Contributed by Bird & Bird.
I. LEGAL FRAMEWORK
1.1. Which main legislative and regulatory provisions govern the banking sector in your jurisdiction?
The provisions regulating the banking sector are set out in different laws, including but not limited to:
- Act V of 2013 on the Civil Code;
- Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises (Banking Act);
- Act CCXXXV of 2013 on Certain Payment Service Providers;
- Act CCXXXV of 2013 on Payment Service Providers;
- Act LXXXV of 2009 on the Pursuit of the Business of Payment Services (Payment Services Act);
- Act XXX of 1997 on Mortgage Loan Companies and on Mortgage Bonds (Mortgage Loan Companies Act);
- Act CXXXIX of 2013 on the National Bank of Hungary;
- Act CXXII of 2011 on the Central Credit Information System (Credit Information System Act);
- Act LIII of 2017 on the Prevention and Combatting of Money Laundering and Terrorist Financing (Money Laundering Act);
- MNB Decree 35/2017 (XII. 14.) on Payment Services Activities; and
- MNB Decree 33/2021 (IX. 15.) on the detailed provisions relating to activities in operating the payment system.
However, due to enhanced consumer protection, many other laws are applicable to financial services, if provided to consumers. These laws include the following:
- Act CLXII of 2009 on Consumer Credit;
- Government Decree 361/2009 (XII. 30.) on the conditions of circumspect retail lending and the verification of creditworthiness;
- Government Decree 45/2014 (II. 26.) on the detailed requirements of the agreements concluded between a consumer and a business party;
- Government Decree 462/2015 (XII. 29.) on the rules relating to the procedure for granting and negotiating mortgage loans, the provision of advisory services on credit, and the professional knowledge of the staff;
- Government Decree 83/2010 (III. 25.) on the determination, calculation, and disclosure of the annual percentage rate of charge;
- NGM Decree 56/2014 (XII. 31.) of the Minister for National Economy on rules of information relating to credits to consumers;
- NGM Decree 3/2016 (I. 7.) of the Minister for National Economy on the rules of providing information on mortgage loans; and
- MNB Decree 32/2014 (IX. 10.) on the repayment installments proportionate to the income and the loan-to-value ratios.
In addition, good practices of service providers are monitored and ensured by the National Bank of Hungary, which issues recommendations and opinions in this respect. A recommendation is issued with the aim to provide general advice on a specific problem and is addressed to all affected regulated entities. An opinion is issued in individual cases if a question regarding the correct legal interpretation of a specific provision is submitted to the National Bank of Hungary. Recommendations and opinions are not binding but the National Bank of Hungary expects regulated entities to comply with them.
1.2. Which bodies are responsible for enforcing the applicable laws and regulations? What are their main competencies?
Accurate application of the laws and regulations concerning the banking sector and financial services are enforced by the National Bank of Hungary, the Financial Arbitration Board, and the competent courts.
National Bank of Hungary
The National Bank of Hungary supervises the financial intermediary system by supervising the entities, the persons, and the activities covered by, amongst others, the Banking Act, the Mortgage Loan Companies Act, the Payment Services Act, and the Credit Information System Act. Its supervision extends to:
- deciding the applications submitted for licenses and other authorizations;
- maintaining registers relating to the banking sector;
- examining the systems of regulated entities for the provision of information and their data reporting; and
- examining whether the regulated entities comply with the Hungarian and the European Union laws and enforce the resolutions issued by the National Bank of Hungary.
The National Bank of Hungary carries out (i) authorization procedures, (ii) examination procedures, (iii) proceedings for the protection of consumers’ interests, (iv) market surveillance procedures, and (v) supervisory control proceedings.
Authorization procedures are to provide licenses for the foundation, merger, and operation of regulated entities, portfolio transfer, and include the proceeding of termination of activities.
Examination procedures cover compliance by the regulated entities with the Hungarian and European Union laws and the enforcement by regulated entities of the resolutions issued by the National Bank of Hungary.
Proceedings for the protection of consumers’ interests monitor the compliance by the regulated entities with the laws and regulations on business-to-consumer commercial practices as well as the basic requirements and restrictions with regard to commercial advertising activities, and the fulfillment of their obligations arising from consumer disputes of a financial nature.
Market surveillance procedure shall be initiated upon identifying any operations carried out without a license or in the absence of notification in the fields of, amongst others, financial or auxiliary financial services, stock exchange services, investment fund management services, investment services, and agency activities.
Supervisory control proceedings mean a site inspection. Should the National Bank of Hungary detect that a regulated entity has breached any provision set out in the relevant legislation or the decision issued by an authority, the National Bank of Hungary shall instruct the regulated entity to remedy the such infringement and warn it of the potential legal consequences or commence the proper proceeding against such entity.
The National Bank of Hungary functions as the resolution authority in Hungary. The resolution is an administrative procedure aimed to reorganize and restructure an institution on the grounds of public interest, ensuring the continuity of its critical functions and restoring its viability. Liquidation remains the primary way of withdrawal of insolvent institutions from the economic market, however, the resolution procedure provides for the possibility that in case the institution is already insolvent or is likely to become insolvent, the National Bank of Hungary may order the resolution procedure, provided that the purposes of resolution can be reached more efficiently through a resolution rather than liquidation (i.e., the resolution is for the benefit of public interest).
The following four resolution tools may be applied by the National Bank of Hungary:
- asset sale: sale of the ownership interests (shares) in or issued by the institution or the assets, rights, and obligations of the institution;
- bridge institution: the ownership interests (shares) in or issued by the institution under resolution or the assets, rights, and obligations of the institution under resolution shall be transferred temporarily to an institution owned in whole or part by the Resolution Fund in order to maintain and sale the functions and the services of such institution;
- asset separation: if needed for the operation of the institution, the assets, rights, or obligations of the institution under resolution or the bridge institution shall be transferred to an institution owned by the Resolution Fund or the state; and
- bail-in tool: certain liabilities are written down or converted, if not adequately covered by capital.
Financial Arbitration Board
The National Bank of Hungary shall carry out through the Financial Arbitration Board the settlement of disputes between consumers and the regulated entities relating to the conclusion and performance of agreements for the supply of services with the aim to reach an out-of-court settlement. To that end, the Financial Arbitration Board must attempt to reach a conciliation agreement or, failing this, adopt a decision to ensure consumer rights simply, swiftly, and efficiently under the principle of cost-efficiency.
The Financial Arbitration Board is a professionally independent body operated by the National Bank of Hungary, composed of the chairman of the Financial Arbitration Board and the arbitration board members.
The courts have the competence to settle disputes concerning the rights and obligations, whether it be contractual or non-contractual, arising out of or in connection with, the existence, validity, effectiveness, and termination of, an agreement concluded in relation to the financial or auxiliary financial services, such as the provision of a loan by a credit institution. The competence of the courts extends to the determination as to whether a regulated entity has complied with the applicable laws and regulations when providing advisory services to, giving information to, or concluding an agreement with, a client in relation to the financial or auxiliary financial services and such client suffers damage in respect thereof.
The National Bank of Hungary may bring court action on behalf of consumers against a regulated entity or person (i) violating any provisions concerning the banking sector, or (ii) using any unfair standard contract term in connection with its activities, provided that such unlawful activity affects a wide range of consumers.
In addition, collaterals may be enforced by the beneficiary through a court proceeding carried out by a bailiff assigned to the court.
1.3. What are the current priorities of regulators and how does the regulator engage with the banking sector?
Amidst the impacts the COVID-19 global pandemic has had on the national economy was a significant drop in the ability of borrowers (both consumers and business associations) to duly perform their payment obligations arising out of loan agreements as well as in the appetite of potential borrowers to apply for new credits and loans. A payment moratorium was introduced as a result of which the obligation of the borrowers to pay any principal, interest, and fees arising out of loan agreements could be, by operation of law, amended so that a payment moratorium was granted to the borrowers in respect of their payment obligations. After being extended several times, the payment moratorium was withdrawn on a gradual basis by the Hungarian Government which is now focusing on legislation that can prevent the loan transactions from becoming non-performing due to the accumulated principal and accrued interests.
The National Bank of Hungary has announced several types of the Funding for Growth Scheme (Novekedesi Hitelprogram) with the aim to support small and medium-sized enterprises in accessing loans and to strengthen financial stability. Within the framework of the Funding for Growth Scheme, the National Bank of Hungary provides credit institutions with zero-interest refinancing loan with a maturity of 10 years (subject to certain conditions, 15 years or 20 years) which they lend to small and medium-sized enterprises under a capped annual cost in the form of loans or financial leases, on the one hand, and for the refinancing of financial enterprises for the same purpose, on the other hand. The Funding for Growth Scheme eases access to loans by small and medium-sized enterprises, thereby facilitating the implementation of projects, the launching of which has been hindered for a while by the high financing costs. Following its announcement, enterprises showed considerable interest in loans provided within the framework of the Funding for Growth Scheme. Furthermore, according to the vision of the National Bank of Hungary outlined in its strategy related to the set of green instruments, Hungary’s sustainable convergence may be realized through the economy’s green transition, which is conditional upon the development of a financial system in Hungary, which takes into consideration and enforces criteria for environmental sustainability. The housing loan market serves as a starting point for supporting the integration of green criteria, since the energy efficiency of the stock of dwellings is low, and thus there is major room for modernization. Along these principles, the National Bank of Hungary has launched – as part of the Funding for Growth Scheme – the FGS Green Home Programme (NHP Zold Otthon Program) in an effort to foster the enforcement of environmental sustainability (green) criteria in the Hungarian housing market.
A new act on bankruptcy and liquidation proceedings has been at the center of the attention of the Hungarian legislator and regulator, as well.
2.1. What licenses are required to provide banking services in your jurisdiction? What activities do they cover?
Banking services in Hungary mean the provision of financial or auxiliary financial services.
Financial services extend to the provision of the following activities in a business-like manner (i.e., gainful (for-profit) economic activity performed on a regular basis for compensation without a pre-specified number of clients):
- taking deposits and receiving other repayable funds from the public;
- providing credit and utilizing loan;
- financial leasing;
- payment services;
- issuance of electronic money;
- issuance of paper-based cash-substitute payment instruments which are not recognized as payment services;
- providing surety and guarantee as well as other forms of banker’s obligations;
- commercial activities in foreign currency, foreign exchange – other than currency exchange services, bills and checks on own account or as commission agents;
- financial intermediation services;
- escrow services, safety deposit box services;
- credit reference services; and
- purchasing receivables.
Auxiliary financial services extend to the provision of the following services in a business-like manner (i.e., gainful (for-profit) economic activity performed on a regular basis for compensation without a pre-specified number of clients):
- currency exchange services;
- operation of payment systems;
- money processing activities;
- financial brokering on the interbank market;
- activities for the issue of negotiable credit tokens; and
- credit advisory services.
As a general rule, the financial and auxiliary financial services may be performed subject to the license issued by the National Bank of Hungary. However, such a license is not needed if the above activities are not carried out in a business-like manner (i.e., gainful (for-profit) economic activity performed on a regular basis for compensation without a pre-specified number of clients). In addition, there are cases where the activities are carried out in a business-like manner, yet they do not need authorization, only a notification procedure must take place (as specified below).
A foreign business association may provide financial or auxiliary financial services in Hungary exclusively through its Hungarian branch, except for the following: (i) credit institutions established in any Member State of the European Union or the European Economic Area and financial enterprises complying with certain conditions may carry out the activities on a cross-border basis, and (ii) a foreign financial institution established in any Member State of the Organisation for Economic Co-operation and Development may carry out certain (not all) activities on a cross-border basis if it has been authorized for such activities by the competent supervisory authority of the Member State where established.
In addition, there are cases where the performance of the financial or auxiliary financial services does not need authorization, only a notification procedure must take place towards the National Bank of Hungary. Credit institutions established in any Member State of the European Union or the European Economic Area and financial enterprises complying with certain conditions are not obliged to obtain the license of the National Bank of Hungary (i) if their activities are carried out on a cross-border basis, or (ii) if their activities are carried out through their Hungarian branches and authorized by the competent supervisory authority of their home state.
Financial and auxiliary financial services may be provided in a business-like manner (i.e., gainful (for-profit) economic activity performed on a regular basis for compensation without a pre-specified number of clients) by:
- a licensed local financial institution;
- a licensed local payment institution;
- local branches of a licensed financial institution registered in any Member State of the European Union or the European Economic Area (notification procedure is needed);
- local branches of licensed payment institutions registered in any Member State of the European Union or the European Economic Area (notification procedure is needed);
- licensed financial institution registered in any Member State of the European Union or the European Economic Area on a cross-border basis (notification procedure is needed); and
- licensed payment institution registered in any Member State of the European Union or the European Economic Area on a cross-border basis (notification procedure is needed).
Most of the financial and auxiliary financial services may be provided by all types of financial institutions. Financial institutions are credit institutions and financial enterprises.
However, not all types of financial institutions are entitled to provide each of the financial and auxiliary financial services. Also, payment institutions, electronic money institutions, and issuers of credit tokens are not entitled to provide all the financial and auxiliary financial services.
Apart from the above, the license issued by the National Bank of Hungary is needed for the below:
- establishment of a credit institution or a financial enterprise;
- the operation, amendment of scope of activities, termination of the operation of, a credit institution or a financial enterprise;
- operation of a payment institution or an electronic money institution;
- notification of the activities of a payment institution whose sole business is the provision of account information services or an issuer of credit tokens;
- authorization of a crowdfunding service provider;
- transformation, merger, or division of a credit institution or a financial enterprise;
- election, the appointment of a senior executive of a credit institution, a financial enterprise, a payment institution, or an electronic money institution;
- acquisition of a qualifying holding in a credit institution or a financial enterprise and increase of the qualifying holding;
- acquisition of a qualifying holding by a credit institution in a nonresident enterprise;
- portfolio transfer by a credit institution, a financial enterprise, or a payment institution;
- activities of an intermediary;
- operation of a Hungarian branch of certain foreign companies to pursue financial, auxiliary financial services, or payment services in Hungary; and
- other matters such as the amendment of the constitutional document of a credit institution.
2.2. What is the procedure for obtaining a banking license? How long does this typically take?
Establishment in Hungary
In the case of the establishment of a credit institution in Hungary, there is a two-phased licensing process. Firstly, an establishment license must be obtained. The National Bank of Hungary requests the opinion of the competent supervisory authorities of other European Union or European Economic Area Member States prior to issuing the establishment license if the credit institution to be established (i) is a subsidiary of a credit institution established in another European Union or European Economic Area Member State, (ii) is a subsidiary of the parent company of a credit institution established in another European Union or European Economic Area Member State, or (iii) has an owner (either a natural or a legal person) with controlling influence that has also controlling influence in a credit institution established in another European Union or European Economic Area Member State. The establishment license shall be repealed if the credit institution fails to submit to the National Bank of Hungary the request for an operating license within six months from receipt of the establishment license. Secondly, an operating license must be obtained.
In the case of the establishment of a financial enterprise, an establishment license must be obtained which also includes a license to operate.
In the case of a payment institution, an operating license must be obtained.
In each of the above cases, the licensing request must be accompanied by various documents specified on the website of the National Bank of Hungary. The documentation must be submitted to the National Bank of Hungary electronically. Following the submission of the documentation, the National Bank of Hungary may request additional information from the applicant at any time. In practice in each licensing process, the National Bank of Hungary requests additional information in two or three rounds.
In respect of the licensing of a credit institution, a financial enterprise, or a payment institution, the official deadline for the National Bank of Hungary to issue its decision is three (3) months starting on the date when the National Bank of Hungary has received all requested information, which can be extended with an additional three months. Taking into account the information requests of the National Bank of Hungary following the initiation of the process, the average time needed to obtain a license for a credit institution, a financial enterprise or a payment institution is six to nine months.
Operation through a Hungarian branch or on a cross-border basis
In the case of a branch or cross-border services of a credit institution, there is a mandatory regulatory process of local registration in local registries as a cross-border service provider, in accordance with the relevant European Union laws. If a credit institution registered in another European Union or European Economic Area Member State intends to establish a branch in Hungary or pursue financial or auxiliary financial services on a cross-border basis in Hungary, it must notify its home regulator in advance of the activities it intends to pursue in Hungary. Within one month of receiving such notification, the home regulator would need to inform the National Bank of Hungary of the credit institution’s planned activities and informs the affected institution accordingly. Upon receipt of the notice of the home regulator, the National Bank of Hungary informs the relevant credit institution regarding the regulations pertaining to consumer protection, particularly, having regard to the requirements to provide information to customers, the requirements for the business rules, and the regulations on the provision of services. The National Bank of Hungary requires that local operations may start only if the branch or the institution satisfies the applicable Hungarian consumer protection laws and any other general goods regulations as listed on the website of the National Bank of Hungary.
No license is needed, and the notification process specified in the case of a credit institution above may apply to a financial enterprise registered in another European Union or European Economic Area Member State in order to establish a branch in Hungary or to pursue financial or auxiliary financial services on a cross-border basis in Hungary if it meets certain requirements defined in the Hungarian laws. However, if such requirements are not met, a license must be obtained for the establishment of a Hungarian branch for a financial enterprise registered in another European Union or European Economic Area Member State.
The provisions applicable to payment institutions are similar to those applicable to credit institutions. Payment institutions established in any European Union or European Economic Area Member State do not need to obtain a license for services to be performed (i) on a cross-border basis or (ii) through its Hungarian branch, provided that in both cases the activities to be pursued in Hungary are authorized by the competent supervisory authority of its home state.
It is worth mentioning that Hungarian law does not provide for any requirements for the license issued by the foreign supervisory authority or the foreign supervisory authority itself. The provisions of the Banking Act and the Payment Institutions Act shall apply to a credit institution, a financial enterprise and a payment institution (respectively) established in another European Union or European Economic Area Member State and authorized by the competent supervisory authority of its home country. No further specification is set out on which foreign supervisory authority must issue the license (a central bank or other agency) since the licensing process in a foreign country is subject to the laws of that foreign country.
However, the foreign entity wishing to perform the services in Hungary on a cross-border basis or through its Hungarian branch must be (i) a foreign credit institution (e.g., bank), (ii) a foreign financial enterprise, or (iii) a foreign payment institution. The Hungarian law does not recognize the possibility of benefiting from the licensing/notification process by any other type of foreign entity.
The notification process generally lasts approximately two months.
2.3. Can a foreign bank operate in your jurisdiction on the basis of its domestic license?
The Hungarian law recognizes the possibility for a foreign bank to operate in Hungary based on its domestic license either (i) on a cross-border basis or (ii) through its Hungarian branch. In both cases, there is a mandatory regulatory process of applying for a local registration in local registries as a cross-border service provider, in accordance with the relevant European Union laws. If a credit institution registered in another European Union or European Economic Area Member State intends to establish a branch in Hungary or pursue financial or auxiliary financial services on a cross-border basis in Hungary, it must notify its home regulator in advance of the activities it intends to pursue in Hungary. Within one month of receiving such notification, the home regulator would need to inform the National Bank of Hungary of the bank’s planned activities and informs the affected bank accordingly. Upon receipt of the notice of the home regulator, the National Bank of Hungary informs the relevant bank regarding the regulations pertaining to consumer protection, particularly, having regard to the requirements to provide information to customers, the requirements for the business rules, and the regulations on the provision of services. The National Bank of Hungary requires that local operations may start only if the branch or the bank satisfies the applicable Hungarian consumer protection laws and any other general goods regulations as listed on the website of the National Bank of Hungary.
It is worth mentioning that Hungarian law does not provide for any requirements for the license issued by the foreign supervisory authority or the foreign supervisory authority itself. The provisions of the Banking Act shall apply to a bank established in another European Union or European Economic Area Member State and authorized by the competent supervisory authority of its home country. No further specification is set out on which foreign supervisory authority must issue the license (a central bank or other agency) since the licensing process in a foreign country is subject to the laws of that foreign country.
2.4. What are the restrictions on ownership, including foreign ownership of banks?
The constitutional document of a bank established in the form of a public company limited by shares may regulate the maximum level of voting rights that may be exercised by a shareholder. The constitutional document may contain provisions to stipulate the maximum level of voting rights of any group of shareholders.
Shareholders having an ownership interest of 5% or more in a bank shall notify the bank of their indirect holding in the bank and any change therein by disclosing the data suitable for identification. The National Bank of Hungary suspends the voting right of the shareholder failing to fulfill such obligation until it has been met.
2.5. What are the requirements for a proposed acquisition and acquirer of a qualified holding in a bank? Would the same requirements apply in the case of an increase of a qualifying holding?
Any person with a qualifying holding in a bank shall fulfill the following requirements:
- being independent of any influences which may jeopardize the bank’s careful, diligent, and reliable (prudent) operation;
- having a good business reputation;
- being capable to maintain the reliable and diligent leadership and control of the bank; and
- having transparency in business connections and ownership structure in order to allow the competent authority to exercise effective supervision over the bank.
The acquisition of a qualifying holding in a bank, and the acquisition of additional qualifying holding in a bank to reach the limit of 20%, 33%, or 50%, are subject to the consent of the National Bank of Hungary. The acquisition of a majority interest in a business association that has a qualifying holding in a bank is also subject to the consent of the National Bank of Hungary.
The person having a qualifying holding in a bank shall notify the National Bank of Hungary two days prior to the execution of the agreement of the intent to terminate its qualifying holding in full or to reduce its qualifying holding below the limit of 20%, 33% or 50%.
Any person who has acquired a qualifying holding in a bank or has changed the size of its qualifying holding in a bank to reach or drop below the limit of 20%, 33%, or 50% shall notify the National Bank of Hungary in writing within 30 days from the execution of the agreement.
III. REGULATORY CAPITAL AND LIQUIDITY
3.1. How are banks typically funded in your jurisdiction?
Deposit growth and an increase in public sector sources of funding can be observed. The banks tend to increase market-based funding, while the gap between the debt issuances and maturing targeted longer-term refinancing operations (TLTRO) remains significant.
The total assets of the banks in Hungary increased by 15% in 2021 due to a rise in cash balances at the central bank, reflecting loan volume growth.
The use by banks of public sector funding such as the European Central Bank’s TLTRO increased in 2021.
The past few years showed a deposit growth representing over seventy 70% of the banks’ total funding. For the period from 2022 to 2024, Hungarian banks are planning an increase in deposits from households and NFCs with a growth rate above 25%.
According to funding plans, the banks intend to increase reliance on market-based funding by eleven 11% over the three-year forecast period.
3.2. What capital and own funds requirements apply to banks in your jurisdiction?
A bank may be established in Hungary with a minimum initial capital of HUF 4 billion. A financial enterprise pursuing credit and loan activities may be established in Hungary with a minimum initial capital of HUF 150 million.
The above amounts are the initial capital being the combined total of the registered capital, capital reserves, and profit reserves. The initial capital must be paid in cash. The initial capital may only be paid into a payment account kept with a credit institution that is not involved in the establishment proceeding, in which the founder has no ownership and which has no ownership in the founder. Use of the initial capital during the procedure for the authorization of establishment is not allowed.
There are requirements for both types of financial institutions’ equity capital as well, i.e., the amount of a financial institution’s equity capital may not be less than the minimum amount of initial capital. If the amount of a financial institution’s equity capital falls below such threshold, the National Bank of Hungary shall have the power to give the financial institution a maximum of eighteen (18) months to bring its equity capital to compliance. If the amount of a financial institution’s equity capital falls below the amount of the registered capital, the National Bank of Hungary shall have the power to instruct the financial institution’s management board to convene the members’ meeting.
Regulation of the capital requirements of banks is sophisticated and complex since banks – for the purpose of maintaining solvency and the ability to fulfill liabilities – shall have sufficient own funds at all times to cover the risks of its activities, covering at least the minimum capital requirement defined in the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012, and the extra capital requirement prescribed in the framework of a supervisory review provided that it may not be less than the minimum amount of initial capital.
3.3. Has your jurisdiction implemented the Basel III framework? Are there any major deviations?
The Basel III framework has been implemented by the European Union with the Capital Requirements package, comprising:
- Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV); and
- Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (CRR).
The rules mainly address the amount of capital and liquidity that banks and investment firms hold.
On the one hand, the CRR is binding in its entirety and directly applicable in Hungary.
On the other hand, the implementation of CRD IV into Hungarian law was achieved by the Banking Act. In addition, MNB Decree 10/2014 (IV. 3.) was adopted in order to harmonize the Hungarian legislation with the CRR.
IV. REPORTING, ORGANISATIONAL REQUIREMENTS, INTERNAL GOVERNANCE, AND RISK MANAGEMENT
4.1. What key reporting and disclosure requirements apply to banks in your jurisdiction?
There are various reporting obligations applying to financial institutions and payment institutions, including the local branches of institutions registered in a European Union or European Economic Area Member State. These are detailed in the below laws.
Pursuant to MNB Decree 58/2015 (XII. 22.) on the obligation to provide basic data, regulated entities must report their basic data to the National Bank of Hungary. Based on it, the following semi-annual reporting requirements are relevant:
- full name;
- short name;
- company form;
- basis number;
- registered seat;
- amount of dotation capital;
- name and contact details of the person responsible for data provision towards the National Bank of Hungary;
- name and contact details of the person responsible for keeping contact with the National Bank of Hungary;
- name and contact details of the person being an addressee of an official letter; and
- personal data of the auditor.
Pursuant to MNB Decree 54/2021 (XI. 23.) on the obligation to provide various data in relation to the basic tasks of the National Bank of Hungary, regulated entities must regularly report certain specific or transactional type data to the National Bank of Hungary.
MNB Decree 3/2023 (I. 19.) on the method and terms of calculating and paying the supervisory fee specifies the self-reporting obligation of the supervisory fee towards the National Bank of Hungary.
Pursuant to MNB Decree 35/2018 (XI. 13.) on the obligation to provide data on credit transactions to the central bank information system, regulated entities must report certain data of credit and loan transactions to the National Bank of Hungary on a monthly or quarterly basis.
4.2. What are the organizational requirements for banks, including with respect to corporate governance?
Banks may only operate in the form of a company limited by shares (reszvenytarsasag) or branches (fioktelep).
Personal and technical requirements for the operation of a bank consist of:
- statutory accounting and records systems;
- internal rules in accordance with prudential requirements;
- personnel requirements;
- infrastructure, information technology, technical and security, and premises suitable for carrying out the activities;
- control procedures and systems;
- property insurance;
- information and control systems for reducing operational risks, and a plan for handling emergency situations;
- clear organizational structure; and
- operation in premises that meet the security requirements prescribed in the relevant laws.
The personnel requirements relate to – in the case of a bank – the management board, the managing director, and the supervisory board, and – in the case of a branch – the person appointed by the foreign financial institution to lead the branch, and its direct deputy, and not the employees of the institution. The qualifications and number of such persons are set out in detail in the Banking Act.
The persons for these positions may be elected or appointed with the prior consent of the National Bank of Hungary.
In addition, the bank must engage an auditor (audit firm) certified to audit financial institutions. Further requirements are set out in the Banking Act to be met by the auditor (audit firm).
Senior executives, managing directors, management bodies
Senior executive means, in the case of banks incorporated as limited companies, the chair and the members of the management board and the supervisory board, and the managing director. Senior executive means, in the case of branches, the person appointed by the foreign financial institution to lead the branch, and its direct deputy. Senior executives may be elected and appointed upon the prior authorization of the National Bank of Hungary.
Managing director means the president of a company elected by the management board with the right of control and employed by the company, or the chief officer appointed to manage the company, employed by the company, also including all deputies of such officer. Banks incorporated as limited companies shall have at least two managing directors.
The managing directors of a bank and the senior executives of a branch need to meet certain requirements (e.g., relevant studies, experience).
Reasons for disqualification as senior executives include conflict of interest, lack of relevant experience, violation of relevant legislation, criminal record, and lack of good business reputation, the cases of which are regulated in the Banking Act.
Management bodies comprise the management board and the supervisory board of the bank, including their members and directors, and also the senior executives of banks incorporated as branches.
All members of the management body with the right of control (acting in its role of decision-making) must be natural persons. At least two members shall be employed under an employment agreement by the bank (internal members). In the case of banks, at least two members shall be recognized as residents according to foreign exchange regulations – including persons with the right of free movement and residence – who have had a permanent residence in Hungary for at least one year. Internal members shall be elected from the managing directors of the bank. Any person who has been the auditor of the bank or a financial institution with close links to the bank within the preceding three years cannot be a member.
All members of the management body with supervisory function (monitoring and controlling the decision-making by the management body with the right of control) must be natural persons. The management body with the supervisory function shall have at least three but not more than nine members that may not be the employees of the bank, except for the employees’ representatives.
Compliance function department
Banks must set up a unit independent of the department responsible for financial and investment services and ancillary services. The National Bank of Hungary shall be notified of the head of the compliance function department.
Also, a single compliance officer may be eligible under certain conditions (e.g., burdensome to the bank and does not adversely affect the compliance function).
Internal control, internal control department
Banks must set up an independent internal control unit supervised directly by the management body with a supervisory function. The internal control system shall be operated by the internal control unit, and the functions of the internal control unit shall be carried out by the internal controller.
The head of the internal control unit or the internal controller shall meet certain requirements (e.g., relevant studies, relevant experience, no criminal record).
Risk exposure and management committee
Banks with a market share of at least 5% in respect of their balance sheet total are required to establish a risk exposure and management committee monitoring on an ongoing basis the risk strategy and the risk appetite of the bank.
The business unit responsible for the risk management function covering all material risks of the bank
Banks with a market share of at least 5% in respect of their balance sheet total are required to set up and operate an effective, comprehensive, and independent business unit responsible for the risk management function covering all material risks of the bank.
Banks with a market share of at least 5% in respect of their balance sheet total are required to establish a nomination committee.
Public-interest banks shall set up and operate an audit committee with certain exceptions set out in the Banking Act.
Banks with a market share of less than 5% in respect of their balance sheet total may set up a joint risk exposure and management and audit committee.
Auditors must meet special requirements.
4.3. What are the local rules for loans to the management body and their related parties?
A credit institution (other than a credit union) may undertake risks comprising an exposure under the conditions set out in the Banking Act:
- to a member of the management board or the supervisory board of the credit institution or a business association having a close connection with the credit institution;
- to a close relative of the persons referred to above;
- to a business association controlled by any persons referred to above, and in relation to the sale of a business association controlled by any persons referred to above to a third party.
- The above risk undertaking is subject to the unanimous decision of the management board and the consent of the supervisory board. The person concerned shall not vote on the decision. These restrictions shall not apply to:
- the overdraft facility in relation to the payment account held at the credit institution up to the amount specified in the internal policy;
- the salary advances made by employers and the residential loans up to the amount specified in the internal policy;
- the mortgage loans if the full amount of such exposure to a specific person does not exceed HUF 15 million; and
- the consumer credit agreements not covered in any of the above points if the full amount of such exposure to a specific person does not exceed HUF 5 million.
The above risk-undertaking may not provide for more favorable terms than the risk-undertakings for any other person not covered by the above list. The value of any exposure to a person stemming from the above risk-undertaking may not reach 80% of the limit set out in Article 392 of Regulation (EU) No 575/2013, provided that the value of any exposure for over one year may not reach 50% of the limit set out in Article 392 of Regulation (EU) No 575/2013.
4.4. What are the main legal provisions governing risk management in the banking sector in your jurisdiction?
Credit institutions are required to have comprehensive and effective governance regimes proportionate to the nature, scale, and complexity of the risks inherent in the financial services and auxiliary financial services they pursue, including but not limited to:
- well-defined, transparent, and consistent lines of responsibilities and functions;
- adequate internal control mechanisms to monitor, prevent and avoid conflicts of interest;
- effective processes to identify, measure, manage, monitor, and report the risks the credit institution is or might be exposed to; and
- gender-neutral remuneration policies and practices.
In a bid to promote effective risk management, the National Bank of Hungary regulates the prudential requirements relating to exposures in default and restructured receivables.
Credit institutions shall have in place written procedures and policies (i) for addressing risks where the recognized credit risk mitigation tools prove less effective than expected, (ii) for the evaluation, measurement, and management of the risks arising from potential changes in interest rates, and (iii) for the process for approving, amending, renewing, refinancing and monitoring credit and loan activities.
The management board of the credit institution shall be responsible for the risk exposures of the credit institution.
A credit institution with a market share of at least 5% in respect of its balance sheet total must establish a risk exposure and management committee monitoring on an ongoing basis the risk strategy and the risk appetite of the credit institution.
A credit institution with a market share of at least 5% in respect of its balance sheet total must set up a department responsible for the risk control function covering all material risks of the credit institution.
A credit institution with a market share of at least 5% in respect of its balance sheet total must set up a nomination committee that, amongst others, recommends candidates to fill management board and supervisory board vacancies.
Each credit institution that is not covered by supervision on a consolidated basis is required to have in place a recovery plan proportionate to the nature, scale, and complexity of the risks inherent in the financial services and auxiliary financial services it pursues. Such a recovery plan must be submitted to the National Bank of Hungary. Considering the potential impact the credit institution’s possible insolvency may have on other credit institutions and the financial markets, the recovery plan shall contain, amongst others, (i) a summary of the key components of the plan and the overall recovery capacity of the credit institution, (ii) a communication and information plan for addressing adverse reactions in the market, (iii) the critical functions of the credit institution, (iv) steps designed to maintain the critical functions of the credit institution with regards to liquidity and solvency, and (v) an estimated time frame needed for each major action set out in the recovery plan.
4.5. What are the legal requirements applicable to banks in combating money laundering and terrorist financing area?
A service provider (such as a Hungarian financial institution pursuing financial services or a Hungarian payment institution pursuing payment services, including the Hungarian branch of a regulated financial institution or payment institution registered in any Member State of the European Union or the European Economic Area) must carry out customer due diligence when establishing a business relationship. As part of such due diligence procedure, the service provider must carry out customer identification. The Money Laundering Act sets out what documents the service provider must obtain from the customers and requires the service provider to check the validity of such documents.
Required documents consist of the following:
- in the case of a natural person, an official document suitable for identification purposes and an official address card for Hungarian citizens, or in the case of foreigners a passport or personal identification document provided that it embodies an authorization to reside in Hungary, a document evidencing the right of residence or a valid residence permit;
- in the case of a legal person, a document not older than 30 days verifying the registration of the company by the court of registration, or in case of other domestic legal persons whose existence is subject to registration by an authority or court, the document of registration, or in case of a foreign legal person the document evidencing that it has been registered under the laws of the country in which it is established.
Besides, the legal person customer must provide a statement on its ultimate beneficial owner.
The service provider shall make copies of the provided documents. As a general rule, any data, document, and copies thereof must be kept for eight years.
During the customer identification, the service provider may request information on the source of funds as well as documentary evidence for the purpose of verification of information disclosed relating to the source of funds. In certain cases, it is mandatory to obtain information on the source of funds (e.g., the customer is from a high-risk third country, or the customer or its beneficial owner qualifies as a politically exposed person).
Provided that its conditions are met, instead of the basic (simplified) customer due diligence procedure, an enhanced customer due diligence procedure shall be carried out.
The service providers must conduct internal risk assessments based on the nature of the business relationship, the type and value of the transactions, and the customer’s circumstances, which is to be proportionate to the service provider’s nature and size, whilst also taking into consideration the national risk assessment. During the internal risk assessment, the service providers must take appropriate steps to identify and assess the risk factors that are to be documented, kept up-to-date, and made available to the competent authorities during their licensing and supervisory activities.
The service provider categorizes customers into low, average, or high-risk categories.
A due diligence procedure must be carried out when establishing a business relationship with the customer as well as the relationship must be monitored continuously. Examples of cases when the customer due diligence must be carried out:
- when carrying out an occasional transaction that amounts to HUF 4.5 million or more;
- when carrying out an occasional transaction qualifying as a transfer of funds, exceeding HUF 300,000;
- when there is information, fact, or circumstance giving rise to a suspicion of money laundering or terrorist financing, provided that the due diligence procedure has not yet been carried out; and
- when there are doubts about the accuracy or adequacy of the previously obtained customer identification data.
The Money Laundering Act sets out the definition of the politically exposed person. Politically exposed persons must make an additional statement on their status as a politically exposed person and they are subject to an enhanced customer due diligence procedure.
The supervisory authority of financial institutions and payment institutions for AML regimes is the National Bank of Hungary. The National Bank of Hungary monitors the compliance of service providers with the provisions of the Money Laundering Act and it may take measures in case of an infringement of AML requirements. Penalties include withdrawing or suspending permits, or imposing a fine. Additionally, money laundering and non-compliance with the reporting requirement in relation to money laundering qualify as crimes under the Hungarian criminal code.
The National Bank of Hungary has the authority to take the following measures consistent with the gravity of the infringement:
- issue a warning to the service provider;
- order the service provider to cease the unlawful activity;
- order the service provider to revise its internal policy;
- withdraw or suspend the activity or operating licenses until the infringement is remedied;
- bring charges against the director or the employee of the service provider;
- initiate that until the infringement is remedied the director of the service provider be suspended from office or dismissed; and
- impose a fine, of not less than HUF 400,000 but not more than 10% of the annual net revenues of the service provider which shall not exceed HUF 2 billion.
In the taking of measures, the National Bank of Hungary must take into consideration amongst others:
- the size of the infringement;
- the intentional or negligent conduct by the persons responsible for the infringement;
- the impact the infringement has on the service provider or its customers;
- the level of cooperation of the responsible persons with the National Bank of Hungary; and
- the duration and frequency of the infringement.
4.6. Are there any legal provisions regulating banking secrecy in your jurisdiction?
In relation to the banking sector, the Hungarian laws set out detailed provisions on business secrets and bank secrets. However, other types of confidential information, including securities secrets and payment secrets, are also regulated by Hungarian laws.
Business secrets mean any confidential fact, information, and other data connected to economic activities, which are not publicly known or not easily accessible to other persons pursuing the same economic activities, where the beneficiary of the secret has taken reasonable efforts that may be expected under the given circumstances to keep such information confidential.
The owner (shareholder) of a financial institution, the person planning to acquire a qualifying holding in a financial institution, the senior executives, and the employees of a financial institution must keep any business secrets made known to them in connection with the operation of the financial institution confidential without any time limitation. The cases where such confidentiality obligation does not apply are listed in the Hungarian laws, for instance, when providing the National Bank of Hungary with a business secret.
Bank secrets mean all facts, information, know-how, or data on clients in the possession of a financial institution relating to the identity, data, financial situation, business activities, ownership and business relationships of the client, the balance of and the transactions executed on the bank account of the client held at the financial institution and the agreements entered into between the client and the financial institution. Any person or entity receiving financial services from a financial institution shall be considered a client. The provisions on bank secrets shall also apply to any person or entity approaching a financial institution in order to receive services, but ultimately deciding not to use such services.
As a general rule, bank secrets may not be disclosed to a third party, except for those cases explicitly listed in the Hungarian laws. For instance, disclosure is permitted if it is needed for the financial institution to sell its claims against the client or to enforce such claims.
Mutual provisions on the business secret and the bank secret
Anyone having access to a business or bank secret must keep such secret confidential without any time limitation. Business and bank secrets may not be disclosed to a third party without the consent of the client or the financial institution (as applicable), subject to the exceptions mentioned above. In the event of termination of a credit institution without succession, the documents containing business or bank secrets can be used for archival research after 60 years from the date of the documents.
Any information that is deemed information of public interest, and such information is rendered subject to disclosure, may not be withheld on the grounds of being treated as a business secret.
5.1. What are the main trends in the banking sector in your jurisdiction?
Implementation of the ESG framework in the banking sector
There has been a growing focus on environmental, social, and governance (ESG) criteria that market participants, regardless of their sector, shall consider during their activities.
Improvement in the Hungarian banking sector is supported by Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088. While green investments are mostly found in the banking product range (e.g., government bond and corporate green bond issuance), ESG considerations are less widespread in financing, however, they are gaining importance gradually.
The National Bank of Hungary promotes the integration of ESG criteria by assessing climate risks and publishing them to market participants. The National Bank of Hungary adopted the Green Monetary Policy Toolkit Strategy in July 2021, which includes two priority programs: (i) the Green Mortgage Bond Purchase Programme and (ii) the Green Home Programme. In addition, the National Bank of Hungary was one of the first central banks to publish the Climate-Related Financial Disclosure in March 2022.
Attempt for full applicability of the document authentication in the financial sector
From September 1, 2022, citizens with a client gateway (ugyfelkapu) have the opportunity to sign documents electronically. The service provides an electronic signing solution for users (natural persons) without requiring that they have their own signature certificate or their own registration in the AVDH (Document Authentication) system. After authentication and verification of the appropriate level, users are able to apply for an electronic signature by using the service provider’s own secret key, even from their mobile devices. After the identification and the authentication of the user, the Document Authentication creates the signature on the designated document, file, and on the (queried) data certifying the identity of the person, then it will supplement the signature structure created that way by the necessary data (time stamp, revocation data). Finally, it returns the successfully verified signature to the user.
Certain commercial banks have been using this solution to make declarations. The Hungarian Government has instructed the Cabinet Office of the Prime Minister to examine the full applicability of Document Authentication in the financial sector until March 1, 2023, in an effort to facilitate digital development.
Electronic land registry proceeding
Currently, all the documents submitted to the land registry must be in the paper-based format (hardcopy), however, as of February 1, 2024, the entire land registry proceeding will be carried out electronically (with the exception of a few documents of technical nature that may also be submitted to the land registry in paper-based format (hardcopy)).
The switchover to the electronic proceeding includes significant amendments in the legislation relating to property law, as well. From the above date on, legal representatives will be entitled to register certain rights with the land register without any official administrative procedure carried out by the land registry. The official administrative procedure will still remain an option to choose from. The possibility to have a right (e.g., a mortgage over real estate) registered with the land register by a legal representative without the participation of the land registry will call into question the authenticity of the land register since the merits of the agreements submitted to the electronic system will not be reviewed or examined by the land registry.
The detailed rules for the electronic system are set out in the Government Decree 179/2023 (V. 15.) on the implementation of Act C of 2021 on the Real Estate Registration.
5.2. What are the biggest challenges in the banking sector at the moment?
Challenges posed by high notarial fees
In 2018, a new decree was adopted on the fees chargeable by notaries public, pursuant to which, the acting notary public may not deviate from the amount calculated based on the decree and may not release the notarial deeds until the notarial fees have been paid in full.
Pursuant to Hungarian law, the notarial deeds are directly enforceable meaning that no preliminary court decision is needed for commencing the enforcement of a loan agreement or a security agreement. In case the obligor breaches a loan agreement or a security agreement that has been incorporated into a notarial deed, provided that certain administrative conditions are met, the lender may directly ask the notary public to commence the enforcement proceeding to be carried out by a bailiff. Under the above decree, the notarial fees have increased significantly, for instance, the notarial fee for incorporating a real estate financing documentation (i.e., one loan agreement and eight security agreements) into a notarial deed amounts now to approximately EUR 7,000.
Given that neither the Hungarian nor the foreign borrowers are eager to pay such high notarial fees (the commercial banks tend to impose on the borrower the obligation to pay the transaction expenses), it has become vital to find a solution that provides the lenders with a position as strong as if the finance documents were incorporated into a notarial deed.
Challenges related to wind and solar power financing
As part of the wind and solar power financing, the main question relating to the mortgage over real estate is which entity has the ownership title over the real estate on which the project is to be developed. In most cases, the real estate on which the project is being developed is not owned by the borrower but by a third party not participating in the financing, thus, a position must be created where the borrower is entitled to use the real estate throughout the construction and operation of the plant safely. Due to such an ownership structure, the collaterals over the real estate are provided by the owner of the real property. The issue roots in Hungarian property law since there is no common understanding of whether the wind turbines and the solar panels installed on the real estate form part of the real estate itself. In most cases the real estate and the wind turbines or the solar panels are considered one real estate by the land registry, however, there have been cases when the land registry created a separate topographical lot number for the solar panels. In addition, it is not decided whether a solar panel counts as a movable or immovable property. The structure of the finance documents shall be set up on a case-by-case basis and may pose challenges to the legal advisors as to the creation of the collateral pool of the financing. The new land register and property laws may provide solutions to these discrepancies. In addition, a new bill to amend certain laws to increase the competitiveness of the economy was submitted for public consultation in May 2023, pursuant to which the construction right (epitmenyi jog) would be reintroduced into Hungarian law.
5.3. What’s new in fintech?
Markets in crypto-assets (MiCA) regulation
The regulation of the European Parliament and of the Council on markets in crypto-assets has not yet been adopted but is waiting for a vote. Once adopted, the regulation will be directly applicable in Hungary.
According to press releases, the National Bank of Hungary is already preparing for the above regulation. Service providers placing general crypto-assets on the public market or wishing to introduce them on trading platforms in the European Union – provided that they are not covered by an exemption – will have to comply with detailed rules (e.g., a registered seat being in the European Union, preparation of a white paper on the characteristics of the crypto-assets and their risks).
In addition, the Hungarian tax law is also being prepared for the “regulated” presence of crypto-assets. As of January 1, 2022, personal income tax is payable on the income from transactions executed in respect of crypto assets. Income from transactions with crypto-assets shall mean profit realized on any transaction executed by a private individual in respect of crypto-assets during the tax year. Profit shall be considered realized (in respect of the excess amount) if the total amount of the proceeds from transactions executed in the year is higher than the evidenced expenses relating to the acquisition of the crypto-assets and transaction fees and commissions, including evidenced expenses incurred in connection with holding the crypto-assets.