Funds: Investing in the Future

The modernisation of Cyprus’ regulatory framework for investment funds is set to raise the island’s profile as a European asset management domicile.

The Cypriot investment fund sector has the potential to develop into a multi-billion-euro industry, and the country is currently emerging as a European domicile for the global investment fund and asset management industry. The country is benefiting from the modernisation of its regulatory framework for investment funds, as well as from an increasing appetite of investors and fund service providers for EU-regulated jurisdictions. Cyprus offers both EU-regulated Undertakings of Collective Investment in Transferable Securities (UCITS) and alternative investment funds, and the country is confident that it will make significant progress in attracting fund managers and management companies in the coming years.

A Young Industry

Initiated in the late 1990s and with substantial flows only in the past few years, the Cypriot fund sector is a relative newcomer in many respects. In 1999, the country introduced the International Collective Investment Schemes Law that allowed the set-up of International Collective Investment Schemes (ICIS). Currently, there are some 100 ICIS established in Cyprus, with more than half set up in the past four years, proving there is increased interest in the jurisdiction. Among other factors, there is no doubt that Cyprus’ growth in this sector has been driven by the country’s tax treaty network, rendering it a launch pad for investment funds primarily into Russia, the former Soviet republics and Eastern Europe. However, in the past two years, an increasing number of funds have also been set up for investment into Asia, primarily in debt and equity securities as well as in real estate. Going forward, the island’s vision for the future includes the development of a world-class fund sector. EU membership helped Cyprus develop into an international business centre, with corporate and financial services as primary activities. There is now increasing awareness that diversity provides stability, and the expansion of the funds sector is seen as the natural extension of the island’s finance sector.

A New Beginning

While Cyprus has a pedigree in the field of investment funds, the Cypriot regulatory authorities have worked diligently to bring the funds framework on par with other international jurisdictions. These efforts include the enactment of the Alternative Investment Funds Law in July 2014 (replacing in its entirety the ICIS Law) as well as the transposition of the UCITS IV Directive in 2012 and the Alternative Investment Funds Managers Directive (AIFMD) in 2013, when Cyprus was the third country in Europe to transpose the latter. The island now offers a European passport to the fund management industry providing exceptional possibilities for cross-border and global fund distribution. This should bring more business to the country and attract both EU and non-EU firms keen to gain the badge of an ‘EU-compliant’ manager and access to European Union investors. Another sector where Cyprus is finally seeing growth is UCITS. A non-existent sector until very recently, it received a fresh boost with the launch of three UCITS funds (including 14 sub-funds) and two international UCITS management companies setting up on the island.

Competitive Framework

Many industry experts believe that UCITS will remain more of a niche market, while alternative investment funds will continue to dominate the fund business in Cyprus. The new law on Alternative Investment Funds (AIFs) enacted in July 2014, provides for a framework similar to that of Europe’s main investment fund hubs like Luxembourg, Ireland and Malta. The new legislation increases Cyprus’ competitive offering by modernising the existing legal framework and opening the market to the registration of new types of funds. The AIF law also provides for the establishment of funds marketed to professional and retail investors, as well as for the introduction of umbrella funds with segregated investment compartments. It has also expanded the scope of legal forms by introducing the Common Fund together with the existing legal forms of Variable Capital Companies, Fixed Capital Companies, and Limited Partnerships.

One Regulator

The Cyprus Securities and Exchange Commission (CySEC) is taking steps to increase Cyprus’ appeal as a fund domicile. Regulatory power was previously shared between the CySEC and the Central Bank of Cyprus, but with the implementation of the new framework for alternative investment funds, all regulation has been brought under the aegis of CySEC, which is set to result in more streamlined procedures and further enhance Cyprus’ attractiveness as a jurisdiction. CySEC now regulates AIFs, UCITS funds and Management Companies, as well as MiFID regulated investment firms.

Full Range of Service Providers

There is already a number of recognised fund service providers established in Cyprus, ranging from global names to local independent operators servicing all types of funds at very competitive rates. Set-up costs for a fund in Cyprus are significantly lower than in the more mature fund centres such as Luxembourg and Ireland. In addition, the ‘Big Four’ accounting firms have a presence on the island while a number of law offices also have cooperation agreements with international law firms, proving that Cyprus has the capacity and expertise to help the fund industry expand.

Despite having a versatile industry cluster, Cyprus seeks to attract more service providers to the island in order to gain critical mass and to win a bigger share of the global funds business. In terms of custodians, Cyprus’ new AIF framework allows financial entities other than banks, to also offer custody services, being subject to prudential regulation and meeting capital adequacy requirements. As it relates to Cyprus AIFs managed by an AIFM authorised fund manager, legislation transposing the AIFMD into national law allows for the flexibility of appointing a credit institution based in another EU member state as custodian/depositary through to July 2017; after such time a Cyprus-based custodian / depositary will need to be appointed. All other AIFs, on the other hand, have the flexibility of appointing a depositary based either in Cyprus, another EU member state or even in a third country (subject to conditions). Further under current legislation, a UCITS needs to appoint a credit institution located in Cyprus or a branch of an EU bank to act as depositary. The UCITS legal framework is being revised with a view to extend the conditions of eligibility of the depositary to other legal entities subject to capital adequacy requirements and to prudential regulation.

Global Reach

Cyprus has good prospects to achieve its goals as the introduction of the EU regulatory framework places the island on the map as a growing domicile for investment funds and asset management. Cyprus provides a lower cost structure and distribution opportunities to a wide range of markets, including but not limited to the EU. The country has a vast network of double taxation treaties with more than 50 countries, which offer interesting tax planning opportunities and key advantages for funds following investment strategies in emerging markets. Determined to build up this sector, the industry is also increasing its marketing efforts. The Cyprus Investment Funds Association (CIFA) was set up to raise awareness of what Cyprus has to offer among international managers, administrators and investors.

Cyprus operates within a regulated fund regime that is in tune with the requirements of the modern fund industry. The recent changes in the fund landscape are expected to raise investor confidence in the jurisdiction by creating a European passport of quality and compliance. This coupled with Cyprus’ attractive fiscal framework, English-speaking workforce and its competitive operating environment will likely increase the island’s ranking as a domicile and servicing centre for both alternative funds and UCITS. This type of growth will not happen overnight, however, the fact that fund managers are increasingly moving to Cyprus demonstrates what the regulatory shift in the European funds landscape could mean for the Cypriot investment fund industry.