Context

Following the recent implementation in Romania of Insurance Distribution Directive 2016/97 (”IDD”), enacted through Law no.  236/2018 on Insurance Distribution, the Romanian Financial Supervisory Authority (“FSA”) issued several norms[1] for the application of the newly enacted law.

This brief note focuses on the provisions of Norm no. 19/2018 on insurance distribution (the “Insurance Distribution Norm”), aiming to regulate the conditions under which EU/EEA insurance distributors may carry out cross-border activities in Romania under the freedom to provide services (”FoS”), which we believe may be worth a brief legal analysis, especially in a context where their reading might be easily misunderstood.

A step forward in clarifying the conditions for providing insurance distribution on a cross-border basis

Historically, there has been substantial legal uncertainty as regards the conditions under which a financial regulated activity (such as insurance intermediation or other types of financial or banking regulated activities) could be provided on a cross-border basis under the freedom to provide services, as opposed to activities to be provided under the freedom of establishment.

This legal uncertainty was not specific only to Romania, as this “grey area of regulation” was raised by the EU Commission in its interpretative communication[2] for many years now. However, in Romania, unlike the case of other jurisdictions, as a rule,[3] competent authorities chose not to take a general firm stance in connection with such topics and did not issue formal guidelines distinguishing between the various scenarios in which the relevant type of regulated activity would be deemed carried out on a cross-border basis under the freedom of services in Romania. Or, this type of clarifications and guidelines are most than welcomed by the industry, especially in the current context dominated by globalization and digitalization, seasoned with complex new legal scenarios such as BREXIT.

In this context, the relevant provisions of the Insurance Distribution Norm[4] seem to represent a first action of this kind by the Romanian FSA, and should be considered carefully by the insurance industry, but not only.

According to the Insurance Distribution Norm:

  • distribution based on the right of establishment requires a distributor from a Member State to setup a branch or permanent presence in Romania.
  • FoS-based cross-border distribution in Romania by a distributor from a Member State is considered distinct from the activity carried out by a branch or permanent presence if this is carried out either:

(a)directly, by communication means (such as telephone, internet, e-mail); OR

(b)temporarily, on the basis of a power of attorney given to the management agent[5] and subject to fulfilling the conditions below.

In the meaning of the FSA norms, the insurance distribution activity is considered to be provided on a “temporary basis” in one of the following cases:

(a)by collaboration with main intermediaries, if the following cumulative conditions are met: (i) the collaboration takes place in connection with a brokerage/intermediation mandate already concluded on a reverse solicitation basis[6], (ii) the duration of the planned collaboration is of max. 3 years, and (iii) in case of punctual and non-ongoing collaborations between insurance companies with various service suppliers for the purpose of obtaining technical support needed to carry out their activities in optimum conditions;

(b)by appointing a management agent, if the conditions under (a) above are met.

There are still some question marks raised by these legal provisions, for example in connection with the situation involving collaborations by insurance companies with local service providers aimed at obtaining technical support needed to carry out their activities in optimum conditions, the punctual and non-ongoing nature of such collaborations needing to be further detailed by the authority. Matters related to the extent of FSA’s control over such type of intermediaries and the categories of Romanian legislation to be complied with by the latter lack clarity as well.

However, the recently-adopted insurance distribution norms may be deemed a definite step forward and represent a fairly welcomed clarification instead of a restriction of the conditions under which EU/EEA-based insurance distributors can carry out insurance distribution activities on a temporary basis in Romania.

This is so because in practice, the performance of activities in the EU under FoS is clearly the preferred route compared to the freedom of establishment[7], due to its different treatment in the legal framework of the host member States’ legislation. It is expected that the above-mentioned FSA norms will be useful in the decision-making process of EU insurance industry players seeking to cover the Romanian market.

From a practical perspective, it is clear that EU insurance distributors should carefully consider the manner in which they structure their business model in Romania, especially in terms of a potential collaboration with main intermediaries or in terms of appointment of a local management agent in respect of ongoing brokerage/intermediation mandates with Romanian clients. A proper understanding and documenting of the fulfillment of the above-mentioned criteria will be of major importance, in order to avoid unwanted consequences.

In the more general context of cross-border provision of financial and banking services on a FoS basis, it would be useful if similar legal provisions were included in the Romanian norms regulating other similar financial activities or if the above-mentioned norms would serve as inspiration for the issuance of further formal and perhaps more detailed guidelines in connection with the localization of financial service activities. Such additional developments would be much appreciated by the relevant industries.

In the meantime, the above-mentioned conditions regarding the temporary provision of cross-border services (including the reference to provision on a reverse solicitation basis) might be viewed as an interpretation benchmark for other regulated financial services as well.