Uncertainty over UK financial services’ EU market access post-Brexit has coincided with a surge in interest in a Cypriot scheme allowing companies temporary business access to the island. The Cyprus Securities and Exchange Commission (CySEC) initiative comes as the authorities in Cyprus, an EU member state with strong business ties to Britain, separately seek to consolidate its status as a leading regional financial centre.
As of July, nearly 90 companies have been registered with the Temporary Permissions Regime (TPR) – including some big players – which enables UK-based firms to offer investment services to professional clients in Cyprus, without having to have a physical presence on the island, until the end of the year.
A report by British think tank New Financial suggests over UK-based 400 financial firms have relocated to the EU, with Britain and the bloc seemingly still some distance from a comprehensive agreement on financial services cooperation post-Brexit. At the same time, UK asset managers are so concerned about competing with their European counterparts that they have called for the abolition of taxes on UK investment funds.
In the absence of any real clarity over EU market access, the TPR scheme is providing a degree of certainty for a growing number of UK companies, assisting with the post-Brexit transition to new contracts and also facilitating those who want to then base themselves on island. In order to further support their decision-making, a dedicated information hub enables UK firms to gain a better understanding of the regulatory environment in Cyprus and the EU in general.
City firms’ interest in Cyprus comes amid the rapid growth of our financial services sector. CySEC now supervises almost 800 entities; its workforce nearly tripling in size over the last ten years to ensure high-level regulatory oversight. Government plans to privatize the Cypriot stock exchange will improve liquidity in the corporate finance market, further enhancing our financial centre ambitions.
The financial services sector has long been a pillar of the Cypriot economy but in the post-pandemic era it is set to play an even more important role. In particular, Cyprus has sought to promote entrepreneurship and enterprise within the sector, the growth in fintech and investment funds reflecting our approach.
There are some 250 fintech firms based in Cyprus, the transformation of financial services encouraged with a sand-box like initiative called the Innovation Hub, whose provisions include regulatory and AML compliance tools, distributed ledger technology, AI tools and a venture capital fund investing in blockchain start-ups.
Indeed, the island’s 27 blockchain start-ups have raised a total of €142 million in funding, comparing very favourably with counterparts in other European countries. Other successful fintech companies in Cyprus include crypto-trading platforms, crypto-exchanges and companies offering alternative payment solutions.
The fintech ecosystem is developing at pace. In Limassol alone, over 8,000 ICT professionals are supporting the industry. It will be further bolstered through EU funds over the next three years, with some earmarked for the development of new innovation clusters fostering ties between entrepreneurs, researchers and academia.
Like fintech, the investments fund sector has been experiencing rapid growth in recent years, focused on retail funds and funds structured for investment in the alternative asset classes. According to the European Fund and Asset Management Association, Cyprus experienced the highest net asset value growth rate at a pan-European level in all categories during the fourth quarter of 2019.
Assets under management have quadrupled since 2012 to over €8 billion and it is estimated that if current growth rates are sustained the figure could reach €12 billion in the next five years. The country may be a newcomer to the international funds sector, but is growing strong. We at Invest Cyprus, the state entity responsible for raising awareness of Cyprus as an international financial and business center across the globe, believe it is in a position to compete with reputable jurisdictions within the European common market.
As an EU member state compliant with European regulations and standards, Cyprus is regarded as an internationally trusted location for the establishment and management of investment funds. Moreover, it is viewed by some as Europe’s new fund hotspot, the benefits of which will be shared across the Cypriot economy, as it looks to diversify in the wake of the pandemic.
A number of factors have combined to bring about our emergence as an internationally trusted destination for investments funds, including low set-up and operational costs compared to other fund centres; the country’s stable political environment and strong legal and regulatory framework; a favorable tax regime (with one of the lowest corporate tax rates in Europe); and the use of English as the language of business. Moreover, the country’s geographic location at the intersection of Europe, Africa and Asia offers access to high-growth markets.
Of the above factors, the development of a robust, dynamic regulatory environment has been a particular achievement, allowing us to create optimal conditions for registered alternative investment funds and their management. Notably, these funds, which may be marketed solely to professional and well-informed investors, can be registered in Cyprus by an approved manager, without the need for CySEC authorisation, saving time and cutting costs. Moreover, Invest Cyprus believes the introduction of tax and re-domiciliation incentives for funds and fund managers, the modernization of procedures and the further reduction of bureaucracy will aid in boosting the fund sector to even higher growth rates.
In the post-pandemic era, we also anticipate particular demand for ‘green’ funds – ESG investing gaining momentum as investors’ sustainability concerns grow. In keeping with a broader ambition to fast-track the island’s transition to a green economy, Cyprus is giving priority to ESG funds as well as developing sustainable finance standards for all our banks and financial services organizations. And CySEC is aiming to closely monitor and enforce both firms’ compliance with the new standards and their ESG responsibilities in general.
As British financial services firms consider their next move following Brexit, many will be reviewing the relative merits of relocation options across Europe. Evidence from the TPR scheme suggests that Cyprus is firmly among the destinations under consideration, with the island’s investment fund sector a clear area of interest. As the island seeks to diversify its economy, the sector’s attractiveness and growth potential means it will play an integral part in the process.