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Hungary Remains Strict on Factoring

Hungary Remains Strict on Factoring

Hungary
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Factoring is an increasingly popular product of banks that appeals to corporate clients of whatever size as it provides liquidity to the clients and stable cash flow.  The factoring is usually structures in a way that the vendors of the client do not receive information on the factoring, the bank stays in the background; the relationship between the client and its vendor remains intact.  In practice, this means that the client continues to collect the amounts the vendor owes, although such amounts do not belong to the client anymore.  Also, it is not uncommon that even the soft workout stage stays with the client in case the vendor is in delay with its payment obligation; i.e. the client will be obliged to chase its vendor for the money.

The Hungarian National Bank had issued several guidelines in the past on the factoring which among others, also analyse this role of the client from banking regulatory perspective, but they either had a different focus or did not provide clear cut answer on the issue.  The issue is the uncertainty whether the client in the above set-up should be deemed as the agent of the factoring bank and if yes, under what conditions may it operate as such. 

The Hungarian National Bank has recently issued a guideline analysing specifically the role of the clients and made entirely clear that should the client have any role in the collection of the amounts factored to the bank, it will become an agent of the bank (i.e. this means that factoring cannot be done "silently" without the client falling under the scope of the banking regulation).  From the client's perspective, this means that it must comply with all the regulatory requirements that an agent would normally do; e.g. requirements on the skill and education of the executive officers – needless to say a client that is not engaged in such agency activity can rarely comply with this requirement.  From the bank's perspective, this means that it must either register the client as its agent with the Hungarian National Bank, or it must obtain a license from the Hungarian National Bank for employing its client as its agent.  The latter is required if the client is entitled under the factoring agreement to amend the payment terms with its vendors, since after the factoring, the client does this to the risk of the factoring bank.

Although this strict guideline pertains to factorings under foreign law (so long the client is situated in Hungary), it does not render factoring practically impossible in Hungary.  With careful structuring the pitfalls of the regulatory requirements may be evaded; nevertheless, it requires some flexibility from the banks and its clients too. 

By Gergely Szaloki, Partner Schoenherr

Hungary Knowledge Partner

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