This article addresses the regulatory and legal issues which arise in the provision of financial services by a financial institution located in one country (the “home country”) to a Romanian customer, without the establishment of a local presence, such as a branch or subsidiary in Romania.
Traditionally, cross-border financial services in Romania were concentrated in the sophisticated end of the market, such as syndicated loans and investment banking. Electronic commerce, involving financial institutions targeting retail clients cross-border, the increased mobility of individuals, and the digitalization of financial services have led to exponential growth for cross-border retail banking.
Offering financial products or services to a client located in Romania may be subject to Romanian laws and the service provider will need to consider whether the activity requires licensing in Romania. The answer to these questions depends largely on assigning a geographic location to the transaction and activity, that is, whether the transaction or the activity “takes place” in the home country or in Romania.
As a rule, the Romanian legal framework which applies to financial services prohibits cross-border services, in the sense that it imposes the requirement to establish a Romanian subsidiary or branch, licensed by the Romanian competent authority to provide financial services in Romania. This means that Romanian laws and regulations apply to the firm’s activities undertaken on the territory of Romania, irrespective of the residency of the client – the so-called territoriality principle.
There are two exceptions expressly provided under Romanian law: (1) the passporting procedure, applicable for member state service providers which exercise the freedom to provide services (FOS) across the EU, including Romania; and (2) reverse solicitation, which is officially recognized pursuant to Law 126/2018 regarding the financial instruments market, implementing the Markets in Financial Instruments Directive (MiFID II). The passporting procedure is available only to those financial institutions that benefit from a harmonized authorization procedure at the EU level: credit institutions, payment institutions, e-money institutions, investment firms, etc.
The exercise of the freedom to provide services (FOS) in Romania is subject to compliance with the Romanian legal enactments adopted for the purpose of protecting the general interest as well as with the banking secrecy rules. The list of the laws adopted for the protection of general interest is communicated by the National Bank of Romania to the home state authority and it is also published on its website. The list includes the main regulations which apply to banking services, mortgage loans, deposits, insurance, private pensions and investment services in Romania, consumer protection, AML, sanctions, and data protection. Although most of these laws and regulations apply only to Romanian firms or local branches, their inclusion in the list raises a question as to what regulatory perimeter is applicable to firms exercising the FOS in Romania.
Reverse solicitation tries to resolve the question of how to determine whether a service is provided “in the territory of Romania” when provided by a third-country firm to Romanian customers. The provisions from Law 126/2018 dealing with reverse solicitation are based on the MiFID II concept and apply when the financial service is solicited by the client. More specifically, pursuant to Law 126/2018, only services carried out in Romania require prior authorization, and that will not be the case where a third-country firm provides services at the own exclusive initiative of a Romanian customer. The exemption applies only to those products and services specifically requested by the customer and the firm may not offer new products or services to that customer. To rely on reverse solicitation, the firm should not contact clients or potential clients in Romania – which means that any marketing activities in Romania or targeted to Romania would trigger the requirement to apply for authorization in Romania.
Although no other formal rules covering the concept of solicitation exist in Romania, we consider that this concept may be used as guidance for the interpretation of the territoriality principle with respect to other financial services, including banking services, as well. To solve the legal challenges and obtain clarity on the local requirements applicable to banking services (other than investment services) we would welcome formal guidance from the National Bank of Romania on this matter specifying when banking services or activities will be deemed to take place outside the territory of Romania and when they would be subject to local licensing requirements.
By Gabriela Anton, Partner and Co-Head of Banking and Finance, Tuca Zbarcea & Asociatii
This article was originally published in Issue 10.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.