Deneo Partners’ Managing Directors Stathis Christophi and Demetris Kyriacou share their knowledge and views on the current landscape regarding offshore regulatory jurisdictions.
Increasing regulation globally has added complexity in applying for and operating an investment firm. As such, a growing number of brokers are looking to expand their regulatory portfolio and obtain the relevant license type to expand their operations in both European and offshore regulated jurisdictions and offer diverse international investment opportunities to their clients.
Deneo Partners is an advisory firm that provides a wide range of services to both private and corporate clients, combining advisory and industry experience which allows us to understand the most complex of issues and provide efficient solutions.
Our Managing Directors have years of experience both on the advisory side, having spent years in investment banking, internal audit, external audit as well as on the industry side, where they held senior positions in Global organizations.
Following are a few key points and insights provided by the Managing Directors of Deneo Partners, Stathis Christophi and Demetris Kyriacou, on offshore regulations for securities brokers.
What are the current trends identified in the industry?
It is an observed trend among the larger groups of FX&CFD brokers to obtain multiple global licenses from various offshore regulations in order to both diversify their regulatory and compliance risk as well as to target specific regions/countries per each separated regulation.
In addition to the above, a major factor that has affected everyone worldwide in the recent years is that of the COVID-19 pandemic which has transformed the global economies while also presenting new opportunities for traders.
The lockdowns and working-from-home restrictions imposed by world governments, along with the increased volatility in financial instruments such as commodities and shares, have introduced many individual and corporate users to online trading, while also increasing the activity of existing traders, and simultaneously presenting prospective opportunities to brokers to increase their market reach.
Another inevitable effect in the FX&CFD industry is that brought by technological advancements. As more investment opportunities become available online and trading apps are being launched, traders can now utilize these apps to access real-time information and make decisions on-the-go through mobile trading services that they have at hand at any time, following sound trading strategies.
The introduction of blockchain technology and cryptocurrencies have expanded the range of instruments that are now available on trading platforms, as well as introduced new crypto exchange and crypto wallet licenses for brokers to obtain. An increasing public interest in cryptocurrencies and the volatility of these digital assets have affected the market demand by both individuals and institutions and opened up a lot of potential for regulated brokers to unlock.
The FX&CFD industry has also become very demanding in regard to the regulations behind obtaining bank accounts, whether in onshore or offshore jurisdictions. There have been major changes in the digital and tech industry, and so we now see a rapid transition from traditional banking solutions to alternative payment method solutions, ex. cryptocurrency payments, with Electronic Money Institutions (EMIs) and Payment Services Providers (PSPs) that offer a wide range of payment acceptance methods and local payment options for traders.
Depending on their license regulation and target markets, regulated brokers will seek to open corporate and client accounts with the corresponding payment providers, locally or offshore to their regulated jurisdiction.
It should be noted, however, that payment providers, in turn, have also tightened their requirements for accepting FX&CFD clients, deeming FX&CFD and retail services as high-risk operations, thus disrupting the flow of funds for traders and forcing brokers to reach out to alternative payment systems.
Which offshore jurisdictions is the best for me as a broker?
This would depend on a number of factors, including the current group structure of the broker, which target markets/territories they are trying to penetrate, as well as the capital available to invest.
Major global financial brokers have turned to jurisdictions with robust regulatory frameworks including but not limited to Cyprus (CySEC), the UK (FCA), South Africa (FSCA), Dubai (DFSA) and many others including offshore jurisdictions like the Seychelles (FSA), Mauritius (FSC), British Virgin Islands (FSC) and the Bahamas (SCB).
Which offshore destination is most popular?
For the last couple of years, we have observed a growing interest from brokers in obtaining the Securities Dealer license with the Seychelles Financial Services Authority (FSA), which is a globally recognized and creditable license to operate as a securities dealer acting either as agent or principal broker (A or B book) as well as portfolio manager.
The FSA is responsible for the licensing, supervision, and development of the non-bank financial services industry of the Seychelles, under the Securities Act, 2007, ensuring that all licensed entities comply with the local regulations and laws.
In addition to its regulatory integrity, Seychelles is a prime jurisdiction for investors looking to set up a local business for sustainable developments thanks to its political and social stability, attractive business conditions, tri-lingual population, commitment to growing infrastructure and strategic location among the major hubs in Europe, Africa, Asia and the Middle East.
What is the minimum capital required for a Securities Dealer license with the Seychelles FSA?
A minimum capital of US $50,000 is required for this type of license with the Seychelles FSA, deposited in a financial institution.
What other ongoing costs are applicable with this license?
Cost estimates that Securities Dealer licensees should have in mind involve, including but not limited to, monthly rent for a local office to satisfy the local presence requirement; salaries of the local (or locally outsourced) Compliance Officer and AML Officer and any additional local administrative employees; corporate fees paid to the local Secretary and Registered Office; fees for the annual audit of financial accounts; a yearly premium for professional indemnity insurance coverage; annual returns filing fees to the Registrar of Companies; and annual renewal fees for the Securities Dealer and Representative Officer’s licenses.
How long does it take to obtain the license?
The application timeframe is around 5 – 6 months after the license application is submitted to the FSA, which includes any subsequent Q&A during the application review process, the conditional license approval and additional conditions met for the official authorization of the Securities Dealer license.
This timeframe is also dependant on the Authority’s workload and any unexpected delays caused by events such as the latest ongoing global pandemic.
What are any ongoing reporting requirements for licensees?
Securities Dealers licensees have several reporting obligations, according to the laws and regulations of the supervisory authority. Those include (list not exhaustive) the Quarterly Returns reports submitted to the FSA, annual Audited Financial Accounts, annual Compliance reports, annual Common Reporting Standard (CRS) reports, and regular tax-related reports submitted to the Seychelles Revenue Commission (SRC) once the Tax Identification Number (TIN) is obtained.
Are there many brokers which are regulated by the FSA currently?
As of the issue date of this article there are over 100 Securities Dealer licensees authorised and regulated under the Seychelles FSA, a number which is steadily growing as more and more companies are looking into obtaining a license with this regulator.
What are any upcoming changes that you expect in the offshore jurisdictions?
The main changes we see are mostly relating to the recent tax environment, due to pressure mainly from the European Union and the respective offshore authorities for companies, not only in the FX&CFD industry, to set up and maintain physical presence in their countries of operational and economic activity and hire local personnel to perform key functions, to fulfil their substance requirements.
More and more jurisdictions are introducing this new requirement which has risen in response to the need for tax transparency and compliance with international guidelines and is subjected to various ongoing developments as more clarifications and guidelines are being issued by the relevant authorities.
The trend sees different jurisdictions working together to protect their reputation and ensure the proper taxation of profits according to the location where economic activities are performed and value is created.
In response, regulated entities that are carrying on a relevant activity, as defined by the new legislation, and that are thus affected by the new legislation, are taking the necessary actions through operational and/or structural changes to continue their activities in their targeted regions requiring adequate and relevant economic substance.
Lastly, what is next for Deneo Partners?
We are committed to continue servicing our global private and corporate clients by providing regulatory, financial, advisory, and corporate services in both onshore and offshore jurisdictions with the high level of quality, expertise, and confidentiality they have come to associate us with.
Ever expanding on our brand of services, we plan on launching new services in areas where we receive requests that need to be addressed. One such example is a need we have identified from our client base for HR talent, from junior up to executive level.
As such, we have developed an affiliation with HRus Partners, a consulting firm providing strategic, tailor-made solutions regarding HR and recruitment, which is licensed by the Republic of Cyprus’ Ministry of Labour & Social Insurance Department for permanent recruitment (License Number 414).
We aim to continue to provide solutions to the most complex issues, ensuring the best service for our clients all over the world through a hands-on and professional approach that safeguards and enhances value.
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