The FIC set up a dedicated task force on financial services in mid-2015, as a response to the many challenges facing this industry and in order to be able to provide an institutional contribution, as opposed to individual contributions by FIC members, to a similar task force created by Coalitia pentru Dezvoltarea Romaniei, which has already been involved in dialogue with the authorities on topics such as new legislation on banking and insurance, eliminating the eight barriers to the development of capital markets, new listings of public companies and other issues.
In the banking sector, the last two years have seen a recovery in profitability for banks after the significant losses recorded throughout the crisis starting from 2009. Lending has begun to grow again, albeit at a much lower speed compared with the period before the crisis, and the sector has undergone some consolidation, with a number of mergers and portfolio sales taking place.
The non-performing loans ratio has gone down significantly, reaching a level of about 10% in September 2016, following write-offs and sales of bad loans to collection companies. While this represents a positive development in the cleaning-up of banks’ balance-sheets, this level remains well above the ratio in more developed European economies. More recently, however, a number of legislative initiatives have caused concern to banks, reducing their appetite for new lending and even creating incentives for some players to leave the Romanian market.
In insurance, the most positive recent development has been the cleaning-up of the sector. A number of companies which were distorting the market by providing cheap RCA to clients and then unjustifiably denying or delaying their claims and which were technically bankrupt were declared insolvent, while others were required by the regulator to bring fresh equity to restore their solvency. However, this cleaning-up had some short-term costs. The credibility of the sector, as well as of the regulator, was negatively affected.
The resulting increase in RCA tariffs was seen as unjustified by clients, who reacted strongly, triggering intervention from the authorities. Financially healthy insurance companies had to contribute to shoulder the consequences of the bankruptcies, which further affected the profitability of a sector which has been in the red every year for the past decade.
The entering into force of the law transposing the Solvency II EU Directive on 1 January 2016 required insurance companies to align to the new rules and standards. The Solvency II regime enhances consumer protection by introducing prudential financial requirements and risk based supervision, in order to ensure compensation payments to the insured and / or beneficiaries of insurance policies.
For capital markets, the last year was marked by positive steps towards Romania graduating from frontier market to emerging market status. However, additional progress will be needed, particularly in relation to new listings and transaction volumes on the stock exchange. This would also have a beneficial effect on institutional investors, such as pension funds, which currently struggle to find adequate investments on the domestic market.
Since 2016, new reporting obligations have come into force for financial institutions under the FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) regimes. The ultimate aim of these new rules is the prevention of tax evasion and improvement of international tax compliance through the automatic exchange of information in a multilateral context. These new rules were implemented into Romanian law in several steps and require financial institutions to report certain information about their clients’ accounts. Although the 2016 reporting only covered financial accounts held by US legal entities or individuals, or by non-financial entities which have US citizens or residents as controlling persons, the scope of the reporting will be gradually widened in the next few years.
One of the major challenges for the banking sector over the last two years has been the lack of predictability of the relevant legislation. Once Romania entered the EU, most investors assumed that its legislation, which incorporated the acquis communautaire as a pre-requisite for accession, would remain relatively stable, apart from incorporating new mandatory EU Directives. Instead, a number of radical changes were debated in Parliament, and some even passed as Laws, despite strong warnings from EU institutions. The most highly publicised case, and arguably the most detrimental to banks, was Law 77/2016 on Darea in plata. This Law appears to be unique in Europe, goes against EU Directive 17/2014 and has been vigorously challenged by banks on constitutional grounds. The Constitutional Court has so far issued decisions which have received contradictory interpretations from various lawyers, and it is still unclear how judges will make decisions based on them. This creates the risk of inconsistent court decisions for similar cases across the country, as well as the risk of legal action from some banks against the Romanian State and from the European Commission for infringement of the Directive.
The Conversion Law was also controversial. This provided for the conversion of CHF-denominated loans to consumers at the historic exchange rate, i.e. that at the date the loan was granted, as opposed to the current exchange rate, thus potentially generating massive losses for banks. This Law was challenged on constitutional grounds by the Prime-Minister after approval by Parliament and rejected by the Constitutional Court on 7 February 2017.
None of the two Laws mentioned above, when presented to Parliament for approval, were accompanied by impact studies prepared by the initiators, in spite of continuous calls from the banking sector and professional associations, including the FIC. Moreover, the debates organised ahead of approval of the Laws were mere formalities, as practically all the arguments against them were rejected without proper judgement on their merit.
There were also cases when even the Government or Governmental institutions came up with proposals which threatened financial stability. The initial version of OUG 52/2016 transposing EU Directive 17/2014 on loan contracts offered to consumers for immovable goods incorporated many elements which clearly went against the spirit of that Directive, and long and difficult negotiations were needed between stakeholders (the FIC included) before most of them were removed.
Lack of predictability of new legislation was not confined to banks, but also affected other sectors from the financial services industry.
Any new legislation should be subject to real consultations involving all stakeholders. Before even being considered, a comprehensive impact study/analysis should be carried out, to make sure negative consequences are averted. Furthermore, Romania’s commitments under the EU Accession Treaty, such as consultation with the ECB before passing legislation affecting the banking sector, and strict observance of European Directives, should be respected.
The main requirements for the effective functioning and development of the insurance sector are coordination of Romanian and European legislation, as well as the implemention of best practices in the field in order to improve consumers` confidence in the insurance industry and to ensure adequate protection of it.
Although the Romanian insurance market ended 2016 with an approximate 12% increase in consolidated GWP compared to the previous year, insurance companies must still face the challenging process of adaptation and market consolidation under the Solvency II regime requirements.
The Solvency II regime has been transposed in Romania and has applied since 1 January 2016. This positive development entails a process consisting of a set of measures to be taken for the effective alignment of corporate governance structures to the new risk management standards, the updating and simplification of insurance products, diversification of distribution channels, as well as the identification of incentives for launching new products in the following sectors: life and health insurance, property and agricultural insurance, as well as motor insurance, which currently dominates the market.
The general approach by insurers to the development of the market is based on the identification of current legislative provisions and also on developing proposals for amendments to generate actions to support the implementation, promotion and distribution of new insurance products.
The main strategies for stimulating the development of the insurance market in the next few years will focus on diversifying the business model of insurers, increasing the penetration of insurance products among consumers and the adoption of a consistent legislative framework.
The main focus for the insurance market, as highlighted also by the Romanian regulatory body for the insurance industry (Financial Supervisory Authority – Insurance Sector – “FSA”) in the 2016 – 2018 Strategy, consists of developing and sustaining a high level of transparency and a trend towards updating and simplifying the distribution of insurance products, by meeting the demands and needs of the market.
Consequently, it is desirable for the insurance market to promote fair commercial practices, assuring that all customers benefit from information with a high level of transparency.
In order to ensure that future potential customers have a good understanding of financial issues, the insurance market must understand and accept that it is important to offer, by its actions, solid financial education for its potential present and future customers. Consequently, a financial education program should be supported at national level, in order to prepare students to acquire financial insight and skills.
The insurance industry should also focus on measures to permanently update and simplify the distribution of insurance products. This objective may be achieved by diversifying distribution channels. One potential approach would be to increase credit institutions’ involvement in the distribution chain, which would build on customers’ confidence in this market sector.
Moreover, it is very important for the insurance market to take all necessary steps to generate customers’ interest in life and health insurance products, by making these more accessible and attractive, as it has been proven that stimulating the availability of insurance products is the most useful way to encourage consumers to see their benefits and purchase them.
Taking into account the legislative changes that have occurred in the past few years, it is highly important to ensure an adequate regulatory framework, that will be capable of eliminating any shortcomings in the functioning of the insurance market. In order to achieve this goal, several principles must be taking into consideration and applied.
Firstly, it is highly important to identify accurately any gaps and inconsistencies that may be found in the existing primary and secondary legislation, as insurers are directly affected by legislation which is unclear or open to interpretation. This has a negative effect on the insurance market, both for insurers and for their customers.
By identifying these faults, insurers may bring up proposals for amending and supplementing FSA rules, which could lead to the issuing of new regulations and guidelines for implementation of primary legislation. Through this active involvement in regulation of the market, insurers may help the FSA to remove duplicates and parallelism in the existing sectoral regulations and to develop, where possible, a uniform set of rules and single standards, applicable to all entities regulated and supervised by FSA. This would bring significant benefits to the entire insurance process.
Secondly, it is very important that the insurance market, using all its practical experience and the multitude of cases it deals with, should support the legislative authorities in reviewing and coordinating primary and secondary legislation, and, if necessary and appropriate, to indicate the need for strengthening, or re-issuing rules or eliminating those which make the insurance process difficult and unattractive for clients.
Moreover, it is particularly important for all the players in the insurance market to be aware that active involvement and constant feedback concerning all public debates on primary and secondary legislation will help both insurers and the FSA to improve the transposition mechanism for European directives and to ensure effective provision of public information, thus facilitating the direct application of European regulations. This involvement will assure an informed, transparent and functional insurance market and will facilitate full integration into the European insurance market.
In view of the above, FIC recommends the implementation as thourougly as possible of the main objectives set as a strategy in the insurance sector, in consultation with the business environment and other relevant authorities, in order to achieve a stable and attractive business and legal environment.
PAID is an insurance pool set up in 2009, after a study by the World Bank, in order to provide cover against earthquakes, flooding and landslides. The earthquake risk is significant in Romania, with 2 major earthquakes during the 20th century (in 1940, magnitude of 7.4 and in 1977, 7.2). Legislation sets out an obligation for home owners to take out insurance cover for natural disaster risk up to an insured amount of 20 000 EUR, but local municipalities do not carry out inspections and do not enforce the penalties provided for by the law.
The yearly premium of 20 Euros for a sum insured of 20.000 Euros, set by the 2009 law, is much lower than the 34 Euros recommended initially by the World Bank after thorough modelling. PAID was set up as a private company, with 12 insurers incorporated in Romania as its shareholders. PAID is distributed by 21 insurers, which are also involved in the sale of optional home insurance for the risks of natural disasters above 20.000 Euros and for the other types of risks (fire, theft, liability).
Since August 2013, it has only been possible to cover the risk of natural disasters by PAID, and since mid-2015, it has been mandatory to subscribe to a PAID policy first before subscribing to an optional policy. PAID has now become a fairly robust company, which is profitable, and which meets European Solvency 2 requirements with a coverage of 130%, with 27 million Euros equity supplemented by Euro 800 million reinsurance capacity. PAID is consequently able to face claims which would result from a strong earthquake affecting its current balanced portfolio of 1.7 million dwellings.
Issue 1: the artificially low premium set by the 2009 law does not allow the purchase of enough reinsurance to face an extreme event. In the case of such an extreme event like in 1977 and with its current 1.7 million dwellings portfolio, it is calculated that PAID would not be able to pay all claims and the shortfall would be between 100 and 500 million Euros.
Issue 2: with PAID’s current portfolio of 1.7 million dwellings out of 8.5 million in Romania, the 20% penetration rate is, moreover, far too low for mandatory insurance. This low penetration is a major exposure for home owners and also for the State budget. An earthquake comparable to that of 1977 would create damage to houses in the range of 5 billion Euros, while only 1.5 billion is insured by mandatory PAID insurance and by optional insurance. The exposure of the state budget is, consequently, huge. Moreover, there would be a likely surge in the price of construction material due to high demand.
Issue 1: FIC recommendation to correct policy premium deficit by introducing a 10% deductible on the 20.000 Euros sum insured (meaning that in a case of claim, the first 2000 Euros of damages would not be indemnified by PAID). This solution has been thoroughly documented and discussed with ASF.
Issue 2: The FIC recommendation is to gradually increase the penetration of PAID: after removing the premium deficit indicated above, the law should be amended:
Life insurance protects people in cases of accidents and death, prevents financial collapse and avoids a family becoming dependent on the public social assistance system. Stimulating private behaviour is a measure of protection applied by most OECD countries and a large part of European Union countries. In Romania, life insurance has developed slowly and now has a penetration rate of only 0.3% of GDP. The average penetration rate in the region and other countries with similar GDP per capita is 1%.
Romania already has one of the highest rates of social security contributions in Europe. Moreover, projected demographic change will increase pressure on the social security budget and have a negative impact on economic growth in the long term, as well as leading to a likely fall in the amount of welfare available to Romanians.
In order to stimulate voluntary financial protection and boost the development of the life insurance market in Romania, the FIC recommends the application of a tax incentive for the purchase of life insurance policies with deductibility for both employees and employers.
The ANPC Draft Law was passed in 2016 by the Chamber of Deputies and is currently awaiting final debate in the Senate.
As stipulated under the ANPC Draft Law’s Explanatory Memorandum, the main aim of the legislation is to establish clear independence and sovereignty for the authority as opposed to other executive bodies, including the Government of Romania, by creating a functional and organisational subordination of the authority to Parliament. The envisaged effect of this legislative proposal is to ensure a stable structure, with a separate budget, capable of taking decisions in consumers’ interests, without any third-party interference. The current proposed drafting of the ANPC’s duties and responsibilities could trigger a potential overlapping with those of other authorities, for example in areas supervised by the National Bank of Romania (NBR) or the Financial Supervisory Authority (FSA). The authority conferred to the ANPC to supervise the market for financial consumer products is broadly regulated (whereas that given to the NBR and/or the FSA relies on several regulations detailing how supervision should be carried out). This situation has led to disproportionate or controversial measures being taken by the ANPC. Consequently, the ANPC’s supervision powers should be more accurately described under the ANPC Draft Law.
The ANPC Draft Law proposes extended approval and authorisation powers for the ANPC with respect to financial products designed for consumers, including applicable taxes and tariffs. As a result, stronger protective measures for consumers are proposed which may trigger additional costs and may prove time consuming for professionals in the financial sector. Financial sector companies are already required to design their products by taking into consideration consumer protection law and the ANPC already has the legal instruments to verify and enforce those provisions, if necessary.
In addition, financial sector companies are already subject to the supervision of the regulatory authorities (i.e. the NBR and FSA) and must observe the NBR’s and FSA’s regulations issued in relation to their activities. Bringing an additional layer of supervision by the ANPC, through giving it the authority to approve financial products designed for consumers could have a significant impact on the financial sector in terms of efficiency and consistency, triggering potentially divergent views from the ANPC compared with the BNR and/or the FSA.
Another important change envisaged under the ANPC Draft Law, which has been debated in detail by the business community, relates to the fining system applied by the ANPC. Whilst the current consumer protection regulations provide for a fining system based on clearly determined minimum and maximum thresholds, the ANPC Draft Law proposes a fining system similar to or, in some cases, even more severe than that currently applied by the Competition Council i.e. based on percentages applied to the company’s turnover for the previous financial year.
The Draft ANPC Law provides that the ANPC may apply fines of between 0.5% and 10% of a company’s turnover and, if one of the companies penalised is part of a group, the above percentages would apply to the total group turnover, on the basis of consolidated financial statements.
Furthermore, ANPC inspectors may also apply preventative measures (such as temporary closure of a business or withdrawal of existing and future financial products from the market) and additional penalties (such as the temporary/permanent closure of a business or withdrawal of the business license).
Besides the fact that this fining system is incompatible with the principles of liability for minor offences as established under Romanian law, it is unclear how this system would, in fact, be beneficial to the consumer. In the absence of clear implementation criteria and given that the enactment of these enhanced duties and responsibilities for ANPC may trigger an overlap with duties of other authorities (such as the National Bank of Romania or the Financial Supervisory Authority, with respect to the financial sector), the ANPC Draft Law lacks the main prerequisites that the business environment expects, i.e. transparency, stability and predictability.
The FIC recommends thorough consultation with the business environment and other relevant authorities and the implementation of amendments to the ANPC Draft Law in order to establish clear duties and responsibilities for this authority, which should not overlap with those of other authorities. This would contribute to a more stable business and legal environment.
Since their launch in 2007-2008, private pension funds in Romania have reached combined net assets under management of more than EUR 7.3bn and have significantly diversified their investment portfolios. Pension funds have thus begun to play an increasingly important role on the local capital markets, especially the Bucharest Stock Exchange (BVB), where they can already be considered the largest domestic institutional investors. Pension funds now have holdings in excess of EUR 1.2bn in BVB listed equity (end-2016). They account for more than 10% of the market’s trading volumes and they have also had a decisive role in the success of the Romanian Government’s public offerings (Nuclearelectrica, Romgaz, Electrica) on the market.
Currently, private pension funds invest up to 93% of their assets domestically and retain a very low risk profile, with 75%-80% of all holdings invested in money market instruments and various bonds. As the banking sector continues the deleveraging process, pension funds provide the alternative much needed capital for development, contributing to the financing of public companies and the optimal allocation of resources in the economy via the stock market. One possibility for development is infrastructure investment, where pension funds could buy into special project bonds issued to support the country's developing infrastructure. While bonds are always a simple option, there are also several other ways to raise capital needed not just for building roads and improving railways, but also to enhance the health and energy infrastructure.
Private pension funds make up a solid bedrock of national capital, which can be used to consolidate financial markets and develop infrastructure. Consequently, the FIC considers that the continued development of the 2nd Pillar, by phasing in contributions as provided by law, would bring significant benefits. We also recommend that the Government should continue the privatisation of state-owned-companies through the Bucharest Stock Exchange.
Over the past two years, the insurance sector has witnessed the opening of insolvency proceedings into four Romanian insurance companies (Astra, Carpatica Asig, Forte and Lig). Compensation claims related to the insurance portfolio were taken over by the Policyholders Guarantee Fund (FGA) up to the EUR 100,000 threshold/insurance creditor and by the Romanian Insurers’ Green Card Bureau (BAAR) for external compensation claims exceeding EUR 100,000 /insurance creditor.
The entry into force of Law no. 213/2015 on the Policyholders Guarantee Fund has introduced a modernized guarantee scheme for Romanian policyholders. The law aims to clarify the scope of the scheme and regulates its legal status, resources, financing, procedure and the terms of compensation claims for the payment of insurance from the Guarantee Fund.
Nonetheless, whilst the purpose was to create a viable and effective mechanism for the functioning of the Policyholders` Guarantee Fund, there are still serious concerns with respect to the EUR 100,000 claim compensation threshold per insurance creditor, in the context of ensuring protection to insurance creditors from the consequences of insurers’ insolvency. The issue related to the applicability of this threshold in the context of legal subrogation has raised concerns in the market and has led to debates amongst legal writers and practitioners as to the interpretation of the concept of “insurance creditor” and to several litigations against the Policyholders` Guarantee Fund filed by insurance undertakings involved in some of the insolvency proceedings currently being carried out in the insurance sector.
Law no. 246/2015 on recovery and resolution of insurance undertakings represents a new approach for the European insurance industry and transposes principles similar to those set out in the 2014/59/EU Bank Recovery and Resolution Directive (BRRD). This law aims to establish rules and procedures for insurers licensed by the FSA, for managing situations of major difficulty that could have a significant impact on the entire financial system, including the use of resolution tools and measures.
However, in contrast to the BRRD and the law transposing the BRRD (Law no. 312/2015) which set out the whole set of measures, tools and related safeguards, Law no. 246/2015 only includes the main recovery and resolution principles and tools, whilst leaving the specific measures and safeguards to be detailed by norms and regulations to be issued by the FSA.
Law no. 151/2015 on the insolvency of individuals, which will enter into force on 1 August 2017, is also likely to have a significant impact on the financial market in relation to debt enforcement. This law was adopted as a result of the growing problem of individual over-indebtedness and, consequently, the inability of the affected persons to comply with their financial obligations. Nonetheless, this law will be inevitably associated with a significant change in payment discipline as well as with higher recovery costs and thus will need to be carefully structured and implemented in order to avoid having a negative impact on the financial market.
The legislation detailed above will support the effective enforcement of debt or collection of receivables. FIC welcomes these measures, but also believes that the legislation should be clarified, in particular Law no. 213/2015 on the Policyholders Guarantee Fund, by redefining the concept of “insurance creditor” in the context of insurers’ legal subrogation right and carefully implemented in order to ensure stability and transparency in the market.
The Romanian Government has passed an Emergency Ordinance aiming to implement EU Directive 2014/17 (the “Residential Loans GEO/GEO”). Due to incorrect implementation of certain provisions in EU Directive 2014/17, the Residential Loans GEO creates legal uncertainty in relation to the obligations of creditors and/or debt collection entities, the assignment of receivables (e.g. internal policies of banks and debt collection entities, transferability of the writ of enforcement, interest and default interest, as well as the applicability in time of the GEO). Also, other provisions of the EU Directive 2014/17 (e.g. art. 28 para. 4) were incorrect transposed in the Romanian law through the Law no. 76/2016 (the “Debt Discharge Law”).
The Residential Loans GEO includes provisions outside the scope of the Directive, concerning regulatory issues for debt collection companies, as well as the granting of loans by non-financial creditors and real estate developers. It also amends Romanian legislation which implemented Directive 2008/48/EC on credit agreements for consumers.
The Residential Loans GEO includes provisions which may impair a creditor’s ability to obtain relatively simple enforcement against a defaulting debtor (e.g. the conditions for the pre-enforcement notice to be delivered, and for mandatory terms to be observed by the creditor for enforcement procedures, as well as the possibility for the debtor to self-sell the secured asset).
Furthermore, the Residential Loans GEO requires banks to establish internal policies and be able to prove they have taken a diligent approach to the consumer before the acceleration of loan agreements, before enforcement or before the assignment of receivables. While protection of consumers is in line with the provisions of the EU Directive, the Residential Loans GEO sets out these requirements in very broad terms, leaving room for interpretation and making the tasks of the lenders/debt collection entities very burdensome.
If loans are assigned to debt collection companies, the security documents do not preserve their attributes as writs of enforcement. The poor drafting of the GEO has created a debate on the market as to whether this is strictly applicable to retail mortgage loans and debt collection entities or whether it should apply, mutatis mutandis, to unsecured loans/corporate loans (which are not within the scope of the GEO), as in principle, this distinction in treatment does not have a clear legal basis.
Another issue is that the GEO provides for specific requirements and/or limitations with respect to interest and default interest. The scope of the application of this treatment is not clear.
Despite the fact that there is an express provision in the GEO stating that it does not apply to loan agreements that are ongoing at the date of its entry into force, unclear drafting creates ambiguity as to whether the provisions will apply only to loans which originated after its coming into force or if certain limitations (e.g. to the treatment of interest/default interest, writs of foreclosure issued in the case of assignment) will apply to loans which did originate before its coming into force, considering that there are hardly any elements to support a difference in treatment in such cases based on applicability in time.
The FIC believes the legislation should be clarified, to create an effective framework for debt enforcement or the collection of receivables.
The agricultural sector contributes to a high proportion of Romania’s GDP (around 6%) and even more to GDP growth when the crops are good. The European joint policy for agriculture 2014-20 provides a framework for subsidies, with less focus on subsidies to production and more on rural development & risk management. As part of this latter category, subsidies from either the European Union or Member States can be channelled through 2 instruments: subsidies to the crop insurance premium (to make it more affordable as it can be up-to 65% of the total insurance premium, and hence to increase the penetration of insurance) or subsidies to a national solidarity fund (for risks which are non-insurable).
In the European Union, 82% of subsidies are applied to the crop insurance premium, 75% of subsidies are funded by the EU and 25% by the Member State. In Romania, insurance against climatic damage to crops only covers 2.2 million hectares out of the 13 million hectares of arable land (17% penetration). This rather low penetration of crop insurance puts at risk the capital invested by farmers in the event of climatic risks and limits their ability to obtain financing. Crop insurance in Romania now covers all climatic risks including frost and drought; the premium can be relatively expensive when the likelihood of risks is high.
In Romania, in the first 3 years of the 2014-20 European joint policy for agriculture, no subsidies have been applied to risk management in agriculture as the Romanian State has chosen to apply them fully to a mutual fund for national solidarity which does not yet exist and which has proved difficult to create.
Since 200 million euros are available for risk management in Romanian agriculture under the 2014-20 European joint policy for agriculture, we consider that Romanian farmers are missing the opportunity of gaining more than 30 million euros every year in the funding of better risk management. Romanian farmers are in competition with farmers from other EU countries who benefit from subsidies making crop insurance more affordable. After consulting with farmers’ associations, a working group of UNSAR & ASF sent a proposal to the Ministry of Agriculture for a change in policy to allow farmers also to receive subsidies for crop insurance
The Romanian government should use the opportunity given by the European Union to member states to make changes in 2017 to European 2014-20 policy for agriculture, to orientate some of the subsidies to insurable risks covered by crop insurance, leaving the remainder to the national solidarity fund which has yet to be created.
Awareness and current status: International and European legislative drivers define financial literacy as a combination between awareness, knowledge, skill, attitude and behaviour necessary for individuals in order to gain an understanding of financial products, concepts and potential risks used in connection with personal finance matters. The level of understanding of financial concepts by individuals represents a vital driving factor for the healthy shaping of competitiveness as well as strong, well developed financial markets.
The scale of the global financial crisis from 2008 revealed the reduced level of understanding of information on the financial market. Even nine years later, significant legislative developments can still be observed, which aim to “re-balance” stability in favour of consumers.
Source: S&P Global FinLit Survey
In addition, in Standard & Poor’s 2015 Global Financial Literacy Survey, Romania ranked last in the European Union, with only 22% of the total population being considered financially literate. As a comparison, the results in similar economies are: 42% in Poland, 54% in Hungary and 35% in Bulgaria. Even on the level of the whole of Europe, Romania lags behind. Only 4 countries recorded lower scores – Albania (14%), Armenia (18%), Kosovo (20%) and the Republic of Macedonia (21%). Even in the Republic of Moldova, 27% of the population is considered financially literate. Participants in capital and financial markets consider this result alarming and one that needs to be addressed urgently.
However, there has been no significant progress in recent years and, there have been some examples of moving backwards (e.g. the removal from high school manuals of chapters focusing on inflation and macroeconomics).
Sector driving factors: In this specific context, for example, in 2016 Government Emergency Ordinance no. 52/20162 entered into force. This sets out legal obligations for banks to hold informational and educational activities targeting consumers at least once per year. Moreover, the ordinance pays special attention to consumers taking first time mortgage credits.
Banks are currently showing increasing interest in providing their clients and potential clients with financial education by various means.
In insurance, the level of informative programs organized for consumers is currently low. However, non-profit organisations have stepped in to fill the gap and are offering some programs.
In the capital market sector, important changes have occurred in the last few years which have increased its visibility and several more are planned.
In addition, there is a need for financial literacy in the pensions sector, especially in relation to voluntary pensions (3rd Pillar), as well in the asset management sector, as mentioned below in our recommendations.
Financial literacy has been neglected in Romania for many years and repeated studies have proved it. This is not surprising since in the past 5 years there have been no specific actions from any public institutions to tackle this issue and, at the same time, the majority do not even have a comprehensive action plan that would target the whole of civil society in Romania.
Financially savvy adults are less likely to default on loans and more likely to save for retirement – which is crucially important in a country like Romania, where the population is aging rapidly. Financially literate people are also better able to manage their daily living activities and employment tasks and can support the development of communities, meaning that financial literacy supports functional literacy.
In the light of the above and taking into consideration the Ministry of Education’s strategy for reforming the curriculum and school manuals, we suggest the inclusion in manuals of dedicated chapters that would cover issues related to financial literacy, money and savings, as well as specific sections dedicated to investments, financial instruments, practical calculus, as well as capital markets.
Financial literacy in schools: The beneficial effects of teaching financial literacy in schools will be seen in the long-term. Currently only a few manuals exist, supported by private initiatives and available to a limited number of students. To reach the whole of society, the involvement of the Ministry of Education is needed to promote this type of learning more widely.
Financial literacy for active people: In order not to fall into the gap of the economy having to wait at least one-generation to benefit from the effects of financial literacy, a national program for the active population should be developed, in cooperation with the Ministry of Labour, under which employers would organise financial literacy training courses, as part of the permanent training of their workforce.
Financial literacy and policy-makers: Improving financial literacy in Romania would also be beneficial for policy makers since it could promote demand for financial services related to savings and limit mistakes in financial decisions related to borrowing.1
Financial literacy for online banking operations. Considering its significant potential, an education program for the users of online banking operations could increase awareness of these operations and streamline the relationship between clients and financial institutions.
Since 2014, the Romanian capital market has passed through a number of reforms under which a significant number of regulatory barriers have been removed: AeRO, the junior market for SMEs, has been created, and a campaign to increase financial literacy and corporate governance has been started. Moreover, the largest IPO of a state owned company (Electrica) in the history of the Romanian capital market has taken place as well as the largest for a privately owned company (Medlife). There have been several other large transactions and, in September 2016, the Bucharest stock exchange was placed on the Emerging Markets Watch list by FTSE-Russell.
In order for the Romanian capital market to be promoted by the global index providers (MSCI, FTSE-Russell, S&P Dow Jones, STOXX) to the Emerging Markets category, the country must comply with a series of qualitative and quantitative criteria. The Bucharest exchange complies with almost all of the qualitative criteria (related to market infrastructure and the regulatory framework), but, in order to comply with the quantitative ones (number of sizeable companies listed on the BVB, with significant liquidity), it needs more listings. Hidroelectrica’s listing would be important as it would be sizeable enough to allow the Romanian stock market to comply with the MSCI and FTSE criteria.
The development is needed for the Romanian capital market to become a viable financing alternative for Romanian companies, to allow the financial system to be more stable and to enable it more easily to absorb shocks. Moreover, it would aid the development of the pensions system, support the privatization programme of state owned companies, and increase the transparency and performance of Romanian companies (both state and privately owned) by applying corporate governance standards, as per the Corporate Governance Code and related regulations. Moreover, funds investing in emerging markets are estimated to be 30 times larger than those investing in frontier markets (Romania’s current status). Promotion to Emerging Market status would benefit not only the capital market, but also the whole of Romania.
The program for state owned companies to be listed on the BVB should be continued, by both accelerating the listing of new companies on the capital market, as well as by encouraging SPOs for already listed companies. There are several suitable IPO candidates: Hidroelectrica, CE Oltenia, Romtelecom, Bucharest Airports, Tarom, CFR, Salrom, Constanta Port, CEC Bank, as well as the strategically privatised companies in the energy sector like Enel, Engie and E.ON.
The listing procedures should be formalised in a multi-year strategy approved by the Government, where companies being prepared for listing are named, with clear timelines and expected listing dates set for each of them. In order for the transactions to have high chances of success, stakes to be listed should be at least 20% of the total shares issued by these companies.
Organisation of all IPOs and privatisations should be centralised under one government entity/fund, which should help ensure the highest market standards for each transaction. Consequently, a formalised decision- making process related to initiation of the listing process should be established.
An experienced team of consultants should be involved in the completion of the listing process from the stage of approval of the privatisation strategy. The remuneration of the privatisation committees should largely focus on the completion of the privatisation process so that delays are avoided.
Considering the oversubscription on retail tranches in previous public offers, the FIC recommends that the Government should have a Civic Shareholding Program, as a long term programme to make the investment process on the Romanian capital market more accessible to regular citizens and to stimulate retail investors to buy shares in the public offers of state owned companies, by allocating dedicated retail tranches in each public offer.
A sustainable structure for Romanian sovereign and development funds should be created, as the two types of fund should be subject to the following goals: to maximise shareholders’ value and promote the development of the financial sector. The growth of the capital market should also allow SOEs and private companies to raise the necessary funding for investment projects, and this should lead to an acceleration in GDP growth.
The fiscal registration procedures for foreign investors which are interested in trading on the Romanian capital market should be simplified.
Development of the private pensions sector should be promoted by extending the investment horizon. This would allow the funds to participate in the financing and development of infrastructure, private equity and real estate projects. This could be acheived by increasing deductability for Pillar 3 and by increasing the contribution to the private pension funds to 6%.
Fiscal measures should be introduced to stimulate long term investments and financing of companies through the capital market.
The national regulatory framework for companies and capital markets should be aligned to current European legislation. Primary and secondary legislation should also be coordinated at national level.
Steps should be taken to continue to improve financial literacy and the corporate governance climate for listed companies.