Over the past three years, the disruption caused by the long-dragged-on Brexit process has spread beyond the United Kingdom, shaking the foundations of the European Union to its very core.
Though much of the political and economic uncertainty associated with Britain’s potential withdrawal from the EU lingers, in the wake of the disruption also lay considerable opportunities, with many of the UK’s European neighbours standing in line to benefit.
Indeed, the prospect of leaving the EU has forced Britain’s financial community to prepare for life outside of the trading bloc as the country and its capital city, London, faces a slow but steady erosion to its position as the European centre of financial services and asset management.
For instance, think tank New Financial said in a report published in March 2019 that it had identified 269 UK-based financial firms that have reacted to Brexit by setting up new hubs, moving staff or rebasing assets elsewhere in the EU. According to the report, 65 billion pounds of portfolio funds have been transferred out of the UK so far – and that is just a conservative estimate based solely on publicly available information.
Carving a Space in the Big Leagues
A number of European centres – including Dublin, Paris, Frankfurt and Luxembourg – are keen to seize this one-time opportunity to win a lucrative market share. However, increasingly, the island-nation of Cyprus – a fast-growing services hub in the Eastern Mediterranean – is being considered the contender of choice.
Professional services are today one of the pillars of the Cypriot economy, and amid economic diversification efforts, the country has become one of Europe’s emerging destinations for investment funds. New legislature put in place in 2018 has enabled the development of AIFs Alternative Investment Funds (AIFs), and the country has managed to attract several funds and fund managers as a result.
Now, with Brexit on the horizon and more and more British funds looking for an alternative entry point into the EU, Cyprus is taking all the steps necessary to make sure its jurisdiction can compete with other well-known funds’[1] centres.
KPMG Cyprus, one of the strongest established professional services[2] providers on the island, is foremost in these efforts. In fact, besides playing a pivotal role in the economic activity of Cyprus and supporting investors, KPMG is the company that has spearheaded this emerging priority segment.
“At KPMG Cyprus we stand at the forefront of the funds’ development”, says Christos Vasiliou, Managing Director and Head of Advisory Services at the firm. “We have been involved in the drafting of the new AIF legislation as far as the framework is concerned, as well as the tax incentives that have been given to funds and fund managers.”
“The funds sector was always considered by us to be one of the biggest growth areas that we could develop going forward. What we did in the past three years was manage to upgrade all the legislation, bring everything up to speed, modernise everything and make our funds service offering extremely competitive. Legal framework-wise we are not running behind any of the other EU jurisdictions when it comes to funds.”
Appointed as Managing Director in January 2019, Vasiliou – the man chosen to help KPMG in Cyprus build upon the opportunity of investment funds – remains cautious, yet optimistic, about the impact of Brexit on the country’s island economy, particularly considering Cyprus’ close trading links with its Commonwealth partner.
“It’s true that Cyprus depends a lot on UK exports and there is a big balance of trade between the two countries”, he says. “The effect on Cyprus of Brexit will depend on the kind of Brexit we will have at the end of the day. Brexit for me is an opportunity for Cyprus, because Cyprus being in the European Union, and enjoying all the European laws and the passporting regime, can be used by British – for example fund managers – to establish a base here through which they can offer their services.”
“I consider Cyprus to be a hub for British businessmen and financial institutions through which they can access the European market. I’m hopeful that it may have a positive effect on Cyprus rather than a negative effect, but it remains to be seen. We should be taking this opportunity further with British businessmen, and British fund managers especially, to promote Cyprus.”
Reaping the Benefits
Besides KPMG, one of the organisations doing just this is the Cyprus Investment Funds Association (CIFA), which focuses on addressing the broad range of needs and issues faced by service providers and businesses involved in the sector, while assisting the government in promoting Cyprus to investors internationally.
The new regulatory environment in Cyprus that CIFA and KPMG have helped establish – combined with the island’s geographical location at the crossroads of three continents and a highly-educated, multi-lingual workforce – is now bearing fruit in terms of attracting investment fund promoters and specialist service providers.
According to the Cyprus Securities and Exchange Commission – the authority responsible for the supervision of the investment services market – the number of collective investment management companies and collective investment organisations under supervision rose to 187 in the first quarter of 2019. In fact, total assets under management totalled a whooping [1] 6.7 billion euros, representing a 7 percent increase, when compared to the last quarter of 2018.
Enthusiasm in the sector is understandably high, with industry players predicting that total funds’ assets could surpass 10 billion euros by 2020. And a key selling point of the Cypriot jurisdiction is based on how its proximity to neighbouring countries in the Middle East and Africa provides for EU-wide access to locally established funds, along with all the advantages of its comprehensive fiscal framework.
“I must stress that Cyprus funds can be used as a passport for non-EU fund managers to direct investments through Cyprus to other countries”, explains Vasiliou, adding that fund managers who leverage the country’s vast double taxation treaty network – encompassing 50 countries – will find that Cyprus is “an ideal distribution network with opportunities for fund managers to direct their investments [internationally] through the island”.
A New Economic Model
“We are moving away from the model of investing through Cyprus to investing in Cyprus”, explains Vasiliou, who was one of the founding members of CIFA. alongside former Chairman of KPMG Cyprus, Angelos Gregoriades (who is now CIFA President). [2] “Cyprus is adopting all incentives to help investors direct investments on the island. Some examples are the investments recently made in the hotel industry, in marinas, in casinos, in the health sector, and in the shipping industry. We are now moving into this new era and we must be doing everything we can in our power [3] to facilitate investors setting up base here.”
Building on its work to establish the legal framework for investment funds, KPMG’s[4] approach to this going forward focuses on developing the island’s innovation and human capital capacity, including the leveraging of the company’s global technology partnership with Google. and the setting up of its ‘Rising Star’ programme, which offers training services to students from China.[5] “Any company which does not adopt technology is destined to fail. There is a huge disruption in the market and we need to adapt to the market needs”, says Vasiliou.
“Our association with Google is a worldwide association. It involves Google and KPMG working together in installing applications and installing business models on the Google cloud platform, which will make it safer for our clients and for our business environment. We are thrilled to have joined forces with them going forward.”
While disruption is persistent in today’s increasingly competitive world, particularly in a European context, opportunities for economic growth are myriad. And yet, success is increasingly reliant on the capacity of individual markets, and their main stakeholders, to adapt. The growing lustre of Cyprus’ investment funds industry is a primary example of what can be achieved when leading corporate players and government join forces, to embrace change – and drive the economy forward.
