CySEC Circular C181 dated 02.02.17 – Obligations of CIFs when providing information to clients on the services and instruments offered

MNK Risk Consulting > Regulatory Developments > CySEC Circular C181 dated 02.02.17 – Obligations of CIFs when providing information to clients on the services and instruments offered

We would like to draw your attention to Circular C181 (“the Circular”) issued by the Cyprus Securities and Exchange Commission (“CySEC”) on 2 February 2017, regarding the obligations of CIFs when providing information to clients on the services and instruments offered. In consideration of ESMA’s publication of the paper ESMA/2015/1886 – Guidelines for the assessment of knowledge and competence (“the Guidelines“) on 17 December 2015 and in preparation for its entry into force on 3 January 2018, CySEC encourages CIFs to take measures to apply the Guidelines the soonest possible. Other relevant regulatory requirements are listed below:

  • Sections 18(2) and 36 of Law 144(I)/2007 (“the Law”);
  • Paragraph 4 and Part V of Directive DI144-2007-01 (“the Directive”);
  • Part III of Directive DI144-2007-02.

A. Scope of the Circular

Through the Circular, CySEC wishes to establish important standards that assist CIFs in meeting their obligations to act in the best interest of their clients and particularly, provides guidance in the assessment of knowledge and competence of the Staff involved in the provision of information to clients regarding investment and ancillary services and financial instruments that a CIF offers.

For the purposes of the Circular, (“Staff”) means the natural persons (including tied agents), that communicate with the CIF’s existing and potential clients, with the purpose of promoting and / or providing relevant investment and ancillary services and financial instruments to clients on behalf of the CIF. In the context of the Circular, Staff does not include persons that only:

  • Point out where clients can find information or direct clients on the CIF’s website to find relevant information a client is seeking;
  • Provide (technical) support to clients in relation to the platform, website and account opening procedure;
  • Provide assistance in uploading documents in the platform;
  • Accept clients’ phone calls and redirect said clients to relevant departments;
  • Produce marketing and promotional material;
  • Perform back-office functions;
  • Provide any other similar service.

B. Organisational requirements for the Staff

Staff must not provide investment advice in relation to financial instruments, unless, the CIF is authorized to provide investment advice, and the relevant Staff meets the professional competence requirements as these are specified through CySEC Law and the Guidelines.

CIFs should ensure that the Staff possesses the necessary knowledge and competence to meet relevant regulatory and legal requirements and business ethics standards, and CIFs are expected to set the level and intensity of knowledge and competence expected for the Staff, based on the scope and degree of the relevant services provided. Staff should possess an appropriate qualification and experience in the provision of such services to clients and relevant certification where applicable (e.g. succeed in Basic or Advanced exams and registration in the Public Register of CySEC certified persons), in accordance with CySEC directive (R.A.D.174/2015).

On an ongoing basis, CIFs should ensure that the Staff continues to possess appropriate qualifications and maintains and updates its knowledge and competence by undertaking continuous professional development (“CPD”) training courses, as well as specific training relevant to its field; and when a Staff member does not possess the above, the said Staff member’s service should be limited to a short period of time and only under the supervision of superiors. CIFs should clearly define the roles and responsibilities of the Staff and ensure that they know, understand and apply CIF’s internal policies and procedures.

CIFs should ensure that the remuneration policies and practices followed for the Staff, are in line with circular C138 and that the Staff uses its real name and not an alias, and does not give false information regarding its credentials, when communicating with clients. Furthermore, CIFs should develop a script or FAQs template that states the information that may be shared with clients, that should be subject to approval from the compliance function and the Board of Directors.

CIFs should prohibit practices such as frequent and repeated telephone calls from Staff to clients, and / or the use of aggressive language, and / or the exercising of pressure, urging / advising clients to undertake actions (e.g. to invest and / or deposit), as this is inconsistent with the provisions of Section 36(1) of the Law.

CIFs should assess the performance of Staff and where the assessment is poor or negative, and / or upon determining that the actions of a particular Staff member towards clients, are contrary to the provisions of the Law and the Circular; the CIF should undertake corrective measures (e.g. warn Staff, record possible punitive actions such as sanctions and / or dismissal of Staff), so as to ensure that such behavior is not repeated by Staff members. It is provided that the Staff is informed in advance of the above mentioned. In the unfortunate event where a Staff member is dismissed for a serious violation of regulatory requirements, information of such dismissal (along with all relevant facts) should be provided to CySEC’s attention.

C. Criteria for knowledge and competence of the Staff

In line with the Guidelines from ESMA, CIFs should ensure that Staff have the necessary knowledge and competence to:

  • Understand the key characteristics, risk and features the investment products available through the CIF, including any general tax implications (as explained in the Circular) and costs to be incurred by the client in the context of transactions (extra care should be taken when giving information regarding products of high complexity);
  • Understand the total amount of costs and charges bearable by the client in the context of transactions in an investment product, or investment or ancillary services;
  • Understand the characteristics and scope of investment services or ancillary services;
  • Understand how financial markets function and how they affect the value and pricing of investment products on which they provide information to clients;
  • Understand the impact of economic figures, national / regional / global events on markets and on the value of investment products on which they provide information;
  • Understand the difference between past and future performance scenarios as well as the limits of predictive forecasting;
  • Understand issues relating to market abuse and anti-money laundering;
  • Assess data relevant to the investment products on which they provide information to clients such as Key Investor Information Documents (“KIIDs”), prospectuses, financial statements, or financial data;
  • Understand specific market structures for the investment products on which they provide information to clients and, where relevant, their trading venues or the existence of any secondary markets;
  • Have a basic knowledge of valuation principles for the type of investment products in relation to which the information is provided.

D. Outsourcing these activities to Third Parties / service providers

The activities mentioned in section A of the Circular, are considered as significant operational functions of the CIF (refer to Paragraph 3 of the Directive) and should therefore be provided internally, either from the CIF’s Head Offices or from any branch situated in the Republic or in another Member State. However, CySEC emphasizes that, where CIF’s services and products are provided by any Third Party, the said Third Party should fall under any of the below:

  1. A service provider located in a Third Country, where all the below must be fulfilled:a.  The conditions with which the CIF must comply in order to be       authorizedand to remain so, are not undermined [Paragraph 16(1)(c) of the Directive];b. The CIF can supervise effectively the outsourced activities [Paragraph 16(3)(e) of the Directive];

    c. CySEC has effective access to the business premises of the service provider [Paragraph 16(3)(i) of the Directive].

  2. A service provider located in a Member State, where any of the below are met:a. It is either authorizedpursuant to European Directive 2004/39/EC on markets in financial instruments, orb. It is acting under the full and unconditional responsibility of the CIF and is registered in accordance with Section 40 of the Law regarding Tied Agents.

When outsourcing, CIFs should ensure that the provisions of Section 18(2)(d) of the Law and Part V of the Directive as well as the relevant circulars issued by CySEC (e.g. C138, the Circular), are fully applied to the service provider but also to the staff of the service provider. CIFs remain responsible for supervision and effectively strict overseeing of the outsourced functions in accordance with the applicable legislation.

E. Monitoring of the Staff and its activities – compliance function

A CIF’s compliance function should have sufficient resources and direct access to all relevant information in order to be able to regularly monitor the activities performed by the Staff (e.g. telephone conversations between the Staff and the clients of the CIF) and assess its knowledge and competence, which also applies for the cases where such activities are outsourced to a service provider. Relevant records should be maintained as evidence of the monitoring performed. CySEC’s circular C030 also applies here.

F. Actions required by CIFs 

CIFs should:

  • Maintain all necessary records in a way that enables the CySEC to monitor compliance with the Circular;
  • Ensure that their policies and procedures fully comply with the provisions of the Circular;
  • Ensure that their existing Staff possess the necessary knowledge and competence;
  • Immediately take, without any delay, corrective measures, where necessary, in order to comply with the Circular.

Concluding to the above, CySEC expects all CIFs to submit a confirmation to the electronic address, by 2 May 2017, which should be signed by the Board Members as to the CIF’s compliance with the Circular and, where applicable, provide reference to any corrective measures adopted for compliance.