Romania: Changes ahead for investment firms

Changes are proposed in a broad spectrum of areas. We have taken stock of the FSA proposals and summarised key changes below. Overall, the draft regulation introduces a more robust framework for oversight in areas of corporate governance, reporting requirements, conduct of business (with a focus on management of transaction settlement defaults and margin trading), cross-border provision of services into G7 third countries, and integration into national law of a series of (updated) ESMA Guidelines on adequacy, suitability and remuneration.

The full text of the draft regulation and the justification document can be accessed here. The consultation period expires on 22 September 2023. Any notes or comments to the proposed changes can be submitted via the online Public Consultation Platform.

• Corporate governance. An obligation is introduced for investment firms to ensure that where a member of the executive body is unable to perform their duties or is pending authorisation by the FSA, another member of the executive or supervisory body must take over the respective role on an interim basis. Such interim member must be notified to the FSA within five days.
• Changes to reporting obligations of investment firms. Notable proposed changes include: monthly lending business reports are to be replaced with quarterly margin trading reports with a minimum prescribed content for each client, while periodic financial statements are to be replaced by periodic prudential reports as regulated under Regulation (EU) 2019/2033 or Regulation (EU) 575/2013, as applicable.

Additionally, a new quarterly report will be introduced for local investment firms providing investment services and/or cross-border activities in other EEA Member States. These reports must include information on the relevant Member State, the services actually provided, the number and categories of clients serviced, the income generated from such activities and the type of financial instruments involved.

Finally, all local investment firms will be required to annually report to the FSA specific information on clients whose information has not been updated, as well as on those clients for whom no investment services and/or activities have been provided. In the context of clients' reporting, the definitions of the terms active/inactive clients were changed to reflect the ESMA's guidelines.

• Management of settlement default. More flexibility is given to investment firms dealing with clients defaulting on transaction settlement due to insufficient funds. In addition to the existing option of covering the settlement gap up to the total amount of the client's liquid assets portfolio held with the firm, investment firms will be able to cover the gap by means of letters of credit (and up to the amount for which each was issued) by local banks or EEA-licensed banks passported into Romania in favour of the respective investment firms. Investment firms intending to use this option must adopt adequate internal prudential procedures.
• Margin trading. For clients who fail to cover margin calls, in addition to the existing prohibition on accepting new margin trade (buy) orders, investment firms will now be able to withdraw the client's pending margin trade orders. They also will have the option of not executing an automatic sell order if the call was triggered by a (distributions related) issuer corporate event, provided a series of conditions are cumulatively met and adequate internal procedures are put in place.
• Cross-border business in G7 Group third countries. Implementing provisions are introduced to remote provision of investment services and/or activities by local firms in third countries that are members of the G7 Group, without triggering the requirement to establish a branch in those countries.
• Auxiliary activities. Investment firms will be allowed to organise financial education programmes other than those referred to in the FSA Regulation 28/2020, subject to prior notification to the FSA.
• Ancillary business exemption. The obligation imposed on a person providing investment services under the ancillary business exemption to notify the FSA is to be repealed. The ancillary business exemption is provided in art. 6 par. (1) let. J) of Law 126/2018.
• ESMA Guidelines. The FSA integrated into Regulation 5/2019 the updated provisions of the ESMA Guidelines on suitability requirements (ESMA35-43-3172), on appropriateness and execution only requirements (ESMA35-43-3006) and on remuneration requirements (ESMA35-43-3565).
• Alignment of cross-references and abrogation of certain provisions. A number of cross-references to local and European legislation were amended to align the provisions of Regulation 5/2019 with the recently adopted Law 236/2022 and EU legal framework on prudential supervision of investment firms. Furthermore, the provisions on minimum capital requirements imposed on investment firms providing certain categories of investment services have been repealed, as these are already reflected in Law 236/2022.

It remains to be seen if all proposed changes will gain traction in the final version of the amending regulation following the public consultation process. Assuming most changes will be adopted, however, investment firms should be looking into whether some of their internal policies require adjusting to reflect the updated legal framework.