Regulation could give Cyprus an edge as financial centre, expert says

Cyprus could strengthen its position as an international financial centre by using its European regulatory framework as a competitive advantage rather than treating regulation simply as a cost, according to Kyriacos Antonaki, Head of AML & Compliance at KENDRIS Capital Limited. In an analysis published by the Cyprus Investment Funds Association, Antonaki argued that the way international financial centres compete is changing as investors place greater weight on governance, transparency, resilience and regulatory credibility. For years, financial centres often competed by offering flexibility, speed and relatively low regulatory barriers, with firms viewing compliance requirements as an expense to be minimised. That approach is becoming less attractive as geopolitical uncertainty, sanctions risks, increased scrutiny of anti-money laundering controls and higher investor expectations reshape the financial services landscape. The change is particularly evident in the alternative investment fund sector, where institutional investors are increasingly examining not only a fund manager’s investment strategy but also its governance, compliance arrangements and the quality of regulatory supervision in the jurisdiction where it operates. “The discussion is moving away from how ‘light-touch’ a jurisdiction is, towards how credible and internationally trusted its framework is,” Antonaki said. He argued that this shift makes the European regulatory framework increasingly valuable to Cyprus. Over the past decade, the European Union has strengthened its financial regulatory system through measures including the Alternative Investment Fund Managers Directive, MiFID II, the Digital Operational Resilience Act and the developing EU anti-money laundering framework. The EU’s new AML framework also includes Regulation (EU) 2024/1624, which establishes the Anti-Money Laundering Authority, or AMLA, as part of efforts to create more integrated and centralised supervision across the European financial system. Although these rules have increased compliance requirements for financial institutions, Antonaki said they have also created greater consistency and predictability. For fund managers, investment firms and institutional investors, operating within a common European framework can provide greater certainty over regulatory expectations and market access. Investors have increasingly shown a willingness to accept higher operating costs when they are accompanied by stronger governance, greater transparency and a more predictable supervisory environment, particularly following market disruptions, sanctions-related risks and increased attention to financial crime controls. Regulatory alignment, European passporting rights and supervisory standards are therefore no longer simply compliance issues, according to Antonaki. They are increasingly part of how investors assess the credibility and long-term stability of a financial centre. For Cyprus, this creates an opportunity to combine its existing advantages with access to one of the world’s largest and most established regulatory markets. As an EU and eurozone member, Cyprus has access to the European regulatory and passporting framework while also offering a competitive operating environment, a developed professional services sector, common law influences and a geographical position between Europe, the Middle East and Asia. “Cyprus combines these advantages with participation in one of the world’s most established regulatory ecosystems,” Antonaki said. He said international firms were increasingly looking beyond jurisdictions offering the lowest costs and instead seeking locations that combine efficiency, market access, institutional stability and regulatory credibility. This could benefit smaller European financial centres such as Cyprus, which cannot compete with larger centres on scale but can compete through adaptability, responsiveness and strategic positioning. Antonaki said the traditional model of attracting financial business through lighter supervision or minimal substance requirements was becoming increasingly difficult to sustain. Investors, counterparties and financial institutions are placing greater emphasis on governance, transparency, operational resilience, effective anti-money laundering controls and the overall credibility of the jurisdictions in which they operate. The focus is also moving beyond whether controls formally exist to whether they work effectively in practice. “Long-term competitiveness is becoming less dependent on regulatory arbitrage and more dependent on institutional trust,” Antonaki said. However, he cautioned that simply having European regulatory alignment would not be enough to secure Cyprus’ long-term position. The quality of supervision, strength of governance, availability of professional expertise and ability to implement rules consistently will all be important in determining whether the country can translate its regulatory position into a lasting competitive advantage. As European regulatory expectations continue to develop, Cyprus will need to demonstrate that it can apply the rules effectively while maintaining investor and international counterparty confidence. Antonaki also stressed the importance of proportionate regulation, warning that competitiveness could suffer if compliance and supervisory costs become excessive for businesses relative to their size, complexity and risk. “A framework that combines effective oversight with proportionality is more likely to support sustainable growth, encourage innovation and preserve Cyprus’ attractiveness as an international financial centre,” he said. The broader trend, he argued, means that the most successful financial centres of the coming years are unlikely to be those perceived as having the fewest rules. Instead, they are likely to be jurisdictions capable of combining efficiency with stability, proportionality and credibility within a trusted international framework. For Cyprus, that could mean positioning its EU regulatory status not as a constraint on its financial sector, but as one of the main selling points for international investors and financial firms.