Seldom in the financial industry do markets run out of bad apples.
Despite measures taken in the past, the current leadership of CySEC, the country’s top securities watchdog, is determined to take tougher action as some firms continue to produce ways to attract clients that are both unethical and illegal.
CySEC supervises CIFs or Cyprus Investment Firms, which provide investment services in complex financial instruments, particularly Contracts for Difference, known as CFDs.
Although the firms provide their services in Cyprus, they also operate in other EU states or third countries, either on a cross-border basis or through establishing a branch.
One area of constant concern is client solicitation and aggressive marketing practices. MiFid II governs the solicitation of clients, and national supervisors are responsible for enforcing these rules and applying administrative action where violations have been identified.
At a press conference, CySEC pointed out that the Market Surveillance and Investigations Department pursued cases in 2021, resulting in fines totalling €1.34 mln.
According to a statement, “administrative sanctions imposed as a result of investigations and supervisory reviews…the vast majority relating to fines and settlements for CIFs or Cyprus Investment Firms, which violated the law governing the provision of investment services, known as MiFID II.”
Inside sources told the Financial Mirror that one way firms are using to solicit clients is by introducing brokers.
According to the European Securities and Markets Authority, ESMA, “third parties, also referred to in the industry as introducing brokers or affiliates, are widely used to facilitate the cross-border distribution of CFDs and other speculative products.
“Third parties have been observed carrying out a wide range of promotional, marketing and client services activities on behalf of investment firms.
“In many cases, these activities overlap, and it can be difficult to distinguish between the marketing of the firm/brand, the provision of customer support services and the provision of investment services.
“Given the extensive use of third parties in the industry, it is critical that authorised firms have robust controls in place to ensure the effective oversight of these relationships.”
In 2017, then CySEC chairperson Demetra Kalogerou told CIF executives that CySEC didn’t want the use of introducing brokers at all, nor affiliates.
In some cases, introducing brokers are those who sell contacts to other CIFs, which engage in aggressive marketing of their products.
This practice is strictly prohibited, and CySEC actively pursues violations.
Sometimes, introducing brokers also sell the same contacts to big law firms abroad to get them to file a complaint against the same financial services firms and then ask CIFs for restitution to withdraw their complaint.
Some CIFs are compelled to seek a compromise to avoid the wrath of CySEC.
With so much at stake, CIFs should avoid aggressive marketing practices altogether and perhaps put the right people at the helm who can help guide their behaviour and practices within the parameters of the law.
The alternative could be devastating.
From what we hear, CySEC will not take prisoners.