Compliance agenda of investment companies

CNB Supervision of the Financial Market: Why is the Compliance Agenda Crucial for Your Company?

Its role lies not only in punishing individual failures, but primarily in protecting the banking sector, capital market, and insurance industry as a whole.

This broad mandate means that CNB supervision is comprehensive and focuses not only on formal compliance with laws, but also on the principles of prudent and honest business conduct.

For the CNB, compliance is not just about adhering to individual sections of the law. Its main mission is to protect "financial stability".

It therefore views every failure of an individual company in a broader context as a potential systemic risk that could undermine investor confidence in the entire market. This is precisely why a robust compliance program is the foundation not only for successfully passing an inspection, but also for the long-term sustainability and good reputation of your company.

The basic legal framework is Act No. 240/2013 Coll., on Investment Companies and Investment Funds (ZISIF), which transposes European directives, in particular AIFMD (alternative investment funds) and UCITS (standard funds). The MiFID II Directive is reflected in Czech law by Act No. 256/2004 Coll., on Capital Market Undertakings.

Understanding these rules and implementing them correctly into internal processes is absolutely essential.

The Czech legal team at ARROWS will help you set up compliance processes not only to meet the letter of the law, but also to demonstrate your responsibility and contribute to your reputation and long-term stability. 

Do you need a strategic review of your compliance? Contact us at consultation@arws.cz.

Key Areas Regularly Inspected by the CNB

The CNB's supervisory practice focuses on several key pillars that form the foundation of the healthy functioning of any investment company. 

Neglecting any of these areas can lead to serious findings and subsequent sanctions. Let's look at the most important ones.

Management and Control System: The Backbone of Your Organization

The cornerstone that the CNB examines with the greatest care is the functionality of your management and control system. 

It is not a formal document, but a living organism of processes that ensures your company operates in accordance with the law and internal rules. Under Section 20 of ZISIF, this system must include a clearly defined organizational structure, risk management rules, an internal control system, and procedures for managing conflicts of interest.

An dysfunctional system is a red flag for the CNB. For example, Expobank CZ was fined CZK 20 million precisely because it did not have an effective management and control system (CNB decision from 2020 under the Act on Banks; the rules for investment companies are similar).

Similarly, another institution was sanctioned for deficiencies in keeping communication records, which the regulator evaluated as a systemic failure.

Particular attention is also paid to staffing. European implementing rules (Commission Regulation (EU) No 231/2013) allow the combination of compliance and risk management functions only where it corresponds to the nature, scale, and complexity of the activity.

For larger and more complex companies, the CNB insists on their strict separation to prevent conflicts of interest.

At ARROWS, we specialize in drafting internal guidelines that are not only in compliance with ZISIF, but are also practically implementable and demonstrable during a CNB inspection. For an initial consultation, write to us at consultation@arws.cz.

Risk Management and Investor Protection: The Core of Supervisory Practice

The CNB is placing increasing emphasis on how financial institutions treat their clients. 

Supervision is shifting from purely formal checks to assessing the real impact of the company's activities on investors. 

The key concept here is misselling – a situation where a client is recommended a product that does not correspond to their needs, knowledge, or financial situation.

The regulator focuses intensively on how companies manage specific risks, such as liquidity risk, concentration risk, or the use of leverage.

Furthermore, it checks whether clients receive complete and truthful information about risks, fees, and potential returns. 

Particularly risky are complex products, such as contracts for difference (CFDs), which according to the CNB are unsuitable for most non-professional customers.

Our lawyers will help you prepare documentation that will protect your company not only from fines, but also from civil disputes with dissatisfied clients.

We also provide professional training for employees so that they understand the rules of conduct with customers and minimize the risk of misselling. For a tailored training offer, write to us at consultation@arws.cz.

Reporting and Information Obligations: Where Mistakes Are Most Commonly Made

Administrative errors may seem like a minor detail, but in practice, they are a common reason for initiating administrative proceedings. 

Even entities that are not subject to full supervision, such as managers of alternative funds under Section 15 of ZISIF, have strict information and reporting obligations.

The most common offenses are delayed or completely missing reports (e.g., ROFOS36 and ROFOS37), errors in reported data, or ignoring CNB calls for remedy.

For the regulator, the inability to meet basic reporting obligations is a signal that the company's internal processes are not in order, which can lead to an in-depth inspection.

Sanctions for these seemingly small mistakes are not negligible. In practice, fines often range in the tens of thousands of CZK, but the law allows for a fine of up to CZK 150 million, to which the costs of the proceedings are also added.

Do not take reporting lightly. At ARROWS, we will ensure the preparation and timely submission of all documents required by law, so that you avoid unnecessary sanctions and unwanted attention from the regulator. Need help with reporting? Contact us at consultation@arws.cz.

Consequences of Failures: Real Examples of Sanctions and How to Prevent Them

The consequences of inadequate compliance can be devastating for an investment company. It is not just about financial penalties, but also about damage to reputation and, in extreme cases, the loss of a license. The CNB's practice shows that the regulator does not hesitate to impose significant sanctions.

For example, Win Investment was fined CZK 2 million and lost its license for a range of failures, including client manipulation and inadequate risk disclosure. The securities trader BH Securities was sanctioned with a fine of CZK 5 million for errors in the distribution of corporate bonds.

These cases show that the CNB targets specific areas where it sees the greatest risks for clients and the market. The experience of our lawyers from dozens of inspections and proceedings before the CNB allows us to identify risk areas before they become a problem. 

We provide legal consultations that protect our clients from fines and inspections. For an immediate solution to your situation, write to us at consultation@arws.cz.

Operating on International Markets: Compliance Without Borders

Expanding into foreign markets within the European Union is a logical step for many investment companies. 

However, this process is associated with the so-called notification obligation. If you want to provide services in another member state, you must first notify the CNB of your intention, which then informs the relevant foreign supervisory authority.

This process requires careful preparation of documentation, including a detailed business plan.

Any error can lead to unnecessary delays or even rejection of entry into the given market. 

Furthermore, as shown by the recent dispute between Fondee and the CNB, which reached the Court of Justice of the EU (Case C-695/22), the interpretation of national and European rules can be highly complex and requires deep expertise.

Expanding abroad brings huge opportunities, but also complex regulatory challenges. We will help you prepare the notification and the necessary documentation for the CNB.

Are you planning international growth? Our lawyers are ready to help you – write to consultation@arws.cz.

Comprehensive Legal Support from ARROWS

Navigating the web of CNB regulations requires more than just passive monitoring of laws. A proactive approach, constant updating of internal processes, and the ability to react quickly to new supervisory requirements are necessary. 

At ARROWS, we understand that functional compliance is not a cost, but an investment in the security and stability of your business.

Our long-term experience in providing services to more than 150 joint-stock companies and 250 limited liability companies gives us unique insight into practice. 

We pride ourselves on the speed and high quality of our legal services, whether it concerns:

• preparation or review of contracts and terms and conditions,

• representation in administrative proceedings before the CNB,

• drafting legal opinions on regulatory issues,

• assistance with obtaining necessary licenses and permits,

• professional training for your employees and management.

In addition, thanks to our extensive network of clients, we actively connect interesting business and investment opportunities. We are not only your lawyers, but also your strategic partners.

If you want to be sure that your compliance agenda is in perfect order and ready for any inspection, do not hesitate to contact us. Get in touch with us at consultation@arws.cz and get a tailored legal solution.