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The Financial Services Sector Is Being Enhanced

The Financial Services Sector Is Being Enhanced

Now that public attention is shifting from managing the Covid-19 pandemic to planning the “day after”, the business world is being called upon to find solutions to deal with the significant challenges posed, such as preserving jobs and ensuring liquidity, which will (unfortunately) likely deteriorate due to the increased difficulties in covering credit criteria. Bearing in mind that the consequences of the pandemic might have a long-term effect, the gap in financing could grow further in this new landscape.

 

Therefore, the capacity of the ‘real economy’ to absorb capital from the financial markets and their capacity to inject smoothly, expediently and prudently capital into the ‘real economy’, will act as a driving force behind the efforts for the economy’s recovery. In brief, the activation and the reinforcement of the operations of financial intermediaries other than banks (alternative financing sources) is the link that will channel available capital across business sectors and geographical areas.

 

Given the importance of alternative financing sources in supporting the economy, the adoption of Law 88(I)/2020 for the Sub-threshold Alternative Investment Fund Managers (‘the Law’), also known as Mini-Managers, has come at the right time. The reason is that this new category of asset management professionals will be exclusively managing investment funds, which serve as an alternative funding method to bank financing. More specifically, the investment funds under the management of said managers, will, inter alia, finance the operations of established companies, start-up companies or companies in their expansion phase. Such financing is being widely known as private equity and venture capitalist financing respectively. The need for the financing of such companies is more than obvious: The financing of established businesses will lead to the preservation of jobs and thus of social peace, while the financing of evolving start-ups will help new business models, products and services, which will be adapted to the reality caused by the pandemic, to emerge.

 

The widely-known UCITS (Undertaking for Collective Investment in Transferable Securities) funds were designed with the retail investor in mind. Therefore, they are subject to retail investor protection safeguards such as investment restrictions and diversification limits, preventing the long-term and concentrated financing of said businesses. However, this role may be undertaken by those investment funds known as alternative investment funds (‘AIFs’) managed by alternative investment fund managers (‘AIFMs’). Currently, Cypriot AIFs can be managed by EU licensed AIFMs, which is however a choice for fund managers intending to manage sizeable portfolios, thus a rather cost-worthy choice. At the same time, the remaining categories of currently eligible AIF managers for smaller portfolios do not have an active alternative financing focus but rather a passive and minor financing participation. Thus, the list of entities eligible to act as managers of AIFs below certain thresholds with an active alternative financing focus has been extended with the introduction of Mini-Managers.

 

By passing this sectoral-specific legislation and providing for an additional regulated alternative financing channel, Mini-Managers can now be licensed by CySEC to manage the non-negligible portfolios of AIFs with total assets of up to €100m using leverage or up to €500m without leverage and a lock-up period of five years. Especially the latter threshold is tailored to the needs of private equity/venture capital portfolios, whereas CySEC will assess the competence of the Mini-Manager’s governing body, risk-takers, risk managers and of other control function officers. In addition to the assessment of persons, CySEC will also assess the operational protocols of Mini-Mangers, so that investments are made in a prudent and documented manner, in order to ensure prudent financing of businesses and AIF investor protection at the same time. For the sake of avoiding dilution of investor safeguards, the Mini- Manager will be ultimately responsible in case of delegation, whereas liability for negligence cannot be out-contracted. The market integrity will be safeguarded through CySEC’s AML supervisory mandate over CySEC authorized Mini-Managers.

 

The establishment and operations of Mini-Managers is  compatible with the limits on the size of the AIFs under their management compared to the requirements on AIFMs licensed under EU Directive 2011/61/EU, who are allowed to manage portfolios exceeding the aforementioned thresholds; nevertheless, the prudential safeguards surrounding the licensing and the operations of Mini-Managers aim at ensuring that the manager – who is obliged to carry out his activities with due diligence and always with the best interests of the AIF that it manages in mind – is sufficiently supervised.

 

In conclusion, the regulation of the operations of Mini-Managers boosts the operability of the market of AIFs as an alternative liquidity channel and enhances their importance as a fundamental financial intermediary for investment. At the same time, it also ensures that the Cypriot regulatory framework is effective, proportionate and evolving and that it captures the industry’s international pace of change and ensures that investor protection is not put at risk of compromise. The new institutional framework allows investment fund managers with assets below the said thresholds to create a base in Cyprus, with well balanced requirements and cost compared to the ones incumbent upon AIFMs of bigger portfolios, thus avoiding the creation of an undue regulatory burden that would hinder the development of a market for licensed and supervised Mini-Managers. At the same time the legislation and CySEC’s Directives introduce tools for ensuring that investors are adequately protected and that the integrity of the market is safeguarded.

 

By developing this market in a proportionate yet prudent manner, the channelling of liquidity towards Covid-19 traumatised businesses will be facilitated, the financial services sector will be further enhanced, while the establishment of such investment fund managers will bring multiple benefits for the local economy, such as the creation of new jobs for highly educated staff.

 

The modernisation of the capital market’s institutional environment remains a priority for the Cyprus Securities and Exchange Commission, always having the protection of the investing public in mind. Ensuring the capital market’s credibility can lead to multiple benefits for the Cyprus economy, especially at a time when the main objective is to attract investments to ensure recovery and build conditions of long-term prosperity.

 

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