The fact that the “future of finance is digital” has increasingly become a self-evident truth not only for the EU Commission, but also in the eyes of the typical EU consumer, especially in the COVID-19 context.
However, as in most cases, the speed at which cross-border digital financial services are developed in the industry is not matched by the development of the applicable legislation or of the official interpretative guidelines or relevant case-law.
The lack of legal certainty surrounding key concepts related to the cross-border business within the European Union, such as the distinction between freedom of services vs. right of establishment, the concept of “temporary provision of services”, the meaning of “provisions adopted in the interest of the general good” in each of the relevant passporting scenarios has been officially acknowledged by the European supervisory authorities (ESAs).
In this context, until the much-needed legislative clarifications are implemented, it would have been preferable for local legislation to refrain from bringing additional layers of complexity and confusion around these concepts. However, unfortunately, this is not the case in Romania, at least in respect of certain types of cross-border financial services that are provided pursuant to the freedom of services, more specifically, financial investment services.
Such positioning of the Romanian authorities by means of secondary legislation in force goes against the well- established principles derived from the applicable European law and related case law and should be corrected sooner rather than later by the relevant authorities in order to avoid potential disputes and unnecessary complications.
How using a Romanian phone number may have unforeseen consequences
Under the Romanian law, there are two key competent authorities that ensure surveillance and regulate the banking and non-banking financial industry. The National Bank of Romania – the “NBR” is the competent authority for all banking services, payment services and e-money services, while the Financial Supervisory Authority (the “FSA”) is the authority competent for the supervision of financial investment services, insurance/insurance distribution and pension funds.
Generally, the traditional approach of the National Bank of Romania in respect of the financial services under its supervision has been aligned with the available official (albeit non-binding) interpretative communications issued by the EU Commission, which was based upon the case-law issued by the European Court of Justice.
In contrast, in respect of some non-banking financial services, the FSA has relatively recently come up with some surprising and highly debatable legislative solutions.
Initially, the FSA aimed to provide more clarity on the distinction between cross-border provision of services and the right of establishment. Notably, in relation to the cross-border provision of insurance distribution services, the FSA attempted to provide some un-precedented clarifications and limitations of the concept of “temporary” provision of services. While the intention to provide more clarity on such topics is generally welcomed, the FSA did not identify the proper means to ensure greater legal certainty, as such clarifications were ultimately deemed too restrictive and consequently contrary to the European rules on freedom of services. Therefore, in response to the informal request of the EU representatives, these clarification norms were repealed and replaced by norms intended to more closely follow the EU interpretative communications issued for the insurance industry.
Despite the aforementioned developments, the same authority has failed to endorse the same principles in the capital markets sector and, in the absence of EU Commission interpretative guidelines dedicated to the financial investment services sector, chose to overlook the general ECJ case law that may correspondingly be relevant. Instead, it has chosen to endorse a very strict and probably quite unique interpretation of territoriality criteria triggering the requirement to open up a Romanian branch or to notify the use of a tied agent (under the right of establishment and related regulatory regime) on the Romanian territory.
Consequently, the FSA norms implementing MIFID 2 in Romania provide that if an investment firm or a credit institution (providing financial investment services) either:
- holds a national telephone number used to promote services /contact potential clients or
- has a physical presence on the Romanian territory,
it will be subject to the right of establishment passporting provisions (branch/tied agent) set forth under Law no. 126/2018 (if it is an EU entity) or respectively, to the authorization procedure with the FSA (if it is a non-EU entity).
No clarification is included in the relevant FSA norms about the concept of „having a physical presence on the Romanian territory”. Thus, it cannot be excluded that the authority might endorse a very conservative interpretation whereby not only setting up a form of local physical infrastructure to contact clients and promote services (such as a representative office) but also the visits of the investment firm representatives for holding physical meetings in Romania would be considered as a form of establishment.
In other words, this could mean that if an investment firm representative pays visits to potential clients in Romania, this could be seen by the FSA as a form of establishment. While the COVID 19 lockdown may have severely restricted the likelihood of such visits, this risk should not be overruled, since using a local phone number to call potential clients may trigger the same consequences.
The approach above is likely unforeseeable for many EU financial service providers, on the one hand because the same authority has chosen a lighter approach in respect of other financial services, in line with the EU guidelines (as regards insurance distribution). On the other hand, this unprecedented, strict approach lacking any nuances required for a case-by-case interpretation may be regarded as divergent from the ECJ case law and the interpretations of the former CESR, potentially representing a barrier to the freedom of services right.
In a nutshell, the ECJ case law, which is generously quoted in the EU interpretative communications for banking and insurance sectors, relevant in substance for all EU services, is quite explicit that there is no clear-cut approach in connection with territoriality criteria and the distinction between the freedom of services and the right of establishment, requiring a case-by-case assessment.
Additionally, ESMA’s predecessor, the CESR, confirmed the possibility of an investment firm to establish a representative office in another Member State solely for promotional purposes, specifying that an „office should not be qualified as a branch under MiFID” and that “in practice, firms should notify under Article 31 where they establish representative offices because of the possibility that they might be conducting cross-border business.” While the CESR recommendations were applicable under MIFID 1, in connection with passporting aspects, the same approach should continue to apply under MIFID 2, given the substantially similar passporting provisions.
Next steps and conclusions
In light of the context above, a more consistent approach and dialogue between the Romanian competent authorities (the NBR and the FSA) across all relevant financial services would be much welcomed by the industry.
Also, considering the above-mentioned precedent whereby the FSA was requested by EU institutions to explain the restrictions imposed on the freedom of services right and remove un-necessary barriers on insurance distribution, a similar approach to be followed in connection with financial investment services cannot be excluded, especially in view of the potential re-launch of the IPO market in Romania.
Also, the faster the European Supervisory Authorities (or at least ESMA) or the EU Commission will provide some official guidance, the more likely it will be to have, sooner rather than later, a more consistent and predictable approach also for the investment firms acting in Romania, for the benefit of all financial service providers and their clients.
It follows that until the above solutions are implemented, financial services providers should pay particular care in conducting any cross-border promotional activities with Romanian clients.
By Simona Petrisor, Partner, and Diana Ispas, Partner, Bondoc si Asociatii