This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in Hungary including national authorities, regulation, licenses, organisational requirements, supervision and assets.
This Q&A is part of the global guide to Banking & Finance.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/
What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?
In October 2013 the Hungarian Financial Supervisory Authority (in Hungarian: Pénzügyi Szervezetek Állami Felügyelete) merged into the Hungary National Bank (the “HNB”) being the central bank of Hungary. Since then the HNB acts as sole regulatory and supervisory authority of the financial sector in Hungary.
HNB in its role as financial supervisory authority monitors and supervises the operation and activities of financial and capital market institutions, funds, insurance companies and other institutions of the financial sector (regulated market, clearing house and central depository).
HNB has also been appointed and designated to act as authority in accordance with the Recovery and Resolution Directive (Directive 2014/59/EU of the European Parliament and of the council of 15 may 2014).
Which type of activities trigger the requirement of a banking licence?
Providing financial- and ancillary financial services requires the holding of a valid license issued by the HNB. The financial services (such as (i) taking deposits and receiving other repayable funds from the public; (ii) credit and loan operations; (iii) financial leasing; (iv) money transmission services; (v) issuance of electronic money; (vi) issuance of paper-based cash-substitute payment instruments (for example traveler’s checks and bills printed on paper) and the provision of the services related thereto, which are not recognized as money transmission services; (vii) providing surety facilities and guarantees, as well as other forms of banker’s obligations; (viii) commercial activities in foreign currency, foreign exchange - other than currency exchange services -, bills and checks on own account or as commission agents; (ix) financial intermediation services; (x) safe custody services, safety deposit box services; (xi) credit reference services and (xii) purchasing receivables) and the ancillary financial services (such as (i) currency exchange activities; (ii) operation of payment systems; (iii) money processing activities; (iv) financial brokering on the interbank market; (v) activities for the issue of negotiable credit tokens and (vi) credit consultancy services) that are subject to a banking license, are listed in Act CCXXXVII of 2013 - on Credit Institutions and Financial Enterprises (the “Hungarian Banking Act”).
Does the regulatory regime know different licenses for different banking services?
Based on the website of the HNB the following licenses may be applied for in connection with banking services:
(i) operating license for credit institutions;
(ii) license to modify scope of activities of a credit institution;
(iii) license to terminate the operation of a credit institution;
(iv) operating license for payment institution (in Hungarian pénzforgalmi intézmény) and
(v) operating license of electronic money institution (in Hungarian: elektronikuspénz-kibocsátó intézmény).
Based on the Hungarian Banking Act the operating license for a credit institution shall include at least the following activities:
A. take deposits or other repayable funds from the public (not including the issue of bonds to the public as specified in the relevant legislation), and
B. to grant credits and loans.
Based on the Hungarian Banking Act credit institutions may be
- banks (in Hungarian: bank) or
- specialized credit institutions (in Hungarian: szakosított hitelintézet) or
- cooperative banks (in Hungarian: szövetkezeti hitelintézet).
Based on the Hungarian Banking Act only banks are entitled to carry out the full scope of the financial services as listed under the Hungarian Banking Act, whereas the scope of activities of specialized credit institutions or cooperative banks is limited to certain activities as established in specific statutory provisions applicable on such types of credit institutions.
Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?
No, it does not. The authorization to establish a credit institution covers activities closely related to the setting up of banking operation only. Separate application proceeding shall be made with respect to any additional activities. Once a license has been issued by the HNB with respect to the operation of a credit institution, such license extends to the financial services and auxiliary financial services only, that are actually listed by the relevant permit of the HNB.
What is the general application process for bank licenses and what is the average timing?
The application process may be initiated by submitting the filled out, online application form that is available on the website of the HNB. Annexes prescribed by law shall also be submitted together with the application form. Amongst others, the following documents shall be submitted in connection with the application for the establishment of a bank: (i) founding documents; (ii) the document which defines the proposed area of operation (nationwide or limited to a specific region); (iii) proof of having fifty % of the initial capital paid up by the founders; (iv) drafts of the financial institution’s organizational and management structure, decision-making and control mechanisms, and its organizational and operational procedures; (v) proof of compliance with statutory requirements regarding personnel and infrastructure; (vi) certain documents and information to be provided in connection with the founder. Within six months following receipt of the authorization of establishment the applicant may apply for the operating license. For an operating license amongst other the following documents shall be submitted: (i) proof of actual payment and further evidences on compliance with the purpose of such payment in connection with the initial capital; (ii) information for the identification of each shareholder of the credit institution with minimum five % share or voting right; (iii) business plan; (iv) standard service agreements, (v) statement on the proposed date for the commencement of operations; (vi) a copy of the letter of intent of admission sent to the National Deposit Insurance Fund (in Hungarian: Országos Betétbiztosítási Alap); (vii) a statement on having the necessary facilities in place to comply with data disclosure obligations, as well as the results of live tests of the computer programs used for such disclosure of data; (viii) the draft of the accounting policy and detailed accounting system; (ix) a statement concerning direct connection to any payment system between credit institutions and an auditor’s certificate concerning the information technology system providing this connection, or a statement concerning the acceptance of an indirect connection; (x) a statement on joining the central credit information system; (xi) the rules of procedure; (xii) organizational structure, and regulations system of management. As for the timing, the general procedural time-limit is 3 months for each license separately (establishment and operation) but such time limit may be extended with 3 additional months in cases of applications relating to foundation-, operation- (activity), merger or diversion.
Is mere cross-border activity permissible? If yes, what are the requirements?
Yes, it is permissible. In case a credit institution licensed in Hungary intends to provide cross-border financial services or auxiliary financial services in another EEA country, the HNB shall be notified in English or Hungarian and in the language of such other EEA country on the intention to provide financial services on a cross-border basis. Notification shall be made in line with Commission Implementing Regulation (EU) No 926/2014 of 27 August 2014 by filling out the relevant form attached to the Implementing Regulation.
What legal entities can operate as banks? What legal forms are generally used to operate as banks?
In accordance with the relevant rules of the Hungarian Banking Act, companies limited by shares or branch offices may operate as banks. In Hungary banks generally operate in the form of private companies limited by shares or as a branch offices of foreign credit institutions. Only few banks operate as public companies limited by shares.
What are the organisational requirements for banks, including with respect to corporate governance?
Organizational requirements are to be distinguished whether required by the rules of Act V of 2013 on the Hungarian Civil Code (the “Hungarian Civil Code”) applicable on the operation form of banks i.e. on companies limited by shares, or by the Hungarian Banking Act
Based on the Hungarian Civil Code the organization of a company limited by shares consists of
- the founder /general meeting of the shareholders;
- board of directors;
- supervisory board;
- audit committee and
Based on the Hungarian Banking Act credit institutions are obliged to have an effective and creditable corporate governance structure and initiative control function in place appropriate to the nature, order of magnitude and complexity of the provided financial services and applied business model of the respective credit institution.
The Hungarian Banking Act distinguishes between
- controlling management body;
- risk exposure and risk management committee;
- comprehensive and independent business unit responsible for the risk management function covering all material risks of the credit institution; and
- nomination committee
in case of credit institutions having a market share exceeding 5%.
Do any restrictions on remuneration policies apply?
Yes, restrictions do apply. Such restrictions amongst others cover the decision making process with respect to remuneration, the percentage between basic remuneration and variable remuneration (bonus) and the limitations regarding bonuses.
Credit institutions with a market share of at least 5 % are required to establish a remuneration committee that shall be responsible for overseeing the remuneration of the senior officers and for the preparation of decisions regarding remuneration.
Basic remuneration and variable remuneration (bonus) shall be handled separately. The variable remuneration may exceed 100 % of the basic remuneration only:
- if proposed for the credit institution’s general meeting by a detailed explanation supporting the higher bonus based on performance and if so authorized by the general meeting;
- provided that in the general meeting members of the credit institution act:
(i) by a majority of at least 66 % provided that at least 50 % of the shares or equivalent ownership rights are represented, or
(ii) by a majority of 75 % of the ownership rights represented; and
- the credit institution notifies the HNB before the proposal is made to the general meeting, and also on the actual resolution.
Variable remuneration shall never exceed 200 % of the basic remuneration.
In addition to the above the following restrictions on bonuses apply:
- a credit institution shall not guarantee bonus to any of its employees also bonus shall not be a part of prospective remuneration plans;
- bonus can be paid or vests upon the senior executive or other staff member only if:
a) it is sustainable according to the financial situation of the credit institution, and
b) it is justified on the basis of the performance of the credit institution, the business unit and the senior executive or other staff member concerned and
- payment of variable remuneration must not limit the ability of the credit institution to strengthen its capital base to the extent necessary and must not result in non-compliance with the provisions of the Hungarian Banking Act, prudential requirements and the provisions of Regulation 575/2013/EU.
Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
The Basel III framework has been implemented through two legislative acts: Directive 2013/36/EU (the “CRD IV”) and Regulation (EU) N° 575/2013 (the “CRR”). Since the entry into force of the CRR being directly applicable in Hungary, rules applicable for regulatory capital (in Hungarian: szavatoló tőke) has been removed from the Hungarian Banking Act and credit institutions shall calculate their regulatory capital on the basis of the requirements set out in the CRR. Additionally, provisions relating to the different capital puffers have been also implemented by the Hungarian Banking Act on accordance with CRD IV, such as systematic risk buffer. There are no major deviations under the Hungarian regulation.
Furthermore, regulatory capital requirements applicable for troubled institution being under resolution (please see details under Question No. 20) shall be determined by HNB acting in its capacity of both supervisory and resolution authority.
Are there any requirements with respect to the leverage ratio?
Similarly to regulatory capital requirements, the leverage ratio and the prevention of excessive leverage are regulated through the CRR. Accordingly, the credit institutions shall maintain appropriate and effective written procedures and policies for the identification, management and monitoring of the risk of excessive leverage in order to ensure that such risk is addressed in a precautionary manner and that the credit institutions are able to withstand a range of different stress events with respect to the risk of excessive leverage.
HNB as supervisory authority shall review and evaluate – among others – the exposure of credit institutions to the risk of excessive leverage as well as the adequacy of the arrangements, strategies, processes and mechanisms implemented to manage the risk thereof. In case of any related failures from the side of the credit institutions, the HNB is entitled to take different type of measures depending on the severity of the risk.
What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
With respect to the management of liquidity risk, the Hungarian Banking Act lays down general quality requirements, while quantity requirements – such as the Liquidity Coverage Ratio (the “LCR”) and Net Stable Finding Requirements (the “NSFR”) – are stipulated by the CRR and the related regulation of the Commission. Accordingly, the Hungarian Banking Act prescribes a general requirement for credit institutions to maintain their liquidity and solvency continuously. Such requirement is to be ensured and achieved through proper regulatory capital (please see details under Question No. 10), appropriate liquidity risk management policies and procedures.
In Hungary, since 1 April 2016 the LCR requirement has been set at the level of 100% by the HNB on the basis of the authorization given under the CRR for Member States for the transitional period lasting until 1 January 2018 when such level (100%) shall be mandatorily applicable in each Member State. Consequently, as of 1 January 2018, the given regulation of HNB has been replaced by the respective provisions of the CRR and, hence, has been repealed.
Regarding the NFSR, the provisions of the CRR shall be applied directly. In November 2016, the Commission has submitted its proposal to the European Parliament and the Council on the amendment of the CRR with respect to – among others – the NSFR proposing the rate of 100%. We understand however that the introduction of such binding minimum standard is still pending.
Do banks have to publish their financial statements?
Yes, credit institutions have to publish their financial statements annually according to applicable rules on accounting.
Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?
Yes, the HNB may exercise supervision on a consolidated basis. If the HNB finds any evidence to substantiate close links between entities it supervises in the course of its inspections, it may declare a credit institution registered in Hungary subject to supervision on a consolidated basis or may decide to extend consolidated supervision over a company affected. Consequences result in obligations to provide data and information by holding members or entities having a close link to the credit institution that is subject to consolidated supervision, and also in obligations regarding operating a secure IT system as well as internal procedures and mechanism in order to identify, measure and monitor transactions subject to the consolidated supervision by the HNB.
What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?
The HNB’s approval is necessary to acquire qualifying direct or indirect holding (10%) in a credit institution or to increase a holding in a credit institution reaching 20%, 33% or 50% stake. Similar to obtaining of the operating license, the application may be initiated by submitting the filled out online application form that is available on the website of the HNB together with various attachments including the following: (i) contractual offer made with respect to the qualifying holding; (ii) evidence concerning the legitimacy of the financial means for acquiring qualifying holding; (iii) zero certificates on no outstanding debts owed to the tax authority, customs authority, health insurance administration agency or pension insurance administration agency of competence under the applicant’s national law; (iv) various statements regarding no criminal records regarding executives, and conditions on prudent operation; (v) a statement declaring any and all contingent liabilities and commitments, by definition of the Hungarian act on accounting; (vi) founding documents, ownership structure; (vii) in case of a foreign financial institution, insurance company or investment firm a statement or certificate from the competent supervisory authority of the country of establishment stating that the enterprise conducts its activities in compliance with prudential regulations shall also be attached to the application for authorization.
Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?
Based on the Hungarian Banking Act any person with a qualifying holding in a financial institution shall be independent of any influences, which may endanger the financial institution’s prudent operation, have good business reputation and the capacity to provide reliable and diligent guidance and control of the financial institution. The acquisition of a qualifying direct or indirect holding (10%) in a credit institution or the increase a holding in a credit institution reaching 20%, 33% or 50% stake is subject to the HNB’s approval.
Are there specific restrictions on foreign shareholdings in banks?
No, there are no restrictions. Additional requirements apply in case of acquisition of qualifying interest by a foreign licensed entity. A statement or certificate from the competent supervisory authority of the country of establishment stating that such foreign licensed entity conducts its activities in compliance with prudential regulations, shall be attached to the application for authorization to acquire the qualifying holding.
Is there a special regime for domestic and/or globally systemically important banks?
HNB as regulator shall identify credit institutions qualifying globally or systematically important taking into account certain features of the given institutions, such as – among others – the size and complexity of the group. The HNB shall also allocate global systemically important credit institutions in at least five sub-categories in a way that the lowest sub-category shall contain the credit institutions which are considered the least important systemically provided that there shall be a constant and linear increase of systemic significance in the sub-categories. The cut-off thresholds between the sub-categories shall be defined clearly. According to the Hungarian Banking Act, credit institutions allocated to the lowest sub-category shall maintain a capital buffer of 1 % of the total risk exposure amount calculated in accordance with the CRR for global systemically important credit institutions. The buffer assigned to each sub-category shall increase in gradients of 0.5 % to and including the fourth sub-category, but the credit institutions allocated to the highest sub-category shall be subject to a buffer of 3.5 %.
Furthermore, other systemically important credit institutions, as identified by the HNB, are required to maintain specific capital buffer for on an individual, sub-consolidated or consolidated basis in addition to the capital requirement imposed by the CRR as well as to other type of capital buffers. Such specific capital buffer shall consist of CET 1 capital, the rate of which shall be up to 2 % of the amount of total risk exposure calculated in accordance with the CRR. Both the rate of such capital buffer and the affected credit institutions shall be revised by HNB annually.
What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?
Sanctions related to financial services may be imposed on credit institutions, executive officers, employees and owners, ranging from preventive measures, restorative-, repressive sanctions to measures applied for managing prudential risks. At minor prudential risks the HNB may order credit institutions to comply with prudential requirements, eliminate uncovered deficiencies, advise credit institutions to provide further training to its employees or to hire employees with appropriate professional skills, elaborate code of conduct, internal regulations and/or declare the fact of infringement, order the cessation of infringement and prohibit further infringing activities. At major prudential risks the HNB may order credit institutions to cut expenses on operation, set sufficient reserves aside, prohibit, limit or make subject to conditions the payment of dividends, the payment of remuneration of executive officers, the provision of financial services. Amongst exceptional measures the HNB may order the sale of assets used for purposes other than banking, may limit or prohibit the credit institution to conclude transactions between the owners and the credit institution, payment of deposits or funds, determine the highest rate of interest, order the executive board to convene the general meeting or may appoint a supervisory commissioner.
Beside measures, credit institutions, executive officers and employee may be subject to fines. The amount of the fine may be imposed on the inspected credit institution and shall be between HUF 100,000 and HUF 2 billion. As for executive officers the amount of the fine shall be between HUF 100,000 and HUF 500 million. Employees shall be subject to the amount of the fine shall be between HUF 20,000 and HUF 20 million.
What is the resolution regime for banks?
In July 2014, a specific insolvency procedure has been implemented in Hungary for troubled institutions on the basis of the Bank Recovery and Resolution Directive (the “BRRD”). The Hungarian legislation was aligned to the provisions of the BRRD. Accordingly, the objective of such procedure is to facilitate the restructuring of troubled institutions while ensuring the continuity of its critical functions and retaining the stability of the system of financial intermediaries. Such procedure provides for the prevention of spillover or other major adverse effects relating to troubled institutions.
Within the framework of the resolution procedure, the HNB was designated to act as national resolution authority and was empowered to exercise a wide range of rights including from the initiation of the resolution procedure to the adaptation of different measures.
The initiation of the resolution procedure is subject to the occurrence of certain conditions, i.e. the insolvency of the institution is not sufficient itself to trigger the resolution, but the existence of public interest also need to be justified.
Within the framework of the resolution procedure, the main instruments available to HNB are
- the sale of business,
- the bridge institution tool,
- the asset separation and
- the creditor bail-in (please see under Question No. 22).
Also, the measures available to HBN varies depending on the given phase of the resolution procedure available: for instance measures in the preparatory phase (e.g. obligatory removal of obstacles to resolvability) aims to pave the way for an effective resolution proceeding, while those that may be taken in an actual event of distress aims to handle the issues arisen due to insolvency is imminent (e.g. dismissal of executives, use of resolution tools such as asset transfers, write down or conversion of capital instruments, intervention in contractual relationships).
HNB is also entitled to impose different type of sanctions in case of the breach of applicable law or the hindering of the resolution procedure.
How are client’s assets and cash deposits protected?
The National Deposit Insurance Fund (NDIF) (in Hungarian: Országos Betétbiztosítási Alap) operates as deposit protector institution in Hungary. The credit institutions are required to join the NDIF and pay a joining fee, furthermore accomplish regular- or extraordinary annual payment. If a credit institution becomes insolvent, NDIF pays compensation for its depositors within 20 working days. The upper limit of payment is defined by law to be EUR 100,000, the payment is made in Hungarian forints calculated at the foreign currency rate valid on the day preceding the start date of compensation.
Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
Bail-in is one of the resolution tools available to HNB. All liabilities may be subject to bail-in except for those explicitly excluded under the Hungarian resolution act and detailed below.
There are three options for the exclusion of liabilities:
- the first category of excluded liabilities consist of those type of liabilities exhaustively listed in the resolution act being unsecured and uncollateralized liabilities, namely
(i) deposits insured by the NDIF,
(ii) investments backed by the Deposit Guarantee Fund (in Hungarian: Betétbiztosítási Alap),
(iii) liabilities owed to non-group member institutions with an original maturity of less than 7 days,
(iv) liabilities with a remaining maturity of maximum 7 days vis-à-vis the payment and settlement systems or participants thereof,
(v) secured liabilities,
(vi) wages payable to the institution’s employees, and
(vii) taxpayer liabilities and liabilities arising from service contracts.
- the second category of excluded liabilities consist of any liabilities (or any part thereof) which
(i) are required – either directly or indirectly – to maintain critical functions and main business lines of the given institution, or
(ii) are necessary and proportionate to avoid a widespread spillover of a negative process which would result in a severe disturbance in Hungary or any other EEA state.
- the third category of excluded liabilities consist of any liabilities (or any part thereof) which the HNB may exclude in its capacity of resolution authority provided that
(i) such liabilities are not capable of being subject to bail-in tool and
(ii) there would be a higher decrease in the value of the claims of other creditors affected by the bail-in if such liabilities would be subject to bail-in.
- the first category of excluded liabilities consist of those type of liabilities exhaustively listed in the resolution act being unsecured and uncollateralized liabilities, namely
Is there a requirement for banks to hold gone concern capital (TLAC)?
Credits institutions are required to hold gone concern capital, i.e. Tier 2 capital in accordance with and as set out in the CRR. Therefore, no specific Hungarian legislation applies in this respect. TLAC-standards have not been implemented yet.
In your view, what are the recent trends in bank regulation?
In line with the European trends, Hungarian regulatory changes focus mainly on consumer protection, security and enhanced service provision. While digitalization and the introduction of open banking offers new business opportunities in addition to compliance requirements, new regulation of 2018 around data protection (GDPR) and investment banking (MiFID 2) are more of pure constraints for market players. One of the biggest change in local bank regulation, on the other hand, has no roots in EU legislation: Hungarian payment service providers are preparing for the mandatory application of the new instant payment system to be operating as from July 2019.
What do you believe to be the biggest threat to the success of the financial sector ?
As current concerns, banks are dealing with steadily low interest rates, already dried-up reserves and considerable regulatory costs triggered by MiFID 2, PSD 2, IFRS 9 and GDPR. In the long run, the financial sector also faces strong competition and pressure to invest in new technologies as well as extensive business development since alternative financial sources, channels and intermediaries are springing up. New products and digitalization, however, do not promise immediate and appreciable growth in return.