Demetris Nicolaou December 21 2012 Freedom of establishment of credit institutions Harneys | Banking & Financial Services - Cyprus Demetris Nicolaou Banking & Financial Services IntroductionEstablishing a branch in CyprusProvision of services on a cross-border basisCommentIntroductionAs a well-established financial services centre and a member of the European Union since 2008, Cyprus is one of the best environments in Europe for the provision of banking services.Two core principles and rights conferred by the European Union are:the right to provide services in any EU member state; andfreedom of establishment.Under these two core principles, a credit institution which is authorised and supervised by the competent authorities of another EU member state may conduct banking activities in Cyprus, for which it has been authorised/licensed by the competent authorities of its country of origin, either by establishing a branch or by way of provision of services.Establishing a branch in CyprusAccording to Section 10A of the Banking Law (N66(I)/1997, as amended) and the guidelines issued by the Cyprus Central Bank, the credit institution's competent home supervisory authorities must notify the Central Bank of the credit institution's intention to establish a branch in Cyprus and provide the bank with the following information:the name of the credit institution;its head office and branch addresses in Cyprus;a programme of operations, setting out the type of business to be conducted and the structural organisation of the branch. In this respect, the credit institution is expected to comply with Annex I of the Banking Directive and, if applicable, the EU Markets in Financial Instruments Directive (MiFID; 2004/39/EC);the names and CVs of the branch management team; andthe capital base and capital adequacy ratio of the credit institution.Information concerning the depositors and investors compensation scheme of which the credit institution is a member, and the capital base and capital adequacy ratio of the credit institution's holding company, must also be provided. The credit institution's competent home supervisory authorities must disclose to the Central Bank any doubts that they have with respect to the capital adequacy ratio.With respect to the programme of operation, the following information must be included:a business plan describing the branch's strategy, its main objectives, the methods by which it will accomplish these objectives and its clientele type;the branch's organisational structure detailing how it will report to the credit institution, the CVs of management personnel and details and links with the administrative, internal control and information technology systems of the credit institution;an overview of the branch's systems and controls, including liquidity requirement policies, procedures for the application of these policies, details of external auditors, anti-money laundering policies, outsourcing and the branch's power to grant credit facilities;a forecast of financial statements (balance sheet, profit and loss and cash flow) for the first 12 months of operations; andpossible financial activities and details on the arrangements for safeguarding client money and assets, compliance with the business conduct code and other obligations that fall under the Central Bank's remit according to the MiFID Directive, code of conduct, and details of the individuals responsible for compliance and complaints handling.The Central Bank must acknowledge receipt of the notification and prepare for the supervision of the branch within two months of receiving the notification. It must also indicate to the credit institution the conditions under which activities are conducted in Cyprus in the general public interest. Before the commencement of operations, the branch must also submit to the Central Bank a confirmation by its external auditors that all necessary information and accounting systems are in place.On receipt of a communication from the Central Bank, or in the event of the expiry of the two-month period stated above without receipt of any communication, the branch may be established and may commence activities.Thereafter, the Central Bank will be responsible, in conjunction with the credit institution's competent home supervisory authorities, for supervising the branch's liquidity. For this purpose, the Central Bank has the power to request the same information from the branch as that provided by banks that are licensed by the Central Bank. The Central Bank may request the branch to report its activities periodically for statistical purposes.In addition, if the branch intends to conduct investments business, this also falls under the Central Bank's remit and it will supervise a number of matters, such as conduct of business obligations and information provided to clients or potential clients.Provision of services on a cross-border basisWhere a credit institution intends to provide services on a cross-border basis by conducting activities in Cyprus, the credit institution's competent home supervisory authorities must submit to the Central Bank a notification of the activities that the credit institution intends to conduct in Cyprus for the first time. The Central Bank will acknowledge receipt of the notification and update the details of the services and activities to be carried on in Cyprus on its website.CommentCredit institutions licensed in other EU member states may take advantage of the freedom of establishment by expanding their operations into Cyprus, and developing their clientele through simple procedures provided within the European legal framework.For further information on this topic please contact Nancy Erotocritou or Demetris Nicolaou at Harneys Aristodemou Loizides Yiolitis LLC by telephone (+357 2582 0020), fax (+357 258 20021) or email ([email protected] or [email protected]).