Cyprus: Implementation Of The Markets In Financial Instruments Directive

This article appeared in International Company and Commercial Law Review, Issue 4 of 2008. It is reproduced by kind permission of the publisher, Sweet & Maxwell Limited.

Cyprus has now passed the necessary legislation to implement Directive 2004/391 and Directive 2006/31.2 Together, these Directives establish a comprehensive regulatory framework for the execution of transactions on behalf of investors by stock markets, alternative trading systems and investment firms, with the objective of protecting investors, developing a single market in investment services across the European Union, and promoting fair and transparent integrated financial markets.

The new Investment Services and Activities and Regulated Markets Law of 2007 (Cyprus), 144(1) of 2007, which was passed on October 25, 2007, replaces the Investment Firms Law of 2002 with effect from November 1, 2007. As well as implementing the MiFID Directive it also harmonises domestic law with relevant European Directives regarding investor compensation schemes, capital adequacy of investment firms and credit institutions, organisational requirements, operating conditions for investment firms and record-keeping obligations for investment firms, transaction reporting, market transparency and admission of financial instruments to trading.

One of the goals of the MiFID Directive is a ''single passport'' for investment firms, banks and stock markets enabling them to offer their services on a cross-border basis throughout Europe on the basis of homecountry authorisations, granted on the basis of uniform prerequisites in all Member States. Under s.6(5) of the Cyprus law, the licence to provide investment services is valid in all Member States, either through a branch or by simply providing services or activities in any Member State. Section 77 of the law recognises the reciprocal right of investment firms licensed by other Member States to operate in Cyprus provided that the activities are within the authorisation granted by the home state regulator.

Section 4(2) of the law restricts the provision of investment services to:

  • Cyprus investment firms authorised to operate under s.6(2) of the law;
  • Cyprus banks and co-operative societies under ss.118 and 122 respectively;
  • investment firms of other EU Member States under ss.77(1) and 80(1); and
  • third country investment firms under s.78(1).

It requires all Cyprus investment firms to be licensed by the Cyprus Securities and Exchange Commission (CySEC). Banks and co-operative societies are regulated by the Central Bank of Cyprus and the Authority for the Supervision and Development of Co-operative Societies respectively. Business descriptions such as ''investment services'', ''investment activities'', ''regulated market'', ''stock exchange'', ''financial services'', ''stock broking services'', broker or any other similar words in any language may not be used by anyone unless he is licensed according to the provisions of the law.

Any document, publication or announcement issued by a Cyprus investment firm must include the number of its authorisation and a statement that it is supervised by CySEC. Cyprus investment firms must maintain a website showing at least the same information.

Provision of investment services on a paid basis without authorisation is a criminal offence under the law, punishable by a fine, imprisonment or both. In addition, the court may disqualify any person found guilty of an offence from providing any investment services regulated by the law for up to five years. The court may also suspend the activities of any person who is charged with an offence under the law pending trial.

Grandfathering And Transitional Provisions

The Investment Services and Activities and Regulated Markets Law of 2007 repeals the Investment Firms Law of 2002 with effect from November 1, 2007. However, firms authorised under s.10(1) of the Investment Firms Law of 2002 are deemed to have authorisation under the new law, subject to compliance with its provisions. Firms holding limited authorisations under s.7 of the Investment Firms Law of 2002 are required to obtain authorisation under s.6(9)(b) of the new Investment Services and Activities and Regulated Markets Law of 2007 within three years, failing which they must withdraw from the investment activities.

Companies whose activities are limited to providing investment advice pursuant to s.69A of the Investment Firms Law of 2002 may continue to provide such advice provided that they submit an application for authorisation under s.21 of the new law. A company which fails to submit an application within the prescribed time limit of two months from the publication of the law in the Official Gazette must immediately cease to provide investment advice and must settle all its obligations to third parties arising from the provision of investment advice within one month after the two-month deadline. Similarly, if CySEC rejects an application, the applicant must immediately cease to provide investment advice and must settle all its obligations to third parties arising from the provision of investment advice within a month.

Third country investment firms authorised under s.29(1) of the Investment Firms Law of 2002 to provide investment services in Cyprus are deemed to be authorised under s.78(1) of the Investment Services and Activities and Regulated Markets Law, and are subject to compliance with its provisions.

Criteria For Granting A Licence

The new law stipulates minimum requirements in terms of capital, management and investor protection which may be summarised as follows.

Initial share capital

  • Investment firms providing reception, transmission, execution, portfolio management and investment advice require a minimum share capital of EUR200,000.
  • For own account trading, underwriting and operation of multilateral trading facilities the minimum capital requirement is EUR1,000,000.
  • For reception, transmission and investment advice without handling any clients' funds the minimum capital is reduced to EUR80,000. Alternatively the firm may opt for a lower minimum capital supplemented by appropriate professional indemnity insurance.


The people who direct the company must be fit and proper and there must be at least two of them (the ''four eyes'' principle).


The identities and respective interests of the shareholders or the ultimate beneficial owners must be disclosed to and approved by CySEC.


The company must be adequately resourced with persons of the necessary integrity, good repute, skills, knowledge and expertise to enable them to discharge their duties properly.

Other requirements

  • The objects clause of the company's memorandum of association must provide that the company operates as an investment company providing the services detailed in its licence issued by CySEC.
  • The company's head office must be located in Cyprus.
  • The company must be a member of the investor compensation fund.
  • CySEC will refuse authorisation if the laws, regulations or administrative provisions of a third country prevent it from effectively exercising its supervisory functions in respect of the company.

Organisational Requirements

The new law also includes a number of organisational requirements aimed at protecting investors' interests.

As a minimum, the company must have specific and adequate policies and procedures in the following areas:

  • compliance with the legislation;
  • regulating personal transactions;
  • protection of clients from any conflict of interest;
  • continuity of operations and services;
  • internal control;
  • proper corporate governance;
  • accounting;
  • segregation and protection of clients' funds;
  • internal audit;
  • risk management;
  • recording of instructions and transactions; and
  • prevention of money laundering.

These must be documented in an internal procedures manual with which all employees must be familiar.

There are additional requirements for multilateral trading facilities (MTF) relating to the rules and procedures for trading and criteria for the execution of orders and determining the instruments; provision of publicly available information and access to such information; access to the MTF; provision of information to users in respect of their responsibility for the settlement of transactions; and procedures to facilitate the settlement of transactions.

Application For Authorisation

Applications must be submitted to CySEC using the prescribed forms. Section 22 of the law requires CySEC to determine the application within six months of submission of a complete application. Failure by CySEC to reach a decision within this time limit is subject to judicial review before the Supreme Court under art.146 of the Cyprus Constitution.

Surrender Or Lapse Of Authorisation

An authorised business may voluntarily surrender its authorisation, or alternatively the authorisation will lapse if the holder does not start to make use of it within 12 months from the date of its issue or if the holder ceases to provide investment services or carry out investment activities for six months. There may be a partial lapse affecting only some of the authorised activities, in which case the authorisation will lapse as regards those activities.

The holder is required to inform CySEC of the circumstances and to settle any obligations arising from the discontinued business within three months.

Withdrawal Of Authorisation

Section 25 of the Investment Services and Activities and Regulated Markets Law sets out the circumstances in which CySEC may withdraw an authorisation. These are as follows:

  • if CySEC determines that the authorisation was obtained on the basis of false or misleading details or by any other irregular means or if the holder has submitted or notified or otherwise publicised in any way false or misleading information, details or documents;
  • if the holder no longer meets the conditions under which authorisation was granted;
  • if the holder has seriously or systematically infringed the operating requirements of the law; or
  • if the holder breaches any other domestic legislation which provides for the withdrawal of authorisation.

Authorisations may be withdrawn either wholly or partially. The Investment Services and Activities and Regulated Markets Law does not specify the procedure to be followed but leaves this to be determined by CySEC.

Once an authorisation has been withdrawn the affected activities must be discontinued immediately and the related obligations must be settled within three months of notification of CySEC's decision. Failure to comply is punishable by an administrative fine of up to EUR350,000. A company whose authorisation has been wholly withdrawn will nevertheless remain subject to CySEC's supervision until CySEC is satisfied that all its requirements have been complied with. Furthermore, CySEC may apply to the court for the liquidation of the company and the appointment of a liquidator under the Companies Law.

Suspension Of Authorisation

At the same time as it commences withdrawal proceedings, CySEC may suspend an investment firm's authorisation if it considers that the continued operation of the business jeopardises the interests of clients or investors or the orderly operation of the capital market. Alternatively CySEC may temporarily suspend an authorisation as a sanction short of permanent withdrawal.

An authorisation may also be suspended where there is a suspicion of breaches of the law or any associated regulations and directives that threaten the interests of clients or investors or the orderly operation of the capital market. The decision to suspend the authorisation may be taken by the president or the vice president of CySEC, who must report the facts to the next meeting of CySEC.

CySEC may give the investment firm up to three months to rectify any breaches. At the end of that period it may revoke the suspension if it is satisfied that the issues have been properly dealt with. If it is not satisfied that the deficiencies have been satisfactorily addressed or if the investment firm fails to notify it of the actions taken within the time allowed, CySEC may extend the suspension and begin proceedings to withdraw the authorisation.

As with the withdrawal process, the Investment Services and Activities and Regulated Markets Law does not prescribe the detailed procedures to be followed for suspensions, but leaves these to be determined by CySEC.


1. Directive 2004/39 on markets in financial instruments amending Directives 85/611 and 93/6 and Directive 2000/12 and repealing Directive 93/22 [2004] OJ L145/1.

2. Directive 2006/31 amending Directive 2004/39 on markets in financial instruments, as regards certain deadlines [2006] OJ L114/60.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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