**CySEC Instructs Investment Firms to Cease Retaining Interest on Client Funds**
The Cyprus Securities and Exchange Commission (CySEC) has mandated that Cyprus Investment Firms (CIFs) must stop retaining any interest earned on client funds held in bank accounts. This directive follows the adoption of a new supervisory position aligned with European regulations and the immediate withdrawal of previous guidance.
In a circular released this week, CySEC highlighted a newly published question and answer document from the European Securities and Markets Authority (ESMA) regarding the safeguarding of client assets. The issue at hand pertains to whether investment firms operating under the Markets in Financial Instruments Directive II (MiFID II) are permitted to earn interest on client money deposited in savings accounts with banks.
The European Commission's response, issued by ESMA on September 21, was clear: investment firms are not allowed to retain interest accrued on client funds. This interpretation of MiFID II stipulates that firms must not utilize client money for their own benefit, which extends to any interest generated while the funds are held in a credit institution.
In light of this new guidance, CySEC has instructed CIFs to reassess their practices without delay. The regulator has emphasized that the previous circular, which allowed for different interpretations, no longer reflects its supervisory expectations and should not be relied upon by firms going forward.
Under the revised framework, CIFs are required to ensure their management of interest generated from client funds is compliant with Article 17(9) of Law 87(I)/2017 as well as the ESMA Q&A. Firms must demonstrate that their arrangements have been thoroughly evaluated and documented, taking into account the rights and interests of their clients.
The recent changes underscore the importance of safeguarding client assets and ensuring compliance with regulatory standards. CySEC has placed the onus of responsibility on senior management within CIFs, mandating that they oversee the implementation of measures in response to this new position effectively and promptly.
Additionally, compliance officers, internal auditors, and external auditors are expected to factor these developments into their evaluations, with any relevant findings to be included in reports submitted to CySEC. The regulator has indicated that during supervisory reviews, it may require CIFs to provide evidence of compliance with both Cypriot legislation and the ESMA Q&A.
The circular, designated as C801, was issued on September 29 and signed by CySEC chairman George Karatzias. The move is part of a broader effort to enhance the protection of client funds and ensure that investment firms adhere to stringent regulatory standards.
As the financial landscape continues to evolve, CySEC's decisive action reflects a commitment to align with European regulatory frameworks and safeguard the interests of investors in Cyprus. The implications of this directive are significant for CIFs, which must now adjust their practices to comply with the new regulatory expectations.