Financial Services Authority: A way forward for the financial services sector
Kyriakos Iordanou 10:50 - 13 September 2023
Apparently, living in the current socioeconomic environment for the last 10 years at least, we never get bored... tired maybe, but surely not bored!
The rate of change of the status quo in the domestic and especially in the international sphere, of emergence of new challenges, of dealing with problems that keep popping up, of the need to adjust and rectify, to reform and to operate in new and demanding regimes, is phenomenal and keeps us on our toes!
We are eye-witnesses of political, geostrategic, social, diplomatic, financial and investment changes, of warfare activities in our wider neighbourhood, of economic instability and surging inflation, of an increasing cost of capital and debt causing social trembles, coupled with an admittedly foreseen rise of political movements in various European regions like those of the notorious 1930’s, which ultimately shaped the future of the world a few years later.
All of the above generate crises, rendering governments, the business community and civic society “hostages” of a constant struggle to combat them, rather than being focused on a more productive agenda and on a more robust future planning.
This was proven recently by the Covid pandemic, the current circumstances resulting from the war in Ukraine coupled with the political and commercial restrictions and the sanctions imposed, and is about to escalate further with the developments in digital technology (e.g. AI evolution) and the environmental and sustainability policies. The new global priorities!
At the same time, a primary place in the daily business and regulatory action-list is kept for the wider compliance matters in the financial and corporate services sectors, the discussions around international tax planning and reporting, as well as the ESG and green transition and the overall sustainability saga.
As a consequence, all of the above inescapably lead the national economies into the arms of stubborn high inflation and to a radical flight in prices, especially in the areas of international trade, energy cost, the supply chains and retail prices. In addition, the continual increase in the cost of capital and the interest rates imposes additional hurdles in sustaining businesses and in providing the essential financial resources for new ventures and start-ups. Civilians and taxpayers experience a noticeable contraction of their earnings and their purchasing power.
We find ourselves standing at a critical edge, where, on the one side, governments and national treasuries need to exhibit their strengths and resilience and, on the other, businesses and households, ought to measure and strengthen their own financial resilience and set out their priorities. It is a tough equation to balance!
Furthermore, the new international outlook puts countries into a different business mode, a more competitive and possibly a more introverted one. Each country will try to mitigate losses and strive to increase revenues, seek relevance and importance in the international business landscape, claiming its “fair” share of the benefits. These benefits may include tax income, attraction of foreign direct investments, exports, as well as political influence. Hence, possibly there may be shifts from the traditional economic and political international establishments, towards new off-springs, e.g. BRICS and the new block that is being moulded. Traditional alliances and trade coalitions may start to “shake”, with new ones being formed.
In my opinion, Europe and the US stand at a particularly difficult step in economic and social terms, given the accumulation of all sorts of burdens and inflexibilities, which may ignite additional conflicts with the “wannabe” competitors and challengers, in an attempt to protect their own “territory”. So, it should not be of surprise to anyone if we come across either fiercer trade protectionism measures (already noticed) or a revisionism of geopolitical and economic long-established situations.
Surely, the effects of the war in Ukraine resulted in a growing sensitivity on the application of other politico-economic tools, such as the imposition of sanctions on Russian interest entities, something that modified the scenery. Hence, the significance of regulatory compliance is excelling, with Sanctions, AML, Terrorist Financing being dealt with at higher political levels. Obviously, given the prevailing circumstances, this is something that we have to live with for the foreseeable future.
Undoubtedly, one of the principal pillars of the economic development of our country over the last decades has been the financial services sector. The economic crisis of 2013, the various revelations by international investigative journalists for ill-doings and scandals, the collapse of banks, the aspirations of OECD and Europe to harmonise trade, business and taxation, as well as all the consequences of the war in Ukraine, unveiled how sensitive and susceptible the services sector is to external influences and international pressure and threats. Ultimately, the lesson learnt, especially over the last several months, is that the services sector is integral to the whole economic environment of the country, catering for the other sectors’ performance as well.
Therefore, it is a sector that needs to be well protected and governed. So, this is maybe the time to proceed with a clear goal setting expedition and to design the relevant strategies supporting these goals. This is the time to retract from burdens of the past and move fast ahead in a consistent, sustainable and robust manner.
Hence, it is essential that all economy stakeholders synchronise their actions and align resources in order to entrench and safeguard the services sector, taking good care of its institutional, regulatory and operational framework. There is an imminent necessity to accept and to adapt to the new realities as they are brought into the scene from the international community, shaping thus a truly modern, attractive, transparent, credible, growth oriented and sustainable business model.
Amid this uncertainty and havoc, Cyprus strives to remain afloat! At the same time, besides ensuring compliance with its international business and regulatory obligations, the government, the political personnel, the business community and the technocrats have an exceptional opportunity to revisit and rethink the future of the country.
It is the time to rectify mistakes, depart from old habits and perceptions and take every possible measure to safeguard Cyprus’ good repute, to build comparative advantages and to be competitive in an ever-increasing tough and unfair international competition.
What are the options for Cyprus then? We could choose from two routes towards these goals, firstly that of improvisation, and secondly, that of adopting and adapting best practices from other countries. It is a fact, the first option, with the fragmentation of the services sector to individual tasks and corresponding authorities is not something that can carry us far. On the contrary, it has been suggested by external assessors that we should work for a consolidated regulatory body, especially for the corporate service providers. So, this leaves us with the latter option!
Taking into consideration the international landscape, the prevailing conditions and prerequisites relating to compliance and the quest for inbound investments and business, Cyprus has to construct a modern, forward looking, robust and convincing new model if it aspires to remain an international business hub of good repute.
Growing from the development stage and reaching maturity whilst learning, at the same time, from more advanced countries in the financial services industry and capitalising on the hard lessons of the recent past, possibly the most relevant and valid way forward is to establish a national Financial Services Authority (FSA), with a wider scope, following the examples of the UK, with the FCA, and possibly those of South Africa and Hong Kong, which could be more relenant to Cyprus given their size. Malta has also established the MFSA with notable results.
The establishment of such an Authority should aim at bringing under a single roof all existing competent and regulatory authorities of the financial services sector as well as the AML and Sanctions legislation, including, among others, the Central Bank of Cyprus, CySEC, the Superintendent of Insurance Companies, the Cyprus Public Audit Oversight Board, the National Betting Authority, the Stock Exchange, ICPAC, the Cyprus Bar Association, even the FIU and other oversight and regulatory bodies of the sector. Although it will be of state-owned nature, it is important for this new Authority to maintain its independence from the mainstream government, as well as from any other political and business influence.
The ultimate purpose is to have as a country, a common point of reference on the strategy and control of the services sector, i.e. a true project owner, to enhance coordination, uniformity, cooperation and implementation by all authorities and their supervised entities, taking enforcement actions where required, whilst instilling accountability and responsibility. Given the example of FCA in the UK, this new Authority should be empowered to take on criminal actions against defaulting entities (after-all breaches of Sanctions and AML laws constitute criminal offences).
This will also require changes and adjustments in the legal framework of the country, possibly with the delegation of authority by the Attorney General.
Primarily though, this means that legacy habits and perceptions relating to ancient Cyprus “city-kingdoms” need to be binned and all current authorities must work in a more concerted way. It is important at this point to underscore that, this proposal in no way purports that the current authorities are abandoned or terminated, it is hereby explicitly suggested that every competent authority continues its operations as normal, however under a supreme umbrella, which will ensure coordination, guidance and protection to each authority.
Should such Authority be put in place, with the delegation of corresponding powers and with the solemn commitment by the government and the political system, it will result in the gradual rectification of the country’s bruised reputation. Furthermore, it will also facilitate Cyprus in opening up for the provision of new types of services and products within the ambit of financial services, of investment attraction and asset management, yet in a more specialised and more competitive way. Such an outcome will be beneficial for the whole economy, the negotiating powers of the government and to society at large.
In other words, Cyprus will be positioning itself at the supreme peak of the financial services centres, offering quality and meaningful services, in a credible, transparent and effective environment. This will also add to the prestige and reputation of the country as a whole, its banking and investment systems, its trusted professionals, the attraction of proper and valuable FDI, the enrichment of the state finances.
I have no illusion that this is going to be an easy decision to take or that it will be done immediately, yet the public discussion needs to be instigated, in order to explore this option. Once again, considering all factors and phenomena mentioned earlier and having in mind the way technology and digitisation shape the future, this is a one-way route we need to embark on, and we should do it as soon as possible. Otherwise, we run the risk of remaining idle and obsolete, whilst the rest of the world is pacing fast, regrettably thus condemning Cyprus and its economy as a non-relevant, a non-attractive and a panting trailer.
The business and professional community of the country should carefully reassess the type and nature of the clients it attracts, redefine its risk assessment and risk appetite, aiming at coveted and renowned organisations, with real substance, real production and real benefit creation for the whole country, not confining it for the elite few! So, we need to be selective and be prepared to reject ambiguous clients. Implementation of the EU Regulation for the screening of FDI is sine qua non towards that goal.
At the same time, we must install the appropriate mechanisms for servicing this upgraded clientele, from the very initial stage, all the way through. Firm and decisive decisions should eventually be taken, in order to set the business development foundations on quality and robust building blocks. A local FSA can provide these foundations and can be catalytic in reversing third party impressions on Cyprus’ oversight and regulatory regimes. It can also boost Cyprus’ reputation and commitment towards quality and value!
Moving ahead, Cyprus should present and prove that it is a truly prominent, serious and trustworthy jurisdiction, a place that business can be facilitated legitimately, efficiently, at premium and competitive quality. Creating such a business ecosystem is not a mere vision, it is an objective to be accomplished and a promising horizon to aim for.
Kyriakos Iordanou, General Manager, The Institute of Certified Public Accountants of Cyrus (ICPAC)