## Executive Summary — IMF Staff Report _cr06347 ## Source details **Canonical URL:** [Executive Summary — IMF Staff Report _cr06347](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06347.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06347.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06347.pdf.json) --- ### Major developments and context - Financial system reform driven by EU liberalization and regulation; restrictions on domestic operations and fiscal differences between domestic and internationally-oriented institutions were eliminated at the end of 2005. - Central bank independence and technical supervisory rules improved; EU accession obligations have strained supervisory resources and skill levels. - MONEYVAL mutual evaluation (2005) found AML/CFT legal provisions and supervisory arrangements “quite satisfactory” but identified areas for improvement. - Key macro/structural background: - Population (government-controlled area): 796,000 (2003). - Per capita income: $16,602 (2003). - Financial intermediation contributed 5.7 percent to real GDP (2003). - “Real estate, rentals and business activities”: 14.1 percent of total output (2003). - Real growth expected to average 3.5 percent in 2004–05. - Cypriot pound pegged to the Euro with formal fluctuation margin of ±15 percent and de facto central parity of €1.7086: £C 1; adoption of the Euro is targeted. - Corporate tax rate: 10 percent (single rate introduced from January 1, 2003). Previously available preferential tax rate for some entities was 4.25 percent until end-2005. - Over 30 double taxation treaties attract international companies. ### Strengths and supervisory capacity — sectoral summaries and recommendations - Banking supervision - Competent supervision enhanced to meet EU requirements; CBC strengthening its Banking Supervision and Regulation Division. - Recommendation: Add qualified/specialized supervision staff for: - supervision of banks’ internal risk systems and models; - financial stability analysis; - meeting commitments towards EU institutions; - expanded cross-border supervision arising from bank expansion. - CBC response: “The CBC aims at taking all necessary steps to strengthen its Banking Supervision and Regulation Division in all aspects…” - Cooperative credit institutions (CCIs) - EU credit directives transposed; secondary legislation and guidelines in process. - Recommendation: “Substantially increase resources allocated to supervision, on the basis of the existing plan, inclusive of training.” - Parliamentary response: Enhancement of CSSDA approved (Official Gazette July 2005) providing for 17 additional staff and upgrading of salary levels; 14 officers will reinforce supervisory staff, tripling present supervisory resources; further training planned. - Recommendation: Develop an overarching change committee to avoid duplication and prudential gaps. - Response: Changes managed through cooperation between CSSDA, Cooperative Central Bank, Pancyprian Cooperative Confederation, and the Audit Office of Cooperative Societies. - Insurance sector - Insurance Services Law transposed EU directives, but little secondary legislation/guidance available. - Recommendations: - Draft prudential regulations and guidelines to guide compliance. - Review existing and required skills in insurance supervision to decide on new staff or areas to outsource. - Responses: Efforts to outsource legal services for EU harmonization; recruitment of appropriate qualified staff to be expedited. - Securities supervision (CySEC) - CySEC is well-staffed with requisite skills. - Constraints identified: - Legal framework limits investigative assistance to foreign regulators where CySEC lacks an independent interest. - Difficulty accessing beneficial owner information for shares registered in the names of lawyers acting as nominees. - Recommendation: Ensure forthcoming legislation removes these constraints. - CySEC response: Finalizing bill amending the CySEC Law; enactment expected in 2006. - Clarification of CySEC’s role over the Stock Exchange: amendment to the Stock Exchange Act enacted September 2005. ### Sector structure, recent trends, and vulnerabilities — key points and statistics - Banking sector components - Commercial banks, cooperative credit institutions, and International Banking Units (IBUs). - Domestic credit institutions: 14 commercial banks and 358 cooperative credit institutions. - Domestic commercial banking dominated by three banks holding about 70 percent of system assets excluding cooperatives, and about half including cooperatives. - Branch density: 65 bank branches per 100,000 residents (2003) versus EU-15 average 49. - International Banking Units (IBUs) - IBUs (licensed/operational): 29 licensed (text also notes 26 operating in other sections); ownership origins diverse (Austria, Ireland, France, UK; Lebanon home of eight IBUs; Jordan four; Russia three). - Domestic profit tax rate on these banks was 4.5 percent until end-2005 when all were made subject to a 10 percent tax rate. - Insurance sector — market composition (selected 2004 figures) - Total number of insurance companies writing business: 43. - Gross premiums (C£ millions): Life 200.4; Non-life 292.2. - Net premiums (C£ millions): Life 179.4; Non-life 216.5. - Density of insurance (total premiums per capita): 668.4. - Bank-controlled companies — net premiums (C£ millions): 432.1; market share (percent): 39.9. - Securities/Stock Exchange (2005 indicators) - CSE General index at end of year: 110.0 (2005). - FTSE CySE20 end of year: 576.9 (2005). - Number of listed issuers: 144 (2005 data in table). - Total market capitalization (C£ millions): 6,242 (2005). - Turnover: about $500,000 daily at end-April 2005; averaged $1.8 million in the first 75 trading days of the year. - Market concentration: about 50 percent of market capitalization represented by the three largest banks (67 percent by 10 companies). ### Financial system counts and aggregates (selected table highlights, years shown where indicated) - Commercial banks (number): 12, 12, 14, 14, 14, 14. - Cooperative credit institutions (number): 360, 363, 363, 361, 358, 348. - International Banking Units (number): 27, 24, 28, 28, 29, 28. - Commercial banks — Total assets (C£ millions): 12,776; 14,936; 15,565; 16,621; 17,818; 22,008. - Cooperative credit institutions — Total assets (C£ millions): 3,158.5; 3,437.0; 3,885.5; 4,402.1; 4,685.9; 5,200.9. - IBUs — Total assets (C£ millions): 6,515.0; 6,603.2; 4,449.4; 4,203.8; 5,325.7; 8,273.9. - Stock market capitalization (C£ millions): 8,296; 5,578; 4,374; 4,442; 4,506; 6,242. - Commercial banks — Return on Assets (note 1/): 1.5; 0.6; -0.1; -0.1; 0.3; 0.6. - IBUs (US$ million) — Total assets: 10,545; 10,150; 8,139; 9,036; 12,531; 17,081. - Memorandum: Cyprus pounds per US dollar (end period): 0.62; 0.65; 0.55; 0.46; 0.43; 0.48. ### Key regulatory, supervisory and market-integrity arrangements - Four principal supervisors: - Central Bank of Cyprus (CBC): supervises domestic banks and IBUs; retains oversight of international financial advisors and non-retail collective investment schemes. - Cooperative Societies Supervision and Development Authority (CSSDA): supervises cooperative credit institutions. - Superintendent for Insurance Control (SI) supported by Insurance Company Control Service (ICCS): supervises insurance. - Cyprus Securities and Exchange Commission (CySEC): regulates Exchange, collective investment schemes, and market intermediaries. - Deposit and investor protection: - Deposit Protection Scheme for domestic banks introduced September 2000; brought into conformity with EU regulations on May 1, 2004 when IBUs joined (except those incorporated in other EU member states). - Investment compensation scheme for bank clients commenced May 2004. - Deposit protection scheme for CCIs in operation since 2000; reportedly conforms to EU Directive 94/19/EC. - Cross-border cooperation: - Domestic MOU (2002; joined by CSSDA in November 2003) allows mutual notification of cross-border activity and supervisory information exchange; excuses CBC and CSSDA from sharing information on individual deposit accounts. - CBC has MOUs with numerous foreign central banks and securities authorities; CySEC is signatory to the CESR MOU and listed in Appendix B of the IOSCO Multilateral MOU and is working towards full signatory status. ### AML/CFT framework and findings (PSMLAL 1996–2004) - PSMLAL covers credit institutions, investment firms, life insurance companies (domestic and international), nonlife insurers operating outside Cyprus, lawyers (in respect of financing business), and accountants/auditors. - Supervisory authorities and professional bodies designated as responsible supervisors; each has issued guidance notes. - PSMLAL criminalizes money laundering with predicate offenses covering all crimes subject to a maximum sentence of 12 months or more. - Law provides for confiscation, freezing and restraint orders; requires customer identification, record keeping, internal control, staff training and suspicious transaction reporting. - Financial Intelligence Unit (FIU) is a multidisciplinary unit with 14 staff; as Chair of the Advisory Authority it leads strategic policy on AML/CFT. - MONEYVAL findings (mutual evaluation mission April 3–9, 2005): - Criminalization of money laundering meets relevant criteria. - Criminalization of terrorist financing should be expanded to include collection of funds. - Powers to trace, freeze, and confiscate proceeds and investigative powers well provided for. - Cyprus law does not provide for civil forfeiture, but confiscation is actively pursued in criminal cases. - Financing of terrorism as defined in the UN Convention is fully achieved and STR requirements on terrorist financing are in place. - Recommendation: Financing of terrorism crime should include the collection of funds in the knowledge they are to be used by terrorist(s). ### Basel Core Principles (BCP) assessment — summary and action points - Prudential regulations and supervisory process assessed as strong; all core principles were compliant or largely compliant. - Key supervisory concern: increased demands on CBC supervisory staff require additional trained and experienced staff. - Selected BCP recommendations and status: - BCP 1.2 Independence: CBC Law amended July 2002 to strengthen Governor tenure provisions; additional capacity and four vacancies to be staffed; supervisory capacity strengthened with employment of two more employees. - BCP 3 Licensing: CBC to conduct more comprehensive character/reputation investigations; applicants required to submit police clearance. - BCP 8 Loan classification: guidelines on nonperforming loans and suspension of interest tightened — nine months to six months on January 1, 2005; directive setting 90 days in arrears for nonperforming and suspension procedures effective January 1, 2006. - BCP 12 Market risk: Capital Adequacy Directive (CAD) sets capital requirements for market risk; CBC monitors reporting and imposes limits on foreign currency open positions. - BCP 15 Money laundering: CBC Guidance Notes require beneficiary identification for trusts/nominees; guidance sets list of “non-cooperative” jurisdictions (Guidance Note dated January 20, 2003); November 2004 Guidance Note addresses ordering customer identity for incoming transfers and requires employee training. - Off-site/on-site supervision (BCP 16): resources need to be increased to meet planned frequency of on-site examinations; risk-based on-site programs established (international banks January 2005; domestic banks January 2006). ### Cooperative Credit Institutions — key supervisory challenges and planned actions - CCIs must comply with EU banking directives by end-2007; transitional period until December 31, 2007 allows operation without full compliance while CSSDA develops capacity. - CSSDA staffing and resourcing: - Parliament approved enhancement (Official Gazette July 2005): 17 additional staff and salary upgrades; 14 officers to reinforce supervisory staff (tripling present supervisory resources). - Recommended supervisory actions (selected CPs): - CP 6 Capital Adequacy: mandatory semi-annual reporting on each CCI’s compliance. - CP 8 Loan Evaluation and CP 14 Internal Controls: strengthen supervisory capacity, automated monitoring, early-warning systems, encourage mergers. - CP 15 Money Laundering: guidance notes finalized and issued on 16/05/2005. - CP 18 Off-site Supervision: accelerate direct connection to central data server; CSSDA has accelerated connection and uses centralized reporting. ### Insurance sector — concentration, solvency and supervisory reform needs - Market concentration: - Leading three life insurance companies have 80 percent of the whole market and are owned by leading banks. - General lines market: 30 companies under supervision in 2004 (28 writing business); five companies have GWPs > £C 10 million; ten companies have market shares <1 percent each. - Reserves, capital and solvency: - Reserving levels unsatisfactory for a number of companies; reserving techniques recently introduced increase reserving requirements. - Existing capital positions of 14 companies are below EU Solvency I minimum requirements. - Five companies operating with suboptimal reserving levels at time of assessment; companies required to increase reserves. - Supervisory capacity and recommended reforms (IAIS-based CPs): - Strengthen ICCS resources and skills; consider granting ICCS full financial autonomy. - Define clear regulations, supervisory objectives, standardized procedures, enhanced reporting (quarterly solvency capital reporting), market analysis, on-site inspection program (including contracting third parties), corrective measures and enforcement regime. - Specific recommendations: verify timely collection of premiums paid in cash; do not recognize non-admissible assets for solvency; require investment policy submissions; require risk profiles for new products; maintain shortlist of potential liquidators. - Authorities’ planned actions (selected timing commitments): - Outsource legal services for EU harmonization; publish upgraded “Report in Insurance in Cyprus” annually; expedite recruitment of qualified staff; tender for ICCS software expected to complete by May 2006; ICCS to send letters to EU home supervisors by end of year; bill for Financial Ombudsman drafted. ### Securities regulation — CySEC findings, constraints and reforms - Assessment context: IOSCO methodology (October 2003) applied; CySEC established 2001; main legislation CySEC Law (2001–2004) and Stock Exchange Law (1993–2005). - Key constraints and recommended legislative actions: - CySEC cannot effectively supervise the Stock Exchange because it is a public administrative body; urgent legislation recommended to allow effective supervision. - Remove obstacle preventing CySEC from sharing information and investigating on behalf of foreign regulators where CySEC lacks an independent interest. - Remove legal uncertainty regarding access to beneficial owner information for shares registered in the names of lawyers acting as nominees. - Revoke provision requiring CySEC to provide the Minister of Finance with any information he deems necessary for public interest (to maintain operational independence). - CySEC to increase staff; 2006 budget provides for a 29% increase in staff costs. - Authorities’ responses and enacted measures: - On September 9, 2005: Law N. 115(I)/2005 amending Stock Exchange Law (clarifying responsibilities of CSE and CySEC); Law N. 114(I)/2005 transposing EU Prospectus Directive; Law N. 116(I)/2005 transposing EU Market Abuse Directives. - CySEC finalizing bill to amend CySEC Law to revoke Minister provision and remove information-sharing obstacle; enactment expected in 2006. - CySEC proposed amendments to secure authority to obtain beneficial owner information; enactment expected in 2006. - CySEC commits to having UCITS valuation rules before authorizing any UCITS. ### Summary assessment and main findings - Prudential regulations and powers for Cypriot banking sector are strong; supervisory process generally effective. - No predominant issues, but main concern is need for additional adequately trained and experienced CBC supervisory staff in response to EU accession and financial sector development. - Suggested supervisory actions include developing comprehensive guidelines on country and market risk and finalizing implementation of stricter criteria for suspension of interest recognition on problem loans. - ROSC Basel Core Principles assessment prepared by two independent experts during mission March 28–April 8, 2005; assessments based on laws, regulations, policies, and practices in place at the time. *Source: IMF staff report — Country Report _cr06347_ (excerpted content unit).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Major developments and context - The financial system in Cyprus is undergoing reform driven by liberalization and regulation from accession to the European Union (EU). Current restrictions on the scope of domestic operations and fiscal differences between domestic and internationally-oriented institutions were eliminated at the end of 2005. - Central bank independence and technical supervisory rules have been improved; EU accession obligations have strained supervisory resources and skill levels. - MONEYVAL mutual evaluation (2005) found legal provisions and supervisory arrangements for AML/CFT to be “quite satisfactory” but identified areas for improvement. - Key macro and structural background: - Population (government-controlled area): 796,000 (2003). - Per capita income: $16,602 (2003). - Financial intermediation contributed 5.7 percent to real GDP (2003). - The group “real estate, rentals and business activities” was 14.1 percent of total output (2003). - Real growth expected to average 3.5 percent in 2004–05. - The Cypriot pound is pegged to the Euro with a formal fluctuation margin of ±15 percent and a de facto central parity of €1.7086: £C 1; adoption of the Euro is targeted. - Corporate tax rate: 10 percent (single rate introduced from January 1, 2003). Previously available preferential tax rate for some entities was 4.25 percent until end-2005. - International companies remain attracted by stability, an extensive network of over 30 double taxation treaties, and skills on the island. ### Strengths and supervisory capacity - Banking supervision - Competent supervision for the banking sector has been enhanced by legislation and regulation to meet EU requirements. - The Central Bank of Cyprus (CBC) is strengthening the Banking Supervision and Regulation Division to meet increased demands from EU accession and bank sector development. - Recommendation: Additional qualified/specialized supervision staff is required, especially for: - (a) supervision of banks’ internal risk systems and models; - (b) financial stability analysis; - (c) meeting commitments towards EU institutions; - (d) expanded cross-border supervision arising from bank expansion. - CBC response: “The CBC aims at taking all necessary steps to strengthen its Banking Supervision and Regulation Division in all aspects in order to meet the increased demands emerging from Cyprus’s accession to the EU and the development and innovation process of the banking sector.” - Cooperative credit institutions - EU credit directives have been transposed into cooperative credit laws; secondary legislation and guidelines remain in process. - Recommendation: “Substantially increase resources allocated to supervision, on the basis of the existing plan, inclusive of training.” - Parliamentary response: Enhancement of CSSDA approved (Official Gazette July 2005) providing for 17 additional staff and upgrading of salary levels; 14 officers from the additional staff will reinforce supervisory staff, tripling present supervisory resources; further training to be undertaken. - Recommendation: Develop an overarching change committee to avoid duplication and prudential gaps. - Response: “Changes during the transitional period are managed through strong cooperation between the CSSDA, the Cooperative Central Bank, the Pancyprian Cooperative Confederation, and the Audit Office of Cooperative Societies.” - Insurance sector - The Insurance Services Law transposed EU directives, but little secondary legislation or guidance is available. - Recommendation: Draft prudential regulations and guidelines as a starting point to providing companies with guidance on how to comply with the law. - Response: Efforts underway to outsource legal services for EU harmonization purposes; legal services will also be sought for implementation of recommended actions. - Recommendation: Review existing and required skills in insurance supervision to decide on new staff or areas to outsource. - Response: “All the necessary procedures will be expedited in order to recruit the appropriate qualified staff the soonest.” - Securities supervision - The securities supervision authority (CySEC) is well-staffed with requisite skills. - Constraints identified: - Legal framework for cooperation limits investigative assistance to foreign regulators when CySEC does not have an independent interest in the matter under investigation. - Difficulty accessing information about beneficial owners of shares registered in the names of lawyers acting as nominees for beneficial owners. - Recommendation: Ensure forthcoming legislation removes these two constraints. - CySEC response: CySEC is finalizing a bill amending the CySEC Law to remove the obstacle to sharing information and to give CySEC clear authority to secure information on beneficial owners; enactment expected to take place in 2006. - Additional issue: Both CySEC and the Stock Exchange are public administrative bodies, which limited CySEC’s legal ability to supervise the Exchange. - Response: Planned amendment to the Stock Exchange Act was enacted in September 2005, providing clarification for CySEC’s regulatory role. ### Sector structure, recent trends, and vulnerabilities - Institutional architecture and market structure - Cyprus has three classes of credit institutions, an active insurance market, and a developing securities market. The market is dominated by three groups which are active in banking, insurance, and securities, while cooperative retail banking provides effective competition. - Prior to EU reforms, international banking units (IBUs) and offshore entities were restricted to nonresident business in foreign currency and preferential tax treatment; this segmentation ended with EU harmonization. - Past shocks and performance drivers - Stock market volatility at the end of the 1990s affected banks that had underwritten loans for share purchases; losses and provisioning were recognized and affected profits. By 2004, banking results were recovering. ### Key statistics (selected tables) - Financial system counts and aggregates (Table 2 highlights, years 2000–2005 where shown) - Commercial banks (number): 12, 12, 14, 14, 14, 14. - Cooperative credit institutions (number): 360, 363, 363, 361, 358, 348. - International Banking Units (number): 27, 24, 28, 28, 29, 28. - Total assets, commercial banks (C£ millions): 12,776; 14,936; 15,565; 16,621; 17,818; 22,008. - Total assets, Cooperative credit institutions (C£ millions): 3,158.5; 3,437.0; 3,885.5; 4,402.1; 4,685.9; 5,200.9. - Total assets, International Banking Units (C£ millions): 6,515.0; 6,603.2; 4,449.4; 4,203.8; 5,325.7; 8,273.9. - Stock market capitalization (C£ millions): 8,296; 5,578; 4,374; 4,442; 4,506; 6,242. - Banking system details (Table 3 highlights) - Commercial banks (C£ million): - Total assets: 12,776; 14,936; 15,565; 16,621; 17,818; 22,008. - Foreign assets: 3,064; 3,739; 3,161; 3,749; 4,433; 7,313. - Advances and Loans: 6,766; 7,652; 8,283; 8,683; 9,332; 9,972. - Total deposits: 9,995; 11,474; 11,999; 12,193; 13,102; 16,024. - Non-resident deposits (of total deposits): 3,759; 4,396; 4,209; 4,133; 4,610; 6,649. - Foreign liabilities: 298; 600; 505; 672; 790; 1,436. - Return on Assets (note 1/): 1.5; 0.6; -0.1; -0.1; 0.3; 0.6. - International Banking Units (US$ million): - Total assets: 10,545; 10,150; 8,139; 9,036; 12,531; 17,081. - Advances and loans (to customers): 2,889; 3,031; 2,611; 2,557; 4,236; 5,501. - Total deposits (from customers): 2,181; 2,689; 3,013; 3,384; 3,081; 4,871. - Memorandum: Cyprus pounds per US dollar (end period): 0.62; 0.65; 0.55; 0.46; 0.43; 0.48. - Notes on classification and data: - The term “group” is used following the CBC’s “Directive for the supplementary supervision of banks in a financial conglomerate” (September 2005). - Some insurance and securities data have gaps; composite insurance companies and EU branches are not included in all series; certain series are provisional. ### Key recommendations (summary of Table 1) - Banking: - Add qualified/specialized supervision staff for internal risk systems and models, financial stability analysis, EU commitments, and cross-border supervision. - CBC: commit to strengthening Banking Supervision and Regulation Division to meet increased demands. - Cooperative credit institutions: - Substantially increase resources allocated to supervision (plan includes training). - Parliament approved enhancement of CSSDA: 17 additional staff, salary upgrades; 14 officers to triple supervisory resources; further training planned. - Establish an overarching change committee to avoid duplication and prudential gaps; current management through cooperation among CSSDA, Cooperative Central Bank, Pancyprian Cooperative Confederation, and the Audit Office of Cooperative Societies. - Insurance: - Draft prudential regulations and guidelines to assist compliance with insurance law. - Review skills and staffing in insurance supervision; recruit appropriate qualified staff expeditiously. - Securities: - Amend legislation to remove constraints on cooperation where CySEC lacks an independent interest and to ensure access to beneficial ownership information for nominee-registered shares. - CySEC: drafting amendments to the CySEC Law; enactment expected in 2006. - Clarify supervision of the Stock Exchange: amendment to the Stock Exchange Act enacted September 2005 to clarify CySEC’s regulatory role. *Executive Summary — IMF staff report content unit* ### 8. The Cypriot banking sector has three distinct components although differences ### The Cypriot banking sector has three distinct components although differences are diminishing with the obligations of EU accession ### Banking sector structure and market concentration - Three components: - Commercial banks. - Cooperative credit institutions (together forming the domestic banking system). - International banking units (IBUs). - Counts and market share: - Domestic credit institutions consist of 14 commercial banks, including 3 specialized institutions with commercial banking licenses, and 358 cooperative credit institutions. - 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. - Branch network and competition: - In 2003, the government-controlled area of Cyprus had 65 bank branches per 100,000 residents, compared to the average of 49 in the 15 members of the EU prior to the last accessions. - Interest rates were controlled at 9 percent until the end of 2000. - Deregulation of interest rates has enhanced overall competition, particularly between commercial banks and cooperative credit institutions. - The number of branches has been declining; a powerful bank employees’ union probably constrains the rate of decline. ### Cooperative credit institutions - Deposits and local presence: - Deposits at cooperative credit institutions represented about one third of total deposits in local currency in all credit institutions at end-2004. - Virtually every village in the government-controlled area of Cyprus has its own cooperative society. - Pricing and tax treatment: - Borrowing from cooperatives is cheaper because of their nonprofit orientation, lower regulatory costs to date, and exemption from tax on profits generated by operations with members. - The only cooperative credit institution supervised by the CBC is the Cooperative Central Bank Ltd, a licensed commercial bank that provides services to the cooperative credit institutions (accepting surpluses as deposits, lending to them, and acting as clearing agent). - Legal/regulatory alignment: - Legislation governing cooperatives was amended in 2003 to transpose the EU directives on credit institutions; cooperatives are expected to conform to the capital requirements and other prudential obligations of EU credit institutions. - Smaller cooperatives can opt to be affiliated with the Cooperative Central Bank, meeting consolidated prudential requirements. - The Cooperative Societies Supervision and Development Authority (CSSDA) is the independent supervisory authority; staff includes a commissioner, two senior officers, 36 officers and secretarial staff. ### International banking units (IBUs) - Counts, ownership, and scale: - There are 29 licensed international banking units, although only 26 are in operation. - Two IBUs belong to companies with operations in the domestic banking sector. - There is one representative bank office. - Ownership origins are diverse; largest IBUs are headquartered in Austria, Ireland, France, and the United Kingdom. - Lebanon is the home country for eight IBUs; Jordan for four; Russia for three. - IBUs vary in size from about 4–5 employees to up to 60 employees. - Location drivers and taxation: - Presence attributed to geographical location and preferential corporate tax rates. - Domestic profit tax rate on these banks was 4.5 percent until end-2005 when all were made subject to a 10 percent tax rate. - Cyprus has a network of over 30 double taxation treaties. ### Insurance sector: structure and key indicators - Market composition and international activity: - 31 licensed companies operate in the domestic market, two of which are foreign undertakings, and 14 international insurers or reinsurers (two captives). - Only one international insurer has large operations. - EU entry introduced EU passporting categories: 5 companies established under the EU passport and 119 registered (at March 2005) to provide services in Cyprus under the EU passport. - As a result of EU law and regulation, 26 companies exited the non-life market. - Market concentration and business mix: - At the end of 2004, of the 43 companies writing insurance, 11 were life, 4 composite, and 28 non-life (these numbers include the international companies, but do not include EU branches). - The life market is highly concentrated: the four largest companies controlling three quarters of premium income. - The largest three nonlife companies controlled 36 percent of premium income. - Companies’ investments were mainly in debt securities, bank deposits, and money market instruments, with less than 20 percent in equity at end-2003. - Selected insurance industry figures (2004): - Total number of insurance companies writing business: 43. - Gross premiums (C£ millions): Life 200.4; Non-life 292.2. - Net premiums (C£ millions): Life 179.4; Non-life 216.5. - Density of insurance (total premiums per capita): 668.4. - Bank-controlled companies — net premiums (C£ millions): 432.1; market share (percent): 39.9. - Source of insurance industry data: Insurance Companies Control Service. ### Securities sector and Stock Exchange - Market structure and instruments: - The securities sector covers the Stock Exchange, market intermediaries, a limited number of collective investment schemes and certain international financial services companies. - It is not a center for domiciling mutual funds. - Stock Exchange statistics and activity: - CSE General index at end of year: 110.0 (2005). - FTSE CySE20 at the end of the year: 576.9 (2005). - Number of listed issuers: 144 (2005 data in table). - Total market capitalization (in millions of pounds): 6,242 (2005). - The Stock Exchange is state owned and has a relatively small number of listed companies (155 overall noted in the text). - Turnover was in the region of $500,000 daily at end-April 2005, while it averaged $1.8 million in the first 75 trading days of the year. - The market is dominated by large banks and utilities: about 50 percent of market capitalization is represented by the three largest banks (67 percent by 10 companies). - Market segments and intermediaries: - Exchange classes of issuers include the bond market, the investment companies market, and three equity issuer markets (main, parallel, alternative). - The main market had 18 listings; in Q1 2005 its average daily turnover was approximately 70 percent of total turnover. - Market intermediaries: 47 authorized market intermediaries; 32 serve almost exclusively nonresidents; 15 serve locally. - International collective investment schemes: 15 authorized with a total net asset value of approximately $400 million. - About 40 international financial advisors operate; they offer investment advice only. - Cyprus has transposed the EU UCITS Directives but had not licensed domestic collective investment schemes to date. ### Regulatory framework, oversight, and market integrity arrangements - Supervisory authorities: - Four authorities regulate and supervise financial institutions in Cyprus: - Central Bank of Cyprus (CBC): responsible for supervision of domestic banks and international banking units (IBUs). - Cooperative Societies Supervision and Development Authority (CSSDA): supervises cooperative credit institutions. - Superintendent for Insurance Control (SI), supported by the Insurance Company Control Service (ICCS): supervises insurance companies. - Cyprus Securities and Exchange Commission (CySEC): regulates the Exchange, collective investment schemes and a range of market intermediaries. - CBC and tax/IBU treatment: - In preparation for joining the EU, Cyprus amended its tax laws in July 2002 to introduce a uniform rate of tax (10 percent) on all enterprises, including banks. - With the abolition of exchange controls, IBUs who opted to be taxed at 10 percent may operate domestically. - All IBUs are treated similarly from end-2005. - Deposit and investor protection schemes: - A Deposit Protection Scheme covering domestic banks was introduced in September 2000 and was brought into conformity with all EU regulations on May 1, 2004, when the IBUs joined (with the exception of those incorporated in other EU member states). - An investment compensation scheme for clients of banks which offer investment services commenced operation in May 2004. - An investment fund for clients of investment firms was also created in 2004. - A deposit protection scheme for CCIs has been in operation since 2000; it reportedly conforms to EU Directive 94/19/EC. - The Cooperative Societies’ Law (CSL) provides that CSSDA, in cooperation with the Pancyprian Cooperative Confederation Ltd., can require establishment of a mandatory solidarity fund for CCIs; a preliminary regulation is in draft. - Insurance and securities supervision resourcing: - The Superintendent of Insurance is supported by the ICCS; the service is staffed by nine skilled personnel and seven support staff; the superintendent and deputy superintendent are appointed by the Council of Ministers. - CySEC has a skilled staff of 40. - The CBC retains responsibility for oversight of international financial advisors and non-retail collective investment schemes and has skilled and experienced securities regulation staff. *Source: IMF staff report text (chapter/section content supplied).* ### 28. The Prevention and Suppression of Money Laundering Activities Law of 1996– ### 28. The Prevention and Suppression of Money Laundering Activities Law of 1996–2004 (PSMLAL) ### PSMLAL scope and institutional framework - PSMLAL covers credit institutions, investment firms, life insurance companies (domestic and international), and nonlife insurance companies operating outside of Cyprus, as well as lawyers (in respect of financing business) and accountants/auditors. - Financial regulators in these sectors and the professional bodies of lawyers and accountants/auditors are designated as the responsible supervisory authorities. - Each supervisor has issued guidance notes under the law for the relevant institutions. - PSMLAL criminalizes money laundering with predicate offenses covering all crimes subject to a maximum sentence of 12 months or more. - The law provides for confiscation, freezing and restraint orders for proceeds. - PSMLAL requires customer identification, record keeping, internal control, staff training and suspicious transaction reporting. - The financial intelligence unit (FIU) is a multidisciplinary unit with 14 staff; as Chair of the Advisory Authority, it is currently the lead in strategic policy making on AML/CFT. ### Overall strengths and vulnerabilities in financial standards implementation - Supervision of commercial banks is particularly strong. - Supervision of cooperative credit institutions (CCIs) and insurance requires enhancement. - Securities sector cooperation could be improved. - Legal framework for supervision of CCIs is in place, but implementation is just beginning. - EU directives for the insurance sector have been transposed, but supervision requires significant enhancement to be consistent with the EU framework. - Regulation of securities activities is well-developed, though there are shortcomings in international cooperation. - Cypriot supervisors generally have a satisfactory legal framework and implementation record in cross-border cooperation, information exchange, and consolidated supervision, though clarity is required for the securities framework. ### Cross-Border Cooperation and Information Exchange - Legal and formal arrangements permit international information exchange by regulators in the banking, cooperative and insurance sectors, with implementation reflecting general supervision in these sectors. - A domestic MOU was signed in 2002 by the three regulatory authorities—the CBC, CySEC, and the SI; in November 2003 it was also signed by the CSSDA. - The MOU allows mutual notification of cross-border provision of activity and exchange of supervisory information. - The MOU addresses the need for consolidated supervision information and explicitly allows for cross-sectoral cooperation where linked to enforcement of the AML law. - The agreement explicitly excuses the CBC and the CSSDA from sharing information on individual deposit accounts. - Informal gateways exist among domestic and international banking supervisory and financial regulatory authorities for exchanging supervisory information without any restrictions. - Section 27(1) of the Banking Law authorizes the CBC to share information with all competent authorities, no matter the sector. - Section 27(4) of the Banking Law requires that the CBC be satisfied that the same confidentiality applies to the information receiving authority as to the CBC itself. - Home supervisors of foreign banks located in Cyprus conduct on-site examinations in Cyprus and discuss the results with the CBC. - The CBC has signed MOUs in banking supervision with the Central Bank of the Russian Federation, the Bulgarian National Bank, the National Bank of the Republic of Belarus, the National Bank of Ukraine, the National Bank of Yugoslavia, the National Bank of Romania, the Financial and Capital Market Commission of the Republic of Latvia, the National Bank of Slovakia, the Bank of Tanzania, the Central Bank of Jordan, the Bank of Greece, and the Central Bank of Lebanon. - MOUs are being negotiated with authorities including those in the United Kingdom and Ireland. - The CBC has signed MOUs in international financial services with the Greek Capital Markets Commission, the Federal Commission for the Securities Market of Russia, the Czech Securities Commission, and the Lithuanian Securities Commission. - CySEC is a signatory to the EU Commission of European Securities Regulators (CESR) MOU, is listed in Appendix B of the IOSCO Multilateral MOU, and is working towards full signatory status; it has signed MOUs with several states and is negotiating with non-EU securities regulators. - The insurance law provides for cross-border cooperation in home/host supervision; the insurance supervisor (ICCS) has joined EU protocols for such cooperation. - The supervisor should adopt a more proactive stance regarding EU companies operating under freedom of service (FoS), contacting their home supervisors to identify which have begun operations. - Laws governing CySEC provide useful cooperation provisions, but legislative shortcomings include: - Inadequate ability to cooperate with foreign regulators where CySEC does not have an independent interest in the matter. - Difficulties obtaining information identifying beneficial owners of shares from lawyers acting as nominees for beneficial owners. - A forthcoming bill is expected to correct these shortcomings. ### Sectoral findings — Banking - Supervision of international banks and domestic commercial banks has progressed to high standards, though additional resources are recommended. - Independence of the central bank is assured by changes in the central bank law and its enshrinement in the Constitution of the Republic. - Prudential oversight improved with internationally conforming standards for nonperforming loan classification. - Market risk supervision would be improved by enhanced oversight of systems and specialized staff training. - Laws and regulatory structure exist for satisfactory supervision of credit cooperatives, but implementation has started and will take time to complete. - Authorities face a considerable challenge in developing appropriate affiliation (or merger) arrangements by end-2007, as required. - EU accession incentives have provided powerful impetus. - Supervision of banks and cooperative credit institutions by the CBC and the CSSDA places two separate supervisory bodies for deposit-taking institutions. - Objectives and operations of these agencies still differ to some degree. - CSSDA is moving to generally adopt the supervisory policies and procedures of the CBC. - These arrangements are likely to prove relatively and unnecessarily costly due to duplication of supervisory functions; authorities may wish to consider this in longer-term planning. ### Sectoral findings — Insurance - Legal framework for insurance supervision is largely in place and provides accountability and budgetary autonomy. - Significant operational enhancement is required. - Institutional structure should provide greater independence and less dependence on a single individual (viz. the SI). - The supervision division lacks sufficient resources and skills to usher the industry into the EU framework for solvency. ### Sectoral findings — Securities - Regulators’ skills and rules were generally impressive, but important shortcomings in information exchange were found. - Regulators were unable to collect information and investigate on behalf of foreign authorities where CySEC had no independent regulatory interest. - CySEC has had difficulty accessing information identifying beneficial owners of shares registered in the names of lawyers acting as nominees. - The regulator is seeking legislative amendment to confirm access to such information and remove restrictions on CySEC’s ability to cooperate with foreign authorities. - Clearer authority for CySEC as supervisor of the stock exchange is necessary. - (Footnote: The relevant amendment to the Stock Exchange Act was enacted in September 2005; it is expected to have provided the necessary clarification for CySEC’s regulatory role.) ### Cross-sectoral matters and corporate governance - Arrangements among supervisors to oversee the financial groups that dominate the market would benefit from elaboration and formalization. - Insurance companies are a relatively insignificant component of major banks’ balance sheets and incomes. - Banks’ risk-assessed capital is purposely insulated from insurance risk in supervision (insurance assets do not qualify as capital). - Bank supervisors keep a watching brief on insurance sector developments and can undertake inspections of insurance companies. - Sectoral supervisors meet regularly to share information; meetings could formally consider implications of insurance companies’ forthcoming compliance with the EU Solvency I directive. - The CBC is developing a comprehensive regulation on corporate governance for banks. - The regulation should be developed and extended in cooperation with other regulatory agencies to cover all financial institutions, including small, family-owned and -run firms. - The regulation will supplement the guidance in the 2001 regulation on internal control systems and should be issued by September 2005. - Extension of such guidance to all financial firms would improve decision making and monitoring in the financial sector. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - Summary reflects findings of the MONEYVAL mutual evaluation mission which visited Cyprus in the period April 3 to 9, 2005. - Criminalization of money laundering meets the relevant criteria in all respects. - Criminalization of terrorist financing should be expanded to include collection of funds. - Powers to trace, freeze, and confiscate proceeds and associated investigative powers are well provided for in the law. - Cyprus law does not provide for civil forfeiture, but confiscation is actively pursued in criminal cases. - Criminalization of the financing of terrorism as defined in the UN Convention for the Suppression of the Financing of Terrorism is fully achieved and requirements for suspicious transaction reporting on terrorist financing are in place. - Financing of terrorism crime should include the collection of funds in the knowledge that they are to be used by terrorist(s). - (Footnote: This description was revised on the basis of the draft executive summary of the mutual evaluation report considered by the MONEYVAL plenary in February 2006.) *IMF Staff Country Report _cr06347 - 28. The Prevention and Suppression of Money Laundering Activities Law of 1996–2004* ### 45. Supervision by the CBC, CSSDA, and CySEC is quite satisfactory, and these ### _cr06347 - 45. Supervision by the CBC, CSSDA, and CySEC is quite satisfactory, and these ### Supervision, AML guidance, and institutional responsibilities - Supervision by the CBC, CSSDA, and CySEC is described as "quite satisfactory." - These agencies, together with the SI, the Bar Association and the Institute of Certified Public Accountants, are issuing guidance in line with the FATF 40+9. - The CySEC and CSSDA are in the process of issuing revised Guidance Notes. - The Bar Association is drafting a Guidance Note to be issued to its members. - Guidance notes should deal explicitly with terrorist financing to provide information to reporting enterprises. - The SI should recruit additional staff and conduct on-site inspections. - Trust and company service providers are at present regulated only through the supervision of lawyers and accountants/auditors. - Legislation is in the process of being drafted for the regulation by the CBC of the provision of trust and company services by persons other than lawyers and accountants/auditors. - The Cypriot authorities’ resolve to reduce vulnerability to money laundering was noted. - The AML law and enforceable and sanctionable guidance notes were found to meet basic preventive obligations. - It was recommended that certain provisions currently in supervisory guidance should be in legislation. - A formal review of measures covering nonprofit organizations would be beneficial. - The FIU is efficient and effective in all aspects of its work. - Footnotes from the source: - The CSSDA advises that its guidance note was issued on May 16, 2005. - The authorities have informed that these guidelines have been finalized and issued to the supervised entities/members concerned. ### Assessment of the Supervision of International Banking — Status of 2001 Recommendations (selected items) - The CBC should publish an annual report on its supervisory activities. - The annual reports of the CBC for 2002, 2003, and 2004 contain sections on the Bank’s supervisory activities in the banking sector. - Restriction on disclosure of individual deposit account information should be removed from the Banking Law. - In practice information on individual deposit accounts can be passed to the parent by the affected subsidiary or branch, or obtained by the foreign supervisor through onsite review. - Independence and Resources (BCP 1.2) - The CBC Law should be amended to provide for greater security of tenure for the Governor; the law should stipulate that reasons for his removal be given and made public. - The new CBC Law enacted in July 2002 stipulates that the Governor cannot be removed prior to the expiration of his term of office, unless he no longer fulfills the conditions required for the performance of his duties or he is guilty of serious misconduct. - It is not stated explicitly in the new CBC Law that the reasons for removal of the Governor should be made public; however, practical expectations are noted. - There is a general need for additional capacity for the exercise of supervisory functions at the CBC, particularly to allow for the planned frequency of on-site inspections. Four existing vacancies should be staffed at an early date. - Supervisory capacity has been strengthened with the employment of two more employees and the frequency of on-site inspections has increased. - Some resources were released when the CBC ceased to be responsible for the supervision of the international financial services companies in September 2002. - A risk-based approach to on-site examinations has been introduced. - Additional qualified/specialized supervision staff are required especially for: - the validation and monitoring of banks’ internal risk systems and models; - financial stability; - commitment towards EU institutions; and - the satisfaction of additional demands emanating from the rapid expansion of banks overseas. - Supervisory powers (BCP 1.4) - The provision in the Banking Law requiring the CBC to consult first with the Ministry for the granting of banking licenses and for remedial powers should be removed. - The Banking Law has been amended to allow licensing policy and remedial measures to be determined without prior consultation with the minister of finance. - Licensing (BCP 3) - The CBC should conduct more comprehensive investigations into the character and reputation of persons associated with the financial services sector in Cyprus, for example, by accessing records of foreign law enforcement agencies and judicial systems. - Applicants are currently required to submit a police clearance from their country of origin. - Loan classification (BCP 8) - The CBC should develop generally applicable criteria for assessing banks’ loan classification and provision policies. - As from January 1, 2003, banks have been obliged to follow guidelines on the definition of nonperforming loans and regulations requiring suspension of interest when loan repayment is in arrears for more than nine months. - This period was reduced to six months on January 1, 2005. - A CBC directive setting 90 days in arrears as the criteria for the classification of credit as nonperforming, and defining procedures for the suspension of interest and other income came into force on January 1, 2006. - Country Risk (BCP 11) - The CBC should consider requiring banks to set formal limits for country and transfer risks or ensure that head offices and parent banks do so and notify them to the CBC. - No formal limits have yet been established; on-site examinations and off-site monitoring oversee such exposures and risk management requirements mandate that such limits be established by the banks and/or their parent establishments. - The CBC should consider establishing formal guidance on a framework for country risk and transfer risk management that could be used by all banks located in Cyprus. - Market risk (BCP 12) - The CBC should implement Basel Core Principles requirements by imposing limits or specific capital charges or both. - The CBC has issued the Capital Adequacy Directive (CAD) to banks which sets capital requirements with respect to market risk. - Reporting under the CAD enables the CBC to monitor risks. Banks submit monthly returns on their open position in foreign currency, including that of overseas subsidiaries or branches; and quarterly returns on interest risk exposures. - The CBC has imposed limits on foreign currency open positions of banks and regularly reviews and approves asset and liability committee (ALCO) limits for each bank. - Money laundering (BCP 15) - CBC Guidance Notes should ensure that the identity of beneficial owners of accounts in the names of trustees or nominees is appropriately disclosed to banks. - CBC Guidance Note (dated September 17, 2001) and supplement (dated November 26, 2001) require banks opening accounts for trusts and nominees to ascertain, without any exception, the identity of all the settlors and the true beneficiaries. - The recommendation that banks obtain satisfactory evidence of identity of customers prior to execution of any banking transaction should be a statutory requirement rather than an expectation. - The CBC’s guidance note sets out what constitutes satisfactory evidence of identity. Observance of the guidance note by banks is legally mandatory and subject to sanctions; it is enforceable in a court of law. - To strengthen customer identification, the list of jurisdictions from which banks are required to submit information to the CBC should include jurisdictions known to have deficient AML frameworks. - The CBC issued a Guidance Note (dated January 20, 2003) with a list of countries and territories considered as "non-cooperative" in the fight against money laundering, in accordance with the FATF criteria. - Banks were requested to exercise additional monitoring procedures with persons from countries on the list and to file suspicious transaction reports to the Unit of Combating Money Laundering if not satisfied as to legitimacy. - With regard to incoming fund transfers, banks should be required to ensure satisfactory information on the identity of the ordering customer is obtained on a consistent basis. - The November 2004 Guidance Note has addressed this issue. - Encourage banks to comply with ML law by developing employee training programs based on actual transactions. - The November 2004 Guidance Note requires banks to educate and train employees. - The CBC should carry out more frequent on-site reviews of recognition and reporting procedures, especially for banks considered high risk. - Supervisory capacity has been strengthened with two more employees; number of on-site inspections has increased; AML procedures are tested during on-site examinations. - Off-site/on-site supervision (BCP 16) - Resources need to be increased to allow the planned frequency of on-site examinations to take place (see BCP 1.2). - Understanding banks’ operations (BCP 17) - The CBC should make it mandatory for a supervised institution to report any material adverse changes in its condition as early as possible. - The Banking Law has been amended to this effect (Section 24 of the 2003 Amendment Law). - Consolidated reporting (BCP 18) - CBC should consider updating itself regarding international experience with early warning systems using prudential reports and other data. - Committee for managing financial crisis has been formed by regulatory authorities and the Ministry of Finance, focusing on banks perceived to be higher risk. - Participation in the Banking Supervision Committee of the European System of Central Banks and the "Coordinated Compilation Exercise for Financial Soundness Indicators" of the IMF has established the basis for developing a framework for macro-prudential surveillance and analysis. - Corrective action (BCP 22) - The Banking Law should be amended to remove any need for consultation with the Ministry of Finance before corrective action is taken (see BCP 1.4). ### Institutional and market structure — overview and key statistics - Cyprus accession to the European Union occurred in May 2004 and was the main event affecting the financial sector and its supervision since the 2001 Module 2 assessment. - Real growth: - expected at 3.4 percent in 2004 and 3.8 percent in 2005. - real growth of 2.7 percent in 2003 for the "finance, insurance, real estate" sector. - Sectoral shares and performance: - The sector "finance, insurance, real estate" is 22 percent of GDP and the single greatest contributor to real output. - Tourism was 20 percent of real GDP in 2003 and declined by 0.4 percent in real terms in 2003. - Banking sector composition: - Domestic credit institutions: 11 commercial banks, three specialized institutions, and 358 cooperative credit institutions. - Domestic commercial banking is dominated by three banks which together hold about 70 percent of system assets, excluding the cooperative credit institutions but including the Cooperative Central Bank, and about half of system assets, including the cooperatives. - The three largest banks: Bank of Cyprus, Cyprus Popular Bank (Laiki), and Hellenic Bank — all locally owned and international groups. - Three specialized institutions: Mortgage Bank of Cyprus; Cyprus Development Bank; Housing Finance Corporation. - The latter two are publicly owned; total assets of the three are only a small proportion of banking system assets. - International banking units (IBUs): - Currently, there are 26 IBUs operating in Cyprus, 2 of which also carry on domestic banking business (Arab Bank PLC and Société Générale of France). - An additional three IBUs are licensed but non-operational. - Representative office: UBS AG. - Largest IBU ownership examples: Kommunalkredit International Bank Ltd. (Austria), DePfa Investment Bank Ltd. (Ireland), Russian Commercial Bank (Cyprus) Ltd., Crédit Suisse First Boston (Cyprus), Ltd (Switzerland), Barclays Bank PLC (United Kingdom). - Tax and regulatory changes: - Cyprus amended its tax laws in July 2002 to introduce a uniform rate of tax (10 percent) on all enterprises, including banks, irrespective of residence of the owner. - As of January 1, 2003, privileged tax treatment of nonresidents was removed; foreign enterprises could elect, for a transitional period terminating at end-2005, to maintain the lower tax rate (4.25 percent). - With the abolition of exchange controls, IBUs who opted to be taxed at 10 percent may provide services to residents. All IBUs will be treated similarly at end-2005. - Cooperative credit institutions: - They hold about one quarter of system deposits. - A licensed commercial bank, the Cooperative Central Bank Ltd., provides banking services to the cooperative credit institutions. ### Summary assessment and main findings (Basel Core Principles) - Prudential regulations and powers for the Cypriot banking sector are assessed as strong and the supervisory process, in general, is effective. - All core principles were considered to be compliant or largely compliant. - No issues are predominant; however key concern: - Increased demands on supervisory staff of the CBC related to EU accession and financial sector development require a number of additional adequately trained and experienced staff. - Suggested supervisory actions: - Develop and circulate a comprehensive framework of guidelines regarding country and market risk. - Finalize the ongoing implementation of more stringent criteria for the suspension of the recognition of interest on problem loans. - Report preparation and mission: - The ROSC for the Basel Core Principles was prepared by two independent bank supervision experts (Marcel Maes and Timothy Sullivan). - The assessments were carried out during a mission to Cyprus from March 28 to April 8, 2005; additional information was added during the review process. - The assessments were based on laws, regulations, policies, and practices in place at the time the assessments were made. *Source: Excerpt from the IMF country ROSC chapter and Annexes as provided in the supplied content.* ### 54. The cooperative credit institutions are supervised by the Cooperative Societies’ ### 54. The cooperative credit institutions are supervised by the Cooperative Societies’ ### Supervision of Cooperative Credit Institutions (CCIs) - CCIs are supervised by the Cooperative Societies’ Supervision and Development Authority (CSSDA). - Historically subject to fewer regulations; required to comply with EU banking directives by end-2007. - New requirements concern organization, internal controls and audit systems, corporate governance, and sharp improvement of prudential ratios. - Smaller/weaker CCIs may need to merge; CCIs unable to meet requirements individually may affiliate with the Cooperative Central Bank and meet prudential requirements on a consolidated basis. - During a transitional period ending on December 31, 2007, CCIs are allowed to continue activities without full compliance; CSSDA must develop supervisory capacity, issue administrative rules, guidelines and best practice papers, and encourage restructuring of predominantly small CCIs. - The extended responsibilities of the CSSDA necessitate additional experienced staff and an appropriate salary system. ### Principle-by-Principle Findings for the Banks (Summary) - Objectives, autonomy, powers, and resources (CP 1) - Prudential regulations are sound; the CBC is commended for actions to enhance Cyprus’ regulatory regime and meet international standards. - Licensing and structure (CPs 2–5) - Effective licensing authority with fair and equitable criteria ensuring a consistent approach to permissible activities and ownership. - Prudential regulations and requirements (CPs 6–15) - CBC requires licensed banks to maintain capital commensurate with nature and scale of risks. - All Cyprus banks operate at capital adequacy levels in excess of the required minimum of 10 percent. - More stringent rules on suspension of interest recognition established in 2004; Cyprus will gain full compliancy at the end of the transition period on January 1, 2006. - CBC should require banks to put in place systems and procedures to acknowledge the special nature of market risk and enhance its management. - Directive: “Directive on the suspension of interest and other income on nonperforming credit facilities” imposes the 90-day rule; came into force on January 1, 2006. - Methods of ongoing supervision (CPs 16–20) - No material differences between supervision of domestic and international banks. - Risk-focused on-site supervision program established for international banks in January 2005; similar program for domestic banks established in January 2006. - On-site examinations: annually for domestic banks and subsidiaries of foreign banks; every two years for branches of foreign banks. - CBC conducts on-site examinations at branches and subsidiaries located overseas and promotes cooperative arrangements with host country supervisors. - Off-site supervision reviews data from various returns; accuracy verified during on-site examinations. - CBC holds annual tri-lateral meetings with senior management and external auditors to review performance, market conditions, supervisory issues, and strategic plans. - Information requirements (CP 21) - CBC has requirements for adequate accounting, records, and internal control systems and assesses each bank’s accounting processes and internal control systems. - Formal powers of supervisors (CP 22) - CBC has extensive legal powers where a bank fails to comply with banking law provisions. - Cross-border banking (CPs 23–25) - CBC practices consolidated supervision globally, undertaking on-site examinations of branches and subsidiaries overseas; MOUs signed with a number of overseas supervisors. ### Table 1 — Banks: Recommended Action Plan to Improve Compliance with the Basel Core Principles (selected items) - CP 1.2 Independence - Recommended: Additional qualified supervision staff needed to meet requirements for validation/monitoring of banks’ risk systems and models, commitments with EU institutions, and additional demands for cross-border supervision from banks’ expansion abroad. - CP 8 Loan Evaluating and Loan Loss Provisioning - Recommended: Finalize implementation of the more stringent criteria for interest suspension. - CP 11 Country Risk - Recommended: Establish formal guidance for a framework for country and transfer risk. - CP 12 Market Risks - Recommended: Improve market risk expertise and supervision. ### Authorities’ Response — CBC Action Plan (selected items) - CP 1.2 Independence - CBC aims to strengthen Banking Supervision and Regulation Division to meet increased demands from EU accession and banking sector development. - CP 8 Loan Evaluating and Loan Loss Provisioning - In December 2005, CBC issued a “Directive on the suspension of the recognition of interest and other income on non-performing credit facilities” which took effect on 1st January, 2006; the “90 days” rule applied in full conformity with international practice. - CP 11 Country Risk - CBC will draft guidelines for 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, periodic validation/testing of internal systems/models as provided in the EU Capital Requirements Directive coming into force on the 1st January, 2007. - Market risk expertise to be enhanced by additional training from the Financial Stability Institute of the BIS and supervisory authorities of other EU countries (UK, France, Germany, Netherlands). ### Principle-by-Principle Findings for the Cooperative Credit Institutions (CCIs) - Objectives, autonomy, powers, and resources (CP 1) - Prudential regulations adapted to the acquis communautaire; authorities commended. - Transitional period until December 31, 2007 allows CCIs to operate without full compliance; CSSDA must develop capacity, issue rules/guidelines, and encourage restructuring. - CSSDA needs additional experienced staff facilitated by an appropriate salary system. - Licensing and structure (CPs 2–5) - Effective licensing authority with fair and equitable criteria; permissible activities should be defined by regulatory decision. - Prudential regulations and requirements (CPs 6–15) - During the transitional period CCIs are not subjected to mandatory new capital adequacy requirements. - Supervisor should enhance monitoring capabilities for timely action. - Enhanced prudential reporting on loans and increased supervisory capacity needed for oversight of large exposures, connected lending, expertise on new risks, and internal control systems. - Updating of guidance notes on AML/CFT to be accelerated. - Methods of ongoing supervision (CPs 16–20) - On-site and off-site supervision must be adapted and developed to meet CSSDA’s expanded responsibilities; additional experienced staff required. - Information requirements (CP 21) - Regulatory decisions in place regarding establishment of accounts and auditing according to international standards. - Formal powers of supervisors (CP 22) - Range of remedial measures available where a CCI fails to comply with law provisions. - Cross-border banking (CPs 23–25) - No cross-border financial services are performed by the CCIs. ### Table 2 — CCIs: Recommended Action Plan to Improve Compliance with the Basel Core Principles (selected items) - CP 1.1 Objectives - Recommended: Manage changes during the transitional period through a global change committee. - CP 1.2 Independence - Recommended: Full government support of supervisory strengthening capacity. - CP 2 Permissible Activities - Recommended: Finalize regulatory decision defining permissible services and activities. - CP 6 Capital Adequacy - Recommended: Mandatory semi-annual reporting on each CCI’s compliance with capital requirements regime. - CP 8 Loan Evaluation - Recommended: Strengthen supervisory capacity and provide for additional prudential reporting. - CP 10 Connected Lending - Recommended: Strengthen supervisory capacity; facilities to connected persons should not be granted on favorable terms. - CP 14 Internal Controls - Recommended: Strengthen supervisory capacity and undertake efforts to encourage mergers favoring critical mass and organizational capabilities of CCIs. - CP 15 Money Laundering - Recommended: Update guidance note. - CP 16 On-site and Off-site Supervision - Recommended: Strengthen supervisory capacity. - CP 18 Off-site Supervision - Recommended: Strengthen supervisory capacity and accelerate direct connection to central data server. - CP 19 Validation of Supervisory Information - Recommended: Strengthen supervisory capacity. ### Authorities’ Response — CSSDA Planned Actions (selected items and exact measures) - CP 1.1 Objectives - Changes during the transitional period are managed through strong cooperation between the CSSDA, the Cooperative Central Bank, the Pancyprian Cooperative Confederation and the Audit Office of Cooperative Societies. - CP 1.2 Independence - Parliament approved enhancement of CSSDA (Official Gazette July 2005). The scheme provides for 17 additional staff and the upgrading of the salary levels of the officers. Fourteen officers from the additional staff will reinforce the supervisory staff, tripling the present supervisory resources. - CP 2 Permissible Activities - A Regulatory Decision will be issued as soon as possible. Make provision that the term “Cooperative Credit Institution” or any derivative cannot be used without CSSDA approval. - CP 5 Investment Criteria - A Regulatory Decision will be issued as soon as possible. - CP 6 Capital Adequacy - Committee approved a new Regulative Directive introducing CAD II, published in the Official Gazette in April 2005. A Commissioner’s Directive will be issued regarding mandatory semi-annual reporting on each CCI’s compliance with capital requirements regime. - CP 7 Credit Policies - Recruitment of additional staff and further relevant training. - CP 8 Loan Evaluation - CSSDA is designing 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 9 Large Exposure Limits - CSSDA is revising and updating its return on large exposures; a Regulatory Decision will be issued as soon as possible. - CP 10 Connected Lending - An amendment of the Law to explicitly provide that facilities to connected persons should not be granted on terms more favorable than normal business terms will take place. - CP 12 Market Risks - Relevant training will be undertaken. - CP 13 Other Risks - CSSDA supervisors will have direct access to centralized reporting when prudential reporting project is completed. - CP 14 Internal Controls - Ongoing efforts to encourage mergers; number of CCIs decreased from 358 to 348 in the first half of this year due to merging procedures. - CP 15 Money Laundering - Guidance notes by CSSDA finalized and issued on 16/05/2005. - CP 16 On-site and Off-site Supervision - Recruitment of additional staff and continuous training. - CP 17 Bank Management Contact - Relevant Regulatory Decision will be issued as soon as possible to impose mandatory and timely communication of material changes in activities and adverse developments. - CP 18 Off-site Supervision - CSSDA has accelerated direct connection to the central data server and uses information provided by CCIs connected through the central server of the Cooperative Computer Society. - CP 19 Validation of Supervisory Information - Recruitment of additional staff as per CP 1.2. ### Insurance Sector—Summary Assessment (selected findings and statistics) - Assessment based on discussions with Superintendent of Insurance and deputy, Insurance Company Control Service (ICCS) staff, industry representatives, an auditor, and the Association of Actuaries of Cyprus. - Documents considered included Law on Insurance Services and Other Related Issues of 2002 (LIS), Amendments I to V to the LIS, guidance on applications and annual returns, orders on format/contents of annual accounts, Report on Insurance in Cyprus 1983–2002, and The Audit of Insurers in Cyprus. - Assessment took account of annual returns and market trends at December 2003; information updated for end 2004 following the mission. - Market structure: - About 44 companies supervised and approximately 1,600 agents active in distribution. - Market rank (of 34 countries): Total Market 56; European Market Rank 28. Life Insurance World Market Rank 51; European Market Rank 25. General Lines World Market Rank 67; European Market Rank 31. - Insurance Sector domestic financial variables by line of business (in thousands of Cyprus pounds) - Non-Life 2003: Gross Written Premium 105,157; Net Premium 59,386; Underwritten Assets 199,226; Earned Reserve 57,934; Assets 109,221; Equity 1,996. - Non-Life 2004: Gross Written Premium 125,445; Net Premium 74,272; Underwritten Assets 228,566; Earned Reserve 67,045; Assets 126,425; Equity 9,048. - Life 2003: Gross Written Premium 151,418; Net Premium 150,340; Underwritten Assets 795,251; Earned Reserve 58,490; Assets 693,160; Equity 6,614. - Life 2004: Gross Written Premium 151,578; Net Premium 132,381; Underwritten Assets 819,419; Earned Reserve 63,913; Assets 709,771; Equity 10,828. - Composite 2003: Gross Written Premium 29,948; Net Premium 24,279; Underwritten Assets 76,288; Earned Reserve 16,061; Assets 50,031; Equity -889. - Composite 2004: Gross Written Premium 32,979; Net Premium 27,098; Underwritten Assets 82,722; Earned Reserve 14,610; Assets 57,481; Equity -496. - Total Market 2003: Gross Written Premium 286,523; Net Premium 234,005; Underwritten Assets 1,070,765; Earned Reserve 132,485; Assets 852,412; Equity 7,721. - Total Market 2004: Gross Written Premium 310,002; Net Premium 233,751; Underwritten Assets 1,130,707; Earned Reserve 145,568; Assets 893,677; Equity 19,380. - Insurance companies transacting business outside Cyprus (in thousands of Cyprus pounds) - Total 2003: Gross Written Premium 129,173; Net Premium 104,332; Underwritten Assets 565,746; Earned Reserve 88,870; Assets 445,356; Equity 4,892. - Total 2004: Gross Written Premium 221,895; Net Premium 196,339; Underwritten Assets 610,064; Earned Reserve 143,001; Assets 430,309; Equity 43,652. *Source: IMF staff report content provided.* ### 75. The leading three life insurance companies have 80 percent of the whole market and ### _cr06347 - 75. The leading three life insurance companies have 80 percent of the whole market and ### Market structure and operational capacity - The leading three life insurance companies have 80 percent of the whole market and these are owned by the leading banks of Cyprus. - The general lines market is more fragmented: - Total of 30 companies under supervision in 2004 (with only 28 writing business). - Only five companies have GWPs of more than £C 10 million. - Ten companies have market shares of less than 1 percent each. - Workforce and distribution metrics: - 38 companies who are members of the Insurance Association of Cyprus currently employ 1,640 staff, implying a GWP of £C 250,000 per staff member. - The number of agents is expected to drop from approximately 3,600 to 1,600 (the number currently active), implying an average portfolio of approximately £C 190,000 per agent. - Market outlook: - The total market is characterized as very small and very fractured, making it unlikely that larger international insurance companies would enter the market. - Most companies are operating from a family-based platform. - Reserving and capital adequacy: - Reserving levels are not satisfactory for a number of companies. - Reserving techniques recently introduced lead to higher reserving requirements. - The existing capital positions of 14 companies are below the minimum requirements of the EU based on Solvency I. - At the time of the assessment, there were five insurance companies operating in the market with suboptimal reserving levels. - Authorities note that the companies had been required to increase their reserves. ### Main findings on supervision and capacity - Supervisory approach and capability: - Supervision takes a ring-fencing approach against total failure rather than seeking to establish a secure and stable financial infrastructure for the domestic market. - With its current capacity, insurance supervision in Cyprus will not be able to respond adequately to major systematic shocks. - The level of skills and resources provided to the SI is suboptimal. - The level of regulation is not precise enough to set clear expectations for supervised companies. - Required improvements and priorities: - Whether all companies in the market will be able to meet future capital requirements, even at a minimum level, needs to be assessed. - Improvements in professionalism are needed and can be obtained and enforced through strict application of EU standards. - The authorities should develop a plan of how insurance supervision can be enabled to perform duties more efficiently, including determination of adequate resources and skills, improved training and legal support. - The superintendent must improve regulation and supervisory guidelines; the existing draft of prudential standards is a good starting point. - For ICCS internal purposes, supervisory processes should be more clearly defined. - Licensing process and rules on fit-and-proper criteria for individuals are in place and appropriate. - A joint effort by all regulatory authorities of Cyprus should define applicable rules on corporate governance. - More guidance should be given to insurance companies on internal control procedures, business continuity plans and insurance fraud, with emphasis on preventive action. - Specific asset and liability controls: - Assets not qualified as admissible to cover reserves should not be recognized for solvency purposes. - Premium receivables should be depreciated and a strict aging structure should be requested to ensure those assets can be materialized if needed. - Verification of the timely collection of premiums paid in cash should be made an essential part of a company’s internal control procedures. - The solvency capital should be reported to the ICCS on a quarterly basis. - It is unacceptable for companies to continue operation if they are unable to meet the minimum requirements. ### Recommended action plan highlights (IAIS Insurance Core Principles) - Conditions for effective insurance supervision (CP 1) - Define regulations to set framework and clear supervisory expectations. - Supervisory objectives (CP 2) - Define clear objectives and measures for ICCS; ICCS should report on achievements regularly and communicate LIS application via regulation. - Supervisory authority (CP 3) - Grant SI a budget to perform LIS duties; require SI to produce annual priority plans; urgently assess composition of required skills. - Supervisory process (CP 4) - Standardize internal procedures and make publications available to the public. - Supervisory cooperation and information sharing (CP 5) - Contact home supervisors (post-EU accession) to identify companies under FoS that have started business activities. - Corporate governance (CP 9) - Joint effort to develop governing rules for undertakings in the financial sector by all four supervisory authorities. - Internal control (CP 10) - Define standards on internal control as essential part of sound insurance principles and enforce via reporting and auditing requirements. - Market analysis (CP 11) - Identify and define necessary information for market analysis and processes to receive and update it. - Reporting to supervisors and off-site monitoring (CP 12) - Store company data electronically; require signed hardcopies and electronic files in prescribed formats; implement plausibility testing of received data. - On-site inspection (CP 13) - Obtain MoF agreement to contract third parties for on-site inspection; develop plan for regular inspections. - Preventive and corrective measures (CP 14) - Develop regulatory rules to prevent noncompliance as well as corrective measures; consider preventive measures to improve ICCS resource allocation. - Enforcement or sanctions (CP 15) - MoF should review whether the variety of cases subject to appeal could be reduced. - Winding-up and exit from the market (CP 16) - ICCS should maintain a shortlist of potential liquidators to shorten appointment processes; include list in withdrawal of license process. - Group-wide supervision (CP 17) - Incorporate information exchange processes and terms of reference for the coordinator into the existing MOU. - Risk assessment and management (CP 18) - Initiate risk management steps once internal control procedures (CP 10) and related recommendations are implemented. - Insurance activity (CP 19) - Require supervised companies to provide risk profiles for new products, rating factors, and changes in attitudes to insurance risks. - Liabilities (CP 20) - Enhance ICCS ability to contract external resources and recruit skilled staff to determine appropriate reserves. - Investments (CP 21) - Require investment policy as part of a company risk profile submitted regularly to ICCS; internal control to cover investment decision procedures and contingency plans. - Capital adequacy and solvency (CP 23) - Make timely collection verification and quarterly solvency capital reporting essential; avoid prolonged operation of companies unable to meet minimum requirements. - Intermediaries (CP 24) - Review planned allocation of ICCS resources given range of supervisory tasks. - Consumer protection (CP 25) - Publish frequency of complaints received at company level to incentivize customer protection improvements. - Information, disclosure & transparency (CP 26) - Improve contents and frequency of the market report. - Fraud (CP 27) - See ICP10 recommendations. - Anti-money laundering (CP 28) - Identify a common approach and provide resources to deal with STRs on an as-needs-basis; note that single premiums into unit-linked contracts have often been provided in cash or from other accounts without leading to STRs to the SI. ### Authorities’ planned actions (selected commitments and timing) - CP 1: Efforts underway to outsource legal services for EU harmonization and implementation of recommended actions. - CP 2 / CP 26: Upgrade the existing "Report in Insurance in Cyprus" by including more detailed reference to the ICCS and publish annually instead of once every two years. - CP 3: Consider granting ICCS full financial autonomy from Government; expedite recruitment of appropriate qualified staff. - CP 4: Expect improved efficiency by implementing prior actions; publications will gradually be made available to the public. - CP 5: ICCS will send by the end of this year a letter to all EU home supervisory authorities. - CP 9: Each supervisory authority will develop its own corporate governance rules in close co-operation (decision taken at meeting on 11/10/2005). - CP 10: Initial discussion next year with the Institute of Certified Accountants followed by discussion with the Cyprus Association of Insurance Companies. - CP 11: Implementation linked to adequate staffing of the ICCS (see CP3). - CP 12: Tender proposals for appropriate ICCS software submitted and under evaluation; procedure expected to be completed by May 2006. - CP 13: ICCS will submit proposals to MoF for funding third-party on-site inspection support; plan for regular on-site inspections is being prepared. - CP 14: Implementation expected if ICCS is upgraded with qualified staff within the next 2–3 years. - CP 15: Discussions underway between MoF and ICCS to review appeal process. - CP 16: Provisional liquidator for rare liquidations will be an officer from the Office of the Registrar of Companies and Official Receiver. - CP 17: Implementation expected within the first semester of next year. - CP 18: To be implemented following other relevant recommended actions. - CP 19: ICCS will request insurance companies to submit requested information; assessment timing depends on ICCS skills (CP3). - CP 20 / CP 21: Implementation depends on adequacy of ICCS staffing (CP3). - CP 23: A letter will be addressed to all insurance companies early next year to implement solvency reporting action. - CP 24: Planned allocation of resources for intermediaries will be reviewed. - CP 25: A Bill for establishment of a Financial Ombudsman has been drafted; could enable ICCS-related consumer protection actions. - CP 27: See CP10 comments. - CP 28: Implementation linked to on-site inspections (CP13). ### Securities regulation (brief summary of assessment context) - Assessment undertaken as part of the offshore financial center assessment program using the IOSCO Assessment Methodology of October 2003. - Main securities supervisory authority: Securities and Exchange Commission (CySEC), established in 2001; supervises the Stock Exchange, retail collective investment schemes, market intermediaries and issuers on the Stock Exchange. - Two investment services activities supervised by the CBC: (i) international collective investment schemes, and (ii) independent financial advisory firms, offered almost exclusively to nonresidents. - Main legislation: CySEC Law (2001–2004) and Stock Exchange Law (1993–2005). - The Stock Exchange has a limited self-regulatory role; apart from the Exchange there are no self-regulatory organizations in Cyprus. - The Cyprus International Financial Services Association (CIFSA) was established to promote and protect interests of international financial services companies and acts as a liaison with financial supervisory authorities and examines investor complaints against members. *Source: IMF staff country report content in _cr06347 - 75. The leading three life insurance companies have 80 percent of the whole market and* ### 89. In addition to the above named laws, the assessment was based on the self ### _cr06347 - 89. In addition to the above named laws, the assessment was based on the self ### Information and methodology used for assessment - Assessment drew on self-assessments completed by both CySEC and the Central Bank, supplemented by information provided by both authorities and data available on the website. - Detailed discussions were held with CySEC, the Central Bank, and the Stock Exchange as well as with relevant private sector companies, representative bodies, the accountancy supervisor, and accountancy firms. - Cooperation was freely given by all concerned. ### Market structure and participants - Stock Exchange characteristics: - State owned. - Number of listed companies: 18 main and 137 supplementary listings. - Turnover: in the region of $500,000 daily at the end of April 2005, down from $1.8 million in the first 75 trading days of the year. - Historical collapse: index fell from about 800 to 80 points in the course of a year and a half (circa 1999/2000). - Market intermediaries: - 47 authorized market intermediaries. - 32 intermediaries offer services almost exclusively to nonresidents. - 15 intermediaries offer services locally; many are members of the Stock Exchange. - Collective investment schemes: - Retail UCITS: Cyprus has transposed the EU UCITS Directives but has not authorized any schemes to date. - Non-retail schemes: about 15 authorized non-retail collective investment schemes with a net asset value of about $400 million. - About 40 international financial advisors. - Two types of international schemes: (i) marketed to experienced investors with a minimum investor subscription of $50,000; and (ii) private schemes restricting the number of investors to 100. - Supervision of international collective investment schemes currently carried out by the CBC under the International Collective Investment Schemes Law, 1999. ### General preconditions for effective securities regulation - Regulatory regime strongly influenced by European Union membership; Cyprus has transposed and continues to transpose many EU securities directives. - Legal, accounting, company law, and taxation regimes heavily influenced by U.K. equivalents. - Accounting: Cyprus has adopted International Financial Reporting Standards (IFRS); all statutorily based financial reporting must use the standards. - Accounting and auditing systems appear to be well supervised. ### Principle-by-principle assessment — key findings - Legislative/supervisory framework: - Generally comprehensive and developed significantly in recent years in preparation for EU membership. - Cyprus had adopted all relevant directives by accession in May 2004 and continues to adopt more EU securities directives. - CySEC resources and capacity: - At present, CySEC appears to have adequate staff resources who are well trained and competent. - Medium-term challenge: retain current staff and increase staff numbers as CySEC assumes more responsibilities (e.g., implementation of significant new EU directives). - Regulator (Principles 1–5): - Regulatory responsibilities of CySEC generally clearly set down in legislation and applied consistently. - Area requiring clarity: respective roles of CySEC and the Stock Exchange in supervision of issuers of securities (listed companies); CySEC’s competency in this area recently questioned by the courts and an appeal is pending. - CySEC seeks amendment to the Stock Exchange Law to clarify its regulatory role. (Footnote: authorities indicated the planned amendment to the Stock Exchange Act was enacted in September 2005.) - Self-regulatory organizations (Principles 6–7): - Apart from a limited self-regulatory role of the Stock Exchange, there are no self-regulatory organizations in Cyprus. - Inspections, investigations, and enforcement (Principles 8–10): - CySEC has wide powers but cannot supervise the Stock Exchange effectively for constitutional and legal reasons (see Principles 25–30). - Information sharing and cooperation (Principles 11–13): - Law provides for sharing information with domestic and foreign regulators. - Limitation: CySEC cannot collect information and carry out investigations on behalf of foreign regulators unless it has an independent interest in the matter. - Difficulty obtaining information identifying beneficial owners of shares from lawyers acting as nominees; forthcoming bill expected to correct shortcomings. - Issuers (Principles 14–16): - Public offering law, stock exchange law, and company law provide for accurate and timely disclosure and adequate safeguards for fair treatment of shareholders. - Accounting and auditing standards align with best international practice (IFRS adopted). - Collective Investment Schemes (Principles 17–20): - Two regimes: UCITS (retail) supervised by CySEC; international collective investment schemes (non-retail) targeted at nonresidents and supervised by the CBC. - UCITS legislation comprehensive; CySEC needs specific rules for valuing assets other than shares in publicly quoted companies held by UCITS. - About 15 international schemes authorized to date with total net asset value of about $400 million. - Market Intermediaries (Principles 21–24): - All market intermediaries except investment advisors must be authorized by CySEC. - Following transposition of the Markets in Financial Instruments Directive, investment advisors will be supervised by CySEC; none currently exist in the domestic market. - 47 market intermediaries authorized by CySEC; 32 serve nonresidents; 15 serve locally. - About 40 firms currently supervised by the CBC that offer only investment advice. - Principles for the Secondary Market (Principles 25–30): - CySEC charged with supervision of the Stock Exchange but constitutionally cannot supervise another public administrative body; cannot apply a whole range of regulatory tools nor has it carried out an inspection of the exchange. - In extreme circumstances CySEC could, via the Council of Ministers, order temporary suspension of the exchange. - In practice, CySEC and the exchange have a satisfactory relationship; CySEC monitors trading on a real-time and daily basis. - The Stock Exchange has exclusive rights to undertake stock market transactions in movable securities in Cyprus; Cyprus must establish exchange authorization criteria upon transposition of the Markets in Financial Instruments Directive. ### Recommended actions (selected, by Principle) - Principle 26: - Introduce legislation as a matter of urgency to allow CySEC to supervise effectively the Stock Exchange by revising the equal constitutional status that prevents CySEC from supervising another public administrative body. - Principle 11: - Remove obstacle preventing CySEC from sharing information and carrying out investigations on behalf of foreign regulators where CySEC does not have an independent interest; noted this issue will be addressed in forthcoming legislation. - Principle 13: - Remove legal uncertainty regarding CySEC’s ability to obtain information identifying beneficial owners of shares registered in the names of lawyers acting as nominees; CySEC seeking amendment in forthcoming legislation. - Principle 1: - Address uncertainty surrounding respective responsibilities of CySEC and the Stock Exchange in supervision of issuers of securities as a matter of urgency; an amendment to the Stock Exchange Law is to be made. (See Footnote: planned amendment enacted in September 2005.) - Principle 20: - CySEC to introduce specific rules for valuing assets other than shares in publicly quoted companies for UCITS; rules currently being drafted. - Principle 17: - Recommended that the Central Bank take a more proactive role, e.g., through inspections, to ensure no members of the public are investing in non-retail collective investment schemes. - Principle 2: - Revoke provision in the CySEC Law requiring CySEC to provide the Minister of Finance with any information he may deem necessary for the public interest to maintain operational independence; noted this will be addressed in forthcoming legislation. - Principle 3: - Increase resources: extra staff will be required to cope with expanding workload, e.g., implementation of new EU Directives. ### Authorities’ response — key actions and commitments - Principle 1: - On the 9th of September 2005, three laws came into force: Law N. 115(I)/2005 amending the Stock Exchange Law to clearly designate responsibilities of the Cyprus Stock Exchange and CySEC regarding issuers; Law N. 114(I)/2005 transposing the EU Prospectus Directive; Law N. 116(I)/2005 transposing the EU Market Abuse Directives. - Principle 2: - CySEC finalizing a bill amending the CySEC Law to revoke the provision requiring CySEC to provide the Minister of Finance with information; expected enactment in 2006. - Principle 3: - CySEC plans to significantly increase numbers of skilled staff; budget for the 2006 financial year provides for a 29% increase in the budget allocated for staff costs. - Principle 11: - CySEC finalizing a bill to remove the obstacle to sharing information and carrying out investigations on behalf of foreign regulators when CySEC has no independent interest; expected enactment in 2006. - Principle 13: - CySEC proposed amendments to secure authority to obtain information on the identity of beneficial owners of shares registered in the names of lawyers acting as nominees; enactment expected in 2006. - Principle 20: - No UCITS authorized to-date; CySEC undertakes to have valuation rules in place before any authorisation is given. - Principle 26: - CySEC will take appropriate steps so the issue of effective supervision of the Cyprus Stock Exchange is addressed with transposition into national law of the EU Directive on Markets in Financial Instruments. _ Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06347.pdf_ --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06347.pdf_