• Make a complaint
  • Request for information
60th Rome Treaty anniversaryYour Europe - The portal to on-line European and national public services

Decision in case 618/2017/CEC on the failure of the European Securities and Markets Authority (ESMA) to open an investigation into the Cypriot supervisory authority’s handling of an alleged fraud by an online trading firm

Available languages: en
  • Case: 618/2017/CEC
    Opened on 11 May 2017 - Decision on 12 Jun 2018
  • Institution(s) concerned: European Securities and Markets Authority

The complainant is one of the many customers worldwide who was not able to recover his deposits from an online trading firm licensed in Cyprus.

He complained to the Cyprus Securities and Exchange Commission (CySEC) about the actions of the firm. He then complained to ESMA about the alleged lack of adequate supervision of the firm by CySEC. He requested ESMA to open a “breach of Union law investigation” against CySEC under the ESMA Regulation.

ESMA informed the complainant that it was inquiring into CySEC’s supervision of the firm, but had not yet decided whether to open a “breach of Union law” investigation. Unhappy with ESMA’s handling of his complaint, the complainant turned to the European Ombudsman.

In the course of the Ombudsman’s inquiry, ESMA’s Chair decided not to initiate a breach of Union law investigation.

The Ombudsman found that ESMA has taken a number of actions in relation to the complaints it received regarding the alleged failure of CySEC to carry out its supervisory tasks. She considered that ESMA’s decision, not to open a breach of Union law investigation into CySEC’s supervision of the firm, was reasonable.

The Ombudsman thus found no maladministration by ESMA and closed the inquiry.

Actors involved in the case

The European Securities and Markets Authority (ESMA) is an independent EU Authority that contributes to safeguarding the stability of the EU's financial system by enhancing the protection of investors and promoting stable and orderly financial markets[1].

The Cyprus Securities and Exchange Commission (CySEC) is the national authority in Cyprus that supervises financial market participants such as Cypriot trading firms[2].

The Cypriot Financial Services Ombudsman (FSO) is an independent body, which examines compensation claims from consumers against financial businesses via an out-of-court procedure[3].

The Auditor General of Cyprus is an independent officer responsible for the audit of central government, public organisations, local authorities and other public bodies in Cyprus, including CySEC[4].

The Competition and Consumer Protection Service (CCPS) of the Ministry of Commerce, Industry and Tourism of Cyprus is the authority responsible for the implementation of consumer protection legislation in Cyprus[5].

The Cyprus Investor Compensation Fund is a fund for customers of Cyprus trading firms. It aims to secure the claims of customers against Cypriot trading firms through the payment of compensation if certain conditions are fulfilled[6].

Some terms used in this decision

Breach of Union law investigation refers to the procedure under the ESMA Regulation[7], which gives ESMA the power to investigate and take action arising from the failure of relevant national authorities to comply with their obligations under various EU financial services legislation[8] (Article 17 of the ESMA Regulation).

Contracts for Difference (CFDs) are a form of derivative trading. In essence, such contracts offered by trading firms enable investors to speculate on the rise or fall of the price, level or value of an underlying asset, including currencies, indices, commodities, shares or government bonds. Investors do not need to own the underlying asset.

Binary options enable investors to get a predetermined fixed pay-out if an underlying asset meets certain predetermined conditions, generally within a particular time-frame. A common form of a binary option is that investors receive a fixed pay-out if the price of the underlying asset, such as an exchange rate, a share or a commodity, reaches a specified level.

The “Joint Group” is a group of national competent authorities set up and coordinated by ESMA since July 2015. The Joint Group focusses on issues relating to a number of Cyprus based trading firms that sell CFDs, binary options and other speculative products throughout Europe.

The “CFD Task Force” was set up by ESMA in July 2015. It is dedicated to policy work relating to the marketing of CFDs and other speculative products.

Background to the complaint

1. The complainant, a Romanian national, is a customer of an online trading firm (“the firm”) licensed by the Cyprus Securities and Exchange Commission (“CySEC”). The complainant claims that, like many other customers in the EU and third countries, he was unable to close his account and recover his funds from the firm. He then complained to CySEC, as well as to the Cyprus Financial Services Ombudsman (“FSO”) asking both of them to intervene in his dispute with the firm and help him to recover his funds.

2. In July 2015, ESMA set up a group of relevant national authorities, including CySEC (“Joint Group”), to look into a number of issues relating to a number of Cyprus based trading firms that offer CFDs, binary options and other speculative products throughout Europe.

3. Around the same time, ESMA set up a CFD Task Force dedicated to policy work on CFDs and other similar and equally speculative products.

4. On 6 August 2015, CySEC announced that, following an increase in the number of complaints received concerning the firm, it had opened an investigation[9]. In its statement, CySEC pointed out that, for complaints containing possible compensation claims, investors were “encouraged” to contact the Cyprus FSO, which has the authority to examine and decide on compensation claims. On 27 November 2015, CySEC announced that, as a settlement, the firm had paid a fine of EUR 335 000[10]. CySEC did not revoke the firm’s license.

5. On 13 June 2016, following contact from the complainant, ESMA informed him that its inquiries into the actions taken by CySEC in relation to the firm were still ongoing and confidential. It also stated that it does not have any function regarding the role of the Cyprus FSO.

6. On 7 July 2016, the complainant wrote to ESMA asking it to investigate CySEC’s alleged failure to supervise the firm in accordance with its powers under the ESMA Regulation.

7. On 25 July 2016, ESMA published on its website an “investor warning” on the risks of investing in complex financial products. In this warning, ESMA referred to the work of the Joint Group. It explained that the group “has been operating as a forum for mutual cooperation between the members. In the context of its supervisory action plan, CySEC has so far imposed administrative fines or reached settlement agreements totaling 2,072,000 [including with the firm]. (...) CySEC’s supervisory and regulatory work is ongoing[11]. It also referred to previous warnings it had issued in February 2013[12] and February 2014[13].

8. On the same day, ESMA published an updated Q&A aimed at relevant national authorities and the industry. The Q&A clarify how the rules relating to the sale of CFDs and other speculative products under the Markets in Financial Instruments Directive (“MiFID”)[14] should be implemented[15].

9. On 26 July 2016, ESMA replied to the complainant. It explained that it had no direct supervisory role vis-à-vis trading firms and thus could not deal with complaints against such firms. However, it had been looking at the supervision to which Cyprus trading firms offering services in speculative products are subject. It stated that its Chair had discussed these matters and the ongoing complaints with CySEC and had also met the FSO. ESMA reiterated that its inquiries were ongoing and confidential.

10. On 12 December 2016, the complainant sent an e-mail to ESMA. He claimed that ESMA had supported the firm by delaying its investigation and keeping it secret. He claimed that the firm was the only one that had infringed the Cyprus legislation implementing the MiFID without having had its license suspended by CySEC. He asked ESMA to open a breach of Union law investigation in accordance with the ESMA Regulation and the applicable Rules of procedure[16]. He asked ESMA to address an “individual decision” to the firm[17] and revoke its license.

11. On 13 December 2016, ESMA replied to the complainant that it did not yet consider it appropriate to launch a breach of Union law investigation, given that the actions by the relevant national authorities were still ongoing. Furthermore, it stated it had to consider other factors such as the requirement of a breach by CySEC of a clear and unconditional EU law obligation as well as the possibility of pursuing other, more appropriate ways for resolving the issue at hand[18]. It confirmed that it was in close contact with CySEC and other national authorities and stated that its work remained confidential.

12. On 15 December 2016, the complainant sent a further e-mail to ESMA, expressing his dissatisfaction with the length of time taken and with the actions of CySEC, the other national authorities and the FSO in relation to the firm.

13. On 15 December 2016, the Auditor General of Cyprus published its 2015 Annual Report[19], which contained a critical section on CySEC’s investigation into the firm.

14. On 27 March 2017, the complainant sent an e-mail to ESMA, asking it to discuss several issues relating to the firm, CySEC and the FSO during the upcoming meeting of its Board of Supervisors. He referred ESMA, amongst other things, to the Cypriot Auditor General’s report on CySEC’s investigation into the firm.

15. On 12 April 2017, dissatisfied with the fact that ESMA was not taking any action against CySEC and the firm, the complainant turned to the Ombudsman.

The inquiry

16. The Ombudsman opened an inquiry into ESMA’s failure to open an investigation under Article 17 of the ESMA Regulation into the alleged breach of Union law by CySEC.

17. In the course of the inquiry, the Ombudsman’s inquiry team inspected ESMA's file on this case and met with ESMA’s representatives to obtain information on the steps ESMA had taken regarding this case.

Arguments presented to the Ombudsman

18. The complainant expressed his dissatisfaction with the way ESMA had dealt with his complaint. He claimed that ESMA issued a warning about CFDs one year after it became aware of the alleged fraud by the firm. By delaying its investigation and keeping it confidential, ESMA was, he argued, protecting the firm at the expense of investors.

19. He complained that the firm was still licensed to operate even though it had defrauded its clients and did not comply with CySEC’s requirements[20] and circulars[21].

20. He noted that according to the 2015 Annual Report of the Auditor General of Cyprus, during CySEC’s investigation of the firm, CySEC officers concluded that the firm was not acting fairly, honestly and professionally and in the best interests of its clients. According to that report, USD 176 million of clients’ money was missing and CySEC officials had recommended to the CySEC Board on two occasions that it should suspend the firm’s license. The complainant claimed that CySEC was failing to act due to political pressure and that it did not want to revoke the firm’s licence. He stated that if the firm’s licence was revoked the “Investor Compensation Fund” would not have sufficient funds to deal with all the resulting compensation claims.

21. On 7 September 2017, ESMA informed the Ombudsman[22] that its Chair had decided that there were no grounds to initiate a breach of Union law investigation of CySEC under Article 17 of the ESMA Regulation. It stated that, in making this decision, the Chair had considered ESMA’s preliminary inquiries and the supervisory and regulatory actions already taken by CySEC, in particular the settlement reached and the action plan agreed between CySEC and the firm. It stated that CySEC was responsible for ensuring that the firm complies with this action plan. The Chair also considered that more suitable means of redress were available at national level via the FSO and by recourse to national courts. It also stated that ESMA does not have the power to look into disputes between investors and trading firms. ESMA also referred to the Joint Group it set up to facilitate coordination between EU supervisors and to scrutinise CySEC’s actions regarding several Cyprus based trading firms, including the firm. It also referred to the work of its policy Task Force on complex products, which resulted in a number of public clarifications of the requirements under MiFID (in the form of Q&A) and warnings to investors. ESMA also noted that its discussions on the possible use of its future product intervention powers under Article 40 of the Markets in Financial Instruments Regulation (MIFIR)[23] were ongoing[24].

22. The complainant disagreed with ESMA’s decision not to open a breach of Union law investigation into CySEC. He claimed that the fine imposed by CySEC on the firm had had no deterrent effect, and that the fact that USD 176 million of clients' money was missing meant that the EU Capital Requirements Regulation (“CRR”) had been breached[25]. He further claimed that the firm had not complied with the "action plan" agreed with CySEC.

23. ESMA provided the Ombudsman’s team with detailed explanations of all the actions taken on the complaints it had received regarding CySEC’s alleged failure to supervise the firm. It stated that it had (a) carried out a preliminary inquiry under the breach of Union law procedure regarding CySEC, (b) coordinated the activities of the Joint Group of national authorities, (c) held bilateral regulatory meetings with CySEC to discuss the complaints received, and (d) updated the complainants on a regular basis regarding its actions. ESMA also (e) attended a meeting of the Committee on Petitions of the European Parliament on this issue[26] and made a public submission[27].

24. ESMA stated that since the conditions set out in Article 17 (6) of the ESMA Regulation were not fulfilled, it could not in any event address an individual decision against the firm under the breach of Union law procedure.

25. ESMA explained that national regulators have a wide degree of discretion in supervising the firms under their control. This means that under the existing regulatory framework, ESMA is confined to assessing whether a national supervisor has fundamentally failed in its responsibility of supervision, or otherwise breached a provision of Union law. ESMA stated that it is not its role to second-guess CySEC’s supervisory decisions regarding individual firms, and that it cannot and does not intervene in contractual or other disputes between an investor and an investment firm.

26. ESMA stated that CySEC had already taken significant regulatory measures in response to the issues raised by the complainants and had committed resources to strengthen the exercise of its supervisory and regulatory powers. Thus, there was no need for ESMA to take any further action.

27. ESMA also referred to its efforts to increase investor protection when it comes to speculative products such as CDFs. In that regard, ESMA referred (a) to its coordination of the CFD Task Force, (b) the issuing of guidelines in the form of Q&A addressed to national authorities and the industry, and (c) the issuing of public warnings to investors.

28. ESMA also stated that the Cypriot FSO, after a period of inaction, was now actively dealing with the complaints against the firm and had already taken a number of decisions finding, in some cases, in favour of the firm and in others in favour of the complainants.

29. ESMA stated that the Joint Group and the CFD Task Force would continue to meet to ensure that work in this field remains a priority.

30. The complainant claimed that ESMA has used its powers to cover up the fact that the firm was insolvent for almost three years. The firm continues to withhold clients’ deposits and does not comply either with the decisions of the FSO or the CySEC’s circulars.

The Ombudsman's assessment

31. The Ombudsman’s inquiry is concerned only with whether ESMA’ decision not to open a breach of Union law investigation into the actions of CySEC, in relation to the firm, constituted maladministration.

32. The Ombudsman notes that Article 17(2of the ESMA Regulation provides that “Upon request (...) or on its own initiative, (...) the Authority may investigate the alleged breach or non-application of Union law.” Moreover, Preamble 3 of ESMA’s Rules of Procedure states that “(...) decisions on initiating investigations remain within ESMA’s discretion (...)”. Article 5(1) of the Rules of Procedure provides that “The Chairperson may close the Request without initiating an investigation, where he/she considers that (...) the Request is admissible but an investigation should not be initiated, as a matter of discretion, taking into account the non-exhaustive list of factors included in Annex 2.” The issue in the Ombudsman’s inquiry is whether ESMA has exercised its discretion in a manner, which is consistent with the rules and principles applicable to ESMA.

33. The Ombudsman notes that ESMA has been, from the outset, in regular contact with CySEC regarding the exercise of its supervisory and regulatory powers in relation not only to the firm in question, but also to other trading firms licensed in Cyprus and offering the same speculative products to retail investors[28]. ESMA has, in response to the many complaints received, taken concrete steps to inquire into the alleged deficiencies regarding CySEC’s supervision.

34. In particular, after ESMA became aware of the complaints against the firm in mid-2015, it made a number of requests for information to CySEC in relation to the firm, which also related to the critical findings of the Cypriot Auditor General in his 2015 Annual Report. In parallel, ESMA set up and coordinated a Joint Group of national competent authorities in relation to certain Cyprus based trading firms offering services in speculative products, including the firm. CySEC was part of that Joint Group. The Ombudsman notes that ESMA and the Joint Group have been satisfied with the concrete regulatory actions undertaken by CySEC. CySEC appeared to have taken account of the concerns raised and has significantly improved its supervisory and regulatory powers vis-à-vis firms that sell CDFs and other similar speculative products.

35. Furthermore, and even though the FSO does not fall within ESMA’s supervisory mandate[29], ESMA also looked into the FSO’s handling of the many complaints received against the firm[30] and considered that information when deciding on the need to launch an investigation.

36. The Ombudsman further agrees that ESMA has no power under the applicable EU Regulatory framework to conduct investigations into the firm. The Ombudsman notes that Article 17(6) of the ESMA Regulation provides that ESMA can take an individual decision in relation to a financial market participant where the competent authority has not applied the relevant rules or has applied them in a way which appears to be a breach of Union law. The Ombudsman notes that ESMA was satisfied by the actions taken by CySEC in this case. In those circumstances, ESMA was justified in considering that there were no compelling grounds to take an individual decision in relation to the firm.

37. Regarding the complainant’s argument that CySEC also breached the CRR Regulation, the Ombudsman notes that ESMA does not have the power to open an investigation in relation to an alleged breach of this Regulation[31]. Only the European Commission, acting under Article 258 of the Treaty on the Functioning of the European Union, has the authority to open an investigation of this kind against a Member State for alleged breach of its EU obligations.

38. The Ombudsman notes that the ESMA decision was influenced by the work it had already done in the context of the Task Force on CFDs and of the Q&A and investor warnings it had issued on speculative products. The Ombudsman notes that both the Joint Group and the CFD Task Force are still carrying out their activities in this field. Moreover, the Ombudsman takes note of the fact that ESMA has, in the meantime, made use of its new product intervention powers under Article 40 of the MiFIR in relation to CFDs and binary options[32]. Thus, on 27 March 2018, ESMA, along with the relevant national authorities, concluded that there exists a significant investor protection concern in relation to CFDs and binary options offered to retail investors, and decided to prohibit for an initial period of three months the marketing, distribution and sale of binary options and place restrictions on the sale of CFDs.

39. Therefore, the Ombudsman considers that ESMA, while not empowered to investigate individual disputes between traders and firms, has nevertheless been active on the general issue of investor protection and the particular situation that arose in Cyprus concerning the supervision by CySEC of the firm.

40. The Ombudsman also notes that ESMA has been in regular contact with the complainants about its inquiry into CySEC. ESMA sent regular e-mails, published a warning statement and made a submission to the European Parliament’s Committee on Petitions. The Ombudsman considers that ESMA also explained in detail to complainants the reasons behind the decision of its Chair not to initiate a breach of Union law investigation into CySEC’s supervision of the firm[33].

41. In view of all the actions ESMA has undertaken, and is still undertaking, and of the fact that CySEC appears to have taken all the required regulatory steps and measures to address the issues in question, the Ombudsman considers that ESMA’s decision not to initiate a breach of Union law investigation into CySEC’s supervision of the firm was reasonable.

42. Therefore, the Ombudsman finds that there was no maladministration by ESMA arising from its failure to open an investigation under Article 17 of the ESMA Regulation into the alleged breach of Union law by CySEC.

 

Conclusion

Based on the inquiry, the Ombudsman closes this case with the following conclusion:

There was no maladministration by the European Securities and Markets Authority.

The complainant and the European Securities and Markets Authority will be informed of this decision.

 

Emily O'Reilly

European Ombudsman

Strasbourg, 12/06/2018

 

 

[1] https://www.esma.europa.eu/

[2] https://www.cysec.gov.cy/en-GB/home/

[3] http://www.financialombudsman.gov.cy/forc/forc.nsf/index_en/index_en?OpenDocument

[4] http://www.audit.gov.cy/audit/audit.nsf/index_en/index_en

[5] http://www.mcit.gov.cy/mcit/cyco/cyconsumer.nsf/page05_en/page05_en?OpenDocument

[6] https://www.cysec.gov.cy/en-GB/complaints/tae/

[7] Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC, OJ L 331, 15.12.2010, p. 84.

[8] The relevant legislation is enumerated in Article 1(2) of the ESMA Regulation

[9] http://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=c5b69085-0611-4a66-b15c-af61bcfb3af0

[10] http://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=f3b8aa80-6679-4efa-9ede-6cb53097e8d5

[11] https://www.esma.europa.eu/sites/default/files/library/2016-1166_warning_on_cfds_binary_options_and_other_speculative_products.pdf

[12] ESMA’s investor warning of 28 February 2013 on CFDs: https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-267.pdf

[13] ESMA’s investor warning of 7 February 2014 on complex products: https://www.esma.europa.eu/sites/default/files/library/2015/11/investor_warning_-_complex_products_20140207_-_en_0.pdf

[14] Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145, 30.4.2004, p. 1

[15] ESMA/2016/1165, https://www.esma.europa.eu/sites/default/files/library/2016-1165_qa_on_cfds_and_other_speculative_products_mifid.pdf

[16] Decision of the Board of Supervisors, ESMA/2012/BS/87rev, Rules of procedure on breach of Union law investigations.

[17] According to Article 17(6) of the ESMA Regulation and Article 12 of the Rules of procedure, ESMA can adopt under certain circumstances an individual decision addressed to a financial market participant.

[18] Under Annex II to the Rules of procedure on breach of Union law investigations.

[19] See Section 3.21 of the 2015 Audit Report, in Greek: http://www.audit.gov.cy/audit/audit.nsf/All/FAD02BCCF6CE5FB6C225808F0025536E?OpenDocument

[20] The complainant referred to the conditions CySEC and the firm had agreed to in an “action plan”, set up in the context of the settlement (fine) in November 2015.

[21] CySEC’s circular of 5 March 2012 on “Clients’ complaints handling by Cyprus investment firms under paragraph 13 of Directive DI144-2007-01” http://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=e678e291-fd1d-437c-abb7-c29076e366b0 and of 30 November 2016 on “Updated version of ESMA’s Q&A document relating to the provision of CFDs and other speculative products to retail investors under MiFID” http://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=8a41b640-9022-4986-b6d9-dff92c39888f 

[22] This consisted of a copy of an email that ESMA had already sent to those who had complained about CySEC’s supervision of the firm.

[23] Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L 173, 12.6.2014, p. 84.

[24] See, ESMA’s public statement on preparatory work in relation to CFDs, binary options and other speculative products of 29 June 2017, https://www.esma.europa.eu/press-news/esma-news/esma-issues-statement-preparatory-work-in-relation-cfds-binary-options-and

[25] Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1.

[26] http://www.europarl.europa.eu/ep-live/nl/committees/video?event=20170711-1500-COMMITTEE-PETI The relevant part starts at: 15:28:15. ESMA's intervention starts at: 15:41:23.

[27] ESMA’s statement to the European Parliament Committee on Petitions of 17 July 2017, ESMA43-318-752, https://www.esma.europa.eu/sites/default/files/library/esma43-318-752_statement_to_ep_petitions_committee.pdf

[28] ESMA sent letters to CySEC regarding the firm in November 2015, June and December 2016 and April and July 2017. It also sent emails in July and December 2015 and in December 2016. ESMA furthermore sent letters to CySEC regarding the Joint Group in July 2015, April and July 2017.

[29] ESMA has no role in relation to the Cyprus FSO since it is not a “competent authority” or “supervisory authority” within the meaning of Article 1(2) of the ESMA Regulation. According to Article 17 of the ESMA Regulation, ESMA can intervene only in cases where there is a breach of EU law by competent authorities. In this case, the “competent authority” for Cyprus is CySEC, not the Cyprus FSO. 

[30] ESMA among others directly addressed letters to the FSO in January 2016 and 2017.

[31] ESMA only has the power to open an investigation in relation to a breach of the financial legal rules that are enumerated in Article 1(2) of the ESMA Regulation.

[32] On 27 March 2018, ESMA agreed to prohibit binary options and restrict CFDs to protect retail investors: https://www.esma.europa.eu/sites/default/files/library/esma71-98-128_press_release_product_intervention.pdf 

[33] ESMA’s decisions have been published in the Official Journal of the EU (OJ). See: ESMA Decision (EU) 2018/795 of 22 May 2018, OJ L 136, 1.6.2018, p. 31 regarding binary options and ESMA decision (EU) 2018/796 of 22 May 2018, OJ L 136, 1.6.2018, p. 50 regarding CFDs.