Hungary's accession to the EU will result in a number of changes to the banking sector. The modifications of the legal rules relevant to the operation of credit institutions and financial enterprises, approved in the last three years, will facilitate Hungary's EU accession and harmonise the rules and regulations applicable to financial institutions. Most of the modifications amending Act CXII of 1996 on Credit Institutions and Financial Enterprises (the "Banking Act") and Act CXX of 2001 on Capital Markets (the "2001 Capital Markets Act") came into force on 1 July 2003 but certain provisions (for example in relation to the powers of the Hungarian Financial Supervisory Authority (the "PSZÁF") will automatically come into force only upon Hungary's accession to the European Union. A substantial part of the amendments relates to the regulatory control of banking groups, investment enterprises and mixed activity holding companies.
The amendments of the Banking Act in relation to Hungary's accession to the European Union ("EU")
One of the most significant changes of the Banking Act entering into force with the accession is the possibility of providing cross-border services, in accordance with the rules relevant for such services. If a credit institution having its registered seat in one of the member states of the EU intends to provide financial or additional financial services in Hungary, it is obliged to notify the competent (local) supervisory authority in its home country ("Local Supervisory Authority") about such intention in advance. The Local Supervisory Authority will notify and the supervisory authority of the relevant country about the establishment of a branch office within one (1) month (the relevant authority in Hungary is the PSZÁF) and the PSZÁF will in turn notify the European Commission. Cross border services can be provided following receipt by the relevant credit institution of the notification by the supervisory authority of the relevant country (i.e. in case of Hungary, the PSZÁF). Credit institutions and certain financial enterprises registered in Hungary will also be entitled to establish a branch office in another member state. If a credit institution or financial enterprise intends to establish such a branch office, it must notify this fact to the Local Supervisory Authority. The Local Supervisory Authority shall notify PSZÁF within three (3) months if the financial enterprise is managed in a proper manner and its financial situation is in compliance with the legal requirements. The PSZÁF will notify the Local Supervisory Authority on the terms of operation of the branch office. The foreign Supervisory Authority is also obliged to notify the European Commission about the establishment of a branch office. Further, as is the case prior to EU accession there will be no requirement to provide two billion Hungarian Forints (HUF 2,000,000,000) as capital. However, the procedure for establishing a branch office may take several month, further, the parent company has joint and several liabilities for its branch office. Nowadays, as there are already several foreign investors in Hungary, we assume that only a few branch offices will be established by foreign banks. However, some of the existing affiliates of the foreign banks and financial enterprises will be liquidated and new branch offices will be established. The transformation of the affiliates to branch offices could raise some technical and legal issues as neither Act CXLIV of 1997 on Business Associations (the "Companies Act"), nor Act XXXII of 1997 on Branch Offices of Foreign Enterprises (the "Branch Office Act") regulates the process for such transformation. The affiliate should be liquidated and at the same time the foreign parent company has to resolve on the establishment of a new branch office in Hungary. It has to be taken into account that at the time when the affiliate will be under voluntary dissolution it cannot have customers, therefore the client files should be "transferred" to the new branch office prior to that date. This means that the establishment of the new branch office has to have happened by the commencement date of the voluntary dissolution of the affiliate of the foreign bank. However, the foreign owner cannot withdraw the invested amount of capital while the voluntary dissolution procedure is uncompleted. The newly established branch office will not be considered to be the legal successor of the affiliate of the foreign credit institution terminated by voluntary dissolution. This could cause some difficulties in the contractual relationships of the bank (for example: agreements with the suppliers, etc.).
Hungary's accession to the EU will also cause some changes with respect to the relationship with third country credit institutions. The Banking Act contains new regulations not only with respect to the credit institutions and financial enterprises having their registered seat in the EU, but these new rules concern also the credit institutions and financial enterprises registered in one of the OECD member states (USA, Canada) and on financial institutions having their registered seat in countries that are not member states of the EU ("Third Country Credit Institutions"). Third Country Credit Institutions can also establish branch offices in Hungary, however such institutions have to meet certain stricter rules, such as providing two billion Hungarian Forints (HUF 2,000,000,000) as capital. Further, a branch office of Third Country Credit Institution is obliged to become a member of the National Deposit Protection Fund (Országos Betétvédelmi Alap) (the "Fund") unless PSZÁF confirms that the credit institution has a deposit insurance system equivalent to the insurance provided by the Fund. Further, the branch office of the Third Country Credit Institutions is obliged to maintain an asset retention index of one hundred percent (100%) at all times. Third Country Credit Institutions are not allowed to advertise, as this is allowed only by financial enterprises registered in Hungary and in the EU. Some amendments have been approved with respect to the consolidated supervision by PSZÁF and the Local Supervisory Authorities. If a credit institution has its registered seat in one of the EU member states, the Local Supervisory Authority, the PSZÁF and the National Bank should co-operate in accordance with EU law and provide information to each other during their operation. The primary supervisory authority is the Local Supervisory Authority, which provides controlling tasks and, if necessary, warnings regarding compliance with the legal provisions. If it is unsuccessful, the Local Supervisory Authority should notify the authority competent according to the seat of the branch office, which should proceed upon the Local Supervisory Authority's request. In cases when prompt measures are required, PSZÁF can proceed to act. However, in such cases PSZAF is obliged to report about its measures to the European Commission. In the case of Third Country Credit Institutions, co-operation between the local authority and the PSZÁF is based on bilateral agreements.
For further information please contact Gabriella Ormai.
