Finance industry driving economic growth

4 mins read

Eleven years ago, Demetra Kalogerou set out to lead a small and unknown regulatory agency in the corner of Europe.

By the time her tenure at CySEC was up a year ago, she had helped reshape the entire industry with her dynamic leadership style.

In this interview, she talks about the lessons of the crisis she inherited and how the industry can continue acting as a driving force for economic growth in an environmentally sustainable way.

She also talks about what the industry can do to help strengthen competitiveness and success.

 During your time, you witnessed the biggest banking crisis in any European country in over a century relative to its GDP. People lost fortunes, many more their sleep. What are the lessons of that crisis?

The financial crisis brought about substantial reform of the banking and financial sector with a need to enhance the supervision of regulated entities so the financial industry, including the banking sector, regained the trust of the consumers and investors.

The government had to realise the importance of supporting the regulators with resources and a budget to provide investors with the necessary protection and safeguard the smooth functioning of the market.

Regulators must perform (a) proactive supervision and (b) event-driven reactive supervision and thematic work.

Furthermore, reg-tech solutions follow a risk-based supervision approach (RBS-F), meaning that the risks inherent in each regulated entity and their potential impact are considered to focus supervision on entities with the greatest risks/highest impact.

The regulators’ priority in the coming years should be designing and developing processes and methodologies that focus on data-driven supervision in implementing European Regulations and securities laws.

Despite reputational damage from the 2013 banking crisis, Cyprus witnessed remarkable growth in its financial services industry. CySEC has a backlog of 100 applications, including funds and investment firms. What are the driving forces behind that success story?

After the three major economic shocks – the 2013 financial and banking crises, the bailout programme agreed with the Troika, and Cyprus credit ratings downgraded to “junk” – the private sector’s overreliance on bank finance made it extremely vulnerable.

It was important to diversify the investments and funding possibilities for investors in order for the Cyprus economy to recover.

This was, to a certain extent, the rationale behind the efforts of CySEC, the Ministry of Finance, CIFA and other market participants to develop the framework for the investment funds sector.

By preparing a series of new laws and amendments to existing laws, we paved the way for the growth of the collective investment sector as a key alternative form of financing the economy.

Within five years, a comprehensive framework was completed that allowed for UCITS and their managers, alternative investment funds and their managers to seek licensing and begin operations.

In 2020, CySEC introduced the legislation for Registered Alternative Investment Funds (AIFs) and small AIF managers (Mini-Managers), while a draft law is being prepared to regulate the companies that undertake the administration of AIFs (fund administrators).

As a result, the collective investment sector has flourished.

From just five regulated entities in 2013, the number has reached more than 300.

Total funds under management jumped from €2.7 bln in 2016 to €11 bln in the first quarter of 2022.

Moreover, the number of Cyprus investment firms (CIFs) has grown to more than 260.

Many of these CIFs are part of the fintech evolution using technology to provide their financial products and services online, creating a unique financial ecosystem that has enhanced economic growth and employment in Cyprus.

What else could be done to attract more investment?

Jurisdictions with open and stable economies, sound, and comprehensive regulations conducive to new technologies and innovation, attract new investments.

Of course, many factors are at play.

If, for example, the professional services sector was not as skilled and well-educated to support the expansion of the investment funds sector, the objective of attracting them and their managers to Cyprus would have been unattainable.

To guarantee that market participants offer a high standard of services, the regulators must ensure that key-position employees are certified and continuously educated on the relevant regulatory framework and have a good corporate governance culture.

This will raise the level of professionalism in the sector, together with market confidence and efficiency.

We should continue to encourage growth through new products and services by exploring the growth and uses of fintech developments like blockchain, virtual currencies, crypto exchanges, and fintech banks while encouraging the use of RegTech solutions and cloud computing artificial intelligence that may help them to be more compliant.

Strengthening the supervisory framework will be key for the capital market to continue to grow and remain a vital source for new investors.

Should capital markets play a role in facing the challenge of climate change?

They can and should have an important role in supporting the European Green Deal’s policy objectives and the EU’s commitment to sustainable development goals.

The capital market can help this along by attracting and channelling capital and funding green, social and sustainable investments.

“Sustainable finance” can help ensure that investments support sustainable recovery and pave the way to a more resilient and green economy.

The legislative measures from the European Commission’s Action Plan include the Sustainable Finance Disclosures Regulation (SFDR), which became applicable in March 2021, and the Taxonomy Regulation and the Low Carbon Benchmark Regulation.

The SFDR aims to bring a level playing field for financial market participants and advisers on transparency in relation to sustainability risks, the consideration of adverse sustainability impacts in their investment processes, and the provision of sustainability-related information concerning financial products. The Taxonomy Regulation establishes criteria to identify to what degree economic activities can be considered environmentally sustainable.

Also, the Low Carbon Benchmark Regulation amends the EU Benchmark Regulation by introducing two new climate-related benchmark classifications, and it requires administrators of ESG benchmarks to publish certain information.

Tough regulation and enforcement are perhaps the most important conditions for a successful market. But what about the industry itself?

Their business strategy’s main pillar is maximising and sustaining profits.

Appropriate and proportionate regulation, administered through robust compliance standards, improves sustainable demand for financial services and maximises profits.

A strong compliance track record increases customer trust and confidence in those services and the businesses that provide them.

A company without this trust, and the confidence of its customers, will not make much profit for long.

I expect compliance functions will seek to leverage RegTech to automate more routine compliance tasks and workstreams.

Eventually, compliance will be able to look to big data and predictive analytics to get to a point where they can accurately identify market risks and breaches before they happen.

Compliance and ethics management are fundamental to a business and should be treated as such.