The European Securities and Markets Authority (Esma) set out guidelines for the assessment of knowledge and competence in its publication Esma/2015/1886 dated December 17 2015. In preparation for these guidelines which come into force on January 3 2018, the Cyprus Securities and Exchange Commission (CySEC) has issued a circular (C181 dated February 2 2017) advising Cyprus investment firms (CIFs) on their obligations when providing information to clients on the services and instruments they offer, in order to meet their overriding obligation to act in the best interests of their clients.
The circular applies to anyone, including employees and tied agents of CIFs, who communicates with existing and potential clients of CIFs with the objective of promoting the services and products of a CIF and providing information to clients regarding investment and ancillary services and financial instruments that the CIF offers. It does not apply to technical support staff, and those performing an ancillary role such as producing marketing and promotional material and performing other back-office functions.
Persons to whom the circular applies are prohibited from providing investment advice in relation to financial instruments. If the CIF is authorised to provide investment advice, it must be provided by authorised and qualified employees of the appropriate department.
CIFs must ensure that persons to whom the circular applies have the requisite knowledge and competence to meet regulatory and legal requirements, as prescribed in the Esma guidelines, and meet appropriate standards of business ethics. They should possess an appropriate qualification, such as success in the basic CySEC certification examinations and registration in the public register, and should have experience in the provision of such services to clients. Individuals not meeting these standards must be appropriately supervised. Skills must be kept up-to-date by means of continuous professional development or training for an appropriate qualification, and by specific training relevant to the individual's activities.
CIFs must clearly define the roles and responsibilities of the persons concerned, and ensure that they are aware of, and understand and apply the CIF's internal policies and procedures designed to ensure compliance with the relevant regulatory requirements. Remuneration must conform with CySEC Circular C138 on remuneration policies and practices and CIFs must ensure that individuals use their real names and not aliases, and that they do not give false information regarding their credentials when communicating with clients. CIFs must compile an information script or a standard FAQ template, approved by the compliance function and the board of directors, setting out the information that can be shared with clients. They must ensure that hard-selling practices such as frequent and repeated telephone calls to clients, the use of aggressive language, and pressuring clients to invest or deposit funds, are never used, as they are not consistent with the provisions of article 36(1) of the investment services law.
CIFs must establish and implement proper performance assessment and disciplinary procedures and ensure that these are communicated to staff. If any member of staff is dismissed for a serious violation of regulatory requirements, the CIF must inform CySEC of all the circumstances so that CySEC can take appropriate action.
CySEC considers the activities covered by the circular to be important operational functions of the CIF which should be provided internally. It is highly unlikely that outsourcing these activities to a service provider established in a third country would be acceptable to CySEC. However, outsourcing to a service provider situated elsewhere in the EU which is authorised under European directive 2004/39/EC on markets in financial instruments, or to a tied agent acting under the full and unconditional responsibility of the CIF and registered in accordance with article 40 of the investment services law may be acceptable. Nevertheless, the onus remains on the CIF to supervise and manage the outsourced functions and to take appropriate steps if it determines that the service provider's performance is deficient.
CIFs must ensure that their compliance function has sufficient resources and direct access to all relevant information required to monitor the activities covered by the circular, whether they are performed in-house or outsourced to a service provider. Particular attention should be paid to telephone communications with clients. The CIF, and the compliance function in particular, should maintain adequate records to enable CySEC to oversee these operations.
In the short-term, CIFs are required to review their policies and procedures to ensure that they comply with the requirements set out in the circular, to ensure that client-facing personnel possess the necessary knowledge and competence, and to take any necessary corrective measures without delay. They are required to provide CySEC with written confirmation by the board regarding these matters no later than May 2 2017.
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