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Regulatory framework
What are the principal governmental and regulatory policies that govern the banking sector?
The main elements of regulatory policies related to the Hungarian banking sector are:
What are the defining characteristics of a bank to be caught by the banking laws and regulations? Is non-bank fintech regulated differently?
The general rules applicable to banks are set forth by Act CCXXXVII of 2013 on credit institutions and financial enterprises (the Banking Act). Banks operate in the form of business associations; therefore, the general rules applicable to the foundation and operation of legal persons established by Act V of 2013 on the Civil Code apply to them as well. However, the provisions explicitly applicable to banks are provided for in the Banking Act. Banks are credit institutions, the business of which is to carry out the activities of taking deposits and receiving other repayable funds from the public; credit and loan operations; and money transmission services. The only banks that shall be authorised to perform all of the activities enumerated in the Banking Act are those involved in:
The Banking Act sets forth the minimum requirements for the initial capital of founding a bank, the documents and certifications necessary for the authorisation process and the provisions applicable to the operation of banks.
Act CXLV of 2017 on the amendment of certain acts relating to the harmonisation of law in the subject of insurance and payment services implemented the provisions of Directive (EU) 2015/2366 on payment services (PSD 2) (the PSD2 Directive). Hungarian National Bank (MNB) Decree No. 36/2017 (XII 14) on payment services activities is also related to the changes introduced by the PSD2 Directive. These laws – with respect to the material scope of the Banking Act – shall be applied generally to organisations engaged in the business of providing payment services under the Banking Act. These laws generally do not differentiate between banks and non-banks, and apply to the operation of every payment service provider (ie, fintech companies shall also be authorised by the MNB).
Do the rules vary depending on the size or complexity of the banking institution?
Generally, the Banking Act does not differentiate between banks based on their size, initial capital or complexity. The rules applicable to the foundation, authorisation and operation of financial institutions depend on the type of the financial institution in question (eg, a bank or a financial enterprise) and not on the size of the given institution. However, certain special entities of the Hungarian banking system are regulated differently. For example, the provisions applicable to the operation of payment service providers are set forth by Act LXXXV of 2009 on the pursuit of the business of payment services.
Primary and secondary legislation
Summarise the primary statutes and regulations that govern the banking industry.
The most important regulations regarding the banking sector are:
Furthermore, some aspects of other acts have significant effects on the banking sector, including:
Which regulatory authorities are primarily responsible for overseeing banks?
The financial markets are exclusively supervised by the MNB. The Hungarian Financial Supervisory Authority (HFSA) used to be almost exclusively responsible for financial markets supervision and had the necessary instruments for this responsibility. However, in 2013, the HFSA was integrated into the MNB. This means that the MNB assumed all functions, duties and responsibilities of the HFSA and the latter ceased to exist on 1 October 2013. Although the HFSA ceased to exist without a legal successor, continuity was preserved because, according to the Central Bank Act, the rights and obligations (including authority over certain state assets) were transferred to the MNB and the MNB took the HFSA's in ongoing procedures.
The reformed MNB is responsible for mitigating and managing risks that have the potential to arise in the financial sector at the system level (macroprudential policy), and for overseeing the safety and stability of individual financial institutions (microprudential policy). It has also assumed the functions of consumer protection, market supervision, capital supervision and insurance supervision while keeping its previous duties and responsibilities, such as the fundamental function of being responsible for monetary policy.
Government deposit insurance
Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.
The Hungarian system for insuring deposits consists of two elements.
For this purpose, the National Deposit Insurance Fund (NDIF) was established by Act CXII of 1996 on credit institutions and financial enterprises. This act was replaced by the Banking Act in 2014, but the regulation has basically remained the same.
Each credit institution must be a member of the NDIF (membership is a condition of foundation). According to the Banking Act, any credit institution shall, upon joining the NDIF, pay a one-time affiliation fee at the rate of 0.5 per cent of its subscribed capital to the NDIF within 30 days of receiving the authorisation.
In addition, NDIF members shall pay an ordinary and, in some cases, a risk-based variable annual fee. The amount of annual fee to be paid may not be higher than 0.3 per cent of:
In the case of deposits being frozen, the NDIF undertakes to provide compensation to the depositors for the principal and interest on frozen deposits. The above undertaking may not be higher than the amount of principal and interest placed in the credit institution in question. Furthermore, only registered deposits will be insured by the NDIF. The capital and interest amount of the deposits will only be reimbursed by the NDIF up to €100,000 per person and per credit institution as compensation.
Receiving ordinary credit
The second element, laid down in the Central Bank Act, is the opportunity to receive extraordinary credit, which may be provided by the MNB for credit institutions and to the NDIF in the event of an emergency. For this purpose, ‘emergency’ means that the insolvency of the credit institution endangers the stability of the entire monetary system. The MNB has discretionary power to provide such extraordinary credit.
The Hungarian government aims to increase the direct and indirect state’s stake in the Hungarian banking system. The exact percentage of its interest constantly varies as the state occasionally acquires and unloads new shares. The current state ownership in credit institutions is around 50 per cent, including the Hungarian Development Bank and the Hungarian Export-Import Bank, which are solely owned by the Hungarian state.
Transactions between affiliates
Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.
In accordance with the Banking Act, 'affiliate' refers to any company over which a parent company effectively exercises a dominant influence. All affiliates of affiliate companies will also be considered affiliates of the parent company.
From a regulatory perspective, a parent company or an affiliate will be considered a client; therefore, in cases of transactions between a parent company and an affiliate, the general prudential rules of the Banking Act will apply, including the rules for limitation of exposure.
Furthermore, some indirect limitations also apply if the parent company qualifies as a credit institution and its affiliate is also:
In such cases, the companies are subject to supervision on a consolidated basis, which means that they must jointly and severally meet the prudential and exposure rules of the Banking Act. This provision may influence the transactions between the companies concerned.
Members of groups that qualify as subject to supplementary supervision, such as financial conglomerates, must also meet the prudential provisions both jointly and severally. Credit institutions subject to supervision on a consolidated basis and all other entities covered by supervision on a consolidated basis may enter into a group financial support agreement, under which a party to the agreement is to provide financial support to any other party to the agreement affected by the necessary measures. Exceptional measures are to be taken by the MNB upon the occurrence of events invoking such measures.
Pursuant to the Banking Act, financial institutions, in addition to financial services as determined by the Banking Act, are exclusively entitled to perform the following activities:
Financial activities not listed above are prohibited activities with regard to financial institutions.
In addition, the provisions of the Banking Act limit certain market activities of financial institutions in the area of risk management in accordance with the relevant EU legislation. Such limitations include limitation of exposure related to the acquisition of ownership and restrictions on investment activities, including real estate investment restrictions.
What are the principal regulatory challenges facing the banking industry?
Hungary is facing similar regulatory challenges to those faced by other EU countries. The main challenges arise from the implementations of EU legal acts into national legislation. The implementation of Directive (EU) 2021/2160 on credit servicers and credit purchasers (the NPL Directive) will be a significant challenge to national legislation. The NPL Directive should enable credit institutions to better deal with loans that become non-performing by improving conditions for the sale of the credit to third parties. EU member states must adopt measures to implement the NPL Directive by 29 December 2023.
The implementation of the Basel IV framework is a remarkable challenge for the European banking industry because methodologies for the determination of capital requirements are to be revised.
Further regulatory challenges arise from the PSD2 Directive, which establishes a clear and comprehensive set of rules that will apply to existing and new providers of innovative payment services. The PSD2 Directive also aims to open up the EU market to new services and providers.
Digital transformation is becoming increasingly strategic for the banking sector and new regulatory challenges are arising from technological changes and development (ie, with regard to online banking, conducting contracts online and digital financial services). A group of these challenges are connected to fraud management, such as the digital identification of customers. The MNB's 2021 fintech strategy, titled 'Financial Innovation and Stability', raises awareness that high-level digitalisation supports the maintenance of the stability of the financial system and also its sustainable contribution to economic growth. However, high-level digitisation can also cause serious risks to stability and consumer protection if unregulated and unsupervised financial services become too powerful. The aim of this strategy is to provide insight into global and domestic financial digitalisation processes.
Are banks subject to consumer protection rules?
The Central Bank Act aims to protect the interests of parties that use the services rendered by financial organisations and to strengthen public confidence in the financial system. The main pillars of the consumer protection policy overseen and enforced by the MNB are efficient supervision, efficient enforcement of sanctions and the protection of defenceless groups in society.
The MNB, upon request or of its own motion, monitors compliance with consumer protection provisions of Hungarian law and opens proceedings. Proceedings for the protection of consumers’ interests may not be opened more than five years after the infringement. If the infringement is constant, the time limit shall commence at the time the infringement is terminated. Where the unlawful conduct is realised through failure to terminate a particular situation or circumstance, the above-specified period shall not commence provided that such a situation or circumstance continues to prevail. The administrative time limit for these proceedings is six months. During this period, the MNB has the power to carry out trial transactions and to conduct direct inquiries or general inquiries. If the MNB finds any infringement, it may impose sanctions such as:
Additional sanctions may be laid down in the legislation that contains provisions for the protection of consumers for any violation of the provisions prescribed therein.
The most common practices that have attracted the attention of the MNB are practices such as unilateral increment of fees and misinforming consumers on practices related to the adoption of fintech. With regard to the latter, generally, consumers are more and more open to digital, innovative and easy-to-use financial services. However, such services open a new avenue for the possibility of fraud. With respect to the fact that these services mainly operate on digital platforms and they process a lot of data concerning their users, the associated cybersecurity risks increase significantly. The MNB supervises Hungarian-based and cross-border fintech service providers. In the case of the latter, the MNB cooperates closely with the competent foreign supervisory authorities. The MNB keeps raising awareness of the possibilities of infringements and fraud when using these new types of financial services. With regard to the operation of foreign-based service providers, the MNB keeps highlighting that the information related to the services provided by these entities shall be available in Hungarian to ensure that domestic users can understand the terms, conditions and other notifications properly.
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
Climate change, sustainable finance, and green economy and its criteria will have a significant impact on future legal and regulatory policy. Sustainable finance refers to the process of taking environmental, social and governance (ESG) criteria into account when making investment or financial decisions. Sustainable finance and ESG criteria have a key role to play in future EU policy, as public and regulatory expectations are rapidly changing in this area. It is understandable that governments, regulators, policymakers and economic operators are becoming more vocal about the importance of the ESG criteria as, in the near future, we foresee that it will become inevitable for financial institutions to embed ESG criteria into their long-term strategies.
The general legal framework of the regulation regarding the sustainable finance and ESG criteria are established by EU directives and regulations, such as:
The European Commission announced a renewed sustainable finance strategy on 6 July 2021, which aims to support the financing of the transition to a sustainable economy. The European Banking Authority (EBA) has also launched its Sustainable Finance Action Plan with a mandate from the European Commission to sequentially integrate the provisions of the plan in prudential regulation. Among other things, the EBA's Sustainable Finance Action Plan included the dissemination of ESG risks according to Pillar 3 of Basel (2022), and a report on the classification and prudential treatment of assets with a sustainability perspective looking ahead to 2025.
The EBA published its own ESG-related reporting requirements (the EBA Requirements) on 24 January 2022. The EBA Requirements define prudential and conduct reporting requirements, with which certain EU-based financial institutions will be required to comply under Regulation (EU) No. 575/2013. The EBA Requirements refer to the physical impact of climate change and the transition risks (eg, the challenges inherent in a move towards an environmentally sustainable economy) as direct effects. The EBA Requirements are intended to operate alongside other ESG-related reporting initiatives that apply to both corporates and financial institutions.
Many national banks are already moving towards greener and more sustainable financial solutions. The MNB ensures that the domestic system of financial intermediation should support environmental sustainability through its financial products and services. The MNB also provides regulations on green financial services, green bonds and green credits, and has published a recommendation after measuring the performance of the financial sector in its Green Financial Report. Cybersecurity, digitalisation, fintech and other new technologies will likely indicate changes in legal and regulatory policies over the next few years to provide a supportive, consumer-friendly and stable environment to digital financial services.
Law stated date
Give the date on which the information above is accurate.
