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Financial conglomerates

Developments in the financial market have led to the creation of financial groups, called financial conglomerates, which provide services and products in different sectors of the financial markets. Until 2002, there was no form of prudential supervision on a group-wide basis of credit institutions, insurance undertakings and investment firms that are part of a conglomerate, in particular regarding the solvency position and risk concentration at the level of the conglomerate, intra-group transactions, internal risk management processes at conglomerate level, and the fit and proper character of the management.

On December 16 2002, the European Parliament and Council adopted Directive 2002/87/EC on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (the EU Directive).

The EU Directive aimed not only to create financial stability, but also to protect individual depositors, insurance policy holders and investors when conglomerates, particularly those of which credit institutions, insurance undertakings and investment firms are a part, face financial difficulties that could seriously destabilize the financial system.

To harmonize the national legal framework with the European legislation, the Romanian government enacted Emergency Ordinance 98/2006 on the supplementary supervision of credit institutions, insurance and/or reinsurance companies, companies for financial investments services and investments management companies in a financial conglomerate (GEO 98), which implemented the EU Directive into national legislation.

GEO 98 lays down the rules for supplementary supervision of regulated entities – Romanian legal persons that are authorized according to the Romanian legislation and that are part of a financial conglomerate. A regulated entity is a credit institution, insurance and/or reinsurance company, a company for financial investments services or an investments management company.

GEO 98 provides the requirements a group must meet to be qualified as a financial conglomerate:

  • A regulated entity is the leader of the group or at least one of the subsidiaries in the group is a regulated entity. Where a regulated entity is the leader of the group, it is either a parent undertaking of an entity in the financial sector or it holds participation in it, or an entity linked with an entity in the financial sector by a relation within the meaning of GEO 98. Where there is no regulated entity as the leader of the group, the group's activities must mainly occur in the financial sector.
  • At least one of the entities of the group is within the insurance sector and at least one is within the banking or investment sector.
  • The consolidated and/or aggregate activities of the entities in the group within the insurance sector and those of the entities within the banking and investment services sector are significant within the meaning of GEO 98.

GEO 98 also stipulates the criteria for the financial conglomerate's qualification as such and the means through which this identification may be accomplished by the competent authorities.

With respect to the supplementary supervision, GEO 98 sets out its applicability and regulates the prudential requirements that need to be monitored at the level of the financial conglomerate. These requirements relate to: capital adequacy, risk concentration, intra-group transactions, internal control mechanisms and risk management processes.

The measures to allow supplementary supervision laid down by GEO 98 identify the criteria to designate the competent authority responsible with the exercise of the supplementary supervision, the rules to appoint the coordinator of the supplementary supervision and its competencies, the obligations of cooperation and exchange of information between competent authorities, the requirements for the management body and mixed financial holding companies, and the enforcement measures that apply if the prudential requirements are not longer complied with or, for other reasons, solvency is jeopardized, or where the intra-group transactions or the risk concentrations are a threat to the regulated entities' financial position.

GEO 98 also addresses the cases when the supplementary supervision is carried on with respect to groups whose parent undertakings are outside the Community and provides for the possibility that cooperation agreements are concluded with the relevant competent third countries' authorities with a view to establishing the methods of application of the supplementary supervision.

By enacting GEO 98, the Romanian legislation creates the basis for the coherent and unitary supervision of the financial groups, providing for a comprehensive and appropriate set of rules on the supervisory concepts with regard to financial conglomerates.

Iulia Bunescu

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