C398 - Thematic review on the inactivity (dormant) fees charged by Cyprus Investment Firms
The Cyprus Securities and Exchange Commission (the "CySEC") released a publication on 7th July 2020: Circular C398 regarding thematic review on the inactivity fees charged by Cyprus Investment Firms.
Via the Circular, CySEC lists several weaknesses identified in the application of the provisions of Article 25 paragraphs (1), (3)(a) and (4)(a) of the Investment Services and Activities and Regulated Markets Law (‘the Law’). Examples of good practice are also provided. The weaknesses are listed below and are identified in three major areas:
A. Inactivity fee Circumstances
1. Although a reference is made to inactivity fees on the ex-ante disclosures of several CIFs, they do not provide adequate information about the circumstances under which a client and/or a client’s trading account is considered inactive/dormant. For example trading activity is used as a dormancy criterion without stating what constitutes "activity".
2. A small number of CIFs linked this activity to the number of trades executed, not the act of trading itself.
3. A limited number of CIFs link the trading activity of clients with KYC documentation requirements. For example clients are considered inactive if their documents expire and they fail to provide updated ones.
B. Size of Inactivity fees
4. CIFs did not clarify the quantitative and qualitative factors (e.g. maintenance/administrative costs) taken into consideration for calculating the size of the inactivity fee whilst some CIFs apply excessively high fees on monthly basis.
5. Several CIFs received an excessively high amount from inactivity fees during a six month period. For a number of CIFs the amount received from inactivity fees represents a significant portion of their revenue.
6. A small number of CIFs had charged inactivity fees retroactively.
C. Ex-ante disclosure of Inactivity fees
7. Although the relevant inactivity fees and conditions are included in the T&C of the CIFs this information was not easily accessible on their websites by the potential clients or clients.
8. A limited number of CIFs had included unclear and conflicting statements in their Terms and Conditions when describing the circumstances under which a client’s trading account was considered inactive.
9. A limited number of CIFs had included unclear and conflicting statements in their Terms and Conditions when describing the circumstances under which a client’s trading account was considered inactive.
10. The majority of CIFs failed to disclose to potential clients or clients whether the client would be informed when they and/or their trading accounts were
categorised ‘inactive’, and if the client would be informed before the first inactivity fee is charged to his/her account.
All CIFs should consider the issues raised in this circular, related to the application of inactivity fees, against their policies and arrangements in place as well as to the relevant disclosures made to potential clients or clients.
CIFs are required to take immediate actions to ensure compliance if weaknesses are identified.
Up to today, the CySEC Board has decided to call upon a CIF to submit its written representations for the possible violation of Article 25(1) and will continue the assessment of the CIFs’ policies and arrangements relating to the inactivity fees taking further actions (e.g.enforcement investigations) where deemed necessary.
If you require support in understanding how this review affects you, or guidance on the actions you are required to take to ensure compliance is maintained, please call us on +357 25933301 or email us at firstname.lastname@example.org to arrange a consultation.
Written by Constantinos Constantinides, Director of FAI Comply