Your Excellency Minister of Finance Harris Georgiades,
Dear Director General of EFAMA Peter De Proft,
Dear chairwoman of the Cyprus Securities and Exchange commission Demetra Kalogerou,
Ladies and gentlemen,
On behalf of the Board of the Cyprus Investment Funds Association I would like to welcome you all in this year’s Funds Summit which aims to update us on recent developments in the Funds Industry and on future challenges both from a market and regulatory perspective and has a theme that highlights the importance of Cyprus Strategic Position and its contribution to the Fund and asset management industry.
The desirability of moving from a bank-dominated financial system to a system with more diverse sources of financing remains highly in the agenda of EU policy makers and regulators so as to create more opportunities for equity funding and reduced risks from such diversification. Furthermore the European Capital Markets Union initiative is looking to promote European venture capital investing, and strong reserves of capital in the hands of venture managers is crucial, if those initiatives are to succeed.
In Cyprus, as the financial services sector emerges from the economic crisis, and the country is regaining its reputation having completed the Economic Adjustment programme on time while introducing major reforms that will increase the efficiency of the public sector, the Cyprus funds industry has an increasingly important role to play in raising finance to invest, generating new jobs and wealth and playing a leading part in the recovery of our Economy.
Social and demographic trends are also highly favourable for Cyprus to play an important role as a regional fund center of excellence due to its strategic location.
Looking at the map a Fund manager operating from Cyprus can reach countries in the CIS and MENA regions with population of nearly 700million with countries that are achieving positive GDP Growth rates.
Last week, the annual report on Private Equity Activity for 2015 reported a total Fund raising amounting to €47.6bn and it was interesting to note that the main investors committing to European Private Equity Funds are based in the Middle East and Asia.
Other attributes of Cyprus relating to the Fund industry is our legal system, based on Common Law Principals which provides among other for redomiciliation procedures that allow Funds to relocate from offshore to onshore and is in full compliance with EU and OECD standards for anti-money laundering and insider dealing.
Furthermore we offer one of the most attractive fund tax regimes in Europe; both at the level of the Fund Manager and the investors, as well as at the level of the Fund.
Worth highlighting is the already introduced provisions that exempt non-domiciled fund managers from taxation on their investment income and the 50% tax exception on their earned income if they are remunerated more than hundred thousand euro per year. There are no withholding taxes on distributions to investors and no VAT is charged on services in respect of investment management, administration and marketing services supplied to Funds carrying on business in Cyprus.
At the level of the Fund gains from buying and selling securities are tax exempt and interest income is reduced by a deem deduction on Funds Invested in the Fund reducing the effective tax on interest to 2.5%. Furthermore a new provision is to be introduced for carried interest taxation not to exceed 7%, and for the categorization of Islamic Fund instruments as securities so as to be exempted from tax on any gains realized.
It is therefore not a surprise that our Funds Industry is gaining significant momentum from both local and international promoters and we already record an increasing number of new applications to set up investment funds in Cyprus and fund management companies whereas we have observed some European based funds and AIFM redomiciling to Cyprus; due to the lower cost of establishing and maintaining their operations.
There are also prospects of fund hosting of non EU and other small and medium size managers. Cyprus based AIFMs due to the proximity and close relationships with Middle East and Russia could provide Fund Hosting services to selective third country investment managers by offering a platform to run their funds on, including of course all supporting administration services.
The Growth in the Cyprus financial sector is reflected in the number of registrations of MiFID firms and asset management companies (both UCITS and AIFMs) as well as Alternative Investment Funds. 12 new application for setting up Alternative Investment Funds are currently going through the authorization process and are nearing completion.
In the relevant slide one could see the increasing numbers of Assets under management mainly in the open-ended funds from overseas investors whereas the following slide shows that most of the assets held under management are mainly in shares and other equity investments.
Looking to the key millstones of the Cyprus Fund industry one can see the transposition of UCITS IV in 2012 and UCITS V which was transposed in April 2016 without any gold plating provisions.
The MiFID Law was introduced in 2007 and with the transposition of the AIFMD in 2013, the legislator took the opportunity to modernize the legal framework for AIFs.
The enactment of the AIF Law in July 2014 provided for a significant modernization of the related legal framework and offered a comprehensive tool box and new structuring options competitive to those of other established jurisdictions, and it further achieved the right balance between the freedom of operation of the asset manager and the protection of investor.
Currently all AIFs are regulated and can be set up with limited number of Well Informed Professional Investors up to 75 or with unlimited number of both retail and Well Informed Professional investors.
Our legal framework is all-encompassing and, at the same time, attractive enough to establish investment funds, which can meet diverse investor requirements and can accommodate a number of investment objectives including: Private Equity, Infrastructure, Real Estate, Venture Capital and Funds of Funds, . Loan origination funds are also permitted when targeting well informed/professional investors. Cyprus AIFs may be set up using a corporate or contractual structure (i.e. limited partnerships or investment companies with fixed or variable capital or common funds).
The AIF with limited number of persons category is particularly suitable for private clients, HNWI and family offices and in such cases they are known as private label Funds (in this lines the “use of fund structures by ultra-high net worth individuals and global family offices” will be addressed today by Simon Mapham UBS wealth advisor)
Cyprus continues to evolve its offering fund product to ensure it meets the industry needs. Innovation and a strong spirit of collaboration between the industry and the regulator are the key drivers to success which can only help improve investment practices and maintain crucial investor trust and confidence.
A consultation paper was issued end of April this year by the regulator introducing new products and thus providing additional types of vehicles for the use of fund managers. It is first suggested that the partnership structure, which is a conventional fund model in particular in emerging markets, gives the option to the General Partner to elect upon its establishment for legal personality while maintaining its tax transparency status. This change will allow for internally managed Limited Partnerships to be set up.
It is further suggested that in order to facilitate the quick and efficient launch of new structures to introduce the Registered AIF’s regime which do not require authorization from the regulator or subsequent monitoring while being stamped as an “AIF” by virtue of the law. This is similar to what Malta and Luxembourg as well as Guernsey are introducing and we look forward to hear from Evelyne Christiaens for Alfi Luxemburg for their views and experience on this new fund product). In this new type of fund the fund manager should qualify as a full scope Cyprus or EU AIFM and the fund should only be targeted to professional and/or well-informed investors.
The Regulator shall rely on the regulated status of the fund manager to ensure compliance and indirect supervision of applicable laws and appropriate standards.
The registered AIF may be organized in any legal form available under Cyprus Law and it can be open or closed-end. It can follow any strategy and invest in any type of assets, whereas contribution in kind and/or in cash are permitted. The period of consultation is up to the end of this week and thereafter the final Laws will move to the Parliament for voting.
As it relates to the asset management legal framework Cyprus has aligned its national regime by closely mirroring the regimes established under the UCITS, AIFM and MiFID Directives. What is important to note is that for alternative funds, a MiFID investment firm may not only act as a delegate of the appointed fund manager, but may also be appointed as the AIF’s manager, subject of course not to exceed the relevant thresholds and provided that this does not constitute the major source of income.
In this area it has been decided to introduce a licensing requirement and supervision regime for the Cyprus sub-threshold AIFM (“Mini Manager”). The Mini Manager could manage: (i) AIFs with limited or unlimited number of persons, (ii) Registered AIFs taking the form of a Limited Partnership and (iii) non Cypriot AIFs (subject to the discretion of such competent authority in the other jurisdiction).
The list of key requirements for the Mini Manager which relate to the governance and other organizational requirements is being discussed with the regulator, the aim being to provide a reasonable and proportionate sub threshold Manager.
What also plays a crucial role in the successful establishment of Cyprus as a funds jurisdiction apart from the Cypriot Governments concrete support is the fact that the competent regulatory authority, the Securities and Exchange Commission, is efficient, effective and approachable, and constantly strives for the creation of a dynamic regulatory framework which is also market sensitive. It is self-evident that good regulation and supervision go hand in hand with successful financial markets that contribute to growth. Cyprus wishes to be at the forefront with its legal and regulatory framework that incorporates the enhanced regulatory measures adopted at EU level, while also offering investors and fund promoters stability along with cost and tax efficiency.
For this purpose, the relevant framework that regulates the provision of Fund administration services is currently undergoing an upgrading process that will strengthen Governance requirements.
The current participants in the market are primarily comprised of boutique local players, however, international service providers such as Alter Domus, Apex and Citco also have representation locally.
It is worth noting that with the fund industry constantly evolving and introducing more stringent requirements the duties of asset managers and other key players such as administrators and depositaries also evolve. (another subject that will be addressed among our guest speakers)
CIFA, with more than two hundred and thirty corporate and individual members is currently on an observer status with EFAMA and we aim to become full member soon. We would like to thank the Director General of EFAMA Mr. Peter De Proft for his support and for being here with us today despite his busy schedule. CIFA acts as the single unified representative body of the industry in Cyprus, representing the sector in economic missions to promote and support the development of the Investment Fund industry.
We as CIFA, are committed to facilitate the constant upgrading of our legal framework and service quality on all fronts, to ensure investor protection by operating nine technical committees to support our members, the Government and the Regulator on new developments in the industry.
Ladies and Gentlemen,
We are well-positioned to support the full operational lifecycle of an investment fund, providing foreign investors, as well as fund promoters, a uniquely competitive entry point to Europe’s capital markets, as well as the necessary financial instruments that serve to protect and enhance investment value. We would therefore welcome you to consider expanding your operations in the region by setting up regional Funds in Cyprus, or setting up a Fund management company for your operations.
We would like to thank you all for your participation here today and thank each one of the esteemed speakers that will be presenting during the summit for being here to share their expertise and knowledge with us.