, banks must perform stress tests and provide quarterly results expressed as change in net-interest income using a standardized interest rate shock of 1 percent in the base interest rate. - Foreign exchange net-open position limits: - overnight in any one currency: 3 percent of capital base; intra-day maximum: 5 percent; - overall aggregate net-position for all currencies: 6 percent of capital base (sum of absolute values of individual net-currency positions); intra-day maximum: 8 percent. - Directive on the “Framework for the Evaluation of Internal Control Systems” requires banks to have contingency plans for continuation of services and restoration of controls, including recovery of information systems and operational risk matters. - Banks required to have appropriate management systems, internal reporting, and internal auditor functions to evaluate compliance and estimate potential losses from exposures. - CBC reviews adequacy and effectiveness of systems to identify, analyze, monitor, and control risks during on-site examinations; off-site monitoring of returns also identifies issues and compliance with limitations. *Source: IMF content unit cr06376.* ### Section 20 of the BL empowers the CBC to increase the banks’ minimum capital requirement to ### Section 20 of the BL empowers the CBC to increase the banks’ minimum capital requirement to ### Capital requirements and liquidity - Section 20 of the BL empowers the CBC to increase banks’ minimum capital requirement to include consideration of other risks. - Directive #10, Monitoring of Foreign Currency Exposures: - Applies to banks whose business is carried out primarily in Cyprus pounds. - Imposes a minimum liquidity ratio for liabilities in foreign currencies, currently set at 75 percent. - Specifies the types of assets that may be treated as liquid. - Published accounts: - The CBC does not currently require banks to include a statement on their risk management policies and procedures in their published accounts. - Accounts are prepared according to International Accounting Standards, which require certain disclosures on risk management. - Transition: - Beginning on January 1, 2007, the CBC will require banks to comply with the requirements of the EU Capital Requirements Directive, which includes disclosures on risk management. - Assessment: Compliant. ### Principle 14 — Internal Control and Audit: arrangements, responsibilities, and supervisory powers - Legal and regulatory framework: - The CBC issues Directives pursuant to its authority under Section 41 of the BL. - In April 2004, the CBC updated Directive #8 on the Framework for the Evaluation of Internal Control Systems. - Section 19 of the BL requires at least two individuals participate and concur in effective direction and management (the “four-eyes” principle). - Section 18(2) of the BL empowers the CBC to assess fitness and propriety of directors, the chief executive officer, and managers, and to direct that unfit persons not assume those roles. - Section 30(1)(a)(v) of the BL empowers the CBC to require removal of any director, controller, or manager of a bank. - Section 26(2) of the BL provides the CBC with access to all records and other information of the bank, including all reports of the internal and external audit functions. - Directive #8 requirements and expectations: - Establishes objectives of internal control systems and basic principles and standards for organizational structure and operational procedures. - Sets out responsibilities of the Board of Directors and senior management, including establishment of an audit committee. - Requires Board and senior management to develop and implement a risk control system appropriate to the bank’s specifics and operational complexity. - Requires the Audit Committee of the Board of Directors be composed of non-executive directors. - Requires the internal audit function to report directly to the Audit Committee. - Supervisory practice: - On-site examinations assess internal audit, credit review, control and administration, treasury management, management information systems, organizational structure, recruitment policies, and other internal control functions. - On-site examinations include comprehensive review of internal audit adequacy, independence, and reporting lines to the Audit Committee. - Competence and skills of bank management are assessed during on-site examinations and via direct contacts between CBC officers and bank management. - Assessment: Compliant. - Comments: None. ### Principle 15 — Anti–Money Laundering (AML): legal framework, guidance, and supervisory measures - Legal framework: Prevention and Suppression of Money Laundering Activities Laws (PSMLAL) of 1996 to 2004: - Defines and criminalizes laundering of proceeds from all criminal offenses punishable with imprisonment in excess of one year. - Provides for confiscation of proceeds from all serious crime. - Empowers courts to issue freezing and restraint orders. - Requires suspicion of money laundering to be reported to the Unit for Combating Money Laundering (MOKAS) without breaching confidentiality. - Empowers courts to order disclosure and production of information held by natural or legal persons, including banks. - Requires persons carrying on relevant financial or other business to maintain procedures for customer identification, record keeping, internal control, and staff training. - Enables registration and enforcement of foreign orders for freezing and confiscation. - CBC Guidance Note (consolidated November 2004): - Takes into account harmonization with EU Directive 2001/97EC, FATF revised recommendations (June 2003), and Basel Committee “Customer Due Diligence for Banks” (October 2001). - Requires banks to implement measures including: - Customer identification and due diligence procedures; - Record keeping procedures; - Controls on cash deposits in foreign currency notes; - Appointment and role of the Money Laundering Compliance Officer; - Recognition and reporting of suspicious transactions to MOKAS; - Prudential reporting to the CBC; - Internal control procedures and risk management; - Education and training of employees. - Prohibits opening or maintaining secret, anonymous, numbered, or fictitious-name accounts. - Requires identification of principal ultimate beneficial owners of private and non-listed public companies (defined as persons with direct or indirect interest of 5 percent or more in share capital). - Requires identification of any person(s) who control a company’s business and assets even if interest is less than five percent. - Minimum records for customer accounts must contain: - Identity of account holder(s); - Identity of beneficial owner(s); - Identity of authorized signatory(ies); - Volume of funds or level of transactions; - Connected accounts; - For selected transactions: origin of funds; type and amount of currency; form in which funds were placed or withdrawn; identity of person undertaking the transaction; destination of funds; form of instructions and authority; type and identifying number of any account involved. - Requires banks to ascertain the identity of all settlors and true beneficiaries when opening accounts for trusts and nominees of third persons. - Requires banks to put in place adequate management information systems for ongoing monitoring of accounts and transactions by June 30, 2005. - Prohibits acceptance of cash deposits in foreign currency notes in excess of $100.000 (one hundred thousand U.S. Dollars) or the equivalent in other foreign currency per calendar year from any person or a group of connected persons, unless with prior written approval of the CBC. - Requires banks to institute internal reporting procedures and appoint a Money Laundering Compliance Officer sufficiently senior to command authority. - Requires Boards and Senior Management to establish an anti-money laundering program via internal control procedures. - Supervisory activity and reporting: - CBC conducts off-site monitoring and on-site examinations to assess compliance with AML obligations. - CBC developed a special examinations manual for evaluating banks’ internal control arrangements for money laundering prevention. - On-site examinations may result in letters with recommendations for corrective action. - From June 1998 to June 2004, banks reported a total of 375 suspicious transactions to the FIU: - 75 in 2002; - 99 in 2003; - 77 in 2004. - Enforcement powers: - Section 58(2)(a) of the PSMLAL authorizes the CBC to impose an administrative fine of up to ₤C3,000 to any person under their supervision who allegedly fails to take prescribed preventive measures; the allegedly non-compliant person is given opportunity to be heard before imposition. - Section 27 of the PSMLAL requires knowledge or suspicion of money laundering to be promptly reported to a police officer or MOKAS; Section 26 provides such disclosure cannot be treated as breach of confidentiality owed by banks to customers. - Internal reporting by bank employees to the Money Laundering Compliance Officer satisfies statutory requirements under Section 27. - Ethics and professional behavior: - The CBC’s directive on internal control indirectly addresses ethics and professional behavior; the CBC is preparing a Directive on Corporate Governance to explicitly address policy statements on ethics and professional behavior. - The Council of the Institute of Certified Public Accountants of Cyprus issued guidance notes (consolidated November 2004) for accountants and auditors; the Council was appointed as supervisory authority for accountants and auditors under Section 59 of the PSMLAL. - Assessment: Compliant. - Comments: - The CBC is commended for efforts to strengthen the regulatory AML regime through Guidance Notes and training. - Supervisory resources increased by two staff members and the number of on-site examinations testing AML procedures increased. ### Principle 16 — On-site and Off-site Supervision: scope, frequency, and practice - Legal powers and reporting: - Section 26(2) of the BL requires banks to provide access to the CBC to all books, records, documentation, and other reports necessary for supervision. - Section 25 requires banks to provide a monthly statement of assets and liabilities and empowers the CBC to require periodic or other reporting. - Section 26 provides confidentiality for information received; Section 29 defines disclosure circumstances. - Supervisory structure and method: - Supervision consists of on-site examination and off-site monitoring performed by the same CBC division to integrate functions. - No material differences between supervision of domestic banks and international banks; scope is determined by bank-specific conditions. - Quality of internal audit work is assessed to determine reliance during on-site examinations. - On-site examination objectives and coverage: - Purpose: evaluate condition and future prospects of a bank, verify adequacy of risk management and controls. - Main areas covered: - a) Quality of management by directors and senior management, including internal controls and internal audit; - b) Bank’s loan portfolio: credit risk management, quality of portfolio, adequacy of provisions for bad and doubtful debts; - c) Treasury operations with emphasis on risk management; - d) Profitability, analysis of income generation and costs, assessment of returns; - e) Compliance with law, license conditions, and CBC Directives (capital adequacy, large exposures, etc.); - f) Adherence to anti-money laundering legislation and guidance notes. - Examination frequency policy: - CBC policy requires on-site examinations: - Annually for domestic banks; - Annually for subsidiaries of foreign banks; - Every two years for branches of foreign banks. - Implementation delay: originally-planned examination schedule was delayed due to resource requirements for implementing EU Directives as part of accession to the EU; CBC expects to fully resume planned on-site examination program now that that work is well underway. - Special examinations may be conducted as necessary. - Communication of findings: - On-site examination findings are communicated to bank management and discussed with senior management in a convened meeting. - A management letter containing on-site examination findings is issued. - Assessment: (Coverage and practice described; implicit compliance with supervisory framework). *Source: IMF assessment cr06376.* ### conclusions is transmitted to bank senior management, and a response detailing corrective ### conclusions is transmitted to bank senior management, and a response detailing corrective measures is required. ### Off-site monitoring and risk-based supervision - The Central Bank of Cyprus (CBC) requires submission of periodic prudential returns including: monthly balance sheet, profit and loss account, capital adequacy, prudential liquidity, large exposures and facilities to directors, foreign currency exposure, interest rate risk, anti-money laundering procedures. - Prudential returns are analyzed, trended, and compared across banks; accuracy is independently verified during on-site examinations. - CBC supervisors assess each bank’s risk profile during on-site examinations and prioritize on-site and off-site work accordingly. - For international banks, the CBC adopted a risk-based approach grouping risk into two categories: Business Risks and Control Risks, producing a Total Business Risk Score/Total Control Risk Score map positioning each bank. - The CBC reviews the risk model once a year. - On-site examination programming considers: positioning on the risk map; an ageing factor setting the maximum interval between two consecutive on-site examinations; knowledge from submitted returns and ongoing contact with bank management; and results of previous examinations. - The CBC is designing and implementing a risk–based supervision methodology for domestic banks. - Bank examination report findings, conclusions, and analysis of periodic returns are reported to the governor of the CBC. - Assessment: Compliant. - Comment: Since no formal procedure exists to assess effectiveness of supervisory functions, the CBC may wish to consider establishing an internal quality control function within the Banking Supervision and Regulation Division to assess the effectiveness of its off-site and on-site supervisory activities and address any weaknesses identified. ### Bank management contact (Principle 17) - Section 28 of the BL requires the CBC to conduct a tri-lateral meeting with senior bank management and the bank’s external auditor at least annually to discuss supervisory-relevant audit matters. - Senior CBC officers conduct at least semi-annual meetings with senior bank management on provisioning, financial performance results, and at the conclusion of on-site examinations to discuss results and corrective plans. - Meetings occur during and after on-site examinations and as a result of ongoing off-site monitoring; visits by parent/head office senior management and internal auditors of foreign banks’ subsidiaries/branches provide further insight. - The governor of the CBC meets with all banks as a group at least semi-annually to discuss general interest matters and changes in supervisory policy and practice. - Section 40 of the BL requires banks to inform the CBC when they have any indication of serious difficulties or are about to suspend payment; banks must report material changes in their circumstances. - Assessment: Compliant. - Comments: None. ### Off-site supervision (Principle 18) - Section 26(2) of the BL empowers the CBC to obtain any information from banks with whatever frequency it deems necessary. - Domestic and international banks provide virtually the same information, through standardized returns with comprehensive instructions; the CBC has unrestricted access to information about any aspect of a bank’s business and related companies. - Prudential returns cover on- and off-balance sheet assets and liabilities, profit and loss, capital adequacy, liquidity, large exposures, loan loss provisioning, market risk, and deposit-related matters at a frequency commensurate with the nature of the information. - Specific details about loan classifications performed by banks are not disclosed in standardized reports; such details are collected and assessed during on-site examinations. - The CBC requires submission of the management letter from the bank’s external auditor and minutes of the Audit Committee. - Section 42 of the BL provides monetary penalties for failure to provide requested information within specified time limits, for knowingly or negligently providing inaccurate, misleading, or incomplete information. - Internal auditors must submit reports to the CBC every 18 months on their activities. - External auditors of international banks must submit reports on compliance with license conditions; reconciliation between returns and audited financial statements; adequacy of internal controls; correctness/adequacy of information local operations provide to parent/head office; and adequacy of provisioning. International banks must provide copies of parent/head office internal audit reports on local operations. - Section 24 of the BL requires banks to produce annual audited financial statements; the CBC prescribes manner and form and has issued directives adopting International Accounting Standards. - Statistical and prudential reports are processed and analyzed; conclusions form part of internal reports identifying compliance, intra-market comparisons, and trends to prompt CBC action and planning for on-site visits. - There is no formal early warning system in place. - Assessment: Compliant. - Comment: The CBC may wish to consider developing and implementing a more formal, comprehensive early warning system to provide timely alerts to prospective issues affecting individual banks, groups of banks, or the system as a whole, to better set supervisory priorities and react timely and adequately to identified issues. ### Validation of supervisory information (Principle 19) - On-site examinations frequency: annually for domestic banks; annually for Cyprus subsidiaries of foreign banks; every two years for Cyprus branches of foreign banks. - Examinations of foreign subsidiaries and branches of Cyprus banks: annually for operations in Greece; every two years for operations in other countries when material (i.e., more than 5 percent of the total balance sheet assets of the entity of which it is a part). - Special examinations may be conducted as needed. - Section 26 of the BL grants full access to all bank records for supervisory work; information in returns is verified during on-site examinations for accuracy, proper classification, and conformity with CBC instructions. - On-site examination planning/execution criteria: (a) relative size of the banking operation; (b) annual growth rate of the operation; (c) relative contribution of the operation to the group as a whole; (d) results of off-site review monitoring and analysis; (e) any special issues; (f) availability of resources. - Section 26 allows CBC examiners to be assisted by duly qualified persons nominated by the CBC, bound by confidentiality—permitting external auditors to assist in on-site examinations and special commissioned work. - Section 28 requires at least annual tri-lateral meetings with banks and auditors; CBC may hold bi-lateral meetings with external auditors excluding the bank when necessary for depositor protection. - External auditors may freely report to the CBC any information relevant to supervisory responsibilities; the BL protects auditors who communicate in good faith to the CBC from breach of confidentiality consequences. - The CBC has issued a notice guiding tri-partite meetings and conditions for bi-lateral meetings with auditors. - Section 24 requires banks to provide the CBC with consolidated balance sheet and profit and loss account certified by an approved external auditor at year-end; Section 2 requires external auditors to be approved by the CBC. - Assessment: Compliant. - Comments: None. ### Consolidated supervision (Principle 20) - Section 39 of the BL permits the CBC to deem holding companies and subsidiaries to be banks for BL purposes; the CBC practices consolidated supervision. - The CBC extended supervision to all bank subsidiaries carrying out banking-related activities as defined in Section 13 of the BL, requiring worldwide consolidation for such subsidiaries. - The CBC obtains information on the nature of activities of non-banking related subsidiaries and their assets, liabilities, and profitability; it may require the holding company to take action regarding non-bank subsidiaries. - Investment in non-banking related subsidiaries, including lending of a capital nature to such subsidiaries, is deducted from the consolidated capital base of the group. - No obstacles exist to direct or indirect supervision of bank subsidiaries or affiliates that carry out banking-related activities; on-site examinations are conducted for material subsidiaries; non-material subsidiaries are monitored via periodic returns. - CBC directives on capital adequacy, large exposures, and foreign currency exposure apply on a consolidated basis. - The CBC requires audited consolidated financial statements annually. - Pursuant to Section 27 of the BL, the CBC may cooperate and exchange information with competent supervisory authorities in Cyprus or elsewhere; the CBC has signed MOUs with local securities, insurance, cooperatives supervisory authorities and with foreign supervisory authorities. - Section 7 requires banks to obtain prior CBC approval to establish business outside Cyprus; Section 13 imposes limits on investments in other companies’ capital; CBC may limit overseas expansion and conducts periodic on-site examinations at overseas locations. - Section 39 empowers the CBC to impose standards and remedial measures on non-banking subsidiaries and/or holding companies; Sections 17 and 18 fitness and propriety provisions can apply to holding company owners and senior management when deemed a bank. - Assessment: Compliant. - Comments: None. ### Accounting standards (Principle 21) - Section 42 of the BL imposes administrative fines for failure to provide requested financial information within specified time limits, or for knowingly or negligently providing inaccurate, misleading, or incomplete records, books, accounts, or other information. - Persons (directors, chief executive, manager, partner, or other officer or employee) who authorize or knowingly permit an infringement of the BL are guilty of an offense and liable to penalties provided in the BL. - Every bank should, within four months from the end of each financial year, submit to the CBC a copy of the balance sheet and profit and loss account in the form prescribed by the CBC, duly certified by an approved auditor, together with a signed copy of his report in the form prescribed by the CBC. Branches of foreign incorporated banks are not required to publish their financial statements. - The CBC Directive on the framework for the evaluation of internal control systems requires banks to maintain comprehensive and reliable financial reporting to ensure accurate and timely disclosure and reliable financial statements; prudential return information is verified periodically during on-site examination. - The CBC has issued a notice on the relationship between the CBC and external auditors to: (a) provide guidelines for tri-partite meetings; and (b) describe conditions under which the CBC may invite auditors to bilateral meetings pursuant to Section 28(2) of the BL. - The tri-partite meetings cover: (i) annual balance sheet and profit and loss account submissions required under Section 24(1) of the BL; (ii) the external auditor’s report to be submitted with those statements; (iii) matters arising from audit work related to (i) and (ii). - The CBC is authorized to set accounting standards for banks, guided by international practice and EU directives; the CBC has issued a directive on the layout and content of annual accounts requiring compliance with international accounting standards modified as necessary to comply with EU directives. - Assessment: Compliant. - Comments: None. *Source: IMF assessment of the Central Bank of Cyprus (CBC) supervisory framework.* ### Chapter 4 of the CBC’s Directive on the layout and content of annual accounts, entitled ### Chapter 4 — Valuation rules; Supervisory framework for accounting, audit, remedial and consolidated supervision ### Valuation rules and accounting standards - Supervisory requirement: banks must utilize valuation rules that are consistent, realistic, and prudent, "taking into account values where relevant." - International Accounting Standards adoption: - Adopted in Cyprus since 1981 through action of the Institute of Certified Public Accountants of Cyprus. - Auditors are required to state in their audit report that financial statements have been prepared in accordance with the International Accounting Standards. - Companies Law amendment in 2003 gave legal backing to International Accounting Standards implementation, making it compulsory for all companies, including banks, incorporated in Cyprus. ### Confidentiality and auditor reporting - Confidentiality: - The confidential character of financial information gathered by the CBC is legally enforced by the BL [Sections 17(4) and 18]. - External auditors of banks: - Prior to appointment, external auditors must be expressly authorized by the CBC (Sections 2 and 24 of the BL). - In practice, most banks are audited by the big four international firms of accountants/auditors. - External auditors are required to conduct audits in accordance with the International Auditing Standards. - Section 28 of the BL permits auditors to freely report to the CBC any information relevant to supervisory responsibilities and protects auditors from confidentiality breaches where they communicate in good faith to the CBC. - The CBC has issued a notice expecting external auditors to report matters of material significance or matters which may be of material significance to supervisory functions. - Assessment and comment: - Assessment: Compliant. - Comment: External auditors do not have a legal duty to report matters of material significance; tri-partite and bi-partite meetings and mandatory transmission of written communications provide a communication system. Cyprus may consider amending the BL to introduce a mandatory duty for auditors to report matters of material significance, as provided for in the pertinent EU Directive. ### Remedial measures (Principle 22) - Powers under the BL: - Section 30 provides extensive remedial powers when a bank fails to comply with the BL, including: - Require the bank to take actions to rectify the matter. - Prohibit acceptance of deposits or granting of credit facilities. - Assume control of the business of a bank. - Revoke the bank’s license. - Section 42 empowers the CBC to impose administrative fines if a bank fails to provide information within specified time limits. Other offenses and penalties are covered in Sections 42 and 44. - Liability: directors, chief executives, managers, partners, or other officers who authorize or knowingly permit infringements are guilty of an offense and liable to penalties in subsections 43(1) or 43(2). - Section 30(2): before taking remedial measures, the CBC must furnish a report to the bank inviting comments within a specified period, which should not be less than three days from the date of delivery of the report. - Assessment: Compliant. - Comments: None. ### Globally consolidated supervision (Principle 23) - Authorization to operate abroad: - Section 13 of the BL: banks cannot extend direct or indirect operations outside Cyprus without prior written approval of the CBC. - CBC conditions approval on ongoing availability of information from overseas operations, ability to carry out on-site examinations, and to exercise consolidated supervision. - On-site supervision practices: - On-site and off-site supervision of overseas operations of Cyprus-incorporated banks has been routinely carried out for many years. - On-site examination checks include: - Centralization of credit control and internal audit. - Identification, measurement, control, and monitoring of risks on a global consolidated basis at head office level. - Monitoring of overseas operations through regular submission of returns to head office. - Credit review by head office of foreign operations. - Involvement of head office management in strategic decision-making. - Management oversight verification during on-site examinations includes: - Adequacy and periodic verification of information reporting on overseas operations. - Appropriate assessment of compliance with internal controls. - Effective local oversight of foreign operations. - If not satisfied, under Section 7 the CBC may amend or impose conditions on foreign operation licenses and may revoke approval in extreme cases. - Planned frequency of on-site examinations of overseas subsidiaries/branches: - Annually for banks with operations in Greece. - Every two years for banks with operations in the United Kingdom and Australia. - Ad hoc on-site examinations may be conducted as needed. - Cooperation with host supervisors: meetings with local supervisors are arranged during on-site examinations; assessment of host supervision is carried out in the spirit and letter of MOUs. - Assessment: Compliant. - Comments: None. ### Host country supervision (Principle 24) - Legal basis for cooperation and information exchange: - Section 27(1) of the BL permits the CBC to cooperate and exchange information with competent banking, insurance, and securities markets supervisory authorities in Cyprus or elsewhere, including EU member states, to assist these authorities or enable effective exercise of their functions, including consolidated supervision. - Section 27(4): exchange only when CBC is satisfied that the receiving authority is subject to the same confidentiality rules. - Section 27(5): information originating in another EU member state may not be disclosed without the express agreement of the competent authorities that disclosed it, and then only for agreed purposes. - Memoranda of Understanding (MOUs): - MOUs have been signed or are in negotiation with overseas supervisors (including the United Kingdom, Lebanon, and Ireland) where Cyprus-incorporated banks have operations. - MOUs specify scope of information exchange, cooperation for on-site examinations, and confidentiality. - Practical cooperation: - Close and frequent contact with host country supervisors. - CBC cooperates and exchanges information with all foreign supervisory authorities in jurisdictions where Cyprus-incorporated banks operate subsidiaries and branches, regardless of significance. - Section 13 empowers the CBC to prohibit establishment of operations in countries with secrecy laws or regulations that prohibit information flows necessary for adequate supervision. - Assessment: Compliant. - Comments: None. ### Supervision over foreign banks’ establishments (Principle 25) - Regulatory parity: - Cyprus branches and subsidiaries of foreign-incorporated banks are subject to the same prudential inspection and regulatory reporting requirements as Cyprus-incorporated banks. - No differences in regulatory regime for Cyprus-incorporated banks and Cyprus branches/subsidiaries of foreign-incorporated banks, except: - Branches of foreign banks are exempted from own capital and capital adequacy requirements; capital-based restrictions (e.g., large exposures limitations) are not applicable and are left to the home country supervisory authority. - Licensing and information exchange: - Applicant banks must submit a "Letter of Authorization" enabling the CBC to approach and exchange information with the home supervisory/regulatory authority of the applicant’s parent institution. - CBC obtains written consent from the home authority authorizing the proposed establishment and an undertaking that the home authority will exercise consolidated supervision equivalent to that provided in the EU over the global activities of the parent institution. - Legal basis for cooperation: Section 27(1), Section 27(4), and Section 27(5) govern cooperation and confidentiality as noted above. - MOUs and practical cooperation: - MOUs facilitate cooperation and exchange of information, including on-site examination cooperation and confidentiality. - CBC permits home country supervisors to conduct on-site examinations in Cyprus and meets with them to discuss results. - Many home supervisory authorities have conducted on-site examinations of branches and subsidiaries in Cyprus pursuant to their primary or consolidated supervisory responsibility. - Assessment: Compliant. - Comments: None. ### Compliance summary and recommended actions - Table 2: Summary Compliance of the Basel Core Principles (CBC) — detailed listing provided; overall high degree of compliance with many principles assessed as Compliant (C). - Recommended Action Plan (Table 3) — Recommended actions include: - CP 1.2 Independence: Additional qualified supervision staff is needed. - 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 interest rate risk expertise and supervision. - Authorities’ response and planned actions: - CP 1.2 Independence: CBC aims to strengthen its Banking Supervision and Regulation Division to meet increased demands from EU accession and sector development. - CP 8 Loan Evaluating and Loan Loss Provisioning: - CBC issued in December 2005 a new "Directive on the suspension of interest and other income on non-performing credit facilities" which took effect on 1st of January, 2006 and by which the 90-days rule has been applied in full conformity with international practice. - CP 11 Country Risk: CBC will draft guidelines for banks on management of country and transfer risk in the near future. - CP 12 Market Risks: - CBC aims to enhance supervision scope to ensure banks perform scenario analysis, stress testing and contingency planning, and 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 additional training provided by the Financial Stability Institute of the Bank of International Settlements and supervisory authorities of other EU countries such as the UK, France, Germany and the Netherlands to specialised staff of the Banking Supervision and Regulation Division of the CBC. ### Cooperative Societies supervision (overview) - Cooperative credit institutions (CCIs) and supervision: - There are 358 cooperative credit institutions ("CCI") with limited or unlimited liability and 104 non-credit limited liability cooperatives. - CCIs operate in various sectors (banking, consumer, trading of agricultural products and services) and are shareholders-members of the Cooperative Central Bank (CCB). - CCIs’ activities and supervision are regulated by the Cooperative Societies Laws of 1985 to 2004 ("CSL") and supervised by the Cooperative Societies Supervision and Development Authority ("CSSDA"). - The CCB has dual status: it is both the apex of the cooperative movement and a bank for purposes of the Banking Law (BL), supervised by the CBC and the CSSDA. - Article 26 of the CSL governs lender-of-last-resort responsibilities of the CCB; Article 94 authorizes the Committee of the CSSDA to issue further prudential instructions. - Article 41D of the CSL makes the Commissioner of the CSSDA responsible for supervision of the CCIs and application of the CSL. *Source: Chapter 4 of the CBC’s Directive on the layout and content of annual accounts (valuation rules), as summarized in the IMF assessment materials.* ### Part VI A of the CSL provides a framework of minimum prudential standards addressing issues ### Part VI A of the CSL provides a framework of minimum prudential standards addressing issues ### Framework of minimum prudential standards - Part VI A of the CSL addresses: - licensing conditions; - minimum capital; - capital adequacy ratio; - organizational and management requirements (“four-eyes” principle, fit-and-proper character); - shareholder requirements; - exposure restrictions; - connected lending limits; - prudential reporting; - on-site examinations; - administrative sanctions; - remedial measures. ### Audit, liquidation, and institutional roles - Section 44 of the CSL authorizes the commissioner to decide on the winding up of a CCI and to nominate a liquidator. - The Audit Office of Cooperative Societies (“AOCS”): - Established by Section 19.1 of the CSL as an independent legal entity. - Performs audit of accounts and financial management of individual CCIs and other non-credit cooperative institutions. - Audit costs are covered by examined CCIs by means of annual fees. - Administered by a committee of five members appointed by the Council of Ministers for a term of three years. - At present, usually chaired by the Auditor General of Cyprus. - The Auditor General also audits the financial statements of the CBC and performs the audit of the CSSDA. ### Historical context and EU harmonization process - CCIs have been operating in a relatively stable social and economic environment with no major structural changes since the division of the CM almost half a century ago. - In 1987, the audit function for CCIs was separated from the supervisory function with establishment of the AOCS. - Negotiations with the EU led to harmonization with EU standards and Banking Directives (BD). - A five-year transitional period as from January 1, 2003 has been agreed by the EU within which all CCIs will be compliant with the BD. - The CSL was modified in 2003 and 2004 to ensure full conformity with the acquis communautaire. ### Affiliation model and supervisory arrangements (Central Body / CCB) - A two-layered approach: - Some CCIs will comply individually on a stand-alone basis. - Remaining CCIs will comply by becoming affiliates of the CCB (the “Central Body”). - Any conforming CCI can join permanent affiliation arrangements voluntarily. - Central Body arrangements will be introduced within the context of permanent affiliation arrangements set out in Article 2, paragraph 5 of BD 2000/12/EC; the CCB and affiliated CCIs must satisfy provisions on a consolidated basis. - Supervisory framework for affiliated CCIs: - Affiliated CCIs supervised by their own supervisory authority (the CSSDA) as stated in Section 41D of the CSL. - Simultaneously, and according to Section 35 of the Banking Law (BL), affiliated CCIs are subject to provisions of the BL to the extent necessary for the CBC to exercise supervision on a consolidated basis. - The CSSDA must provide the CBC with all necessary data and information regarding affiliated CCIs and will participate in joint on-site examinations. - Role and powers of the CCB/Central Body: - Empowered to supervise affiliated CCIs explicitly and only for purposes of permanent affiliation arrangements and in accordance with BD provisions. - Has no authority to perform prudential supervision but can monitor solvency and liquidity and issue compulsory instructions addressing concrete management issues (administrative, organizational, operational areas such as internal audit, risk management, credit policy). - Characteristics of Central Body instructions: - Will lay down main principles applying generally accepted banking principles and procedures to ensure financial stability and competitiveness of affiliated CCIs. - Will be general and directed towards all CCIs except where size or other reasons require specially-formulated or modified instructions. - Will not: - aim at full control of CCIs nor cover routine operations (routine operations conducted per CCIs’ internal control procedure manuals); - replace or reduce the role and authority of CCIs’ management, but form a framework for support, monitoring and control in specific important areas; - alter authority and powers of the CSSDA or their authority and independence; - replace supervisory and prudential instructions issued by the CSSDA. - Before issuing instructions, the Central Body must consult the commissioner and collaborate to ensure conformity with legal and regulatory framework of CCIs. - The CSSDA and the Central Body are to collaborate systematically to resolve pending issues and meet respective duties and obligations. - Memorandum of Understanding between the CBC and the CSSDA: - Decided that CBC’s supervision of the CCB must take into account the permanent affiliation arrangements of the CCB with affiliated CCIs. - Arrangements for CBC’s supervision of the CCB and its affiliates on a consolidated basis are governed by the BL and Article 5A(3)(b) of the CSL. ### Transparency and reporting - The CSSDA’s annual report highlights the financial situation of CCIs and informs on regulatory developments. - A new website in English is under construction. ### Assessment, transitional arrangements, and timing - Assessment: Materially Noncompliant. - A comprehensive transitional regulatory and supervisory system requires every CCI to conform to the EU-banking directives before the end of 2007. - During the transitional period, CCIs are allowed to continue existing business within Cyprus under the CSL without restrictions or conditions, resulting in the cooperative credit sector not being fully compliant with the EU banking directives during that period. - Pursuant to Section 2 of the transitional provisions of the CSL: - CCIs have been asked to inform the CSSDA on measures they intend to take to comply with upcoming prudential requirements. - The CSSDA has developed a monitoring system of a number of prudential issues for each CCI (e.g., “four-eyes” principle, capital, large exposures, connected lending, etc.). - Although a basic framework of prudential standards exists in law and supporting regulations, the transitional arrangements fundamentally restrict full, proper enforcement of and supervision under them. ### Transition implementation plans and supervisory capacity building - A sample of CCIs representing different types will probably decide without further delay on affiliation, enabling the CCB to start a pilot project in the second half of 2005, with benefits to be extended to other CCIs that choose to affiliate. - Recommendation to accelerate the affiliation process, particularly formulation of rules governing affiliation of non-conforming cooperatives with the CCB. - Ongoing efforts by the CCB and the CSSDA to encourage mergers to enhance critical mass and economies of scale required for upcoming regulatory and supervisory reinforcement. - Recommendation to organize and manage the change process closely and coordinate different working groups and committees under a global change committee. ### Specific legal-administrative note (Principle 1(2)) - Principle 1(2) states each such agency should possess operational independence and adequate resources. - Description: - According to the CSL, the Minister of Commerce and Industry supervises the cooperative societies and is authorized to give instructions to the Commissioner of the CSSDA regarding the exercise of his powers. - Section 3(2) explicitly exempts the CCIs from the application of this requirement. *Source: IMF (cr06376).* ### Section 41D (1) of the CSL confers the responsibility for supervising the CCIs to the ### Section 41D (1) of the CSL confers the responsibility for supervising the CCIs to the commissioner. ### Governance, appointment, and legal mandate - Section 41D (1) of the CSL confers supervisory responsibility for the CCIs to the commissioner. - The commissioner: - Is appointed by the Council of Ministers for a period of five years with the possibility of renewal. - Is not allowed to hold any other position or public office in Cyprus or be employed against remuneration in the private sector. - Is the presiding officer of the CSSDA and chairs the Committee of the CSSDA. - Committee composition and powers: - Committee is composed of the commissioner or his deputy (the senior director) and four other members appointed by the Council of Ministers for a term of five years. - The committee determines the strategy and policy of the CSSDA and regulates CCIs according to specific provisions of the CSL. - Article 41J allows the Council of Ministers to set prudential rules and to delegate this power to the Committee; Regulative Administrative Act N°110/2004 (Official Gazette, February 27, 2004) delegated this power to the Committee. - Article 41G empowers the committee to make additional rules for the CCIs. - Legal powers of the commissioner: - Article 41JC(1) gives the commissioner the power to demand and collect information useful for the exercise of his powers pursuant to the cooperative law. - Article 41D enables the commissioner to address compliance with the CSL and the safety and soundness of the CCIs. - The commissioner may exercise qualitative judgment in forming his/her opinion and has the right to conduct audits and collect information [Article 41D (2)(b)]. - The commissioner may take prompt remedial measures or impose sanctions, including revocation of the license [Articles 41F (3) and 4 and 41JH]. ### Organizational structure and staffing capacity - Operational services of the CSSDA: - Supervision Department: 7 staff. - Development Department: 33 staff. - Development department staff perform supervisory-related tasks (e.g., continuous monitoring of CCI’s compliance with the CSL, validating prudential returns, input of data into the central data system). - Historical focus and concentration of assets: - Historically, activities were mainly directed to support a great number of very small CCIs; "50 CCIs out of 360 account for 75 percent of the assets of the sector". - Transition and capacity-building plan: - A transition plan provides for 17 additional staff. - Fourteen of the 17 will reinforce supervisory staff, "tripling the present supervisory resources." - Some additional staff will fill existing vacancies; pending their entry the supervisor tends to hire nonpermanent experienced staff to meet urgent needs. - Plans call for upgrading salary levels of both officers and staff. - Remuneration and recruitment: - The salary scales of the CSSDA are equivalent to government salary scales. - Public sector salaries are considered to be higher than private sector salaries, at least as far as the entry level is concerned; hiring additional staff with adequate academic and professional background is reportedly not to be problematic. - Outsourcing authority: - The Commissioner may contract or hire lawyers, auditors or other professional experts related to the execution of his legal duties; however, the Commissioner has not yet done this. - Termination protection: - The Commissioner’s mandate may only be terminated by the Council of Ministers when he no longer fulfills the conditions required for the execution of his duties or when he has committed a serious offence. ### Cooperation, training, confidentiality, and external assistance - Liaison and joint supervisory work: - CSSDA liaises intensively with the CBC and combines efforts with the CBC and the CCB preparing for the new supervisory and regulatory environment. - A six-month training program organized during which four CCIs have been submitted to joint on-site examinations. - Establishment of affiliation arrangements will allow progressive transfer of many support efforts to the Central Body (the CCB) and enable CSSDA development staff to switch to supervision. - International technical assistance: - An Administrative Co-operation Program between Cyprus and the European Union (Twinning Light Project) will provide technical assistance for effective supervision of cooperative credit institutions. - Project duration: five months; should start no later than September 2005. - Specific objectives: strengthen administrative capacity of the CSSDA for effective on-site and off-site supervision, including enhancement of electronic monitoring, based on relevant acquis communautaire and Basel Committee supervisory principles, taking into account the common position agreed with the EU. - Information sharing and confidentiality: - Section 41D (1)(c) allows the commissioner to cooperate and share information with local or foreign agencies provided the receiving agency treats the information as confidential. - A Memorandum of Understanding between the CBC, the Cyprus Securities and Exchange Commission, the Insurance Companies’ Control Service, and the CSSDA came into effect on January 1, 2003. - Articles 41D(1)(c) and 41H allow competent supervisory authorities to cooperate and exchange information, with the condition that exchanged information is subject to equivalent confidentiality rules and may not be disclosed without the express agreement of the disclosing authority. - Section 41H (1) requires the Commissioner, the Committee, and CSSDA staff to preserve confidentiality of information and use it only in the exercise of their duties. ### Supervisory independence, legal protection, and financial arrangements - Financial resources: - According to Section 4(6)(c) of the CSL, the commissioner shall have at his disposal the financial means necessary for the unobstructed and immediate exercise of duties imposed by the CSL regarding supervision and control of the CCIs. - Annual budget process: Budget is prepared by the Committee, forwarded to the Council of Ministers through the Ministry of Finance, and finally submitted to and approved by the House of Representatives; this process may raise questions about financial independence of the supervisory authority. - Legal protection for supervisors: - Section 4(5) of the CSL: the commissioner and supervisory staff are exempt from civil liability regarding any action or omission in exercising their duties and powers unless it is proven that the action or omission was performed in bad faith or involved serious negligence. - Defense of CSSDA staff against lawsuits rests with the Office of the Attorney General and all legal expenses are covered by the Cyprus government. ### Permissible activities, naming, and licensing criteria - Definition of CCIs and permissible activities: - Article 1 of the CSL defines a CCI as a society whose business it is to receive deposits or other repayable funds from the public, to grant credit for its own account, or to provide electronic money services. - Section 41A(1) stipulates that only licensed cooperative credit institutions established in Cyprus or in an EU member state or a third country may carry out the business of accepting deposits. - The Committee of the CSSDA is mandated to define services or activities CCIs are allowed to offer or exercise; the CSSDA plans to issue a Regulatory Decision on this. - Licensed CCIs must indicate near their name and on documents whether they operate as a stand-alone CCI or as a CCI affiliated with the "Central Body." - Name protection: - Use of the phrase "cooperative credit institution" is not currently protected, but protection of the word "cooperative" may provide protection. - Section 55.1: the use of any name of which the word "cooperative" forms part is prohibited without the sanction of the Council of Ministers; contravention is a criminal offense. - Licensing criteria and applicant requirements: - Article 41F(1) authorizes the CSSDA to set licensing criteria; criteria are set in the CSL [Article 41B(1)]. - Section 41E: criteria are to be complied with on a continuous basis. - The commissioner may reject a license application and may amend, withdraw, or impose new terms on existing licenses (Article 41F). - The commissioner verifies organizational structure and that the CCI provides necessary guarantees/conditions for effective supervision [Article 41B(1)(ii)]. - Shareholders-members are individuals; CCIs are non-profit, governed by the "one-member–one vote" principle. - Article 41B(1)(a)(iii): license shall only be granted if CSSDA is satisfied with fit-and-proper character of members that hold a percentage of capital that exceeds 10 percent (in practice this situation does not exist). - Minimum initial capital: "a minimum initial amount of capital in Cyprus pounds of an equivalent of one million Euros is required by Article 41B(i)." - Governance and capacity requirements: CSL requires direction by at least two persons with necessary expertise and skills, good administrative and accounting organization, and proper internal control system [Article 41B(ii)]. - Article 41B(iv): applicant must satisfy the commissioner that it shall have prior to commencement the requisite financial capacity and liquidity to achieve the proposed program of activities. ### Assessments and mission recommendations - Assessment for supervisory independence and resources (principle referenced in text): - Assessment: Materially Noncompliant. - Comments: Annual budget approval process may raise doubts about financial independence. Supervisory capacity must be developed substantially to cope with the new regulatory environment; required additional staff is evidence of that need. - Mission recommendation: Government should proceed without further delay with execution of the various plans to strengthen supervisory capacity of the CSSDA. - Assessment of legal and regulatory powers: - Principle 1(3) (prudential rules and delegation): Assessment: Compliant. - Principle 1(4) (powers to address compliance and safety and soundness): Assessment: Compliant. - Principle 1(5) (legal protection for supervisors): Assessment: Compliant. - Principle 1(6) (information sharing and confidentiality): Assessment: Compliant. - Permissible activities: - Assessment: Materially Noncompliant. - Comment: The Committee should complete issuance of its Regulatory Decision defining the services or activities that CCIs are allowed to offer or exercise. *Source: Assessment of the Cooperative Societies Supervision and Development Authority (CSSDA) and the Cooperative Societies Law (CSL).* ### Appendix of the CSL, either by establishing a branch or via cross-border services, if the ### Appendix of the CSL, either by establishing a branch or via cross-border services, if the ### Licensing, Market Access, and Withdrawal of Licenses - CCIs from third countries (i.e., nonEU member states) have the right to exercise activities in Cyprus if the conditions of article 41B(1) are met. - Licensing conditions: - For a branch: licensed by the home-member state; activities compatible with the home license; contact to be taken with the home supervisor. - For cross-border provision of services: presence of a home license and intended activities consistent with the intended license. - Article 41F(4): the commissioner has the right to withdraw a license at any time if it is established that the license has been obtained on false statements or by concealed substantial evidence. - Assessment: Compliant. - Comments: Necessary regulatory framework is in place; existing CCIs have a transition period in which to decide whether to affiliate with the Central Body or continue to stand-alone. Transitional period ends on December 31, 2007. ### Ownership and Controlling Interests (Principle 4) - Legal framework (Cooperative Laws, Articles 6 and 7): - Each CCI is independent and self-governing; may have limited or unlimited liability. - Where liability is limited by shares, no member other than a registered cooperative society may hold a portion of share capital exceeding the maximum limit prescribed by the CSL, which in percentage shall not exceed one-fifth of the share capital. - Irrespective of liability or shareholdings, each member holds only one vote (one-member, one-vote). - Section 41B(1)(a)(iii): license granted only if CSSDA satisfied with fit-and-proper character of members that hold a percentage of capital that exceeds 10 percent. - Section 41E: criteria to be complied with on a continuous basis. - Assessment: Not applicable. - Comments: Given existing legal framework, controlling interests cannot exist for CCIs. ### Investment Criteria (Principle 5) - Article 40(a) of the CSL: with approval of the Commissioner, each CCI may use funds to purchase immovable or movable property necessary for its purposes. - Article 41J(e): Council of Ministers may define limits of participation in other enterprises for licensed CCIs; authority delegated to the committee. - Planned Regulatory Decision to adopt provisions of Directive 2000/12/EC (in 2005) regarding limits of participation: - A participation in a company outside the financial sector exceeding 10 percent of that company's capital is a qualifying holding, which should not exceed 15 percent of the own funds of the CCI. - Aggregate portfolio of qualifying participations in nonfinancial-sector companies must not exceed 60 percent of the own funds of each CCI. - Assessment: Largely Compliant. - Comments: Committee should complete issuance of Regulatory Decision incorporating Directive 2000/12/EC provisions. CSSDA will require demonstration that acquisitions/investments do not expose CCI to undue risks and that adequate financial and organizational resources exist from the outset. ### Capital Adequacy (Principle 6) - CSSDA Regulative Directive 58/2005 introduced a risk-based capital requirement regime for CCIs based on Directive 2000/12/EC (Official Gazette February 11, 2005). - Differences vs. CBC Directive: - a) Minimum ratio requirement set at 8 percent (based on EU Directive 200/12/EC minimum requirements) — compared to 10 percent for the banking sector. - b) Tier 2 capital includes members reserve liability and uncalled capital per Article 36 of Directive 2000/12/EC. - c) Tier 1 capital includes reserves for general banking risks; Tier 2 does not include general provisions for bad debts. - CSSDA approved a new Regulative Directive introducing CAD II; published in Official Gazette April 2005 (Regulative Administrative Act No. 195/2005). - Risk profile: main function acceptance of deposits and granting loans to members. Total cooperative membership across activities exceeded 500,000; membership of CCIs totals around 358,000. - Article 41D: empowers commissioner to impose necessary measures if licensee’s capital falls below minimum ratio. - Assessment: Largely Compliant. - Comments: CSSDA should require reporting on CCIs’ capital ratios and their components at least semi-annually; current reporting is only on an annual basis. ### Credit Policies and Loan Evaluation (Principles 7 and 8) - Typical asset mix: home mortgage loans, personal/consumer loans, small business/professional loans to members, mostly collateralized or guaranteed. - Article 37: loans to non-members must be approved by the commissioner. - Article 40(a): excess funds invest in government securities or deposit with Cooperative Central Bank or, with commissioner consent, in any other bank. - Article 41JA and Rules 58(2): maximum limitations and controls for large exposures and exposures to connected parties; internal maximum lending limits included in by-laws and approved by the commissioner. - Commissioner’s Directives 3-01 and 3-02 require well-documented credit policies, practices, and procedures. - On-site examinations: - CSSDA examiners review appraisal and authorization, identification of substandard lending, provisioning policy, record keeping and control. - CSSDA reviews monthly and annual information on loans by sector, interest-rate duration, security, overdue and excess exposures. - Asset quality classification: Pass, Special Mention, Substandard, Doubtful (definitions comparable to other jurisdictions). - CSSDA examiners review a sample of at least 30 percent of the balance sheet value of CSI credit exposures; sample biased toward large/problematic loans and includes on- and off-balance-sheet exposures. - CCIs required to review individual credits, classifications, and provisioning at least annually; independent AOCS reviews provisioning policies during annual audit. - Assessment (both principles 7 and 8): Materially Noncompliant. - Comments: - Within 2004 and 2005, on-site examination program covered only a fraction of CCIs; examined CCIs account for 17 percent of the total loan portfolio of the sector. - Program limited by small number of current staff and need for further training. - CSSDA management has developed plans to augment supervision staff; training has begun. - CSSDA should require additional regular reporting from CCIs on credit-related matters (e.g., classification of credits and other assets, non-performing assets, provisioning, assets with suspended interest) and include such reporting in ongoing analysis. ### Large Exposure Limits (Principle 9) - Article 41JA provisions: - Forbidden for registered CCI (except those affiliated with Central Body) to allow total exposures to a client/group to exceed 25 percent of its own funds at any time (or other lower % defined by CSSDA Committee). - Forbidden to allow total value of all large exposures to exceed the eightfold of its own funds at any time (or other lower % defined by Committee). - Forbidden to allow total value of exposure without guarantee to certain insiders to exceed five percent of its own funds at any time (or other lower % defined by Committee). - CSSDA Committee authorized to exempt exposures totally or partly when extreme low risk involved, provided exemption does not violate any European Community Act. - CSSDA verifies existence of management information systems to identify concentrations and collects annual information on large exposures; currently revising and updating return on large exposures. - Assessment: Materially Noncompliant. - Comments: Limited on-site coverage (examined CCIs account for 17 percent of total loan portfolio); staff and training constraints persist. ### Connected Lending (Principle 10) - Article 41JA prohibits certain unsecured exposures to committee/board members and related persons to exceed 5 percent of own funds. - Requirement: facilities to committee members and connected persons must be approved by CCI’s Committee, and member concerned may not vote on the resolution. - No explicit legal requirement that facilities not be granted on more favorable terms than corresponding loans to nonrelated counterparties. - Article 43(2): permits commissioner to deal with problems arising in connected lending. - Article 41J(a): empowers Committee to regulate computation of capital, but regulations do not currently provide for deduction of connected lending exposures. - CCIs submit semi-annual returns showing loans related to committee/board members; CSSDA testing revised return on monitoring credit facilities to committee members and connected persons. - Assessment: Materially Noncompliant. - Recommendation: CSSDA should specifically require that facilities granted to connected persons may not be granted on more favorable terms than corresponding loans to nonrelated counterparties. ### Country and Market Risks (Principles 11 and 12) - Country Risk: - Currently CCIs do not engage in cross-border lending and investment activities. - Assessment: Not Applicable. - Comment: CSSDA has issued Regulative Decision regarding Cross-Border Credit Transfers under Article 41G(2). - Market Risk: - CCIs required to invest excess funds in government securities or deposit with Cooperative Central Bank (Article 40(a)). - CCIs are not authorized foreign exchange dealers (except as agents of the CCB); foreign exchange services offered by CCB. - CSSDA approved Regulative Directive introducing CAD II (to be published April 2005) to harmonize capital requirements with EU Directives (93/6/EEC and amendments). - Assessment: Largely Compliant. - Recommendation: CSSDA intends to issue a directive specifying rules/conditions for foreign exchange license; supervisor should develop expertise to supervise new risks. ### Other Risks, Liquidity and Interest‑Rate Risk (Principle 13) - Commissioner’s Directives 3-01 and 3-02: require internal operating procedures and internal control systems. - Commissioner issued Directive on Liquidity Ratio: minimum acceptable liquidity ratio set at 25 percent; Article 41F authorizes remedies for noncompliance. - CCIs provide monthly returns on liquidity to CSSDA; CSSDA testing revised prudential liquidity return. - For CCIs connected electronically to Cooperative Computer Society central server (currently 220 CCIs, including all larger institutions): - Computerized gap analysis system exists for ongoing monitoring of interest-rate fluctuations; information available to CCI management; CSSDA access planned by end of 2005. - Back-up of record keeping provided. - Assessment: Materially Noncompliant. - Recommendation: CSSDA should enhance ability to regularly acquire and analyze information on interest-rate risk directly or via accelerated access to the Cooperative Computer Society reporting system. ### Internal Control and Audit (Principle 14) - Article 41B(1)(a)(ii): registered society must be directed by at least two persons with honesty and requisite experience and good administrative and accounting organization and proper internal control systems. - Article 41F(3)(e): commissioner may demand removal or alteration of duties of any CCI officer/employee; Article 43 authorizes dismissal of committee under certain circumstances. - Directives 3-01 and 3-02 provide detailed manual for internal controls; future directive on broader principles of internal control planned. - Annual audits by independent AOCS include internal operations and controls; CSSDA officers have access to audit reports and participate in follow-up. - Assessment: Largely Compliant. - Comments: Many small CCIs lack ability to employ internal audit and effective segregation of duties due to limited management/staff. Lack of effective internal control is material factor in decisions on affiliation with Central Body. On-site coverage limited (examined CCIs account for 17 percent of loan portfolio). ### Anti–Money Laundering (Principle 15) - Prevention and Suppression of Money Laundering Activities Laws 1996 to 2004 (PSMLAL) establish framework: - Criminalizes laundering of proceeds from serious offenses; enables confiscation; freezing and restraint orders; reporting to Unit for Combating Money Laundering (UCML) without breaching confidentiality; courts empowered to order disclosure/production of information; requires persons in relevant financial business to maintain customer identification, record keeping, internal control, communication and staff training; enables registration/enforcement of foreign freezing/confiscation orders. - Commissioner’s Directives (July 30, 1999; August 9, 2000; November 7, 2000) address prevention/suppression of money laundering by CCIs; directives identical to CBC Guidance Notes prior to CBC November 2004 Guidance Note. - Directive provisions include: - prohibition of secret, anonymous, and numbered accounts and fictitious names; - obligation to obtain customer data file; - appointment of a conforming officer to liaise with Financial Intelligence Unit (MOKAS), advise staff, and decide on specialized training. - Comprehensive new Commissioner’s Directive in draft form based on CBC November 2004 Guidance Notes. - Assessment: Largely Compliant. - Comments: CSSDA should complete issuance of the new Guidance Note. CCI activities remain basic and mainly confined to members, introducing social control. ### On‑Site and Off‑Site Supervision (Principles 16, 18, 19) - Legal powers: - Article 41D: commissioner responsible for supervising compliance. - Article 41JD and Article 3(5): empower commissioner to inspect records, enter premises, and demand information within set deadlines. - Article 41JC(1)–(7): empowers commissioner to demand and collect information and protects confidentiality. - CSSDA Supervision Division: currently seven officers and staff; plans/budgets awaiting approval to increase total CSSDA staff to 57, with initially 21 allocated to Supervision Division. - Development Division: 33 officers and staff supplement Supervision Division work. - On-site program: - Began November 2003 as separate function. - 16 examinations conducted since inception, including 4 with Central Bank of Cyprus assistance. - On-site examinations planned using a basic risk-based approach; goal to conduct annual examination of all unaffiliated CCIs and annual consolidated exam of Central Body and affiliates. - On-site examines compliance with CSL, by-laws, organization, accounting, internal controls, anti-fraud, AML, loan evaluation, provisioning, liquidity, profitability, asset safeguarding, overall soundness. - Off-site supervision: - Uses periodic returns (monthly, quarterly, annual) and centralized processing system for 220 connected CCIs. - Off-site monitoring covers deposits, loans, distribution by sector, arrears, liquid assets, liquidity ratio, own funds, solvency ratio, large exposures. - Validation of supervisory information: - Independent AOCS performs annual financial and management/performance audits; CSSDA participates in follow-up meetings. - Assessments: - Principle 16 (On-Site and Off-Site Supervision): Materially Noncompliant. - Principle 18 (Off-Site Supervision): Materially Noncompliant. - Principle 19 (Validation of Supervisory Information): Largely Compliant. - Key operational figures and constraints: - Examined CCIs account for 17 percent of total loan portfolio. - Current Supervision Division staff: 7. - Planned total CSSDA staff: 57; initially 21 to Supervision Division. - Development Division staff: 33. - CCIs connected to central server: 220 CCIs (including all larger institutions). - Number of on-site examinations since inception: 16 (4 with CBC assistance). - Comments and recommendations: - On-site program limited by small staff and training needs; management has plans to augment staff and training has started. - Off-site capability materially impacted by small Supervision Division; Development Division mitigates currently but permanent augmentation required. - CSSDA should proceed to establish complete direct connection to Cooperative Computer Society central server to facilitate timely access. ### Bank Management Contact and Reporting (Principles 17 and 21) - AOCS submits audited annual report for each institution to Commissioner. - CSSDA officers hold meetings with institution Committees and external auditors to discuss audit results and corrective actions. - Development Division officers have regular contact with CCIs they support, providing ongoing knowledge of institutions. - Articles 12(2)–(3): amendments to by-laws require registration and submission to commissioner; commissioner may register or refuse. - Article 41Z(1)(b): CSSDA Committee can define/regulate periodic submissions and timeframes by regulative decision; Regulative Decision underway to require notification of material adverse developments. - Accounting: - Article 19 and Regulative Decision 59/2005: accounts must be prepared and audited to establish a “true and fair view,” in accordance with international auditing and accounting standards. - Assessment (Principle 17): Largely Compliant. - Assessment (Principle 21): Compliant. - Comments: CSSDA should complete issuance of planned Regulative Decision to require timely notification of material changes/adverse developments. ### Remedial Measures and Enforcement (Principle 22) - Article 41D(1)(d): commissioner empowered to take remedial measures, cease the Committee or any officer, and appoint liquidator. - Article 41D(2)(a): authorizes suspension or withdrawal of operating licenses. - Articles 41D(2)(c) and 41JE: authorize administrative sanctions. - Article 41F(3) and (4): enable withdrawal of license when failures occur, liquidity/solvency diminished, depositors’ interests at risk; Article 41F(3)(e) authorizes removal or alteration of duties of any officer/employee; Article 43 authorizes dismissal of committee. - Assessment: Compliant. ### Consolidated and Global Supervision, Host‑Country and Foreign Establishments (Principles 20, 23, 24, 25) - CCIs currently do not have subsidiaries, overseas activities, joint ventures, or foreign branches. - Assessment: Not Applicable for Principles 20, 23, 24, 25. - Relevant legal provisions: - Article 41D(1)(e): commissioner responsible for supervising compliance of societies affiliated to Central Body for consolidated supervision purposes. - Article 41G(1)(d): CSSDA Committee may define conditions for branches or cross-border services within EU framework. - Article 41D(1)(c) and Articles 41(D)(b) and (c): commissioner responsible for cooperation and exchange of information with other competent supervisory authorities, subject to professional secrecy guarantees. - Comments: Legal powers exist to cooperate with home/host supervisors and to supervise branches/cross-border services once such activities occur. ### Summary Operational and Numeric Highlights - Transitional period expiration: December 31, 2007. - Membership figures: total cooperative membership across activities exceeded 500,000; membership of CCIs totals around 358,000. - CCIs connected to Cooperative Computer Society central server: currently 220 CCIs (including all larger institutions). - On-site examinations conducted since program inception: 16 examinations (including 4 conducted with the assistance of the Central Bank of Cyprus). - Sample size in on-site credit review: at least 30 percent of balance sheet value of CSI credit exposures. - Examined CCIs account for 17 percent of total loan portfolio of the sector (coverage in 2004 and 2005). - Liquidity ratio minimum acceptable level: 25 percent. - Capital minimum ratio for CCIs under CSSDA Directive: 8 percent. - Banking sector minimum ratio (comparison): 10 percent. - Qualifying participation thresholds planned: 10 percent (qualifying holding definition), 15 percent (limit per company as % of own funds), 60 percent (aggregate nonfinancial participations as % of own funds). - Current Supervision Division staff: 7; planned total CSSDA staff: 57; initially 21 to be allocated to Supervision Division; Development Division staff: 33. - Regulative Directive and Acts timing: - Regulative Directive 58/2005 (Official Gazette February 11, 2005). - CAD II Regulative Administrative Act No. 195/2005 (published April 2005). - Directive alignment: Directive 2000/12/EC and EU Directives 93/6/EEC as amended by Directives 98/31/EC, 98/33/EC, 2002/87/EC and 2004/39/39. *Source: Cooperative Societies Law (CSL) Appendix and CSSDA assessments, as provided in the content unit.* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Summary of supervisory assessment and recommended actions - The assessment used the Basel Core Principles (BCP) framework to identify compliance gaps and produced a Recommended Action Plan (Table 6) mapping specific CP references to remedial actions. - Key recommended actions (preserve original CP numbering and wording): - 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. Make provision that the term “Cooperative Credit Institution” or any derivative of this term cannot be used without the approval of the CSSDA. - 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 the 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 terms more favorable than those used in the normal course of business. - 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’ planned actions and capacity enhancements - Staffing and institutional support: - Parliament approved enhancement of the CSSDA (Official Gazette July 2005) providing for 17 additional staff and upgrading of salary levels. - Fourteen officers from the additional staff will reinforce the supervisory staff, “tripling the present supervisory resources.” - Regulatory and reporting measures: - A Regulatory Decision will be issued “as soon as possible” to define permissible services and activities and to finalize decision on participation in other enterprises (CP 2, CP 5). - The Committee approved a new Regulative Directive introducing CAD II (published in 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 regime (CP 6). - A Regulatory Decision will be issued regarding returns on large exposures “as soon as possible” (CP 9). - An amendment of the Law will explicitly provide that facilities to connected persons should not be granted on terms more favorable than in the normal course of business (CP 10). - Guidance notes on money laundering were finalized and issued on 16/05/2005 (CP 15). - A Regulatory Decision will be issued to impose mandatory and timely communication of material changes in activities and adverse developments (CP 17). - Systems, supervision, and prudential reporting: - CSSDA is designing and building new automated analytical monitoring and early-warning systems using information from CCIs connected through the central server of the Cooperative Computer Society; additional prudential reporting for loan loss provisions will be required (CP 8). - CSSDA has accelerated direct connection to the central data server and will use information provided by CCIs connected through the central server (CP 18). - Recruitment of additional staff and continuous training are planned to strengthen on-site and off-site supervisory capacity and validation of supervisory information (CP 1.2, CP 16, CP 19). - Structural consolidation: - Ongoing efforts to encourage mergers: the number of Cooperative Credit Institutions decreased from 358 to 348 in the first half of the year due to merging procedures (CP 14). ### Capacity-building and expertise development - Planned measures to address market and other emerging risks: - Relevant training will be undertaken to adjust and develop expertise to supervise market risks and other risks (CP 12, CP 13). - Accelerated access to centralized reporting for interest rate risk; CSSDA supervisors will have direct access when prudential reporting project is completed (CP 13). --- ### Insurance sector assessment: institutional context, market structure, and key statistics ### Scope and macro indicators used in the assessment - The assessment of observance of the IAIS Core Principles used the October 2003 Core Principles Methodology in the context of the Offshore Financial Center (OFC) Assessment Program. - The assessment drew on legislation and guidance including: Law on Insurance Services and other related Issues of 2002 (LIS) and Amendments I to V; guidance notes and orders concerning annual returns and accounts; the Report on Insurance in Cyprus for the years 1983–2002; and The Audit of Insurers in Cyprus (Institute of Certified Public Accountants of Cyprus). ### Market size, structure, and rankings - Supervised entities and aggregate results: - There are currently 44 companies being supervised under the powers of the SI. - Total gross written premiums (GWP) of those companies are £C 415.7 million. - Total underwriting results are £C 12.6 million. - All figures in the insurance-sector text are based on results at December 2003 (annual returns at Dec 2004 had not been returned to the SI at the time of the mission). - International ranking and penetration: - Sigma Report rankings (2003): 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. - Penetration: “slightly below 6 percent of GDP” and “less than $1,000 premiums per capita”; Cyprus ranks at the lowest end of the 25 EU countries (only Malta and Greece have lower premiums per capita). ### Life insurance market dynamics and product composition - Historical and recent shares: - Life insurance dominated from 1994 until 2003. Market share grew from 50.1 percent to 54.4 percent in 1998, peaked at 77.6 percent in 1999, and dropped from 67.3 percent in 2000 to 50.2 percent in 2003 with a stable total premium of £C 154 million. - Product mix: - Unit-linked life insurance products account for approximately 75 percent of the Cypriot life market’s product mix. - SwissRe’s Sigma Report No. 3/2003: unit-linked products had a 35 percent share of the Western European market (contrast provided in assessment). - High unit-linked share attributed to: market developments following U.K. trends and lack of private-customer access to mutual funds until 2003. - Growth drivers: - Increase in life insurance premiums primarily generated by single premium policies. - Underlying growth rate for 1997 to 2000 was between 12 percent and 18 percent. ### Non-life market trends and 2003–2004 aggregates - General lines regain: In 2003 general lines accounted for £C 105 million of GWP, with an increase of almost 13 percent in 2004 (Insurance Association of Cyprus, based on unconfirmed preliminary results). The increase was driven by rate increases (notably motor insurance) and development in fire and property classes. - Aggregate figures from supervisory returns (in thousands of Cyprus pounds): - Domestic Non-Life market totals: - 2003 Gross Written Premium: 105,157; Net Earned Premium: 59,386; Assets: 199,226; Equity: 57,934; Technical Reserve: 110,574; Underwriting result: 1,996. - 2004 Gross Written Premium: 125,445; Net Earned Premium: 74,272; Assets: 228,566; Equity: 67,045; Technical Reserve: 126,425; Underwriting result: 9,048. - Domestic Life market totals: - 2003 Gross Written Premium: 151,418; Net Earned Premium: 134,313; Assets: 795,251; Equity: 58,490; Technical Reserve: 693,160; Underwriting result: 6,614. - 2004 Gross Written Premium: 151,578; Net Earned Premium: 132,381; Assets: 819,419; Equity: 63,913; Technical Reserve: 709,771; Underwriting result: 10,828. - International Non-Life total reported: - 2003 Gross Written Premium: 56,884; Net Earned Premium: 29,523; Assets: 104,237; Equity: 52,213; Technical Reserve: 36,981; Underwriting result: 4,362. - 2004 Gross Written Premium: 163,888; Net Earned Premium: 140,211; Assets: 201,427; Equity: 92,626; Technical Reserve: 108,474; Underwriting result: 32,393. - International Life total reported: - 2003 Gross Written Premium: 68,050; Net Earned Premium: 66,352; Assets: 431,066; Equity: 15,688; Technical Reserve: 398,949; Underwriting result: -1,451. - 2004 Gross Written Premium: 48,851; Net Earned Premium: 47,070; Assets: 378,553; Equity: 27,957; Technical Reserve: 310,850; Underwriting result: 8,775. - Composite companies (domestic totals): - 2003 Gross Written Premium: 29,948; Net Earned Premium: 24,279; Assets: 76,288; Equity: 16,061; Technical Reserve: 50,031; Underwriting result: -889. - 2004 Gross Written Premium: 32,979; Net Earned Premium: 27,098; Assets: 82,722; Equity: 14,610; Technical Reserve: 57,481; Underwriting result: -496. ### Observations guiding supervisory priorities - Concentration and market structure: - Life-market concentration: examples from Table 10—Laiki Cyprialife Ltd and Eurolife each around 28 percent market share in 2003; cumulative market shares indicate a concentrated life market (2003 total life market share figures: Laiki Cyprialife Ltd 28.4 percent; Eurolife 27.6 percent; Universal Life 24.8 percent). - Profitability and solvency signals: - Underwriting results exhibit variability across segments and companies; some entities show negative underwriting results in the sampled years (e.g., several life and non-life companies with negative underwriting results in 2003). - Supervisory implication: - The assessment places emphasis on strengthening supervisory capacity (human resources, automated monitoring, direct data connections), improving prudential reporting and validation, finalizing regulatory instruments (permissible activities, investment criteria, large exposures), and enhancing market-risk and other risk supervision capabilities. *Source: Assessment and Recommended Action Plan; Authorities’ response; Insurance Companies Control Service data as presented in the assessment.* ### 33. The following tables show the total premiums by core line of business for both ### Total premiums by core line of business ### Domestic Premiums by Line of Bussiness, 2003 and 2004 (Table 13) - Units: (in thousands of Cyprus pounds) - Column headings (as presented): GrossPremium, NetPremium, Under-WrittenReserve, Earned, Assets, Equity, TechnicalwritingResult - Non-Life - 2003: GrossPremium 105,157; NetPremium 59,386; Under-WrittenReserve 199,226; Earned 57,934; Assets 109,221; Equity 1,996 - 2004: GrossPremium 125,445; NetPremium 74,272; Under-WrittenReserve 228,566; Earned 67,045; Assets 126,425; Equity 9,048 - Life - 2003: GrossPremium 151,418; NetPremium 150,340; Under-WrittenReserve 795,251; Earned 58,490; Assets 693,160; Equity 6,614 - 2004: GrossPremium 151,578; NetPremium 132,381; Under-WrittenReserve 819,419; Earned 63,913; Assets 709,771; Equity 10,828 - Composite - 2003: GrossPremium 29,948; NetPremium 24,279; Under-WrittenReserve 76,288; Earned 16,061; Assets 50,031; Equity -889 - 2004: GrossPremium 32,979; NetPremium 27,098; Under-WrittenReserve 82,722; Earned 14,610; Assets 57,481; Equity -496 - Total Market - 2003: GrossPremium 286,523; NetPremium 234,005; Under-WrittenReserve 1,070,765; Earned 132,485; Assets 852,412; Equity 7,721 - 2004: GrossPremium 310,002; NetPremium 233,751; Under-WrittenReserve 1,130,707; Earned 145,568; Assets 893,677; Equity 19,380 _Source: Insurance Companies Control Service_ ### Premium by Line of Business for Companies Transacting Business Outside of Cyprus, 2003 and 2004 (Table 14) - Units: (in thousands of Cyprus pounds) - Column headings (as presented): GrossPremium, NetPremium, Under-WrittenReserve, Earned, Assets, Equity, TechnicalwritingResult - Non-Life - 2003: GrossPremium 56,884; NetPremium 29,523; Under-WrittenReserve 104,237; Earned 52,213; Assets 36,981; Equity 4,362 - 2004: GrossPremium 163,888; NetPremium 140,211; Under-WrittenReserve 197,843; Earned 92,320; Assets 108,474; Equity 32,393 - Life - 2003: GrossPremium 68,050; NetPremium 67,983; Under-WrittenReserve 431,066; Earned 15,688; Assets 398,949; Equity -1,451 - 2004: GrossPremium 48,851; NetPremium 47,070; Under-WrittenReserve 378,553; Earned 27,957; Assets 310,850; Equity 8,775 - Composite - 2003: GrossPremium 4,239; NetPremium 6,826; Under-WrittenReserve 30,443; Earned 20,969; Assets 9,426; Equity 1,981 - 2004: GrossPremium 9,156; NetPremium 9,058; Under-WrittenReserve 33,668; Earned 22,724; Assets 10,985; Equity 2,484 - Total - 2003: GrossPremium 129,173; NetPremium 104,332; Under-WrittenReserve 565,746; Earned 88,870; Assets 445,356; Equity 4,892 - 2004: GrossPremium 221,895; NetPremium 196,339; Under-WrittenReserve 610,064; Earned 143,001; Assets 430,309; Equity 43,652 _Source: Insurance Companies Control Service_ ### Principle-by-Principle Assessment - The assessment of the insurance supervision has been based on the Insurance Core Principles of the IAIS. - The assessment was conducted against the essential criteria for all principles. *Source: Insurance Companies Control Service; assessment based on the Insurance Core Principles of the IAIS.* ### 35. There were no differences in the supervision of companies conducting domestic ### cr06376 - 35. There were no differences in the supervision of companies conducting domestic ### Conditions for Effective Insurance Supervision - The Law on Insurance Services and other Related Issues of 2002 (LIS) sets out the legal framework under which insurance companies operate in Cyprus. - Administrative supervision is assigned under s4 to a Superintendent of Insurance (SI) and one Assistant SI; appointment is made by the Council of Ministers. The SI can make use of a service established as the Insurance Companies Control Service (ICCS). - The LIS does not specify a reporting relationship between the SI and the Ministry of Finance (MoF); the MoF is in almost all cases the institution for an appeal. - Regulations, other than the LIS, have not been issued to provide clear instructions to companies on how to comply with the law; the ICCS should define minimum requirements for insurance undertakings. - Accounting and actuarial standards: in the absence of a developed national GAAP, Cyprus applied IAS and for insurance-specific application U.K.-GAAP; transformation to IFRS4 will be based on similar evaluation rules. - Public statistical information: available through MoF (with a two-year delay) and the “Report on Insurance in Cyprus” issued by the ICCS. - Assessment: Largely observed. - Comments: Regulation must be defined to set a supervisory frame and create clear expectations for companies. ### The Supervisory System — objectives, authority and process - Principle 2 (Supervisory objectives) - The supervisory objectives are stated in the LIS and cover relevant areas but are broad and general. - The LIS refers in s5(2) to administrative functions only; there is no specific law or administrative act defining objectives or powers of the SI beyond the LIS. - There is no regular public report on ICCS activities and no precise performance indicators for SI or ICCS staff. - Assessment: Largely observed. - Comments: SI should define clear objectives, publish regular activity reports, and issue regulations clarifying LIS application. - Principle 3 (Supervisory authority) - Legal powers: LIS identifies the SI as responsible and entitles the SI to issue circulars and further regulation; draft “Orders for insurance companies to set and maintain prudential standards” has been in draft since 2002. - Independence and accountability: governance structure not clearly defined; many sanctions can be appealed to the MoF (s43, s96(2), s202(5)), allowing executive override in many cases. - Financial resources: ICCS has no budget or control over financial resources; recruitment process not influenced by SI; recent vacancies took more than 1.5 years and did not lead to recruitment. - Human resources: composition of ICCS staff lacks appropriate skills; actuarial expertise outsourced to Governmental Actuarial Services Department (GaD). - Confidentiality: LIS (s7 and s8) provides safeguards; no breaches reported. - Assessment: Partially observed. - Comments: SI must be granted a budget; produce a multi-year priorities plan; assess and address required skill composition for ICCS. - Principle 4 (Supervisory process) - Processes are not clear, transparent, and standardized; supervisory actions are individualized. - Administrative decisions subject to judicial review and appeal to MoF; appeals process may undermine timely interventions. - ICCS publishes a regular report with a delay of more than two years; report lacks statements on policy conduct, objectives, or performance. - Assessment: Largely observed. - Comments: Standardize internal procedures and publish more timely supervisory information. - Principle 5 (Supervisory cooperation and information sharing) - ICCS has signed the Helsinki and Siena protocol and the SI attends quarterly CEIOPS meetings. - Every chapter of the LIS contains clauses on applicability to non-Cypriot companies and their supervisors. - Assessment: Observed. - Comments: No substantial information sharing since Cyprus joined the EU in May 2004; in 2005 the SI should contact home supervisors to identify freedom of services (FoS) companies actively doing business. ### The Supervised Entity — licensing, governance, fit-and-proper, changes in control - Principle 6 (Licensing) - Licensing process defined in Part III of the LIS; guide available documenting procedures. - In the last 24 months, there were two licenses granted. - Assessment: Observed. - Principle 7 (Suitability of persons) - Fit-and-proper criteria are defined in Part IV of the LIS; standardized process for obtaining CVs and criminal records exists. - At least five cases where suitability of a person was challenged by the ICCS. - Assessment: Observed. - Principle 8 (Changes in control and portfolio transfers) - Notification threshold for ownership: 10 percent (LIS, Part X). - SI has power to approve or disapprove changes in control; in the past 24 months there has been one application for change in control. - Portfolio transfer process set out in Part VIII of the LIS; regulation aligned with EU requirements. - Assessment: Observed. - Principle 9 (Corporate governance) - Corporate governance rules apply to companies listed on the Cyprus SE or part of a listed Cypriot Bank (account for approx. 60 percent of the market). - LIS does not require all insurance undertakings to follow corporate governance standards; more than two thirds of companies are family owned or very small businesses. - Assessment: Partially observed. - Comments: Develop joint governance rules for financial sector undertakings involving all three supervisory authorities. - Principle 10 (Internal control) - No specific requirements currently for internal control mechanisms; LIS requires auditing firms to report irregularities to the SI. - SI holds the board ultimately responsible but does not insist on establishment/maintenance of internal control systems. - Assessment: Partially observed. - Comments: Define minimum internal control standards as part of sound insurance principles; require internal audit and access to internal audit reports. ### Ongoing Supervision — market analysis, reporting, inspections, corrective measures, enforcement, exit, group supervision - Principle 11 (Market analysis) - SI can require data from insurers but market analysis relies primarily on insurer-provided data; no systematic use of investment market, socio-demographic, or trend data. - Assessment: Partly observed. - Comments: SI should define necessary information for market analysis and coordinate with other public services to acquire it. - Principle 12 (Reporting to supervisors and off-site monitoring) - Reporting forms introduced in 2003; some misunderstandings persist. - Companies report six months after closing; during assessment only data as per December 2003 was available. - Many smaller companies struggle to meet reporting requirements; received data not consolidated regularly. - Assessment: Partially observed. - Comments: Require electronic submission in prescribed formats and signed hardcopies; implement plausibility testing of received data. - Principle 13 (On-site inspection) - SI has right to perform on-site inspections but uses it rarely; four on-site inspections during the last 24 months; none were random. - By law SI has wide-ranging powers to conduct on-site inspections. - Assessment: Not observed. - Comments: Obtain MoF agreement to contract third parties and develop a plan for regular on-site inspections including random inspections. - Principle 14 (Preventive and corrective measures) - LIS allows sanctions (withdrawal of license, disapproval, fines) but preventive measures not explicitly allowed; ICCS processes geared more to correction than prevention. - Assessment: Largely observed. - Comments: Develop preventive regulatory rules to reduce compliance failures and allocate supervisory resources efficiently. - Principle 15 (Enforcement or sanctions) - LIS provides for formal directions and a range of sanctions; SI can require capital increases, restrict dividends, restrict asset transfers, and initiate actions against subsidiaries. - Historical enforcement: 13 withdrawals of licenses since 1995; 5 cases of administrative fines in 2004; 5 requests to increase reserves in 2003 and 2004. - Assessment: Largely observed. - Comments: MoF should review the number of cases subject to appeal to improve SI independence and avoid delay in enforcement. - Principle 16 (Winding-up and exit) - LIS amended to incorporate 2001/17/EC on reorganization and winding up; protections for policyholders prioritized. - Two withdrawals of licenses but neither resulted in winding up. - Assessment: Largely observed. - Comments: ICCS should maintain a short list of potential liquidators to expedite appointments upon withdrawal of license. - Principle 17 (Group-wide supervision) - Insurance laws harmonized with relevant directives (including Financial Conglomerates Directive). - Adjusted solvency margin required for insurance groups; single coordinator may be appointed for supplementary supervision of financial conglomerates. - Law on supplementary supervision of insurance groups effective as from 1/5/2004; law on supplementary supervision of financial conglomerates effective as from 1/1/2005. - No practical experience yet in group-wide supervision; no coordinator appointments made so far. - Assessment: Observed. - Comments: Incorporate information exchange processes and coordinator terms of reference into the MOU signed in 2002 by Central Bank, Securities Commission and SI. ### Prudential Requirements — risk, underwriting, liabilities, investments, derivatives, solvency - Principle 18 (Risk assessment and management) - ICP requires risk management policies appropriate to complexity, size, and nature of business; market contains very small to medium-sized firms with no common approach to risk management. - Assessment: Partially observed. - Comments: Introduce initial steps toward risk management alongside internal control standards (ICP 10). - Principle 19 (Insurance activity) - SI reviews reinsurance arrangements and requires disclosure of reinsurance covers. - Net retention rate: 59.1 percent. - In the last 24 months the SI has required strategic underwriting and pricing policies; requirement does not extend to expense-control systems. - Assessment: Largely observed. - Comments: Request supervised companies to provide a risk profile when introducing new products and changes in underwriting. - Principle 20 (Liabilities) - LIS provides for establishing adequate technical provisions and liabilities based on sound accounting and actuarial principles; structured reserving methods recently introduced. - At the time of assessment, there were 5 insurance companies operating in the market with suboptimal reserving levels; authorities required them to increase reserves. - Assessment: Partially observed. - Comments: ICCS needs ability to contract external resources and recruit skilled staff to assess reserves (see Principles 1 and 3). - Principle 21 (Investments) - Clear instructions on qualified assets and eligible assets to cover technical reserves; investment reports submitted quarterly. - Board held responsible for investments; no formal requirement to establish a specific investment policy. - One major life undertaking almost lost its license in 2004 due to an actuarial assessment; position restored rapidly. - Assessment: Largely observed. - Comments: Investment policy should be part of a risk profile submitted regularly to the ICCS. - Principle 22 (Derivatives and similar commitments) - Derivatives rarely used; prior approval by the Superintendent has been required in practice when used. - Assessment: Largely observed. - Principle 23 (Capital adequacy and solvency) - Solvency requirements in place in accordance with the EU (Solvency I). - Existing businesses given until March 2007 to meet Solvency I; prior solvency regime remains in force until then for existing businesses. - Problem: premium receivables accepted as assets for solvency purposes; at least four companies currently unable to meet existing capital requirements. - A draft outline for Solvency I full implementation strategy was provided during the assessment. - Assessment: Partially observed. - Comments: Solvency capital should be reported quarterly to the ICCS; monitor collection of premiums paid in cash and require write-off procedures to reduce unreliable premium receivables. ### Markets and consumers — intermediaries, consumer protection, disclosure, fraud - Principle 24 (Intermediaries) - SI requires intermediaries to be licensed/registered per the European directive; about 1,600 intermediaries, mostly tied agents, active in the market. - Assessment: Observed. - Comments: Review resource allocation for intermediary supervision given supervisor tasks. - Principle 25 (Consumer protection) - SI receives customer complaints and refers them to undertakings; ICCS has no legal power to resolve complaints but intervenes informally. - No ombudsman for insurance matters. - Assessment: Observed. - Comments: SI could publish frequency of complaints at company level to incentivize improved consumer treatment. - Principle 26 (Information, disclosure & transparency) - Insurers required to disclose financial position and risk exposures; SI publishes market trends and statistics every second year and plans annual reporting. - Assessment: Largely observed. - Comments: Improve content and frequency of market reports; increase company-level quantitative disclosure. - Principle 27 (Fraud) - SI has power but lacks resources to fully establish/enforce fraud-detection regimes; legislation punishes insurer and claims fraud. - Assessment: Largely observed. - Comments: See ICP10 recommendations for internal control improvements. ### Anti-money laundering / Combating the financing of terrorism (AML/CFT) - Principle 28 (AML/CFT) - The Prevention and Suppression of Money Laundering Activities Law covers (a) long-term insurance contracts including unit-linked and conventional policies; and (b) non-Life insurance contracts provided by companies registered in the Republic of Cyprus operating exclusively outside the Republic of Cyprus. - Under Section 60, the Council of Ministers designated the Superintendent of Insurance as the responsible supervisory authority for insurance-company compliance with the law. - Under Section 60(3) the Superintendent issued Guidance Notes to insurance companies notifying them that their activities fall within scope of the law. - Sections 91 and 99 require each life-insurance undertaking to submit, with annual insurance accounts, a certificate of compliance with Guidance Notes; certificate signed by Board members, CEO, and compliance officer (Section 67). - There are only two Cypriot insurance companies with branches or subsidiaries (one branch and one subsidiary), both in Greece. - Due to lack of resources, no real improvement in AML/CFT resourcing is expected in the near future. - Assessment: Partially observed. - Comments: Identify a common approach and provide resources to process suspicious transaction reports (STRs) on an as-needs basis; assessment noted that many single premiums into unit-linked contracts were provided in cash or from other accounts without STR submissions. ### Key statistics and historical enforcement data (as reported) - Two licenses granted during the last 24 months. - Four on-site inspections during the last 24 months (none random). - 13 withdrawals of licenses since 1995. - 5 cases of administrative fines in 2004. - 5 requests to increase reserves in 2003 and 2004. - Net retention rate: 59.1 percent. - Approximately 60 percent of the market accounted for by companies listed on the Cyprus SE or part of a listed Cypriot Bank. - About 1,600 intermediaries active in the market. - Forms for reporting introduced in 2003. - SI’s market report publication lag: more than two years. - Laws effective dates: supplementary supervision of insurance groups came into effect as from 1/5/2004; supplementary supervision of financial conglomerates came into effect as from 1/1/2005. - Solvency I transitional deadline for existing businesses: March 2007. - At assessment time: 5 insurance companies with suboptimal reserving levels; at least four companies unable to meet existing capital requirements. - Cyprus joined the EU in May 2004. - Recent vacancy recruitment delays: more than 1.5 years for some postings. ### Recommended action plan (summary of main recommendations) - Grant the SI a budget and budgetary control to secure supervisory independence and operational effectiveness. - Issue and publish detailed regulations and minimum requirements (sound insurance principles) to clarify how the LIS should be applied, including: - Minimum prudential standards (draft “Orders for insurance companies to set and maintain prudential standards” to be finalized). - Internal control standards, including internal audit, actuarial, and compliance functions. - Corporate governance requirements proportionate to size, nature, and complexity of insurers. - Preventive regulatory measures and progressive escalation of remedial actions. - Standardize and publish internal supervisory procedures and make regular, timely ICCS reports available to the public (reduce two-year reporting lag). - Implement a plan for regular and random on-site inspections and obtain authority/agreement to contract third-party experts (auditors, actuaries) for inspections and reserving assessments. - Improve off-site monitoring: require electronic submission of signed reporting forms in prescribed formats; implement plausibility testing and quarterly solvency capital reporting. - Prepare and execute a supervisory strategy for full implementation of Solvency I by March 2007, including contingency plans for smaller companies likely to face capital shortfalls. - Strengthen AML/CFT resourcing and define a common approach for handling STRs; ensure compliance certificates for life insurers are enforced and reviewed. - Incorporate group-wide information exchange processes and coordinator terms of reference into the existing MOU among Central Bank, Securities Commission and SI. - Maintain a short list of potential liquidators to expedite winding-up procedures when license withdrawal occurs. - Assess ICCS staffing needs, recruit or contract necessary actuarial and technical expertise, and reduce reliance on unchallengeable external actuarial advice. *Source: IMF assessment of observance of the IAIS Insurance Core Principles (assessment text).* ### 36. Recommended actions are outlined as part of the comments on each assessed ### 36. Recommended actions are outlined as part of the comments on each assessed ### Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles (summary of recommended actions by principle) - Conditions for effective insurance supervision (i.e., CP 1) - Regulation has to be developed to set a framework in which insurance undertakings operate and in order to create clear expectations of a supervisory standpoint towards the companies. - Supervisory objectives (i.e., CP 2) - Clear objectives and measures should be defined for the ICCS. The ICCS should report on its achievements on a regular basis. The ICCS should communicate through regulation how it wants the SIL to be applied. - Supervisory authority (i.e., CP 3) - The SI has to be granted a budget in order to perform the duties laid out in the LIS. The SI should produce an annual plan laying out priorities. Urgent need to assess the composition of skills required to properly exercise the powers of the LIS. At the time of the assessment, the SI was not provided with resources adequate to perform insurance supervision able to respond to critical situations. - Supervisory process (i.e., CP 4) - Internal procedures of the supervisor should be standardized for more efficient operation. Publications should be made available to the public. - Supervisory cooperation and information sharing (i.e., CP 5) - The SI should contact home supervisors to identify which companies under the FoS have actually started business activities; there has not been any information sharing since Cyprus joined the EU in May 2004. - Licensing (i.e., CP 6) - None. - Suitability of persons (i.e., CP 7) - None. - Changes in control and portfolio transfers (i.e., CP 8) - None. - Corporate governance (i.e., CP 9) - Joint effort to develop governing rules for undertakings in the financial sector by all three supervisory authorities. - Internal control (i.e., CP 10) - Define standards on internal control as an essential part of the sound insurance principles and enforce those standards through reporting and auditing requirements. - Market analysis (i.e., CP 11) - The SI should identify information required or of interest to other public services and define information necessary to prepare a market analysis and the process for receiving and updating it. - Reporting to supervisors and off-site monitoring (i.e., CP 12) - Company data should be stored electronically once received. Companies should submit signed hard copies and electronic files in prescribed formats. A procedure to imply some degree of plausibility testing of received data should be established. - On-site inspection (i.e., CP 13) - Gain agreement from the MoF to obtain the right to contract third parties to support on-site inspections. Develop a plan to perform regular on-site inspections regardless of clear evidence that an inspection is deemed necessary. - Preventive and corrective measures (i.e., CP 14) - The ICCS should develop regulatory rules enabling it to prevent breaches in compliance; emphasis should remain on corrective measures but consider preventive measures for resource efficiency. - Enforcement or sanctions (i.e., CP 15) - The MoF should review whether the variety of cases in which an appeal is possible should be reduced considerably. - Winding-up and exit from the market (i.e., CP 16) - As s157 requires the SI to appoint a liquidator, the ICCS should have a short list of potential candidates as part of the license withdrawal process. - Group-wide supervision (i.e., CP 17) - Incorporate relevant information exchange processes and terms of reference for the coordinator of financial conglomerate supervision into the 2002 MOU among the supervisors. - Risk assessment and management (i.e., CP 18) - Initial steps toward risk management should be considered after internal control procedures of Principle 10 are sufficiently regulated and recommendations implemented through sound insurance principles. - Insurance activity (i.e., CP 19) - The ICCS should ask supervised companies to provide a risk profile stating introduction of new products, availability of rating factors, and changes in attitude to insurance risks. - Liabilities (i.e., CP 20) - Determination of appropriate reserves requires ICCS ability to contract external resources and recruit further adequately skilled staff (see Principles 1 and 3). - Investments (i.e., CP 21) - Company investment policy should be part of a risk profile submitted regularly to the ICCS. Internal control procedures should cover initial investment decision procedures and operational risk contingency plans. - Derivatives and similar commitments (i.e., CP 22) - None. - Capital adequacy and solvency (i.e., CP 23) - Cash collection should be an essential part of internal control procedures to prevent premium receivable accumulation. Solvency capital should be reported to the ICCS on a quarterly basis. Awareness that companies unable to meet minimum requirements should not continue operations. - Intermediaries (i.e., CP 24) - Given the range of tasks, the planned allocation of resource could be reviewed. - Consumer protection (i.e., CP 25) - The SI could publish frequency of complaints received on a company level to incentivize more customer-friendly company behavior. - Information, disclosure & transparency towards the market (i.e., CP 26) - Improve contents and frequency of market report. - Fraud (i.e., CP 27) - See ICP10 recommendations for further details. - Anti-money laundering (i.e., CP 28) - A common approach should be identified. Provide resources to deal with STRs on an as-needs basis. During life market assessment, managers stated many single premiums paid into unit-linked contracts had not been withdrawn from other saving vehicles but provided in cash or from other cash accounts; sources and provision to life insurance companies did not lead to submission of STRs to the SI. ### Authorities’ Planned Actions in response to the IAIS recommendations (highlights) - Conditions for effective insurance supervision (i.e., CP 1) - Efforts underway to outsource legal services for EU harmonization; legal services will also be sought for implementation of the proposed recommended action. - Supervisory objectives (i.e., CP 2) - Efforts to upgrade the existing "Report in Insurance in Cyprus" by including more detailed reference to the ICCS and publish it annually instead of once every two years. - Supervisory authority (i.e., CP 3) - Recommended action implies granting the ICCS full financial autonomy from the Government; political decision under consideration to rationalize supervision of insurance and financial services. Procedures expedited to recruit appropriate qualified staff as soon as possible. - Supervisory process (i.e., CP 4) - Implementation of prior actions expected to considerably improve operational efficiency; publications will gradually be made available to the public. - Supervisory cooperation and information sharing (i.e., CP 5) - The ICCS will send by the end of this year a letter to all EU home supervisory authorities to implement the recommendation. - Corporate governance (i.e., CP 9) - Heads of supervisory authorities decided at meeting on 11/10/2005 that each authority will develop its own rules in close co-operation with each other. - Internal control (i.e., CP 10) - An initial discussion next year with the Institute of Certified Accountants followed by further discussion with the Cyprus Association of Insurance Companies. - Market analysis (i.e., CP 11) - Implementation linked to adequate staffing of ICCS (see CP3). - Reporting to supervisors and off-site monitoring (i.e., CP 12) - Computerization tender proposals under evaluation by a special committee; procedure expected to be completed by May 2006. - On-site inspection (i.e., CP 13) - ICCS will submit proposals to the MoF for funding; a plan for regular on-site inspections is being prepared. - Preventive and corrective measures (i.e., CP 14) - If ICCS is upgraded with qualified staff within the next 2–3 years, implementation will proceed in parallel. - Enforcement or sanctions (i.e., CP 15) - Discussions underway between the MoF and the ICCS to review the appeal process. - Winding-up and exit from the market (i.e., CP 16) - Provisional liquidator appointed by the Superintendent of Insurance will be an officer from the Office of the Registrar of Companies and Official Receiver. - Group-wide supervision (i.e., CP 17) - Implementation expected within the first semester of next year. - Risk assessment and management (i.e., CP 18) - Implementation to follow after other relevant recommended actions are implemented. - Insurance activity (i.e., CP 19) - ICCS to write to all insurance companies requesting proposed information; assessment requires appropriate ICCS skills (linked to CP3). - Liabilities (i.e., CP 20) and Investments (i.e., CP 21) - Actions directly linked to adequacy of ICCS staffing in numbers and skills (see CP3). - Capital adequacy and solvency (i.e., CP 23) - Early next year a letter will be addressed to all insurance companies to implement the recommended action. - Intermediaries (i.e., CP 24) - Review planned allocation of resources for intermediaries. - Consumer protection (i.e., CP 25) - ICCS lacks legal right to examine complaints; a Bill has been drafted for establishment of a Financial Ombudsman which would enable implementation. - Information, disclosure & transparency towards the market (i.e., CP 26) - Efforts to upgrade "Report in Insurance in Cyprus" and publish it annually instead of once every two years. - Fraud (i.e., CP 27) - See comments under CP10. - Anti-money laundering (i.e., CP 28) - Implementation linked to carrying out on-site inspections (see CP13). ### IOSCO assessment—institutional and market context (summary of findings) - Assessment context and methodology - The assessment of observance of the IOSCO Objectives and Principles of Securities Regulation was undertaken as part of the offshore financial center (OFC) assessment program. The Cyprus Securities and Exchange Commission (CySEC) is the main authority responsible for securities market supervision in Cyprus. The Central Bank supervises certain international financial services companies engaged in securities activities. Michael Deasy from the Central Bank of Ireland was the assessor. - The assessment used the IOSCO Assessment Methodology of October 2003 and was influenced by Cyprus’ market structure and accession to the European Union in May 2004. - Market structure and statistics - Stock Exchange listings: 18 main and 137 supplementary listings. - Stock Exchange turnover: currently in the region of $500,000 daily at end-April 2005; in the region of $1.8 million in the first 75 trading days of 2005. - Exchange history: in 1999/2000 its index fell from about 800 to 80 points over about a year and a half. - Market intermediaries: 47 authorized market intermediaries; 32 serve almost exclusively nonresidents; 15 serve locally and many are members of the Stock Exchange. - Collective investment schemes: sector in infancy; Cyprus has transposed EU UCITS Directives but has not licensed any schemes to date. - Central Bank regulated investment services: (i) international collective investment schemes and (ii) independent financial advisory firms—both serve almost exclusively nonresidents. - Regulatory structure and legal framework - Except for international financial services companies supervised by the Central Bank, CySEC supervises all securities activities including the Stock Exchange. There are no self-regulatory organizations. - Main legislation includes The CySEC Law 2001–2004 and the Stock Exchange Law 1993–2004. - Regulatory regime highly influenced by EU membership; company law influenced by U.K. legislation. A sound legal, taxation, and accounting framework appears to be in place. - Assessment approach to principles - Principles classified as: implemented, broadly implemented, partly implemented, not implemented, or not applicable based on criteria in the Guidance Note and particular market circumstances. *Source: IMF assessment material on insurance supervisory recommendations and IOSCO assessment in Cyprus.* ### 50. Regulator (Principles 1–5). The regulatory responsibilities of CySEC are ### Regulator (Principles 1–5) — The regulatory responsibilities of CySEC ### Overview and institutional capacity - The regulatory responsibilities of CySEC are generally clearly set down in legislation and CySEC appears to apply them in a clear and consistent manner. - Current staff numbers appear adequate but extra resources will be required in the near future to deal with extra responsibilities which CySEC will be required to assume, e.g., implementation of recently adopted EU directives. - Current staff appear to have the requisite skill-sets and competencies to carry out the responsibilities of CySEC. - The authorities have indicated that the planned amendment to the Stock Exchange Act was enacted in September 2005. ### Supervision of issuers and the Stock Exchange - The respective roles of CySEC and the Stock Exchange in the supervision of the issuers of securities (i.e., listed companies) require clarity. - CySEC’s competency in supervision of listed issuers has recently been questioned by the courts and an appeal is pending. - CySEC is seeking an amendment to the Stock Exchange Law to put its regulatory role beyond doubt. - CySEC cannot effectively supervise the Stock Exchange for constitutional and legal reasons because one public administrative body cannot supervise another public administrative body; consequently it cannot legally apply a whole range of regulatory tools, such as the imposition of conditions or restrictions, nor has it ever carried out an inspection of the Exchange because of these constitutional difficulties. - In practice, CySEC and the exchange appear to have a satisfactory supervisor/supervisee relationship; for example, CySEC monitors trading on the exchange on a real time and daily basis. - CySEC could, in extreme circumstances, through a circuitous route involving the Council of Ministers, order the temporary suspension of the exchange. ### Inspections, investigations, and enforcement - CySEC has wide powers of inspection, investigation, and enforcement. - Constitutional and legal constraints limit CySEC’s ability to supervise the Stock Exchange effectively (see Principles for the Secondary Market). ### Information sharing and cooperation - The law provides for sharing of information with both domestic regulators and foreign regulators. - CySEC cannot collect information and carry out investigations on behalf of foreign regulators unless it has an independent interest in the matter being investigated. - CySEC has experienced difficulties in obtaining information identifying the beneficial owners of shares from lawyers acting as nominees; a forthcoming bill is expected to correct this. ### Issuers (Principles 14–16) - The public offering law, stock exchange law and company law provide for accurate and timely disclosure of financial results and adequate safeguards in the fair and equitable treatment of shareholders. - Accounting and auditing standards are in line with best international practice. - Cyprus has adopted International Financial Reporting Standards (IFRSs) for accounting purposes. ### Collective Investment Schemes (Principles 17–20) - Two distinct collective investment scheme regimes exist in Cyprus: - UCITS-type schemes supervised by CySEC and based on the EU UCITS Directives, targeted at the retail market and marketable to Cyprus and non-Cyprus residents alike. The relevant UCITS legislation has just been adopted in Cyprus and to date no Cyprus UCITS has been authorized. - International collective investment schemes not marketed to the public and largely targeted at nonresidents. Fifteen such schemes have been authorized to date with a total net asset value of about $400 million. - The UCITS legislation is comprehensive, but CySEC needs to introduce specific rules for the valuing of assets other than shares in publicly quoted companies held by UCITS; CySEC intends to issue such guidelines before a Cyprus UCITS is authorized. - International collective investment schemes comprise two types: - Schemes marketed to experienced investors and carrying a minimum investor subscription of $50,000. - Private schemes which restrict the number of investors to 100. ### Market intermediaries (Principles 21–24) - All market intermediaries, with the exception of investment advisors, must be authorized by CySEC. Investment advisors give advice only and do not receive or execute orders, hold client assets, or manage investment portfolios. - Following transposition of the recently adopted EU Markets in Financial Instruments Directive, investment advice is recognized as an investment service and investment advisors (none currently exist in the domestic market) will fall to be supervised as investment intermediaries by CySEC. - There are 47 market intermediaries authorized by CySEC, generally offering a broad range of services. - Thirty-two of these intermediaries offer their services almost exclusively to nonresidents and were previously categorized as international financial intermediaries supervised by the Central Bank. - The remaining 15 intermediaries generally offer their services locally; many provide stockbroking services. - The Central Bank supervises international financial services companies whose activities have been restricted to the offering of investment advice; there are about 40 of these and following the transposition of the EU Directive they will fall to be supervised by CySEC. - The legislative regime for the supervision of market intermediaries and its implementation appear effective. *Source: IMF report.* ### 61. The Stock Exchange is the only securities exchange in Cyprus. It has exclusive ### cr06376 - 61. The Stock Exchange is the only securities exchange in Cyprus. It has exclusive ### Stock Exchange exclusivity and legal context - The Stock Exchange is the only securities exchange in Cyprus and has exclusive rights to undertake stock market transactions in movable securities in Cyprus. - The exclusivity is attributed to political and historical reasons related to the nongovernment controlled areas issue and not intended to restrict new entrants. - Cyprus will be required to establish exchange authorization criteria when the recently adopted EU Markets in Financial Instruments Directive is transposed into Cyprus law. ### Institutional framework and remit (CySEC, Central Bank, Stock Exchange) - The Stock Exchange was established in 1996 under the Stock Exchange Law (“Law to provide for the development of the Securities Market in the Republic, the Establishment and operation of a Cyprus Stock Exchange, the Establishment of a Stock Exchange Council and Other Related Matters of 1993–2004”). - The Securities and Exchange Commission (CySEC) was established in 2001 under the CySEC Law (“Law Governing the Establishment, Structure, Responsibilities, Powers, Organisation of the Securities and Other Related Issues of 2001–2004”). CySEC replaced the earlier Securities and Exchange Commission established in 1996. - The CySEC Law and subsequent laws nominate CySEC as the authority responsible for supervision of the Stock Exchange, collective investment schemes, investment intermediaries, and issuers of securities on the Stock Exchange. - The Central Bank of Cyprus retains responsibility for supervision of international financial services companies and International Collective Investment Schemes governed by the International Collective Investment Schemes Law of 1999, and for International Trustee Services Companies. - In May 2004, the Exchange Control Law was abolished when Cyprus joined the EU, removing the resident/nonresident distinction and leading to changes in the regulation of investment intermediaries: all such intermediaries (other than those offering investment advice only) became subject to CySEC supervision. International advisory firms continue to be supervised by the Central Bank pending new CySEC legislation. - Collective investment schemes: International collective schemes (not marketed to the public) will continue to be supervised by the Central Bank; UCITS (schemes open to the public) will be supervised by CySEC. - The regulatory regime applied by CySEC is based on EU Directives and requires transposition of several EU Directives (Markets in Financial Instruments Directive, Market Abuse Directive, Prospectus Directive, Transparency Directive). The EU Market Abuse and Prospectus Directives were transposed into domestic law in September 2005 (following the assessment mission). ### Overlap of responsibilities and legislative actions - There is an overlap of responsibilities between CySEC and the Stock Exchange in supervision of issuers of securities. - A High Court decision recently questioned CySEC’s competency in this area, overturning a previous decision in CySEC’s favor; that decision has been appealed. - A bill amending the Stock Exchange Law to clarify roles was submitted by the Attorney General's Office to Parliament. The authorities indicated that the planned amendment to the Stock Exchange Law was enacted in September 2005 and is expected to have brought necessary clarity to CySEC’s role. ### Assessments and implementation status (IOSCO Principles 1–12 highlights) - Principle 1 (Regulator responsibilities): Assessment — Partly implemented. - Comment: Uncertainty surrounding the respective responsibilities of CySEC and the Stock Exchange should be addressed urgently, particularly given the 1999/2000 collapse in stock market prices and dented public confidence. - Comment: In the longer term, merit in exploring greater cooperation and potential consolidation of regulation between Central Bank and CySEC for CIS oversight. - Principle 2 (Independence and accountability): Assessment — Broadly implemented. - CySEC operates without evident external political or commercial interference in day-to-day decisions. - Board appointment by the Council of Ministers; objective criteria for appointment, terms, and removal defined in law. - CySEC is accountable to the minister of finance and to parliament; required to submit annual report and financial statements. Board and staff must appear before legislature as required. - Funding sources include fees and annual subscriptions of investment firms and mutual funds, prospectus review fees, a fixed amount of £C 75,000 per annum payable by the Stock Exchange, and government contributions (fixed £C1.0 million plus a variable amount). - In 2005 a variable amount of £C500,000 was approved; in 2006 the approved variable amount was increased to £C 1.020 million. - The CySEC Law requires CySEC to provide the minister of finance with any information the minister may deem necessary for the benefit of the public interest; the provision has never been invoked and is understood will be revoked in forthcoming legislation. - Recommendation: The section requiring CySEC to provide the minister with any information he may deem necessary should be revoked to avoid possible abuse. - Principle 3 (Powers, resources, capacity): Assessment — Fully implemented. - Legislative framework adequate, but CySEC cannot directly impose restrictions or withdraw authorization from the Stock Exchange because one public administrative body cannot supervise another; actions would require ministerial and Council of Ministers intervention in extraordinary public-interest circumstances. - In practice CySEC and the exchange have a satisfactory relation, but inability of CySEC to take direct action against the exchange is unsustainable and must be addressed by transposition of the Markets in Financial Instruments Directive specifying that the national regulator must regulate all market operators. - Staffing: currently adequate or near adequate, but expansion will be needed to implement EU Directives and regulate International Financial Advisors. - Funding: government pays fixed annual sum of £C 1 million and variable amount; in 2005 a variable amount of £C 200,000 was paid. - Comment: The inability of CySEC to regulate effectively the Stock Exchange merits a “Not implemented” assessment (reflected in Principle 26). Extra resources will be needed in the very near term. - Principle 4 (Regulatory processes): Assessment — Fully implemented. - Rules, Cyprus Constitution, Public Administration Act, and court system support clear and consistent regulatory approach; consultative process in place; CySEC discloses policies in announcements, circulars, and on its internet page. All material decisions subject to judicial review (Article 146 of the Constitution). - Principle 5 (Professional standards/confidentiality): Assessment — Fully implemented. - Section 13 of the CySEC Law prohibits board members (and related parties) from participating for personal benefit in matters under CySEC control; breach leads to revocation of appointment. - Terms of Employment Regulation require disclosure of employee interests. - Section 31 binds employees to confidentiality and professional secrecy; disclosure permitted only as necessary for administrative recourse or evidence of criminal/disciplinary offense. - Employment regulations require staff to act fairly, objectively, impartially. - Principles 6–7 (Self-regulation and SRO oversight): Assessments — Fully implemented. - The Stock Exchange has a limited self-regulatory role and oversees systems for clearing and settlement; CySEC monitors market abuse, large exposures, default risk, and unfair trading practices. - Comment: CySEC’s inability to fully regulate the Stock Exchange is reflected in Principle 26 assessment. - Principle 8 (Inspection, investigation, surveillance powers): Assessment — Broadly implemented. - CySEC powers derive from domestic legislation transposing EU legislation (Investment Services Directive, soon to be replaced by Markets in Financial Instruments Directive). - CySEC can inspect operations, books, and records without prior notice and obtain all necessary data and information. It monitors trading on the exchange daily and in real time. - CySEC can determine or access the identity of all customers of regulated entities. - Comment: Despite supervisory difficulty over the Stock Exchange, a “Broadly Implemented” rating is appropriate for inspection, investigation, and surveillance powers. - Principle 9 (Enforcement powers): Assessment — Fully implemented. - Under the CySEC Law and the Investment Firms (IF) Act 2002–2004, CySEC can inspect, obtain information, apply administrative fines, and revoke authorizations. - Section 23(6) of the Investor Compensation Fund regulations allows CySEC to prohibit an investment firm from disposing of specific assets to secure clients’ interests (i.e., freeze assets). - Under Section 29 CySEC can apply to Registrar of Companies, the Stock Exchange, and any public service for information necessary to investigations; these authorities are bound to provide information. CySEC has an MOU with banking and insurance regulators for information exchange. - Principle 10 (Effective use of powers and compliance program): Assessment — Fully implemented. - Section 26 authorizes inspections of investment firms, CIS, related parties, and companies listed on the Stock Exchange. CySEC has power to inspect the Stock Exchange but cannot do so for legal/constitutional reasons (see Principle 3). - Inspections are risk-rated and active; CySEC monitors trading via an on-site surveillance system daily and in real time to detect market abuse and insider dealing. - Post-inspection, findings are submitted to the CySEC Board and firms are notified of nonconformity. - Central Bank supervises residual international securities firms on an exceptional inspection basis and relies on reporting, audited accounts, annual meetings, and cooperation with the Cyprus International Financial Services Association (CIFSA). - Principle 11 (Authority to share public and non-public information): Assessment — Not implemented. - Section 29 enables CySEC to apply to domestic authorities for information; Section 30 permits cooperation with foreign regulators and exchange of information, but CySEC cannot collect information and carry out investigations on behalf of foreign authorities unless CySEC has an independent interest. - Comment: The inability to share information without restriction and to carry out investigations on behalf of foreign authorities is of serious concern. The matter is proposed to be rectified in forthcoming legislation. - Principle 12 (Information sharing mechanisms): Assessment — (Descriptive) CySEC has power to establish mechanisms for information sharing with domestic and foreign regulators and has entered an MOU with banking and insurance regulators; Section 26 allows collaboration with other public authorities in Cyprus. ### Key numeric and legal facts (preserved) - Stock Exchange established: 1996. - CySEC established: 2001. - International Collective Investment Schemes Law: 1999. - Stock Exchange Law referenced period: 1993–2004. - CySEC Law referenced period: 2001–2004. - Exchange Control Law abolished: May 2004. - EU Market Abuse and Prospectus Directives transposed: September 2005. - CySEC fixed annual payment by Stock Exchange: £C 75,000 per annum. - CySEC fixed government payment: £C1.0 million (also referenced as £C 1 million). - Variable government payments: £C500,000 approved in 2005; increased to £C 1.020 million in 2006; elsewhere cited variable payment of £C 200,000 paid in 2005 (context: meeting increased responsibilities / funding). - Investor Compensation Fund regulation: Section 23(6) permits asset disposal prohibitions. *The IMF assessment contained in the cited publication.* ### Section 26 also provides that one of CySEC's responsibilities is to collaborate with competent ### Section 26: CySEC cooperation and Principles 13–21 (Issuers, Collective Investment Schemes, Market Intermediaries) ### International cooperation and assistance to foreign regulators (Principles 12–13) - CySEC’s responsibilities include collaboration with competent authorities abroad; CySEC has entered into MOUs with a number of foreign regulators. - CySEC is a signatory to: - the MOU sponsored by the EU Commission of European Securities Regulators (CESR); - the IOSCO multilateral MOU (Appendix B). - It is intended that following the introduction of the legislation referred to in Principle 11, CySEC will be in a position to sign Appendix A. - Assessment: Fully implemented (for Principle 12). - CySEC can generally provide effective and timely assistance to foreign regulators, subject to shortcomings under Principle 11 (absence of the ability to collect information and carry out investigations on behalf of foreign authorities unless CySEC has an independent interest). - Assistance covers records for securities and derivatives transactions, insider dealing, market manipulation, registration, issuance of securities, market intermediaries, etc. - Assessment (Principle 13): Broadly implemented. - Comment: It is important that CySEC confirm its ability to obtain the identity of beneficial owners of shares registered in the names of lawyers by passage of the planned amendment to legislation. ### Identification and disclosure of beneficial owners - International Trusts: - Section 11 of the International Trusts Law restricts disclosure: “Subject to the terms of the Memorandum of Association of an international trust and provided the court does not issue an order for the provision of information in accordance with Section (2), the commissioner or any other person, including government officials and officers of the Central Bank of Cyprus, may not disclose to any person not authorized by law to know information or documents.” - CySEC relies on Section 33 of the CySEC Law: “The Commission shall have the power to request and collect information necessary for the exercise of its statutory responsibilities ... and to demand in writing the provision of information within a specified time limit from issuers who have their share listed on the Stock Exchange, Members, underwriters investment consultants, investment firms, investments companies, as well as from all other natural or legal persons or organisations that the commission considers to be in a position to provide such information.” - By virtue of Section 33, CySEC considers itself a person “authorized by law to know information or documents,” enabling identification of beneficial owners of international trusts. - CySEC has in the past obtained beneficial ownership information from international trusts and would, if requested, pass such information to the requesting authority. - Nominee shareholdings and legal professional privilege: - CySEC has encountered difficulties identifying beneficial owners when shares are registered in the names of lawyers acting as nominees. - Authorities agree that the legal professional privilege invoked by lawyers to refuse to provide beneficial owner names is based on a misconception about the breadth of privilege and are prepared to challenge this in court. - CySEC has proposed amendments to the CySEC law to give CySEC clear authority to secure information on the identity of beneficial owners of shares. The enactment of this bill is expected shortly. ### Principles for Issuers (Principles 14–16) - Principle 14 — Disclosure of financial results and material information: - Public offerings governed by the Public Offer Law, reflecting the EU Directive on the Drawing-up, Scrutiny and Distribution of the Prospectus to be Published when Transferable Securities are offered to the Public, 1989. - Public offerings must be accompanied by a prospectus previously approved by CySEC; the prospectus content must be verified by the issuer, each board member, advisors/experts for their parts, and the sponsoring broker. - It is a criminal offense to knowingly make a false, misleading, or fraudulent statement in material aspects of the prospectus or to conceal material information. - Issuers must publish annual reports and audited financial statements within four months of their financial year end; must prepare and submit half yearly accounts, preliminary statements of profits and losses, and disclosures of material information to the Stock Exchange for announcement. - CySEC has a dedicated staff of five people to undertake obligations in this area. - CySEC and the Stock Exchange can impose administrative fines for issuer breaches. - Assessment: Fully implemented. - Principle 15 — Fair and equitable treatment of shareholders: - Rights and equitable treatment set down in Cyprus company law (broadly based on U.K. company law) and Stock Exchange Law and regulations: participation at general meetings, voting for directors, equal voting rights for same-class shares, provisions for minority shareholders. - Corporate change approvals: simple majority (50 percent plus) for certain changes; 75 percent majority for more fundamental changes. - Takeover bids: all shareholders of the same class must be treated equally and must be given a reasonable time—i.e., between 30 and 45 days—to accept or reject the proposal. - Corporate Governance Code: introduced by the Stock Exchange in September 2002 (voluntary); became mandatory for companies listed on its main market in August 2004. - Assessment: Fully implemented. - Principle 16 — Accounting and auditing standards: - Financial statements prepared in accordance with International Financial Reporting Standards (IFRSs). - Public companies required to prepare comprehensive annual audited accounts. - The Institute of Certified Public Accountants of Cyprus (ICPAC) is the regulatory body for accountants, is a member of the International Federation of Accountants (IFAC), and has adopted the IFAC Code of Ethics for Professional Accountants (mandatory for ICPAC members). - ICPAC has introduced a system of peer reviews to enhance audit quality. - The "Big Four" accountancy firms are well represented and audit almost all major financial institutions. - Assessment: Fully implemented. ### Principles for Collective Investment Schemes (Principles 17–20) - Institutional framework: - Two distinct CIS regimes: - CIS supervised by CySEC, based on EU UCITS Directives (CIS). - International Collective Investment Schemes (ICIS) supervised by the Central Bank, targeted at foreign investors and denominated in currencies other than Cyprus pounds. - UCITS legislative history: first UCITS Law enacted in March 2003; replaced by UCITS Law effective July 2004 reflecting the two EU UCITS Directives of 2002. - Market and licensing: - CIS market in Cyprus is in its infancy; to date no CIS have been licensed by CySEC because participants cite an unfavorable tax regime for UCITS. - About 50 UCITS licensed in other EU member states market units in Cyprus under the European passport and are registered with CySEC. - CySEC has three staff members in the CIS area involved in transposition of the EU Directive into Cypriot law. - Assessment (Principle 17): Fully implemented. - Comment: If the funds industry develops in Cyprus, additional staff resources will be required. - Legal form, documentation, and custodial arrangements (Principle 18): - Section 10 of the UCITS Law: CIS may take one of two legal forms—contractual form of a common fund or a variable capital investment company. - All CIS must prepare two prospectuses—full and simplified—with sufficient information for informed investor decisions. - All material changes to scheme documentation must be approved in advance by CySEC. - All CIS must have a depository independent of the management company for safeguarding assets. - Section 114: an approved external auditor must audit the half yearly and annual reports of CIS. - Assessment: Fully implemented. - Disclosure and valuation (Principles 19–20): - Full and simplified prospectuses must disclose valuation rules and the method of calculation of net asset values. - Disclosure must enable investors to make informed decisions, including investment policies and objectives, rights of investors, valuation methods, purchase/redemption/pricing procedures, audited financial depository, etc. - CySEC can withhold licensing approval where regulatory requirements are not satisfied. - Section 118 of the UCITS Law provides guidance on asset valuation; CySEC can issue directives to elaborate valuation methods. - CIS accounts must be prepared in accordance with International Accounting Standards; these should be reflected in NAV calculations. - UCITS Law sets specific requirements for valuation of publicly quoted companies, but no specific rules yet for valuing other assets; this is being addressed in a directive to be issued by CySEC. - Section 55: depository must ensure valuation complies with law and scheme rules. - Section 115: pricing upon redemption and subscription on a daily basis in accordance with valuation rules; price must be made public one day after calculation. - Operator must obtain prior CySEC approval for suspension of issue or redemption of units. - Sections 134 and 145: CySEC may revoke a CIS license or impose administrative fines for noncompliance. - Assessment (Principle 19): Fully implemented. - Assessment (Principle 20): Partly implemented. - Comment: Specific rules for valuing assets other than shares in publicly quoted companies should be introduced before any schemes are authorized. - Central Bank–supervised ICIS (types and statistics): - ICIS types: - Marketed to the general public (mirror 1985 UCITS Directive investment restrictions; cannot use European passport) — no such funds authorized to date; Central Bank has decided not to authorize these funds in the future in light of Cyprus UCITS introduction. - Marketed to experienced investors — minimum initial investor subscription of $50,000. Only two licensed to date; only one has commenced operations; it has a net asset value of $12.5 million. - Private international schemes — restrict investors to 100 and prohibited from marketing to the public. Thirteen such schemes exist with a total net asset value of $380 million. - The second and third types are not intended for the public; second type requires $50,000 minimum; third type limited to 100 investors and quarterly returns indicate none have more than 50 unitholders. - The CBC (Central Bank of Cyprus) monitors these schemes via regulatory returns, audited annual accounts, annual meetings, and has power of onsite inspection; can revoke recognition of a scheme and require replacement of operator or trustee. - Assessment: Fully implemented. ### Principles for Market Intermediaries (Principle 21) - Legislative framework: - Investment Firm’s Law of 2002–2004 ("IF Law") governs market intermediaries. - Prior to IF Law, two categories: (i) members of the Stock Exchange regulated under Stock Exchange legislation (stock brokers); and (ii) International Financial Intermediaries regulated by the Central Bank (serving nonresidents). - Following IF Law, all intermediaries except investment advisors are supervised in the same manner; international intermediaries regulated by the Central Bank are now regulated by CySEC except international financial advisors. - Market structure and authorizations: - In practice, many former international intermediaries continue to offer services to nonresidents, partly because they elected to remain taxed at the lower rate of 4.25 percent until end-2005. - As of the date of assessment, CySEC had authorized 47 intermediaries: - 15 were "local" intermediaries (almost all members of the Stock Exchange). - 32 were former international intermediaries (many operating in Russia for Russian citizens). - The IF Law reflects the EU Investment Services Directive and includes a comprehensive authorization process covering probity and competence of principals, initial capital, internal controls, and risk management systems. - Assessment (Principle 21): [Assessment label provided in source: not explicitly restated for Principle 21, but description indicates comprehensive framework in place.] *Source: CySEC assessment (cr06376).* ### Section 10 of the law gives CySEC the power to refuse authorization if authorization requirements ### Section 10 — CySEC powers, supervision of market intermediaries, and secondary market oversight ### Authorization and on‑going supervision of intermediaries - Section 10 of the law gives CySEC the power to refuse authorization if authorization requirements have not been met. - Intermediaries must notify CySEC of any projected changes in circumstances affecting the conditions of the license. - CySEC publishes a list of authorized intermediaries indicating the services for which they were authorized. - CySEC has the power to inspect intermediaries and carried out 13 on‑site inspections last year. - Intermediaries who solely provide investment advice (i.e., do not deal on behalf of clients, do not hold client assets, do not manage investment portfolios) are not yet subject to CySEC regulation; transposition of the Markets in Financial Instruments Directive (MiFID) into national law will classify investment advice as an investment service and change this. - A draft law prepared prior to MiFID transposition would transfer supervision of International Financial Advisory Firms (currently regulated by the Central Bank) to CySEC. - The Investment Firms unit in CySEC employs a staff of eight involved in authorization and ongoing supervision; the assessment concluded authorization and supervisory processes and procedures were satisfactory and firms expressed respect for the competence of the unit. - Assessment status for authorization and supervision: Fully implemented. ### Capital, prudential reporting, and risk coverage (Principle 22) - Initial own funds of intermediaries varies between Cyprus £100,000 ($220,000 approx.) and £C500,000 ($1.1 million approx.) depending on services provided. - On an ongoing basis, capital must never fall below 25 percent of the previous year's expenses or the initial capital, whichever is the higher. - The minimum capital ratio is set at 10 percent. - Capital adequacy requirements cover position risk, settlement and counter‑party risks, foreign‑exchange risk, and large exposures in relation to trading book business. - Reporting requirements to CySEC: monthly, quarterly, or six‑monthly depending on services; audited external annual accounts required. - Assessment status: Fully implemented. ### Internal organization, conduct, and customer protection (Principle 23) - Intermediaries required to have: - Appropriate management and organizational structure. - Board of directors with executive and nonexecutive independent directors. - At least two experienced and competent persons to manage the firm. - Viable organizational structure. - Legal requirements include adequate internal control systems and appointment of an internal auditor. - CySEC’s code of business conduct covers customer protection, knowing customers’ investment needs, avoiding/managing conflicts of interest, minimum contents of customer agreements, and periodic customer information. - Intermediaries must maintain a unit for processing and resolving customer complaints; resolution must be without undue delay, considering gravity and financial implications. - Directive requires mechanisms to ensure safe segregation of customer assets from firm assets and from assets of other customers. - Firms must have a compliance officer for money laundering; larger firms generally have additional compliance officers. - A draft law exists to establish a financial services ombudsman covering banking, insurance, and securities. - Assessment status: Fully implemented. ### Failure procedures, early warning, and crisis cooperation (Principle 24) - CySEC uses early warning mechanisms: regular capital adequacy returns, management accounts every three months, annual audited accounts, and on‑site inspections. - Section 16 of the IF Law permits CySEC to restrict activities of an intermediary by suspending or withdrawing fully or partly its authorization and to appoint a receiver. - Sections 45 and 46 of the IF Law allow CySEC to communicate and cooperate with domestic and foreign regulatory authorities in dealing with financial disruption. - Section 23(6) of the Investor Compensation Regulations allows CySEC to prohibit intermediaries from disposing of specific assets to secure client interests or take other appropriate measures. - Assessment status: Fully implemented. ### Secondary market structure and exchange authorization (Principle 25) - The Stock Exchange is the only securities exchange in Cyprus and, under the Stock Exchange Law, has exclusive rights to undertake stock market transactions in movable securities in Cyprus for political and historical reasons. - No authorization regime for new exchanges exists currently; a change in the law is required to establish a new exchange. Transposition of MiFID will require regulator‑set criteria for authorization of exchanges. - The Stock Exchange details: - Established in 1996. - 100 percent owned by the State. - Deals mainly in equities and bonds; does not deal in derivatives; stock lending and short selling are forbidden. - Market capitalization in the region of £C4.4 billion ($10 billion approx.). - 17 main listings, including 4 banks. - Turnover in the region of £C1.2 million daily; fell to £C250,000 in late March/early April 2005 partly due to the collapse of a broking firm. - All listed securities, except government bonds, are dematerialized. - Talks with the Athens Stock Exchange to establish a common trading platform led to an agreement in October 2005; the platform will commence trading in 2006. - The exchange has eight members. - Historical event: In 1999/2000 the index fell from about 800 points to about 80 points; exchange compensation fund was not drawn down. - Assessment status: Fully implemented (with caveats regarding authorization procedures). ### Ongoing supervision, inspections, and constitutional limitations (Principle 26) - CySEC is charged with supervision of the Stock Exchange but faces a constitutional difficulty: as a public‑administrative body CySEC cannot supervise another public‑administrative body (the exchange) and cannot directly impose restrictions, conditions, or withdraw authorization. - To act against the exchange CySEC must notify the minister of finance, who may recommend suspension to the Council of Ministers; such orders are for extraordinary public interest circumstances. - CySEC has never carried out an inspection of the Stock Exchange because of these difficulties; the assessment strongly recommends CySEC carry out an inspection once the constitutional issue is resolved. - CySEC monitors trading on the exchange daily and in real time, processes and analyzes data from the real‑time database, and produces exception reports. - Amendments to exchange rules and trading system require prior approval of CySEC. - Assessment status: Not implemented. - Recommendation: Legislation should be introduced urgently to allow CySEC to supervise effectively the Stock Exchange, addressing the equal constitutional status issue. ### Transparency, market abuse detection, and enforcement (Principles 27–28) - Principle 27 — Transparency: - Market users have instant access to all pre‑trade and post‑trade information; information on market participants' terminals is relayed promptly and synchronously to all, including investors through data vendors. - The exchange does not permit derogation from the objective of real‑time transparency. - Assessment status: Fully implemented. - Principle 28 — Market abuse: - Under Section 67 of the Cyprus Securities and Stock Exchange Laws, market/price manipulation punishable by imprisonment of up to seven years or a fine of up to £C20,000 ($44,000 approx.) or both. (Amended law of September 2005 repeals section 67; market manipulation now punishable under market abuse law No. 116(I)/2005 that tightens criminal sanctions and allows for administrative fines.) - Providing misleading information and insider trading are offenses punishable by imprisonment and a fine. - CySEC detects and deters market abuse via direct connection to the exchange's trading system and connection to the Central Depository and Central Registry (instant access to investor identities). - In cases of unusual trading CySEC contacts the brokerage firm's internal auditor and may enter and investigate, impose administrative sanctions, suspend, or withdraw authorization. - CySEC officers can instigate formal investigations or submit cases to the Attorney General depending on evidence and whether a criminal offense is prima facie established. - Two impediments to full effectiveness: overlap of responsibilities between CySEC and the Central Bank in supervision of issuers (Principle 1) and inability to supervise the Stock Exchange (Principle 26). - Assessment status: Fully implemented. ### Large exposures, default procedures, and clearing/settlement (Principles 29–30) - Principle 29 — Large exposures and default risk: - Large exposures monitored via capital adequacy ratios. - Each Stock Exchange member places in a special clearing deposit account at least £C50,000 ($110,000 approx.) and a percentage of the value of transactions each year to cover counterparty risk. - Each investor's holding is held in a segregated account. - If a member fails to pay, the exchange immediately advises CySEC for investigation. - Default procedures are published through exchange laws, regulations, rules, and circulars. - Assessment status: Fully implemented. - Principle 30 — Clearing and settlement: - Exchange rules and contractual provisions published in the Official Cyprus Gazette. - Customer protection procedures include delivery versus payment and segregation of customers' assets in individual names in the Central Depository Central Registry. - Trades settled on a rolling T+3 basis; no failed trades in the last three years. - In case of failure the exchange may use member deposit balances, sell securities and credit the member, and impose a fine not exceeding £C500 or up to 10 percent of the total amount of the transaction for every day of noncompliance. - Securities lending is not permitted. - All securities except government bonds are dematerialized; no lag between settlement and registration. - Settlement bank: Bank of Cyprus; settlement takes place in Cyprus pounds only. - Department heads review operational risk processes continuously; internal auditor also reviews them. - Assessment status: Fully implemented. ### Summary implementation and recommended actions - Table summary counts (implementation grades from the assessment): - Implemented: 23 (Principles 3, 4, 5, 6, 7, 9, 10, 12, 14, 15, 16, 17, 18, 19, 21, 22, 23, 24, 25, 27, 28, 29, 30) - Broadly Implemented: 2 (Principles 2, 8, 13) [note: listed as 2 but three principle numbers provided in the source] - Partly Implemented: 2 (Principles 1, 20) - Not Implemented: 3 (Principles 11, 26) - Selected recommended actions from the assessment: - Principle 1: Address uncertainty surrounding responsibilities of CySEC and the Stock Exchange urgently; appropriate amendment to the Stock Exchange Law is noted. - Principle 2: Revoke provision in CySEC Law requiring CySEC to provide the Minister of Finance with any information he may deem necessary, to preserve operational independence. - Principle 3: Increase staff resources at CySEC to meet expanding workload (implementation of EU directives). - Principle 11: Remove obstacle preventing CySEC from sharing information and carrying out investigations on behalf of foreign regulators where CySEC has no independent interest. - Principle 13: Ensure CySEC’s ability to obtain information on beneficial owners of shares registered in the names of lawyers acting as nominees. - Principle 20: For UCITS, introduce specific rules for valuing assets other than shares in publicly quoted companies before authorization is given. - Principle 26: Enact legislation urgently to allow CySEC to effectively supervise the Stock Exchange by revising the equal constitutional status issue. ### Authorities’ response (selected points) - On September 9 2005, three laws came into force to clarify responsibilities of CySEC and the Stock Exchange and to transpose the EU Prospectus and Market Abuse Directives into domestic law. - CySEC is finalizing a bill to revoke the CySEC Law provision requiring provision of information to the Minister of Finance; enactment expected in 2006. - CySEC plans to significantly increase skilled staff; the budget approved for 2006 provides for a 29 percent increase in the budget allocated for staff costs. - CySEC is finalizing a bill to remove the obstacle to sharing information and carrying out investigations for foreign regulators; enactment expected in 2006. - CySEC has proposed amendments to secure authority to obtain information on beneficial owners held by nominee lawyers; enactment expected in 2006. - CySEC undertakes to have UCITS valuation rules in place before authorizing any schemes. - CySEC will take appropriate steps so the issue of supervising the Cyprus Stock Exchange is addressed with transposition of MiFID into national law. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr06376.pdf_