hungarian financial supervisory authority
TRANSCRIPT
A publication by the Hungarian Financial Supervisory Authority
1013 Budapest, Krisztina krt. 39.
Phone: (00-36-1) 489-9100
Fax: (00-36-1) 489-9102
Website: www.pszaf.hu
©Hungarian Financial Supervisory Authority
Hungarian Financial supervisory autHority
TABLE OF CONTENTS
THE HFSA’S MISSION ......................................................................................7
PRESIDENT’S FOREWORD ...............................................................................8
ACRONYMS ...................................................................................................14
THE HFSA’S STATUS AND OPERATING ENVIRONMENT .............................18
MAiN ChANgES iN ThE hFSA ACT, ExpANdEd dECrEE-iSSuiNg righTS ... 18
ChANgES TO ThE rEguLATOry ENvirONMENT ......................................... 19
ECONOMiC ENvirONMENT ............................................................................ 19
RISK-BASED SUPERVISION, IMPACT RATING AND SUPERVISION METHODOLOGY ............................................................................................21
iMpACT rATiNg ANd iNSTiTuTiON ASSESSMENT ....................................... 22Individually supervised institutions ................................................................... 24Jointly supervised institutions ........................................................................... 24
rEviSiON OF METhOdOLOgiES ..................................................................... 25On-site inspection manuals ................................................................................ 25
iCAAp-SrEp MANuALS ..................................................................................... 25
KEY TARGET AREAS OF SUPERVISION IN 2012 ..........................................26
KEy TArgET ArEAS OF SupErviSiON iN 2012 .............................................. 26
SUPERVISION OF INSTITUTIONS .................................................................32
OFF-SiTE SupErviSiON .................................................................................... 33Off-site supervision of money market institutions .......................................... 34Off-site supervision of pension, healthcare and voluntary mutual funds .... 35Off-site supervision of capital market institutions .......................................... 36Off-site supervision of insurers .......................................................................... 37
ON-SiTE SupErviSiON ..................................................................................... 38Findings of on-site inspections ........................................................................... 38Measures concluding inspections...................................................................... 40Money market sector inspections ..................................................................... 40On-site supervision of pension, healthcare and voluntary mutual funds .... 43Capital market inspections ................................................................................. 43Findings of on-site supervision of insurers ...................................................... 44IT inspections at supervised institutions........................................................... 45
FiNdiNgS OF SrEp ExErCiSES ....................................................................... 46Supervisory colleges ............................................................................................ 47
SupErviSOry COLLEgES OF BANKiNg grOupS .......................................... 48Banking group supervision in the capacity of home supervisor.................... 48Banking group supervision in the capacity of host supervisor ...................... 48Insurance colleges ............................................................................................... 48Regional cooperation at the HFSA’s initiative regarding insurers .................. 49
MARKET SUPERVISION .................................................................................51
MArKET SupErviSiON ACTiviTiES ................................................................. 51
MArKET iNSpECTiONS ..................................................................................... 51Short Selling decree ............................................................................................. 51Inspection of unlicensed portfolio management at online FOREX service providers ............................................................................................................... 52Inspection of unlicensed debt purchasing activities ....................................... 53Inspection of unlicensed financial services marketed as bond issuance ..... 54
SupErviSiON CONCErNiNg iSSuErS OF puBLiCLy TrAdEd SECuriTiES . 54
SupErviSOry LiCENSiNg OF SECuriTiES iSSuANCE ................................... 55Verifying compliance of investment funds with new legal requirements .... 55Findings concerning the licensing of the public issuance of securities and introducing them on regulated markets (stock exchange) ............................. 56
CONSUMER PROTECTION ...........................................................................58
CONSuMEr pOLiCy.......................................................................................... 58
ThE FOuNdATiON OF ThE hFSA’S CONSuMEr prOTECTiON ACTiviTiES ANd ThE TOOLS AT iTS diSpOSAL ................................................................. 60Effective consumer protection regulation ........................................................ 60The HFSA’s own consumer protection tools ..................................................... 62Consumer protection administrative proceedings .......................................... 67Consumer protection inspections ..................................................................... 68Major consumer protection administrative proceedings launched at the HFSA’s initiative in 2012 ........................................................................... 70Major consumer protection administrative proceedings launched on consumer claims in 2012 .............................................................................. 73Resolutions arising from cooperation with the Financial Arbitration board .......................................................................... 75Public actions and enforcing claims of public interest .................................... 76Consumer protection monitoring ...................................................................... 78Regular and proactive supervisory communication – informing customers via contemporary channels ............................................................................... 78Informing consumers via the HFSA’s customer service ................................. 81Informing consumers via the civil consumer protection network ................. 83
LICENSING ....................................................................................................85
MONEy MArKET LiCENSiNg ........................................................................... 85Credit institution licensing .................................................................................. 85
Licensing financial enterprises and independent intermediaries ................. 86
CApiTAL MArKET LiCENSiNg .......................................................................... 87
iNSurANCE LiCENSiNg ................................................................................... 88
LiCENSiNg iN ThE pENSiON, hEALThCArE ANd vOLuNTAry MuTuAL FuNdS SECTOr .......................................................... 89Licensing authority examinations for intermediaries ..................................... 90
PRUDENTIAL LEGAL ENFORCEMENT ..........................................................91
rELEASE OF ruLiNgS ...................................................................................... 91
MONEy ANd CApiTAL MArKET LEgAL ENFOrCEMENT ............................... 92Money market ...................................................................................................... 92Capital market ..................................................................................................... 96Insurance legal enforcement.............................................................................. 97Legal enforcement regarding pension funds ................................................... 99Legal enforcement concerning authority examinations for intermediaries .............................................................................................. 101
DOMESTIC COOPERATION .........................................................................103
COOpErATiON AgrEEMENTS ....................................................................... 103
CONFErENCES, EvENTS ................................................................................. 103
REGULATORY TOOLS .................................................................................105
hFSA dECrEES ................................................................................................ 105
rECOMMENdATiONS .................................................................................... 107CEO letters .......................................................................................................... 109
METhOdOLOgy guidELiNES ....................................................................... 110
INTERNATIONAL COOPERATION .............................................................112
COOpErATiON AT EurOpEAN LEvEL ........................................................... 112The European financial supervisory structure ............................................... 112
ThE hFSA’S pArTiCipATiON iN ThE EurOpEAN FiNANCiAL SupErviSOry STruCTurE ..................................................................................................... 113The European supervisory authorities and the ESRB ................................... 113
iNTErNATiONAL COOpErATiON OuTSidE ThE EurOpEAN uNiON ........ 116
MANAGEMENT OF THE HFSA’S RESOURCES ............................................122
hr pOLiCy, hr MANAgEMENT ..................................................................... 122HR policy ............................................................................................................. 122HR management ................................................................................................ 122Training, development ...................................................................................... 123
Distribution of resources .................................................................................. 125
iNTErNAL rEguLATiON ANd OrgANizATiON dEvELOpMENT ............... 126Internal regulation ............................................................................................. 126Internal control system ..................................................................................... 126Internal audit ...................................................................................................... 127Organization development ............................................................................... 129
COMMuNiCATiON: hFSA wEBSiTE, CONSuMEr iNFOrMiNg, prESS ..... 130Communication, website, informing of consumers ...................................... 130Press .................................................................................................................... 131IT priorities .......................................................................................................... 132
prEpArATiON OF LAwS ................................................................................ 133Participation in the preparation of laws ......................................................... 133Lower level legal provisions (government decrees, ministerial decrees) ... 134
ThE hFSA’S ACTiviTiES iN dATA prOviSiON, dATA puBLiCATiON ANd riSK MONiTOriNg ................................................................................ 135
ThE hFSA’S ANALySiNg ACTiviTiES ............................................................. 138
LAwSuiTS ........................................................................................................ 139
ThE hFSA’S FiNANCiAL MANAgEMENT iN 2012 ......................................... 140Revenues of the HFSA ....................................................................................... 141The HFSA’s fee revenues per market sector ................................................... 143Revenues from fines .......................................................................................... 148Own account and other revenues ................................................................... 149The HFSA’s expenditures .................................................................................. 149
KEY EVENTS OF 2012 IN CHRONOLOGICAL ORDER ................................160
ATTACHMENTS ............................................................................................166
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ThE hFSA’S MiSSiONThe Hungarian Financial Supervisory Authority is an autonomous regulatory organ responsible for the supervision, control and regulation of the financial intermediary system of Hungary. It is only subordinated to the power of law.
The fundamental mission of the Supervisory Authority is as follows:
to ensure, and when necessary, to enforce � the solid, transparent and efficient operation of the financial intermediary system, as well as the prudent activities of its constituent persons and organizations,
to create � stable and orderly operating financial markets, as well as secure and competitive development frameworks, which are compliant with the laws of the European union, through its decrees and other regulatory proposals,
to identify � and efficiently prevent the risks jeopardizing the individual financial institutions and sectors, through its preventive measures, as well as to reduce or eliminate the already existing risks,
to protect the rights and interests of the customers � who use the services provided by financial institutions in a consistent and proactive manner, to establish a forum for consumer dispute-settlement, and to increase consumers’ financial awareness,
to strengthen public trust in the financial intermediary system � ,
with a view to facilitate European-level financial supervision, � as a member of the European System of Financial Supervisors, to represent Hungarian interests and to cooperate with the European and other supervisory authorities.
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prESidENT’S FOrEwOrdThe President of the Hungarian Financial Supervisory Authority reports to Parliament on the HFSA’s activities annually. The 2012 Annual Report outlines the HFSA’s activities last year, the changes in organizational and operating conditions, the developments of the international supervisory environment, and summarizes the experiences learned during that year. The Annual Report, however, is not merely a report to Parliament; it is also intended to inform industry professionals, the wider public and financial organizations on how the HFSA carried out the duties assigned to it by law, how it performed and how it managed its assigned resources.
***
The economic crisis that began in 2008 is now taking new turns. Consolidated mostly with help from governments, the European banking system continues to rest on fragile foundations and the financial system seeks additional support, mainly in the Southern European countries. One lesson from the crisis is that a new approach and new tools are needed in supervision: First, greater attention must be paid to phenomena and innovations emerging in areas of the financial system outside the banking sector. Second, the interactions between banks and the real economy must also be scrutinized with a different approach. In addition, the capital level of the banking system must be raised and its liquidity must be improved so that it becomes more risk tolerant in bearing former burdens and resisting future shocks. Further, it became clear that the actual condition of the financial intermediation system is inseparable from its sovereign environment. The condition of the banking system is closely dependent upon the macroeconomic conditions that constitute its framework and vice versa: the operation of the banking system and its problems also impact the macroeconomic environment.
Today, the eradication of the lingering defects in the system requires more than just improving the capital position of banks. These capital raises and recapitalization steps must be carried out in a market conform manners, i.e. without spending taxpayer money. new solutions and mechanisms are needed that will either replace or reduce the burdens of any underlying government contribution during future crises while improving the efficiency of supervision. Action items coordinated at European union level can only be implemented successfully if deposit insurance and the crisis management efforts of institutions become, like a safety net, an integral part of harmonized European frameworks. These elements altogether constitute the banking union.
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One new challenge for the European integration process is that the single supervisory mechanism will already be in place in 2014 (primarily in the Eurozone) while certain elements of the banking union (e.g. the European level resolution mechanism and the joint deposit insurance system) will not have been implemented. Although Hungary is not required to join the banking union but has the option to do so, it impacts us fundamentally as the Hungarian market is part of the European union’s single market. Further, a large number of financial institutions operating in Hungary are subsidiaries and branches of Western European or global financial service providers that are directly impacted by these changes and Hungarian financial institutions are also present in other Eu member states. However, institutions with no international background cannot stay out of the process, otherwise they may suffer regulatory or competition disadvantages.
The specific method of implementation calls for some major decisions on the part of the European union to which we must contribute in a manner that harmonizes with our national interests. While these are one-off decisions, their consequences will determine financial development for decades in Europe and Hungary. Thorough and careful preparations are required: the effects of any possible wrong decision are far too costly, not only in a material sense but also for society. Therefore, responsible, timely decisions must be taken, applying calm assessment and wisdom.
In line with international trends set by the G20, the European union is currently implementing a comprehensive financial regulatory reform, aiming to make the financial system more resistant and secure, and to deepen integration and thereby also improve the EU’s competitiveness in financial services. The new regulation philosophy calls for a new approach and contemporary regulatory tools. In more and more areas, minimum harmonization is replaced with full or maximum harmonization. To this end, directives are gradually replaced by regulations that are directly effective in the entire EU, and by regulatory and implementing technical standards. This revaluates Hungary’s participation in the preparatory efforts directed by the European supervisory authorities, as this is where national considerations can be best enforced.
Thanks to the new approach, the European mapping and implementation of the Basel III international regulatory package (the prudential regulation of credit institutions and investment enterprises) is carried out via an Eu-level regulation (CRR) and directive (CDR IV) and will be supplemented with a series of technical standards (e.g. standardized and joint data reporting on capital: COREP). The final text of the CRD has been approved and member states will have very limited time for implementation. The intention of legislators is that the new prudential regulatory system will enter into effect on 1 January 2014. The CRR will be in effect directly in EU member states.
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Thus there is no implementation obligation here either, but special attention must be paid to the implementation of both legal provisions.
The regulation to be introduced in the insurance sector will be similar to that in the banking system. The new regulations known as Solvency II also put the emphasis on the following items: more accurate measurement of risks; strengthening capital coverage; model-based calculation of capital requirement; assessment and approval of these by supervisory authorities; and strengthening disclosure requirements. However, insurers have several peculiarities, mostly because of the long time horizon typical to the life sector that presents quite a challenge to institutions regarding investments. Bringing assets and liabilities into harmony requires careful and diligent, i.e. prudent behaviour on the part of insurers. However, this is not always simple in an era of low interest rates and investments with poor profitability, and spurs intensified risk assumption. While the low interest rate environment that took shape in recent years brings great help for debtors by reducing repayment interest rates, the same phenomenon poses several challenges to insurance companies because it is difficult to achieve promised returns in such circumstances.
Concerning the capital market, the European capital market infrastructure and short selling are regulated in regulations already (and in technical standards), but regulations are under preparation on reducing market fraud and selling capital market assets. Sometimes these efforts are accompanied by the review of supporting directives.
***
Since early April 2000 (pursuant to an act passed under the first Orbán government), the HFSA has been an integrated supervisory authority. Thus it is supervising all sectors (banking, insurance, capital markets, funds) simultaneously and in a standardized manner in an economic environment characterized by specialization, diversity of complexity and a closely interlocking and complementary array of competing financial products and financial institutions. The relations of owners, the opportunity to transfer risks between institutions and sectors, short transactions times enabled by technological development and the management of all these factors from the regulatory side all suggest that the financial system can only be kept under control efficiently in integrated form along standardized supervision rules. Prudential supervision, consumer protection inspections and capital market inspections are means that are built on each other and complement each other. All are necessary if we seek to paint a true picture of risks present in the sector. Therefore, effective supervision today is only possible with full utilization of these synergies.
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Risk-taking is an attribute of the financial sector’s operation, but it must be kept within reasonable limits. Thus one key task of the HFSA is to monitor developments in the financial sector and to intervene before risks become hazards to stability and confidence. Licensing, continual supervision and consumer protection all have a risk management and risk mitigation role. The prudential supervision of institutions can only be efficient if it is risk-based. However, risk-based supervision cannot be effective if it lacks the means of early intervention, i.e. if the supervisory authority can act only after a negative-impact event occurs instead of taking measures before, or as, the threat emerges (i.e. in due time). Therefore, the HFSA consistently represents the opinion that supervisory toolsets must be extended also to enable prevention.
With the introduction of risk-based supervision, the HFSA’s supervisory methodology was renewed. In addition to risk-based supervision gaining ground, the crisis also highlighted the indispensability of comprehensive on-site inspections. One significant accomplishment of 2012 was that the first three-year cycle was completed, during which the HFSA carried out the comprehensive, on-site inspection of all banks, specialized credit institutions, financial groups and joint stock insurance corporations. At institutions representing the greatest significance from a systemic risk viewpoint, the HFSA performed on-site inspections more frequently than required by law, paying special attention to its home supervisor status where applicable.
In additional to prudential considerations, the HFSA is also committed to financial consumer protection, as we believe that prudential and consumer protection considerations can only be interpreted [in conjunction and] in harmony with each other. The prudential position of financial institutions must be built on consumer confidence, and vice versa: consumer confidence requires a strong system of financial institutions. The equation works both ways: one cannot build a strong financial institution by deceiving consumers, and such deception may lead to the erosion of trust in the entire intermediary system.
Financial consumer protection and supervisory actions that support it are becoming stronger and stronger worldwide and also in Hungary. The HFSA handles almost ten thousand consumer claims annually, and launches targeted and thematic inspections at its own initiative at financial organizations to reveal and correct high-risk practices that impact a wide range of consumers. In 2012, the HFSA had institutions pay back more than HuF 5.3 billion in incorrectly collected revenues to mandatory pension fund members and customers of banks. While the HFSA’s consumer protection activities aiming to resolve systemic consumer-related problems represent a significant step forward, they are not always suitable to resolve unique consumer complaints.
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Therefore, the transformation of financial arbitration in Hungary on the HFSA’s initiative constituted outstanding progress regarding the resolution of unique financial disputes. Effective July 2011, the Financial Arbitration Board (FAB) began operations as a professionally independent body within the HFSA organization. The FAB makes decisions quickly, effectively and free of charge concerning disputes arising from contracts made between consumers and financial service providers.
The establishment and operation of a financial consulting network of national coverage with professional and financial support from the HFSA is a significant accomplishment in serving financial consumers. The HFSA’s goal in setting up the consulting network was to take independent and proficient financial consumer informing services beyond the Budapest-based HFSA customer service, and to make sure that professional consultation offices that meet HFSA expectations are in place in each region.
In the HFSA’s opinion, publicity is the best and strongest tool in expanding the coverage of consumer protection. The media is the most effective way of calling the attention of consumers to the accomplishments of consumer protection activities, identified risks, potential market anomalies and players that pursue unfair practices.
The issue of foreign currency-denominated lending impacts a significant section of Hungarian society. Under the final mortgage repayment option closed at the end of February 2012, 170,000 foreign currency loans were repaid in a total amount of HuF 1,354 billion. Debtors unable to opt in to final repayment had the option to convert their foreign exchange loans to forint loans at a preferential exchange rate between April and end August 2012. Another debt repayment facilitation step in 2012 was the extension of the exchange rate barrier program, also aimed to assist foreign currency loan debtors. Debtors choosing to opt in the program are freed from currency exchange rate fluctuation risks for years; by the end of 2012, more than 110,000 pool accounts were opened by foreign currency loan holders participating in the program.
Receivables management is another problem that impacts a wide range of consumers. using the tools available to it, the HFSA took steps, issued a recommendation and proposed new regulation. The regulatory proposal was prepared by March 2012 and defined the concepts of debt purchasing and receivables management as business activities. The proposal initiated that the market entry and operation of receivables management firms should be made subject to a licence and stricter operating requirements and recommended strict rules of conduct to receivables management firms in order to eliminate misdemeanours.
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Mandatory pension fund members could report their intention to return to the social security pension system by 31 March 2012: accordingly, a total of 25,305 mandatory pension fund members returned to the state pension system, with their mandatory pension fund membership terminated on 31 May 2012. At the end of the year, the aggregate membership in the mandatory pension fund sector was slightly below 100.000.
***
The HFSA’s role is to provide for the continual and stable operation of the Hungarian financial system also amidst the financial crisis, thereby contributing to the public good. The HFSA has entirely fulfilled this role: while financial turbulence and crises evolved in a number of EU member states, in Hungary there was no need to spend public funds on stabilizing the financial sector. Owing to timely measures taken by the HFSA, the parent institutions made available sufficient capital to their daughter companies. Where the HFSA deemed that there was no realistic opportunity to restore capital position either by internal capital accumulation or by an equity raise, it exercised its right to revoke the institution’s operating licence. In the case of the Soltvadkert és Vidéke Savings Cooperative, the insolvency of the financial institution was a realistic threat, thus the only adequate tool remaining at the HFSA’s disposal to settle the situation was to revoke the cooperative’s operating licence.
The continuing crisis severely impacted Hungarian banks, insurance companies and the Hungarian capital market alike. Sector participants are still struggling with these impacts and the HFSA has had to face the negative consequence of the lengthy crisis for several years. At the same time, owing to regular and thorough supervisory efforts, the Hungarian financial intermediary system has withstood the storm unleashed by the crisis, demonstrating an extraordinary resistance to shocks. A key element of this resistance is the capital adequacy of banks, which the HFSA examines on an ongoing basis.
The HFSA operates with a view to the tasks and objectives set out in its mission statement. Significant progress and development was achieved in each area last year and the HFSA was able to accomplish targets along strategic objectives in a swiftly changing environment full of challenges. Existing supervisory values, accomplishments in supervision, accumulated supervisory knowledge and experience, together with the organic relations between professional areas and the embedding of the HFSA into the European supervision system all constitute a solid basis for optimism regarding serious future challenges to the financial system.
May 2013, Budapest
Dr. Károly SzászPresident
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ACrONyMSACI (Hpt.) � – Act CXII of 1996 on Credit Institutions and Financial
Enterprises
ACM (Tpt.) � – Act CXX of 2001 on the Capital Market
ACP � – Autorité de contrôle prudentiel (Prudential Supervisory Authority, France)
AIMFD � – Alternative Investment Fund Managers Directive
AFPSSS (Tvt.) � – Act XXIII of 2003 on Finality in payment and securities settlement systems
AIFCD (Bszt.) � – Act CXXXVIII of 2007 on Investment Firms and Commodity Dealers, and on the Regulations Governing their Activities
AIFMC (Batv.) � – Act CXCIII of 2011 on investment fund managers and collective investment forms on 1 January 2011
APR � – Annual percentage rate
ASC � – Advisory Scientific Committee (ESRB)
ATC � – Advisory Technical Committee (ESRB)
BaFin � – Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Supervision of Financial Services, Germany)
BIS � – Bank for International Settlements
BSE (BÉT) � – Budapest Stock Exchange
BUBOR � – Budapest Interbank Forint Credit Interest Rate
CAR (TMM) � – Capital Adequacy Ratio
CCP � – Central Counterparty
CDS � – Credit Default Swap
CIRC � – China Insurance Regulatory Commission
COREP � – Common Reporting (tables for reporting on capital adequacy)
CRD � – Capital Requirements Directives (European directives 2006/48/EC and 2006/49/EC on the capital requirements of credit institutions and investment enterprises)
CRR � – Capital Requirements Regulation (draft regulation on prudential capital requirements of credit institutions and investment enterprises)
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EBA � – European Banking Authority
ECB � – European Central Bank
Ecofin � – Council of Economic and Finance Ministers of the Eu
EIOPA � – European Insurance and Occupational Pensions Authority
EMIR � – European Market Infrastructure Regulation (regulation on trading repositories)
ERA � – HFSA’s electronic system for receiving authenticated data
ESA � – European Supervisory Authority
ESFS � – European System of Financial Supervisors
ESMA � – European Securities and Markets Authority
ESRB � – European Systemic Risk Board
FAB (PBT) � – Financial Arbitration Board
FIN-NET � – A financial dispute resolution network of national out-of-court complaint schemes in the European Economic Area countries
FINREP � – Financial Reporting (general financial data reporting to the supervisory authority)
FMA � – Österreichische Finanzmarktaufsicht (Financial Market Authority of Austria)
FMC (FEUVE) � – Financial management control
FSB (PST) � – Financial Stability Board
FSI � – Financial Stability Institute
HAS � – Hungarian Accounting Standards
HBA � – First Domestic Voluntary Deposit Insurance and Institution Protection Fund of Credit Institutions
HFSA (PSZÁF) � – Hungarian Financial Supervisory Authority
HFSA Act (Psztv.) � – Act CLVIII on the Hungarian Financial Supervisory Authority
IAIS � – International Association of Insurance Supervisors
ICAAP � – Internal Capital Adequacy Assessment Process
ICP � – Insurance Core Principles
IFRS � – International Financial Reporting Standards
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IIF � – Institute of International Finance
IMF � – International Monetary Fund
Insurance Act (Bit.) � – Act LX of 2003 on Insurance Institutions and the Insurance Business
IOPS � – International Organisation of Pension Supervisors
IOSCO � – International Organization of Securities Commissions
KEF � – Public Procurement and Supply Directorate General
KELER � – Central Counterparty and Depository of Hungary Co. Ltd.
KHR � – Centralized Credit Information System
KIID � – Key Investor Information Document
KOMÓD � – The HFSA’s risk-based supervision methodology
MABISZ � – Association of Hungarian Insurance Companies
MANBESZ � – Association of Hungarian Non-profit Insurance Unions
MfNE (NGM) � – Ministry for national Economy
MiFID � – Markets in Financial Instruments Directive, 2004/39/EC
MNB � – Magyar nemzeti Bank (national Bank of Hungary)
MTF � – Multilateral Trading Facility
MTPL (Kgfb) � – Motor third-party liability insurance
NSAs � – national Supervisory Authorities
OECD � – Organisation for Economic Co-operation and Development
OTIVA � – national Fund for Safeguarding Savings Cooperatives
PD � – Prospectus Directive (on the prospectus to be published when securities are offered to the public or admitted to trading) 2003/71/EC
PKN � – Central Registry of Pension, Healthcare and Voluntary Mutual Funds
PP Act (Mpt.) � – Act LXXXII of 1997 on Private Pensions and Private Pension Funds
PSA (NYESZ) � – Pension savings account
REPIVA � – Institution Protection Fund of Regional Financial Institutions
ROO (SZMSZ) � – Rules of Organization and Operation
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RTS � – Regulatory Technical Standard
SAO (ÁSZ) � – State Audit Office
SEPA � – Single Euro Payments Area
SREP � – Supervisory Review and Evaluation Process
SSM � – Single Supervisory Mechanism
T2S � – (real time gross securities settlement system)
TAKIVA � – Institution Protection Fund for Savings Cooperatives
UCITS � – undertakings for Collective Investments in Transferable Securities
UL � – unit-linked (unit-linked life insurance)
XETRA � – Exchange Electronic Trading (electronic securities trading platform)
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ThE hFSA’S STATuS ANd OpErATiNg ENvirONMENT
’One strategic objective of the HFSA is the improvement of its efficiency, performing its tasks as an independent, strong and integrated supervisory authority.’1
Main changes in the hFSA Act, expanded decree-issuing rightsParagraph (1) in Article 23 of the Fundamental Law of Hungary authorized Parliament to establish, in cardinal Acts, independent regulatory organs for fulfilling specific tasks and mandates of the executive power. Accordingly, pursuant to Article 1 of Act CLVIII of 2010 on the Hungarian Financial Supervisory Authority (HFSA Act), the Hungarian Financial Supervisory Authority (HFSA) is the autonomous regulatory organ responsible for the supervision, control and regulation of the financial intermediary system of Hungary. It is only subordinated to the power of law.
Pursuant to Paragraph (2) in Article 23 of the Fundamental Law, the leaders of independent organs are appointed by the Prime Minister or, on the Prime Minister’s proposal, by the President of the Republic for a period specified in a cardinal Act. The leader of an autonomous regulatory organ shall appoint one or more deputies. In accordance with Paragraph (2) in Article 23 of the Fundamental Act, the President of the HFSA shall report to Parliament on the HFSA’s activities on an annual basis.
Rules pertaining to the HFSA’s legislatory mandate are specified in Article T) and Paragraph (4) in Article 23 of the Fundamental Law. Pursuant to Article T) of the Fundamental Law, legislation includes Acts of Parliament, government decrees, orders by the Governor of the national Bank of Hungary, orders by the Prime Minister, ministerial decrees, orders by autonomous regulatory bodies and local governments.
Pursuant to Paragraph (4) in Article 23 of the Fundamental Law and acting within his competence specified in a cardinal Act, the President of the HFSA shall issue decrees by statutory authorisation, which may not conflict with any Act, government decree, any decree of the Prime Minister, ministerial decree or with any order of the Governor of the national Bank of Hungary. Decree designated deputies of the President of the HFSA may issue decrees on behalf of the President.1 Mottos are taken from the document, “Strategy of the Hungarian Financial Supervisory Authority”.
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Changes to the regulatory environment
Effective 28 October 2012, Act CLI of 2012 on amending certain financial laws assigned to the president of the HFSA three new rights to issue decrees:
Definition of detailed rules for reports related to severe IT system 1. problems occurring during data reporting;
Creating detailed rules for setting, collecting, managing, recording and 2. refunding the administrative services fee in the case of financial, capital and insurance market organizations, voluntary mutual funds, private pension funds and occupational pension service providers in respect of procedures within the HFSA’s purview:
licensing foundation or establishment; �
licensing mergers and separations; �
registration; �
issuing operating licences; �
reporting cross-border activities; �
establishing a branch; �
approving or amending rules; �
licensing qualifying participation; �
licensing or registration necessary for using an independent or tied �intermediary.
For setting detailed rules regarding the content, form and submission 3. of licensing and reporting forms and electronic templates to be used pursuant to Paragraph (3) of Article 50 of the HFSA Act.
Economic environment
The economic crisis that began in 2008 severely impacted the Hungarian capital market and the country’s banks and insurance companies. Financial sector participants are still struggling with its effects, and the HFSA will be dealing with the negative fall out of the prolonged crisis for years to come. As markets stagnate or shrink owing to declining demand, the risk appetite of institutions decreases, as does turnover and the size of managed portfolios. The HFSA’s operation is funded from fees paid by supervised institutions, with the major part based on capital requirements that relate to assumed risks, while the lesser part reflects managed assets and turnover. Therefore, in addition to posing prudential, market supervision and consumer protection
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risks, the crisis has also caused the HFSA’s fee revenues to fall year by year, precisely at the moment when its responsibilities and international financial obligations expanded.
These circumstances fundamentally changed the economic environment of the HFSA’s operations, presenting new challenges to the entire organization. The HFSA is not publically funded in any form at all; supervisory fees paid by industry participants are its sole source of revenue. In 2012, the HFSA’s revenues were 7.6% lower nominally than in the previous year. The biggest fee decline was suffered at the funds sector, where revenues fell by 59% from the 2011 level. Supervisory fee revenues in the capital markets sector were 11.5% lower in 2012 than in 2011. The insurance sector has also been shrinking for years, with supervisory fee revenues from this sector down by 5.3% in 2012. The largest fee revenue generator is the financial market sector, but even that sector failed to grow, with supervisory fee revenues in 2012 down 1.8% on 2011.
The effects of the crisis are lingering, which might generate an increasing number of problems in supervised sectors and may yet bring new issues to the surface. The HFSA must tackle all this with a shrinking budget, and in order to manage future challenges effectively must apply the most efficient supervisory methodology in all of its work.
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riSK-BASEd SupErviSiON, iMpACT rATiNg ANd SupErviSiON METhOdOLOgy
‘The HFSA’s objective is to develop and apply risk-based methodologies that regulate the operation of financial markets and render a high degree of flexibility, quick response capability and an adequate toolset for exercising supervision.’
Pursuant to Article 38 of the HFSA Act, the HFSA exercises ongoing supervision over organisations and persons subject to the laws specific to the financial sector. Licensing, institution supervision (prudential), consumer protection and market supervision procedures are all part of this. Ongoing supervision encompasses on-site inspections along with the verification and analysis of data derived from regular and ad-hoc provision, documents submitted to the HFSA and officially available information.
In line with European practice, the HFSA strives to utilize available resources with a view to the risk level represented by individual institutions. For many years the HFSA has followed a risk-based supervision methodology (KOMÓD) when supervising institutions. In this approach, optimum supervisory effectiveness is sought by efficiently distributing resources based on the actual legality and prudential supervision tasks.
Risk-based supervision aligns the supervision process to actual risks. In the real-life application of risk-based supervision, the supervisory resources assigned by the HFSA to the supervision of each institution or phenomenon that conveys observed and detected financial market risks are proportionate to their impact on the financial system. Proportionate supervision also means that the HFSA employs different tools for supervising institutions that may threaten the financial system in different ways. This differentiation equally entails the applied supervision methodologies and the depth, scope and intensity of supervision.
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impact rating and institution assessment
Table 1: number of impact-rated institutions per sector (YE 2012)
Description Strong impact
Above medium impact
Below medium impact
Weak impact Total
Banking groups 13 5 6 27 51
Credit institutions 10 5 32 3 50
Cooperative credit institutions
0 0 31 98 129
Financial enterprises 1 13 28 216 258
Capital market institutions
3 1 36 58 98
Payment institutions 0 0 2 3 5
Insurers 5 6 25 76 112Pension, healthcare and voluntary mutual funds
2 7 39 59 107
Total 34 37 199 540 810
The HFSA measures the risk of institutions based on their impact on the financial system (impact rating) and on the riskiness of individual institutions and groups (institution assessment).
In the first step, supervised institutions are assigned to categories based on their impact on the financial system and based on specific criteria (See Table 1). The applied indicators are aligned to the characteristics of each sector and institution type. They are mostly based on the institution’s size, number of customers and the total value of managed customer assets, but they also reflect other sector-specific characteristics of supervisory relevance.
In the next phase, the system identifies the risk level of specific institutions based on their individual assessment. Institution assessment is a periodically repeated procedure (also supported by data provision and monitoring) whereby the HFSA assigns the risk level of specific service providers to risk categories based on a number of quantitative and qualitative indicators and on the assessment of the typical risks of these institutions. The specific risks of institutions are assessed based on several factors, including the environment, business performance (financial and operational risks), products offered and a number of corporate governance aspects. The institution’s aggregate (net) risk, i.e. the level of risk impacting the entire institution is determined by the
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extent of risk mitigation achieved by risk management techniques per risk group in respect of identified risks conveyed by the institution’s activity. At the end of this process, assessed institutions are assigned to various risk categories based on the weighted average of their ratings.
Table 2: Impact rating ratios by type of institution (YE 2012)
Description High risk (%) Significant risk (%)
Moderate risk (%)
Low risk (%)
Credit institutions 37,5 33,3 29,2 0,0Cooperative credit institutions 26,2 42,9 31,0 0,0
Financial enterprises 16,9 51,5 31,5 0,0Capital market institutions 33,9 52,5 11,0 2,5
Payment institutions 25,0 43,2 29,5 2,3Insurers 13,5 51,4 29,7 5,4Pension, healthcare and voluntary mutual funds
13,0 29,6 50,0 7,4
The aggregate rating and the institution’s impact rating determine the institution’s place in the supervision matrix, expressing its riskiness and its impact on supervisory objectives. Depending on the riskiness (impact x probability) of institutions, the following supervision methods are applied in the supervision matrix:
levels of institution assessment (monitoring based, simplified, �comprehensive),
levels of SREP (simple, standard or complex), �
intensity levels of supervision (monitoring based, standard or close), �
levels of supervisory actions (legal compliance monitoring, supervision �program, measures taken on the basis of risk assessment),
monitoring (monitoring, intense monitoring, immediate intervention) � .
Table 3: Risk map – impact/probability matrix (YE 2012)
PROBABILITYLow Moderate Significant High Total
IMPA
CT
Strong impact 0,2% 2,6% 3,1% 0,7% 6,6%Above medium impact 0,2% 3,7% 4,8% 3,5% 12,2%
Below medium impact 1,1% 10,9% 15,8% 7,6% 35,4%
Weak impact 0,9% 7,0% 24,7% 13,3% 45,9%Total 2,4% 24,1% 48,4% 25,0% 100,0%Remark: the colours in the table indicate the intensity of supervision as follows:
Close supervision Standard supervision Supervision by monitoring
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The figures of the supervision matrix show the ratio of all supervised institutions in all supervised sectors belonging to close, standard or monitoring-based supervision. Based on their position in the matrix, institutions can be supervised individually or jointly.
Individually supervised institutionsInstitutions qualifying as strong-impact entities owing to their size, activity, role in sustaining financial system stability or impact on consumers are monitored by the HFSA by way of individual supervision (whereby the risks of a specific institution or group of institutions are assessed individually). Here the HFSA assigns a supervisor to the institution or group who is responsible for identifying and managing the risks of these entities.
Depending on the institution’s risk and impact rating, the intensity of individual institution supervision can be standard or close.
Standard supervision complements monitoring activities with the findings of comprehensive inspections, also involves the collection of other information about the institution and the quarterly review of simplified institution assessment tables. Standard supervision is typically applied for institutions with above average impact.
In terms of intensity, close supervision exceeds standard supervision as it also involves permanent contact keeping and the ongoing updating of the detailed institution assessment table. Close monitoring is mostly applied to strong-impact institutions. In other cases, it may be necessary owing to the risk rating of the institution.
Jointly supervised institutions The jointly supervised category includes a large number of institutions with low individual impact on the entire financial system. In respect of these institutions, the HFSA’s task is to ensure that no significant risks to the proper operation of the financial system risks can appear and accumulate in this market segment.
In the course of joint supervision, risks are screened on the basis of the combined examination institution groups with similar characteristics and risks. The primary objective of this exercise is to identify, measure and mitigate the common risks of the group. While risk-mitigating measures are set for individual institutions, their impact is aggregated through the reduced risk levels of institutions. Second, if the HFSA detects risks or exposures at several institutions but believes it may be important to manage them at the individual institution level, it publishes supervisory requirements in a recommendation or CEO letter.
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revision of methodologies
On-site inspection manualsInspection manuals collect, per main risk type, information and considerations that are fundamental for the comprehensive on-site inspection of institutions and groups belonging to a specific sector. Another purpose of these manuals is to aid standardization of supervisory inspection.
In 2012, inspection manuals compliant with current legal provisions were drafted for the on-site inspection of insurance companies, investment fund managers and healthcare, pension and voluntary mutual funds. Further, a review was performed on the inspection manuals prepared in 2011 for cooperative credit institutions, investment enterprises, banks and banking groups and for the performance of the public law tasks assigned by law to the Association of Hungarian Insurance Companies (MABISZ). upon the reviews, changes were made to the manuals based on real-life experiences with the inspection methods and work sheets set forth therein, and with a view to amended Eu and domestic laws and data reporting requirements.
iCAAp-SrEp manuals
2012 also saw the review of the internal capital adequacy assessment manuals of institutions (e.g. banks, specialised credit institutions, credit cooperatives, investment enterprises) subject to the European Capital Requirements Directive (CRD). The review covered the methodology guides to the capital requirement calculations of institutions (Internal Capital Adequacy Assessment = ICAAP) and to the related supervisory review process (SREP), encompassing the modification thereof. In the course of the review, the methodology guides were supplemented with new Eu principles and guidelines that both the supervised institutions and the HFSA had to implement. The ICAAP and SREP methodologies are also published on the HFSA website.
As a new element in the SREP methodology in 2012, the HFSA prepared an assessment methodology for institution protection systems. The assessments place institutions in strong, medium or weak protection capability categories. Recent experiences highlight the importance of institution protection systems in the credit institution sector. Today several institution protection systems are present in the sector (OTIVA, TAKIVA, REPIVA, HBA), however, their size, available safety reserves, by-laws, etc. all differ. These integration organizations have an expanding role in preventing members from sliding into a crisis or near-crisis situation and in helping the management of such situations once they occur. In the SREP exercise, the HFSA checks the institution’s membership in an integration organization and assesses the
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protective capability of the institution protection system. The HFSA is entitled to set various additional capital requirements at member institutions for specific protective capability categories upon the SREP.
KEy TArgET ArEAS OF SupErviSiON iN 2012 Pursuant to point e) in Article 21 of the HFSA Act, the HFSA president specifies the key target areas of supervisory inspections every six months. When setting the target areas, the experiences of on-site and off-site inspections must be a starting point, and consideration must be given to HFSA strategy; to the risks identified in the semi-annual HFSA risk and financial consumer protection risk reports; to the topics raised at Financial Stability Board sessions; and the work plans of Eu supervisory authorities (EBA, ESMA, EIOPA). Key inspection target areas are identified on the basis of supervisory knowledge and information available at a specific point in time. However, emphases may be shifted in the light of subsequent events and developments.
In the reporting period, key inspection target areas serve as points of reference for:
comprehensive, target and thematic inspections, �
the elaboration of methodologies, �
analyses and the elaboration of amendments to legal provisions, HFSA �recommendations and decrees, and
how to improve HFSA staff knowledge of specific topics. �
The key target areas of inspection set for the first six months of 2012 were reviewed at mid-year. After careful evaluation, the president of the HFSA mostly designated the same risks and threats as key areas for the second half of the year.
Key target areas of supervision in 2012
MOnEY MARKET SECTOR
Capital1.
The lingering effects of the crisis have had a significant impact on the capital position of financial institutions. Therefore, owing to low internal capital accumulation rates caused by low profitability and the need for equity raises at certain institutions, the HFSA has been paying special
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attention to the capital position of institutions and the quality of capital elements. The purpose of this special treatment at institution, group and sector level is to identify operational risks that relate to capital position i.e. to detect unfavourable trends in a timely manner, and to deal with them swiftly and correctly. The HFSA’s approach and response in this area made a significant contribution to the solid capital adequacy of Hungarian institutions, which is considered secure even in international comparison.
Liquidity2.
The experiences gained during the crisis highlighted the key importance of liquidity. Recognizing this, deposit and balance sheet coverage indicators were launched at the HFSA’s initiative from the middle of January 2012.
Adequate liquidity is a priority also at Eu level. Adherence to the Basel III regime is tighter now and new mandatory liquidity indicators will be introduced: the liquidity coverage ratio (LCR) effective 1 January 2015, and the net stable funding ratio effective 1 January 2018 (NFSR). In this respect, Hungarian legislation is ahead of European, as the HFSA already required financial institutions operating in Hungary to apply the new indicators.
Credit risk3.
The crisis also had a significant impact on credit institution customers. Credit portfolios deteriorated significantly in recent years, thus the HFSA paid special attention to credit risk trends, focusing on restructured receivables and work-out activities during inspections. The prudential management of credit risk, in particular the adequacy of provisioning in the light of deteriorating portfolios, growing non-performing loan ratios and the related capital requirement of credit risk was scrutinized during both comprehensive inspections and regular (annual) SREP reviews.
The management of credit risk was also a focus item for consumer protection. In H1 2012, the HFSA scrutinized the compliance of final repayment plans offered by credit institutions for retail foreign exchange-based mortgages. Further, through 2012, the HFSA closely inspected the forced collection and receivables management activities of financial enterprises, their compliance with the requirements for transparent pricing set out in the ACI and with the statutory APR cap, and the practices of institutions regarding the new KHR inventory system.
Business strategy4.
Recent changes in the international, Eu and domestic economic environment had a significant impact on Hungarian credit institutions. Owners revised existing medium and long-term business strategies and were compelled to specify the changes to the HFSA. This re-drafting of former business models
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can be regarded as one of the responses of financial market participants to the crisis. Thus the HFSA must know these responses in detail as they may convey risks.
Supervisory inspections and prudential meetings held with the senior managers of supervised institutions indicated significant strategy uncertainties; credit institutions did, or will, reshape and rethink their approach. Therefore, the HFSA monitored changes to credit institution strategies in 2012, via on-site and off-site supervision.
Payments5.
In February 2012, frequent hacker attacks and frauds, and the bankruptcy of Malév Hungarian Airlines called for consumer protection inspections of service provider conduct concerning banking cards. In addition, customer informing prior to payment service contract signing also became an inspection focus. Further, compliance with the new four-hour limit for electronic transfers that entered into effect on 2 July 2012 was also subjected to intensified supervisory scrutiny.
CAPITAL MARKET SECTOR
MiFID1. 2 compliance
Promoting compliance with the Eu Markets in Financial Instruments Directive (MiFID) was set as a key supervisory inspection area for 2012. The HFSA closely examined the standardized application and control of MiFID regulations and MiFID-related recommendations.
Inspection of the operation of key institutions2.
In order to provide for the uninterrupted operation of the capital market and to sustain and strengthen trust, the HFSA paid particular attention to strategic issues pertaining to the operation of the BSE and the KELER group in 2012. As part of this approach, the HFSA closely cooperated with partner authorities, partner supervisory authorities and performed in-depth analysis.
Application of the KIID3. 3 (Key Investor Information Documentum) in domestic practice
The KIID was elaborated by the European Securities and Markets Authority (ESMA) to help uCITS4 directive implementation. Its application in domestic practice, i.e. proper investor informing, received special supervisory attention from a consumer protection viewpoint.
2 Markets in Financial Instruments Directive (MiFID), encompassing the following topics: obligation to obtain preliminary information on customers; order fulfilment in the most favourable way for the customer; conflict of interest, incentives.3 KIID (Key Investor Information Document): A brief, standardized pre-contract information document used in Eu Member States.
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Online sales channels for investment products and other retail 4. savings products
Mapping and inspecting online sales channels for investment products and other retail savings offerings was also a key target area of consumer protection inspections in 2012 as this area conveys special risks compared to traditional sales channels. The HFSA inspected advertising activities at the institutions concerned and sought to uncover potentially deceptive and aggressive commercial practices.
Inspection of issuance activities5.
Of the mandatory information elements that public issuers must provide customers with on a regular basis, the annual report is key (encompassing the audited financial statements, the auditor’s report, the management’s liability acceptance statement, and the presentation of the company’s business environment and future prospects). The HFSA’s objective is to ensure that the required reports are published in due time and that they comply with all content-related and accounting framework requirements. On multiple occasions, our inspections found issuers failed to publish their annual reports by the statutory deadline or with contents required by law. As part of its market supervision activities, the HFSA paid special attention to the compliance of extraordinary information provision.
InSuRAnCE SECTOR
Capital position and profitability1.
In the insurance sector, capital position and profitability were focus items for the HFSA in 2012. The main reason was the consistent erosion of profitability at insurance companies that may have an adverse impact on the institutions’ capital position through balance sheet earnings. Owing to rising capital and revenue risk levels at institutions, special attention was paid to these items during on-site and off-site inspections.
Motor third party liability (MTPL) insurance and the related 2. activities of MABISZ
Motor third party liability insurance offerings have been a key inspection target area for the HFSA for many years. MABISZ, the Association of Hungarian Insurance Companies, is an institution with a public role. However, its activities are not regulated properly in laws, thus the HFSA considers the supervision of MABISZ a priority. In 2012, the HFSA applied a new methodology for inspecting key areas such as the Indemnification Account, the Indemnification Fund and claim history management and maintenance. The methodology was developed for inspecting the MTPL-related activities of MABISZ and is a new prudential approach tool.
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Consumer protection inspections focused on payment notices sent out to customers and on cancellation notification practices. Additional focus items included the MTPL rate advertisements and problems in relation to change of insurance companies.
Unit-linked life insurance products, life insurance packaged with 3. loan products
The management of life insurance offerings linked to an investment unit (unit-linked products, uL), the analysis of the related investment policies and the investigation of life insurance packaged with loan products regarding the potential impact of final mortgage repayment were selected as key inspection target areas by the HFSA. The reason is that prior inspections found the investment policies of unit-linked asset funds to be cause for concern from a prudential and a consumer protection viewpoint.
Insurance branches4. 4
Insurance branches called for special attention owing to the size of the portfolios they manage in certain sectors and the significant role of certain insurance branches in specific sub-markets.
Accident tax5.
With a view to consumer protection considerations, the HFSA closely monitored the compliance of information provided to customers regarding the accident tax introduced effective 1 January 2012, its extent and levying, i.e. the HFSA examined if customers were informed appropriately and in due time about the new obligation, the amount payable and applicable conditions.
PEnSIOn, HEALTHCARE AnD VOLunTARY MuTuAL FunDS SECTOR
Use of technical and operational reserves1.
In the funds sector, on inspection focus for the HFSA in 2012 was the use of technical and operational reserves as part of liquidity management. Operating expenditures of funds could only be financed from operating revenues, and the latter are decreasing consistently owing to the changing market and regulatory environment.
Investment activities2.
The HFSA considered the inspection of funds sector investment activities a key priority in 2012, as the objective of funds is to make the highest possible service payments while they can only finance those from effective investment activities. A key focus of these inspections is to keep compliance with legal and prudential requirements under ongoing supervision.
4 An insurance company or reinsurer seated in another country that pursues activities in Hungary via a branch. The Hungarian branch of an insurer or reinsurer based in the EEC is supervised by the home country supervisory authority.
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Balance and membership fee statements3.
As part of the comprehensive inspection of funds in 2012, the HFSA paid special attention to balance and membership fee statements in relation to services, the legal compliance of payments and the use of fund savings.
TARGET AREAS OVERARCHInG MuLTIPLE SECTORS – SERVICES TO PEOPLE WITH DISABILITIES
Through 2012, the HFSA considered it a key focus area to scrutinize the conduct of financial organizations when providing service to people with disabilities. The protection of the interests of people with disabilities is a basic responsibility of the HFSA assigned to it by the HFSA act. The verification of compliance with all legal provisions pertaining to consumer rights set out in financial sector laws and implementation decrees is part of this consumer protection mandate. The purpose here is to eliminate any potential disadvantages deriving from a person’s disabilities and to ensure equal treatment and equal opportunities. It is not sufficient to apply equal treatment when providing service to people with disabilities. Actual equal opportunities can only be ensured if additional services are also provided. An HFSA recommendation was issued on this topic in 2012, aiming to enforce the rights of people with disabilities in the widest possible context, encompassing a high level of access to services and the provision of additional services that actually ensure equal opportunity and to remove barriers as soon as possible in a targeted manner.
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SupErviSiON OF iNSTiTuTiONS‘Strengthening the role of proactive, risk-based supervision; monitoring the risks, risk management and stress resistance of supervised institutions in addition to compliance are strategic objectives of the HFSA.’
The HFSA carries out continual supervision of organizations and persons subject to laws specific to the financial sector. As part of this continual supervision, the HFSA performs prudential supervision, market supervision, and employs the toolsets of consumer protection (off-site and on-site) to monitor the activities and processes of money and capital market institutions, pension, healthcare and voluntary mutual funds, insurers (financial organizations), and the so-called financial infrastructure institutions (regulated market, central counterparty, central repository). The purpose of continual supervision is to detect risks in a timely manner and to manage them appropriately.
In the case of off-site inspections, the means of continual supervision include the monitoring, processing and analysis of available information, ongoing contact keeping with the institution, harmonization and other communication related to applications and announcements. On-site supervision comprises the execution of inspections. Information obtained in the course of continual supervision is incorporated into risk assessment, and risk assessment and institution assessment provide feedback to continual supervision. All this determines the method and intensity of the institution’s treatment by the HFSA, along with the inspection schedule and the areas of focus of individual inspections.
In recent years, the HFSA’s method and practice of the supervision of institutions transformed markedly, involving the organizational separation of on-site and off-site supervision. Subsequent experiences and accomplishments proved organizational separation to be the right professional decision.
Further, methodology developments were carried out regarding both on-site and off-site supervision in recent years and changes were made to the organization of work. The purpose of these changes was to exploit additional benefits of transformation, to establish sound cooperation between the two areas, and to improve the efficiency of supervision.
When carrying out comprehensive on-site inspections at financial institutions in various sectors, the HFSA always examines the compliance of activities aimed at preventing terrorism financing and money laundering. Such examination is performed using sector-specific methodologies that are revised on an annual basis. In cases when immediate action is required, the HFSA launches
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targeted inspections. When more than one sector or institution is involved, the HFSA initiates a thematic inspection.
Off-site supervision
The main objective of off-site supervision is to enable the HFSA to monitor on an ongoing basis the risks of supervised institutions and to take proactive action if needed to ensure their secure operation. This monitoring is based on data provision by institutions, prudential meetings with the managers of supervised institutions, expert meetings and other information.
In order to monitor the activities and risks of supervised institutions continually, a thorough analysis is drafted at regular intervals in which supervisory areas assess, in a defined framework, the individual sectors, activities and the typical key risks of strong-impact institutions along with the extent and trends of these risks, other related information, market news and information received from the sector.
Considering that in a quickly changing market environment, day-to-day monitoring and risk assessment based on data provision from supervised institutions is of increased importance, the HFSA pays special attention to the structure of supervisory reports, to updating their content and to the accuracy and quality of submitted data reports. In its consolidated supervision work, the HFSA made significant efforts to have supervised institutions convert to IFRS-compliant reporting instead of applying Hungarian accounting standards (HAS) when completing capital adequacy reporting (COREP) tables.
Harmonization with the representatives of new market entrants waiting licensing continues to be an integral part of off-site supervision, as are the various forms of contact with already operating institutions that are either strong-impact entities or convey risks of some sort. Regular and ad-hoc prudential meetings, discussions with top management, legal representatives and auditors also belong here. In addition to enabling the review of the current processes, risks, revenue and capital position of the financial institution concerned, prudential meetings also provide an opportunity to discuss current issues (e.g. the participation of banks and credit institutions in the home protection program).
An important and recurring element of the supervision of institutions is the assessment of rules, strategies, procedures and methodologies pertaining to the internal governance, risk management and capital adequacy of financial sector institutions. The purpose of this assessment is to decide whether the institution’s own funds provides sufficient coverage for the risks run and whether it enables the reliable management of these risks.
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In the course of continual supervision, several questions were again raised in 2012 about the interpretation of legal provisions. These questions formed the basis of the HFSA’s proposed amendments to laws, recommendations, official rulings and methodology.
Supervisory duties are becoming increasingly international. Tasks deriving from Eu and other international cooperation are all part of this trend. They include supervision of institutions with a Hungarian parent company and international subsidiaries; supervision of subsidiaries subject to consolidated supervision by a foreign authority along Hungarian regulations; supervision of the Hungarian branch office of foreign institutions and that of cross-border activities; regular contact keeping with partner authorities as part of home-host supervisory cooperation and in line with applicable Eu regulation. Concerning the latter, personal meetings, information exchange and professional consultations take place in supervisory college sessions.5
Off-site supervision of money market institutions
In addition to monitoring continually the actual capital position of banking groups, the HFSA regularly analysed the changes of banking portfolios and profitability, and elements of strategy change by foreign owners. In 2012, so-called prudential meetings were held with the leaders of large banks on two occasions. Based on those meetings, the HFSA gained a comprehensive picture of the current position, measures and future expectations of banks.
In order to provide for an appropriate level of liquidity at banks in relation to the significant weakening of the forint, the HFSA scrutinized the liquidity position of banks on a daily basis. When risks were identified, the HFSA called the attention of the bank’s leaders to take action to sustain a secure liquidity position. With a few exceptions, all small and medium banks fulfilled the minimum requirement (65%) set for the FX Financing Adequacy Indicator (DMM) introduced on 1 July 2012. The HFSA took measures against institutions that failed to comply with the decree and required them to report data on a daily basis.
Monitoring of the usage of the “Home protection” package was also a key task in 2012, along with the impact analysis of measures such as the exchange rate barrier, the application of forced sales quotas for housing properties, etc. The HFSA analysed in detail the impact of final mortgage repayment on the capital, liquidity and profitability position of credit institutions, in particular that of banking groups.
5 Supervisory colleges of financial groups operating in multiple countries are institutions of cooperation between national supervisory authorities. Their purpose is to promote the efficient supervision of institutions operating in several countries.
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In 2012, the HFSA paid special attention to strengthening the institution protection and integration cooperation that evolved among credit cooperatives. At the middle of the year, the HFSA published its non-binding requirements regarding institution protection systems, then evaluated institution protection funds. The results of this evaluation were published on the HFSA website then presented to all stakeholders at consultation sessions. Finally the HFSA began to enforce rating-based capital requirements on the member institutions of these funds.
The experiences gained through the inspection of credit cooperatives were shared by the HFSA at regular conferences for institutions and in professional circular emails. With these efforts, the HFSA’s objective was to prevent the formation of risks and to disseminate best practices.
Off-site supervision of pension, healthcare and voluntary mutual fundsOf the tasks carried out under the supervision of the funds sector in 2012, items that deserve special mention include the assessment of quarterly reports, the analysis of time deposits of healthcare funds and the examination of compliance with HFSA resolutions issued after the inspection of the direct and indirect costs of private pension fund investments into investment units.
In the assessment of quarterly reports, focus items included (1) the examination of the liquidity of operating activities, i.e. are funds able to finance their day-to-day operating expenditures from accumulated reserves and the amounts deducted from member payments for operating and liquidity reserves, (2) the examination of gaps between the yield rate and the reference yield. As part of the latter, whenever the deviation from the investment returns to be achieved by the fund (the reference rate) reached a certain level, we requested an explanation and information on what measures the fund intended to take (e.g. change of investment policy, modification of the reference rate, change of asset manager) to ensure harmony between targets and actual results. The last focus item was (3) the assessment of the continuity of funds operations.
After reviewing quarterly reports, the HFSA sent several prudential letters to funds in 2012. In the case of two funds, the HFSA ordered extraordinary data reporting. Amidst liquidity difficulties around operating activities, more frequent data reports seemed to help prevent the financing of operating expenses from technical reserves, i.e. from the individual accounts of members.
As part of continual supervision, the HFSA reviewed the changes of healthcare fund investments and analysed whether interest received was in line with
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the overall interest rate environment in the case of funds with time deposits exceeding HuF 200 million.
This analysis encompassed nine funds and the HFSA found that the interest rates on time deposits were not below the market level and were above the inflation rate. However, the HFSA believes one fund kept an unreasonably large amount of cash in a current account sight deposit, thus realizing only low interest income.
Based on analysis findings, the HFSA’s senior managers issued CEO letters, calling on funds to seek the most efficient, highest return investment options for their long-term assets in order to increase future service payments, to strive for unique agreements regarding time deposits, to lay down asset management rules in an investment policy and to prepare a liquidity plan as part of liquidity management efforts.
Off-site supervision of capital market institutionsIn 2012, concept-level changes continued at key capital market institutions (Budapest Stock Exchange, KELER Central Clearing House and Repository, KELER Central Counterparty). The HFSA monitored these changes and made the supervision of these institutions a priority. At the BSE, preparations for the planned conversion to the XETRA trading system are a key task. These preparations are underway.
Key inspections at funds
An inspection was launched in 2010, scrutinizing mandatory pension fund investments into indirect investment instruments (investment units). At three funds, the inspection was closed in 2012. The HFSA examined whether asset managers could have implemented these investments at a lower cost for fund members by buying the same instruments directly instead of buying investment fund units.
Two mandatory pension funds fulfilled the HFSA resolution and demanded their asset managers pay back the calculated amount while in the case of another pension fund such repayment by the asset manager took place after the second-degree ruling of the Curia (rejecting the fund’s appeal). As a consequence of the HFSA inspection, nearly HuF 5 billion was paid back by three fund managers to the pension funds. The beneficiary pension funds distributed this amount among members and either paid out the surplus as an extra amount over the return-guaranteed capital, or transferred it to the Pension Reform and Debt Reduction Fund as part of member receivables. The HFSA examined the settlement calculations and found them correct. In addition, the HFSA imposed supervisory fines totalling to HUF 300 million.
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At KELER, preparations for joining the T2S6 securities and account management system and for reaching compliance with EMIR7 are important elements of the strategy. As part of transforming the group’s operation, clearing activities were integrated into KELER Central Counterparty Co. Ltd. effective 1 January 2013.
Off-site supervision of insurersOwing to the financial crisis, risks that threaten the liquidity of institutions intensified, calling for the reworking of supervisory methodologies (data reporting, indicators) that serve to measure and assess these risks. The new data reporting table launched in Q1 2012 and the combined liquidity indicator can be used to draw conclusions regarding the future, capturing the expectations of insurers on growth, expected capital outflows and the like.
In some cases, the intensification of factors that impacted adversely the profitability and capital position of insurers (capital reallocation within the group, decreasing sales and premium revenues) called for the closer moni-toring of intra-group transactions, the ordering of extraordinary data reports and the application of customized capital models that can forecast the capital adequacy of insurers. Regarding prudential supervision at the institution level, the changes of business policy and strategy of insurers remained focus items, along with the mapping and assessment of the related risks.
The number and weight of the Hungarian branches of insurers seated in another Eu member state is growing continually and in some segments their role became decisive. Therefore, the HFSA rendered special importance to monitoring the volume and risks of their activities and to inspecting the quality of customer servicing. As a consequence, the HFSA ordered ad hoc data reporting from branches and initiated amendments to laws on several occasions.
As part of preparation for the Eu directive (Solvency II) that re-regulates the capital requirement of insurers, the elaboration of supervisory methodologies began (e.g. application manual, SRP manual), as the new directive introduces several new topics that did not exist in former directives and that are subject to supervisory approval. By the time Solvency II enters into effect (the date of which is unknown for the time being), member state authorities and thus the HFSA must be prepared for receiving all new licensing applications and to carry out the licensing procedures.6 T2S (TARGET2-Securities = joint real-time gross securities settlement system) eliminates borders in securities transactions using a central securities account management and securities settlement platform. It is expected that by the middle of 2016 transactions involving securities issued in Hungary will be settled on the securities side through the joint securities settlement system.7 EMIR (the regulation on trading data repositories) was called to existence mainly by the financial crisis. Its primary purpose is to increase transparency on the OTC derivatives market and to ensure the secure and reliable operation of central counterparties.
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As in previous years, the HFSA performed a quantitative impact study (QIS) in 2012, this time for the 1 December 2011 date (QIS2011). The main purpose of the study was to help understand the draft data reporting tables to be applied in the Solvency II system and to assess the impact of certain new regulatory elements. 29 domestic insurers participated in the QIS exercise. The HFSA held consultations with the concerned parties about results, the summary of which is available on the HFSA website.
In 2012, the HFSA elaborated its standardized supervision concept of insurance intermediaries. As a consequence the organizational framework for supervising insurance intermediaries changed effective 15 January 2013, when this task was transferred to the newly established Financial Enterprises and Intermediaries Supervision Department.
On-site supervision
Findings of on-site inspectionsA dedicated department was established in September 2010 to carry out on-site inspections at financial market institutions. The Credit Institutions and Financial Enterprises Inspection Department is responsible for the on-site inspection of banks, banking groups, credit cooperatives and financial enterprises. In the case of insurance, capital market and fund sector institutions, different units of the department perform on-site and off-site supervision.
Parallel to organizational changes, the procedure of supervisory inspections and the planning mechanism of the Supervisory Directorate were transformed as well, with additional resources assigned to on-site inspections.
In 2012, the inspections were carried out based on the implemented scheduling system, with daily plans broken down by department.
When preparing inspection plans, the HFSA takes the following into account:
medium-term cycle plan of supervisory inspections (according to the �HFSA Act, a comprehensive inspection with an on-site element must be carried out at supervised institutions every 3-5 years),
available resources, �
the risk rating of institutions and the corresponding resource and time �requirement of the inspection,
the scorecard system developed for deciding eligibility to a specific �group of inspected institutions; the system also scrutinizes the unique characteristics of the institution.
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Based on last year’s findings, in 2012 the HFSA continued with the practice of holding consultations with the auditors chosen by institutions. This aided preparation for the inspections.
Table 4: Inspection statistics
Number of on-site inspections
2011 actual 2012 actual 2013 plancompr. other compr. other compr. other
Large banks 4 2+9* 4 7+10* 4 9+10*Small and medium banks 11 0 5 2 8 2
Credit cooperatives 30 1 33 2 38 6Joint stock insurance companies
12 0 10 1 10 0
Insurance associations 0 1 9 2 10 0
Pension, healthcare and voluntary mutual funds
8 43 21 23 30 0
Capital market players 14 6 13 1 18 1
Total 79 62 95 48 118 29
* SREP reviews
In the middle of 2012, the mandatory three-year inspection cycle required by law for banks, specialized credit institutions, joint stock insurance companies, reinsurers and financial groups came to an end. At the same time, the new inspection period lasting until 2015 began. The HFSA fully completed the inspection of institutions assigned to the three-year cycle. At institutions that represent greater systemic risk significance, the HFSA carried out on-site inspections more frequently than required by law. The inspection of institutions covered by the five-year cycle will end in 2014.
Chart 1: number of comprehensive inspections
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At capital market participants, we inspected investment service activities (as part of comprehensive inspections) at credit institutions that are licensed to pursue such activities.
Measures concluding inspectionsIn 2012, 107 inspections were concluded, 25 of which were started in 2011. Of concluded inspections, 27 ended with a fine imposed on the institution and 5 with a fine imposed on specific persons. A personal fine was imposed when an executive officer was found personally responsible for the formation of a high risk at the inspected institution.
The amount of fines imposed was as follows:
Funds sector: no institution fines were imposed by the HFSA �
Insurance sector: HUF 18 million in institution fines �
Capital markets sector: HUF 20 million in institution fines �
Money market sector: HUF 19 million in institution fines, HUF 27.3 �million in personal fines.
Chart 2: number of resolutions issued upon inspections by the Supervisory Directorate
Money market sector inspectionsIn 2012 in the money market sector, comprehensive inspections were carried out at five banking groups, including 23 institutions belonging to these groups, at four small and medium banks and 33 credit cooperatives. Follow-up
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and targeted inspections were held at two banking groups, including nine institutions belonging to these groups, at two small and medium banks and at two credit cooperatives.The scope of these comprehensive inspections included the main activities of the institutions and their key risks. During the inspections, special attention was paid to the compliance of managing non-performing loans, the portfolio of which augmented owing to the crisis, the adequacy of provisioning, restructuring practices, the proper management of liquidity risks, compliance with accounting and data reporting requirements and capital position trends. The inspections helped to improve risk management and risk analysis at the institutions. In the course of the inspections, the HFSA called the attention of institutions to monitoring their liquidity position on an ongoing basis and to prepare and maintain plans for unexpected situations. At credit cooperatives, inspection focus was extended to strengthening the governance and control role of owners; to requiring compliance with membership-related legal provisions consistently; and to internal control systems (risk management, internal audit and compliance activities) and their strengthening in line with HFSA requirements. From an accounting viewpoint, special attention was paid to compliance regarding pending interest settlements and thus to detecting items not allowed to be charged as profits. Another control focus was the availability of analytic accounts that served as a basis for key figures in data reports submitted to the HFSA.On 27 June 2012, the uK Financial Services Authority (FSA) and the uSA Commodity Futures Trading Commission (CFTC) published their report on the investigation carried out at Barclays Bank concerning the adverse influencing of EURIBOR and LIBOR interest rates regarding daily subscriptions for various foreign currencies (especially uSD) and of various maturities. The investigations found that Barclays acted inappropriately on numerous occasions when setting LIBOR and EuRIBOR subscriptions and the manipulation of the reference interest rate was also suspected. These investigations directed attention all around the world to the vulnerability of interbank interest rate setting mechanisms. In response, the HFSA launched inspections at 17 BuBOR-subscriber institutions. Regarding BuBOR subscription practices, the purpose of the prudential thematic inspection at banks participating in subscription was to assess internal procedures, the level of their documentation and the established control environment. The HFSA’s statistical analysis proved that no wilful diversion (of the interest rate) took place in the past, as BuBOR smoothly followed the central bank interest rate trend. However, the inspection also found that the process that shapes BUBOR was not and is still not sufficiently regulated at banks. Further, the process was not integrated into risk management systems and control was also lacking. The HFSA’s thematic inspection was closed at each institution in early 2013, with resolutions not setting out any measures. The HFSA outlined proposals and non-binding requirements in a CEO letter to the management of institutions on how to strengthen the subscription control environment.
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Key inspections of 2012Last year, money market inspections focused on the adequacy of managing portfolios that deteriorated owing to the crisis and on the adequacy of provisioning. The inspections revealed that some credit institutions applied restructuring instead of performing a realistic assessment of debt repayment probabilities and harmonizing the steps with customers to promote repayment. By doing so, these institutions sometimes covered up the true magnitude of problems and put their asset quality in a better light than the reality. After a targeted inspection at a savings cooperative, the HFSA found that the series of restructuring steps (that were sometimes carried out without a customer request or even without customers knowing about it) led to a situation where neither the reserves set up for non-performing loans nor interest rate revenues reflected a realistic picture, as pending items were not put in pending status. After the real loss was identified, the HFSA revoked the institution’s operating license.As the financial position of enterprises deteriorated and the number of loan eligible customers decreased, the focus of credit institution activities shifted from lending to receivables management. However, we found just the opposite trends at certain credit institutions upon supervisory inspections. These institutions believe that the way to break out from the crisis is to expand lending, i.e. to acquire customers that other credit institutions refuse to finance and to buy and collect low quality debts. Our inspection findings show that this business model significantly raises the risks associated with the assets of these institutions. Therefore, in the course of on-site inspections, we paid special attention to the risk running practices of institutions engaged in extensive lending; to the solvency and payment willingness of their customers; the financial rationale of these decisions; the rating of portfolio elements; and the adequacy of provisioning. The HFSA took measures in every case when it detected the breaching of risk assumption or risk management rules and when it encountered practices aimed at covering up portfolio deterioration. While inspecting savings cooperatives in 2012, the HFSA again came across a type of internal fraud that management control, built-in process controls and internal audit failed to detect. We found that the credit institution concerned, failed to pay sufficient attention to managing centrally the balance statements to be sent to customers and to investigating suspicious and potentially fraudulent cases where the statements were returned as “addressee unknown”. The HFSA already sent out proposals in CEO letters to credit institutions based on thematic inspections carried out in 2010. Further, the HFSA’s management decided that the signs suggesting fraud would be subjected to deeper and more extensive scrutiny upon on-site inspections. A decision was made that the HFSA would apply stricter sanctions in the future in order to eliminate control discrepancies in the fraud prevention activities of cooperative credit institutions.
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On-site supervision of pension, healthcare and voluntary mutual funds
On-site inspections carried out in the funds sector in 2012 can be split into two parts. In the first half of the year, targeted inspections continued at mandatory pension funds in relation to the pension reform that impacted those funds. As part of phase III of those reviews, thirteen mandatory pension funds were inspected. Then in the second half of the year inspections began at voluntary mutual funds to keep the five-year inspection period.
In phase III of the targeted inspection of mandatory pension funds, the HFSA studied the underlying basic documents of tens of thousands of returns and payments in order to verify whether the return-guaranteed capital and the excess amount payable to members was calculated correctly. The inspection also reviewed whether amounts payable on top of the return-guaranteed capital were paid by the deadline and in accordance with the declarations of members returning to the state social security (pension) system. The inspections found that the vast majority of payable amounts were calculated and paid correctly and to the right beneficiary. The related settlement statements were also found to be correct. At some funds the HFSA detected problems deriving from administrative errors and, via resolutions, required funds to resolve the issues. The funds concerned fully complied with the resolutions and implemented the measures set therein.
Comprehensive inspections of voluntary mutual funds (pension funds, healthcare funds, self-support funds) had several key areas of focus, including the liquidity of operating activities; the availability of documentation for charged expenses; settlement with members by the deadline and with the correct amount; correctness of data reports submitted to the HFSA; and verifiability of these reports in general ledgers and analytic records. In order to improve the efficiency of inspections, the HFSA held consultations with the fund auditor prior to each comprehensive inspection.
Capital market inspections
In the course of off-site supervision and inspections held at institutions engaged in investment services, the HFSA paid special attention to how such institutions manage risks revealed in the thematic analysis of high-leverage8 dealings. The measures taken by institutions to ensure and control the standardized application of MiFID requirements were also the focus of inspections. Further, the HFSA concentrated on the requirements aimed to protect customer receivables and compliance with requirements about
8 Leverage means that using a deposit amount (margin) set by service providers, deals can be made where the transaction value can be as high as one hundred times the invested amount. The larger the leverage, the greater is the risk of losing the invested amount.
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informing customers. Mapping and mitigating risks associated with third party contributors (account and deposit managers) of service providers was a priority for the HFSA, along with the inspection of institutional deposit management at credit institutions.
Findings of on-site supervision of insurersComprehensive inspections focused partly on corporate governance issues and partly on inventory systems, registries, IT security and the verifiability of data reports submitted to the HFSA. In addition, depending on the impact rating of supervised institutions and the extent of specified risks, the HFSA examined insurance, liquidity and market risks as part of comprehensive
Thematic analysis in relation to deposit management
Based on a survey involving interviews and extraordinary data reports and comprehensive inspections carried out in 2011 and H1 2012, the HFSA performed a thematic analysis of the tasks of deposit managers and their deposit management practices. As part of this effort, the HFSA assessed the additional services provided by deposit managers, such as asset value calculation, investment limit monitoring, management of corporate events, distant trading settlements. The HFSA also assessed the level of IT support behind these services, the elaboration of conditions, the use of deposit management subcontractors and potential risks associated with service provision. The purpose of the survey was to further specify the HFSA’s former recommendation on deposit management. Thanks to the submitted comments and proposals and consultations with the parties concerned, the HFSA’s recommendation on deposit management has become more up to date.
Third party deposit managers – thematic analysis
The case of foreign investment service providers that went bankrupt recently (e.g. MF Global uK Ltd., WorldSpreads Ltd. and FXdirekt Bank AG) illustrates well that investment service providers operating in Hungary have significant direct counterparty risk exposure, and their customers have indirect exposure to third party deposit managers. Therefore, the HFSA performed a survey in 2012 about third party account managers used by specific investment service providers, regarding their own and customer-owned financial instruments and assets held with them.
After processing the survey data, the HFSA called attention to risks in a CEO letter and in a public information document. In addition, the HFSA reviewed effective supervisory regulation documents (Recommendation no. 9/2012, Methodology guide no. 1/2012) that set out relevant non-binding requirements regarding partners used by certain financial organizations.
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inspections, and also focused on capital adequacy and profitability risks. Regarding operational risks, the inspections focused on mandatory motor third-party liability insurance and unit-linked life insurance as areas of key importance. Experiences of the latter in the first three-year inspection cycle are summarized in the HFSA’s prudential and consumer protection recommendation on unit-linked offerings.
IT inspections at supervised institutionsThe legal compliance of IT security in the financial sector is supervised by the HFSA’s IT Supervision Department. In addition to core inspection duties, this department also participates in licensing and professional assessment tasks. In 2012, the HFSA’s staff carried out 82 on-site inspections with an IT-related purpose (money market: 56, insurance: 9, capital market: 8, pension, healthcare and voluntary mutual funds: 9).
A new element in the HFSA’s activities last year was the focused inspection of controls regarding outsourcing, in particular IT cloud services. In July 2012, the HFSA issued a CEO letter outlining the risk management guidelines of social and public cloud services. In the course of money market inspections, the HFSA paid special attention to improving the readiness of banks to mange extraordinary situations. According to findings, the guiding principles set out in the methodology guide issued in 2011 about the security of online banking were integrated into the day-to-day practices of institutions. In the credit cooperative sector, the gradual integration of IT applications can be observed. In relation to this trend, the HFSA paid special attention to elevating the security level of applications.
Key inspections of 2012
The HFSA performed three key targeted inspections: one at a multiple agent, one at MABISZ, and the very first targeted inspection in the history of branch supervision. The latter was carried out at the Hungarian branch of a Romanian insurer in cross-border cooperation with the Romanian supervisory authority. In line with the general approach to MTPL inspections, the inspection of MABISZ focused on the fulfilment of tasks set out in applicable legal provisions, i.e. on the management of the Indemnification Account and the Indemnification Fund and the operation of the Information Center and the National Office.
Based on inspection findings, the HFSA limited temporarily the dispositional authority of one institution over its technical reserves and own funds. In addition to inspections carried out at joint stock insurance corporations, the HFSA launched comprehensive inspections at small agricultural insurance associations as well in 2012.
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Findings of SrEp exercises Pursuant to its obligations set out in the ACI and the AIFCD, the HFSA regularly assesses the capital position of supervised institutions and their internal capital adequacy assessment process (ICAAP) at least once per year. The Supervisory Review and Evaluation Process (SREP) comprises the inspection and assessment of the risk profile and capital position of credit institutions and investment enterprises by the supervisory authority. In the Eu, the application of SREP is a mandatory requirement and has become a recognized supervisory tool. It has proved to be useful in ensuring capital adequacy at institutions and in revealing deficiencies in risk management.
In 2012, the total additional SREP capital required at sector level was HuF 667.3 billion. Most of this amount resulted from the revision of credit risk calculations of banks, of which the additional capital requirement set for large banks was HuF 621.4 billion. In the case of large banks, the additional capital requirement set upon the ICAAP-SREP process was an average of 37.5% of the regulatory minimum requirement. Consequently, the average minimum CAR requirement resulting from SREP exercises was 11%. This substantially exceeds the 2011 minimum CAR level of 9.6%. The entire growth stems from the supervisory review. Thus the HFSA set an additional capital requirement that was six times the capital requirement set by banks for themselves in the ICAAP process. In 2011, the same gap was barely twofold.
In the case of the 20 medium and small banks and the three quasi credit institution financial enterprises, the HFSA set an average additional capital requirement of 44.5% compared to the regulatory capital requirement in the SREP process.
In 2012, the HFSA examined the internal capital adequacy assessment procedures of credit institutions mostly off-site, and in 26 cases as part of comprehensive inspections. Finally, the capital requirement that came out during the SREP from HFSA and savings cooperative calculations was 30% above the regulatory minimum capital.
Pursuant to the AIFCD, the own funds of investment enterprises must achieve at all time the higher of the capital needed to launch activities or the capital requirement determined by risks run. For half of the 21 investment enterprises covered by the SREP procedure, the minimum capital requirement is determined by the initial capital needed to launch activities (institutions determined by initial capital), while for the other half of it was determined by the extent of risks run (institutions determined by risks run). Of the 11 institutions determined by risks run, three set up additional capital (130%-150%) under the ICAAP. The HFSA set an additional capital requirement (110%-125%) under the SREP for another four institutions, while for the remaining four entities the SREP capital requirement was set at 100%
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of the regulatory capital. The additional capital requirement emerging from the ICAAP-SREP process caused a capital gap at one institution in each of the two analysis groups. The institutions concerned replenished this capital after the SREP process.
Table 5: HFSA-approved additional capital requirements by sectors
Supervised sectorHFSA-approved additional capital requirement in percentage of the regulatory capital requirement*
10 large banking groups + 37,5%23 small and medium banks, quasi credit institution financial enterprises + 45,5%
129 cooperative credit institutions + 30,4%
21 investment enterprises
+16% (institutions determined by risks run)
+8,4% (institutions determined by initial capital)
*non-weighted average
Supervisory collegesThe supervisory colleges of financial groups operating in multiple countries are forums of supervisory cooperation. They are part of the European supervisory structure, and the need for their efficient operation was amplified by the global financial crisis. Under the framework of cooperation in supervisory colleges, regular and significant exchange of information takes place among national supervisory authorities. The European Supervisory Authorities set an action plan for supervisory colleges on an annual basis and how to verify the fulfilment thereof. Applicable EU regulations require European supervisory authority members to attend college sessions and colleges must verify whether their members comply with relevant requirements.
Colleges are organised and led by the national supervisory authority supervising the parent institution of the financial group (consolidating or home supervisor). College members (home and host supervisors) regularly exchange supervisory information on the group concerned, assess risks and may request each other to carry out supervisory procedures. In total, the HFSA participates in 20 banking and 16 insurer supervisory colleges. Colleges also play a significant role in representing the interests of host countries.
The HFSA leads the banking supervisory college of the OTP Group. In Central and Eastern Europe, the HFSA is the only supervisory authority to perform home supervisor functions, regularly holding meetings with the participation of the supervisors of foreign OTP group member institutions and EBA representatives. In the case of other Eu-based supervisory colleges, the HFSA attends meetings in the capacity of host supervisory authority overseeing a subsidiary or significant branch. In addition, the HFSA also works with the supervisory authorities of certain non-Eu countries in quasi-colleges.
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Supervisory colleges of banking groups
Banking group supervision in the capacity of home supervisor
As previously, the OTP supervisory college held two sessions in 2012, attended by all partner supervisory authorities concerned and the EBA’s representative. Similarly to previous years, the joint risk assessment of the group was completed with the participation of all partner supervisors. One significant task in 2012 was to examine whether the OTP group’s own funds is suitable on a consolidated and solo institution basis with a view to the financial position and risk profile of the group. In their Joint Decision, the supervisory authorities of Eu member states set an additional capital requirement to the banking group effective 1 January 2013. In line with relevant EU rules, this joint decision was made with the participation of the HFSA, the Bulgarian national Bank, the Romanian national Bank and the Slovakian national Bank.In addition to OTP supervisory college sessions, the HFSA also held bilateral meetings with the partner authorities of Montenegro, the ukraine, Romania and Russia. In order to ensure the regularity of the exchange of information, beginning in 2012 the HFSA updates host supervisors on current issues in a quarterly newsletter.
Banking group supervision in the capacity of host supervisor
Regarding the vast majority of significant institutions, albeit in a host supervisor’s role, the HFSA makes all efforts in the related supervisory coll-eges to have its observations about risks, capital and liquidity fully taken into consideration by the consolidating supervisory authorities. The HFSA participates in joint decision-making, i.e. it submits the risk assessment of banking subsidiaries operating in Hungary along with ICAAP-SREP inspection findings to the home supervisors. In 2012, the monitoring of requirements set by the Austrian authorities regarding conditions of sustainable growth represented an additional task.
Based on a joint decision by the HFSA and the home supervisory authorities, the Hungarian branches of InG Bank n.V., Citibank Europe plc., and Deutsche Bank AG were qualified as branches of systemic significance.
Insurance colleges
Similarly to former years, 2012 saw intense working relations with partner supervisors also in respect of insurance groups. The HFSA participated in 22 college sessions where the EIOPA was also represented. Preparation for Solvency II, in particular pre-application tests and the presentation of the groups’ internal model results remained in the focus of college work. In addition, shaping the scope, form and frequency of information flow within
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the colleges, and often the implementation of this information flow were focus items as well. Consolidating authorities always welcomed regional supervisory initiatives of host supervisors that aimed to map out the risks of branches.
Regional cooperation at the HFSA’s initiative regarding insurers
In relation to risks pertaining to Hungarian insurance company branches operating in neighbouring countries, the HFSA initiated regional cooperation with the host supervisory authorities of those branches. The main purpose of this cooperation is to map risks; implementation is by way of telephone conferences, tripartite prudential meetings (between home and host supervisor plus company concerned) and in relation to comprehensive supervisory inspections.
Table 6: Banking group and insurance group supervisory colleges (as of 31 December 2012)
Banking groups Home supervisorOTP group HFSA (Hu)Erste group FMA (AT)Raiffeisen group FMA (AT)KBC group (K&H) CBFA (BE)BLB group (MKB) BaFin (DE)Intesa Sanpaolo group (CIB) Banca d'Italia (IT)uniCredit group Banca d'Italia (IT)Banco Popolare group Banca d’Italia (IT)Credit Agricole group (Credigen) ACP (FR)BnP Paribas group (Cetelem) ACP (FR)Banque PSA Finance group ACP (FR)Banque Accord group (Oney) ACP (FR)RCI Banque group ACP (FR)Commerzbank group BaFin (DE)DZ Bank group (Fundamenta) BaFin (DE)Volksbank group FMA (AT)Bank Burgenland group FMA (AT)Porsche Bank group FMA (AT)BranchesDeutsche Bank group BaFin (DE)InG group De nederlandsche Bank (nL)Insurance groupsAllianz group BaFin (DE)Metlife group (AHICO, Metlife) CBI (IE)AXA group ACP (FR)BnP Paribas Assurance group (Cardif insurers) ACP (FR)
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Generali group ISVAP (IT)*Grawe group FMA (AT)Groupama group ACP (FR)HDI/Talanx group (Post insurance companies) BaFin (DE)
KBC group (K&H) CBFA (BE)Signal Iduna group BaFin (DE)unIQA group FMA (AT)Aegon group De nederlandsche Bank (nL)VIG group (union, Erste) FMA(AT)InG group De nederlandsche Bank (nL)Munich Re group (Victoria, Ergo Élet, DAS) BaFin(DE)VKB group (MKB insurance companies) BaFin(DE)
*IVASS effective 1 January 2013.
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MArKET SupErviSiON‘Increased attention to new trading forms and platforms that may transform the operation of capital markets.’
Market supervision activities
The Market Supervision Directorate fulfils three core responsibilities. Most of its work entails market supervision inspections (focusing on unauthorized, i.e. unlicensed or unreported operations and capital market fraud) and the related legal enforcement steps. They also deal with the supervision of public securities issuers and legal enforcement regarding their operation. The third set of responsibilities relates to the licensing of securities trading (including acquisitions by way of a public tender offer) under which the HFSA supervises compliance with legal requirements.
Market inspections
In the framework of market inspections, the HFSA’s Market Supervision Directorate examines market behaviour in order to ensure the transparency, fairness and security of the market and to eliminate any threats to these characteristics. A significant change in this activity in 2012 was the regulation of short selling transactions.
Short Selling decreeIn response to the need for the regulation of short selling transactions at European level, the European Parliament and the Council created and published in its official paper on 24 March 2012 the Regulation (EU) No. 236/2012 on short selling and certain aspects of credit default swaps (Regulation). Effective 1 November 2012, the Regulation is directly applicable in each Member State of the European union, without national transposition. Depending on the size of the short position, the new regulation deploys to investors (natural persons and legal entities alike) with a short position a reporting or publication obligation concerning shares floated on the regulated market and the MTF9 , and only a reporting obligation in the case of government securities. Further, the regulation forbids the conclusion of uncovered short selling deals for shares, government securities and CDS.
In order to ensure that the legal and technical conditions of implementing
9 The threshold for the reporting obligation is 0.2% of the issuer’s subscriber capital in the case of shares and 0.1% of total government securities issued and present on the market in the case of government securities and CDS. The publication obligation is only applicable to shares. The threshold here is 0.5% of the issuer’s subscribed capital.
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the Regulation by the statutory deadline of 1 november 2012 are in place, the HFSA initiated the integration of the Regulation into Hungarian legislation. In addition, the HFSA arranged for IT development to enable the receipt, storage and forwarding of data related to mandatory reporting and publication.
In accordance with the Regulation, the HFSA implemented various IT solutions on the www.kozzetetelek.hu website to support the publication of net short positions. These solutions enable the HFSA to authenticate domestic and foreign natural persons and legal entities that report transactions. Further, the HFSA also elaborated electronic templates to assist the fulfilment of the reporting and publication obligation.
The HFSA is entitled to set transaction restrictions and prohibitions, extraordinary reporting and publication obligations on net short positions concerning all financial instruments. Plus, under market supervision proceedings, the HFSA may inspect compliance with the Regulation’s provisions in respect of reporting, publication and transaction restrictions.
In line with international experiences, the HFSA’s findings concerning the application of the Regulation show that the market transparency of short positions increased. until the end of 2012, the HFSA received 53 reports and 10 net short positions were published. The application of the Regulation led to the decrease of CDS premiums and government bond yields, making the management of government debts easier. 17 active Hungarian market participants reported to the HFSA the use of authorized primary dealer and market maker exemptions specified in the Regulation. The HFSA did not forbid the use of such exemption in any of these cases.
Inspection of unlicensed portfolio management at online FORex service providersOne key capital market risk identified by the HFSA in 2012 was the activity of unlicensed portfolio managers that typically related to online forex trading, a still popular offering. In order to reduce this phenomenon, the HFSA launched several market inspection proceedings aimed at examining unlicensed investment service activities and, when necessary, to sanction the entities engaged in such activities.
The HFSA scrutinized the activities of the Switzerland-based Mandus Invest SA. and found that the company offered portfolio management services to Hungarian investors in Hungary, without an HFSA license. Mandus Invest SA. managed the money of investors based on a so-called “Managed Account Contract” and concluded forex deals based on powers of attorney received from them. The company signed “rolling spot” type forex orders for various currency pairs. In rolling spot deals, investors trade on exchange rate differences between the currencies in currency pairs. Open positions are technically closed at the end of each day and are opened again in the same
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instance while the interest rate difference between the positions are settled daily, thus the position is automatically rolled until closing. Via a British service provider, Mandus Invest SA. signed deals on behalf of the investors who directly bore the risks deriving from the acquired assets. In a resolution, the HFSA prohibited Mandus Invest SA. from pursuing unlicensed investment service provision. At the same time, considering that the company was already under liquidation proceedings carried out by the Swiss authority and that the Swiss authority has the sole rights to act on behalf of the company, the HFSA chose not to impose a fine as the cessation of unlicensed activity was deemed guaranteed.
The HFSA also detected various off-shore companies that allegedly carried out unlicensed portfolio management activities. These companies present themselves on their websites as hedge funds, i.e. professional fund managers. Their contract templates signed with customers bear the features of portfolio management agreements. Pursuant to these contracts, the companies are entitled to invest funds received from customers in their own name but on behalf of customers. Owing to suspected unlicensed activities on the part of these companies, the HFSA launched market supervision proceedings that would be closed formally in 2013. During the inspections, the HFSA put the companies on the warning list on its website in order to inform investors and to prevent further losses. In addition, the HFSA initiated criminal proceedings on grounds of unlicensed financial activities in all cases at the investigating authority in charge.
Inspection of unlicensed debt purchasing activities
At the end of 2011, the HFSA requested data from financial institutions to find out which persons purchased debts as a commercial activity when financial institutions transferred their receivables arising from financial services. The HFSA also examined whether unlicensed debt intermediaries appeared in the course of these transactions.
Based on information obtained from these data reports, the HFSA launched market supervision proceedings on several occasions in 2012 on suspected unlicensed commercial debt purchasing activities. As a consequence of these proceedings, the HFSA prohibited unlicensed debt purchasing on six occasions and imposed market supervision fines in each case on the entity pursuing such activities. The total amount of fines imposed was HUF 8,000,000. Further, on grounds of the suspected crime of unlicensed financial activities, the HFSA initiated criminal proceedings. Concerning the quantity of purchased debts, one company that stood out among sanctioned companies was PERDY Credit and Property Kft., a business that purchased a total of 585 debts in packages and including unique receivables, without an appropriate HFSA license.
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Inspection of unlicensed financial services marketed as bond issuanceIn 2012, the HFSA inspected several businesses that marketed their unlicensed financial service activities as bond issuances.
Supervision concerning issuers of publicly traded securities
The HFSA’s role is to verify that public capital market issuers comply with their obligations set out in legal provisions. This supervisory activity examines the fulfilment of informing obligations regarding regulated information, including among others, regular and extraordinary information provision, and the compliance of financial statements with accounting rules. The HFSA reviews whether the informing and disclosure obligations set for the issuers of publicly traded securities are complied with and assesses whether the information they publish meets legal requirements with a view to undisturbed market operation and the informing of investors.
As in previous years, the HFSA paid special attention also in 2012 to reviewing the IFRS based consolidated financial statements of listed securities issuers that are subject to Regulation no. 1606/2002/EC of the European Parliament and the Council on the application of international accounting standards (IFRS). For the proper application of IFRS enables the review and comparison of the IFRS-compliant consolidated financial statements of such companies and thereby helping to strengthen market confidence, protect investors
Key case
under the framework of market supervision proceedings, the HFSA scrutinized the activities of XGA Vagyonkezelő Zrt. (XGA Property Management Co. Ltd.). The HFSA found that all documents labelled and sold as bonds in XGA Zrt.’s investment scheme failed to meet legal requirements owing to deficiencies in their content and form. In practice, the company pursued unlicensed fund collection from the public and thereby carried out unlicensed financial service provision.
The HFSA imposed market supervision fines of HUF 70 million on XGA Zrt. and prohibited with immediate effect the continuation of its unlicensed activities. The purpose of imposing this substantial market supervision fine was to deter both this specific business and indirectly all participants of the Hungarian financial market from committing a similar violation of laws in the future. After passing the resolution on the case in 2013, the HFSA made available the findings on unlicensed activities to investigation authorities in order to promote criminal proceedings.
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and promote the effective operation of capital markets. In the course of its inspections, the HFSA reviews published financial statements, mainly focusing on the disclosure requirements of individual standards.
In 2012, 74 public issuers made a total of 4,261 disclosures, of which 2,510 served extraordinary informing purposes. 56 securities of the public issuers are traded on the regulated market: 51 are share issuers, 5 are present on the public capital market with securities representing loans. Six of the companies have both latter types of securities available to the public.
In 2012, the HFSA launched 37 inspections in this segment, 29 of which it concluded last year. Within the concluded inspections, fines were imposed in eleven cases. The HFSA imposed institutional fines of HUF 13,400,000 on supervised public issuers and an additional HUF 900,000 on senior officers.
Supervisory licensing of securities issuance
In the area of licensing securities issuances, 2012 brought several major tasks and challenges for the HFSA.
Verifying compliance of investment funds with new legal requirementsOne typical task for this professional area of the HFSA derived from the entry into effect of Act CXCIII of 2011 on investment fund managers and collective investment forms on 1 January 2011 (AIFMC). The new law serves compliance with Eu law harmonization obligations10. Upon its entry into effect, national regulation on investment funds was removed from the scope and effect of Act CXX of 2001 (ACM) and a new set of regulations were established under the framework of a new law both for Eu-compliant uCITS funds and their non-harmonized “domestic” counterparts.
In order to ensure compliance with the new requirements, the AIFMC set a mandatory compliance verification obligation for all investment funds that existed already when the AIFMC took effect. For the HFSA’s licensing area, this requirement called for verification of the documentation (prospectus, rules of fund management and key investor information documents) of more than 500 investment funds. Owing to changes in legal provisions during the year, the original 31 May 2012 deadline for verifying compliance was moved to 1 July 2012 in respect of uCITS and to 31 December 2012 in respect of non-harmonized “domestic” investment funds. Effective 28 October 2012, Act CLI of 2012 on the amendment of certain financial laws introduced a unified system of documentation formats (prospectus, rules of fund 10 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (uCITS).
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management) for investment funds of identical type and operation. The new documentation system combines fund management, investment protection and supervisory licensing criteria. Investment funds must also comply with these requirements.
Until 31 December 2012, the compliance verification exercise was completed for 246 investment funds. In 244 of these cases, a resolution was issued licensing the modification of fund management rules.
In the course of compliance verification, law interpretation questions and need for quick but solid professional responses posed unique challenges to the HFSA’s licensing area. In 2012, the HFSA elaborated several proposals on amending the AIFMC and the government decree on its implementation11, and a presidential recommendation was issued concerning the main principles of preparing and using the key investor information document12.
In addition to fulfilling compliance verification duties, the HFSA also issued 62 resolutions approving the public issuance of investment units, registered 63 investment funds and deleted 32 investment funds from the registry.
Findings concerning the licensing of the public issuance of securities and introducing them on regulated markets (stock exchange)In 2012, eleven issuance programs were set up on the market of securities representing loans. In relation to these programs, the HFSA licensed the publication of prospectuses (and the related announcements) with a total frame amount of HuF 1.840 billion.
In relation to the floating of shares on the regulated market, the HFSA licensed the publication of six prospectuses (and the related announcements). Of these, the aggregate issuance value related to issuers already present on the stock exchange (Est Media, Masterplast, Business Telecom, Phylaxia) was close to HuF 5 billion. In the case of a new player (Altera nyrt.), issuance value will be determined before the actual issuance.
Several public limited companies (established recently by way of transformation) requested HFSA approval for introducing their shares (technically) on the stock exchange where a significant portion of subscribed capital was actually contribution-in-kind. The elements of such contribution-in-kind are usually equity participations, know-how, copyright concerning studies and articles, and admitted debt receivables. However, applicants were not able to prove 11 Government Decree no. 345/2011 (XII. 29.) on the investment and borrowing rules of investment funds.12 Recommendation no. 7/2012 (V.31.) of the President of the HFSA on the key principles of preparing and applying the key investor information document for investment funds and the fund managers of investment funds.
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the valuation of these items even on request from the HFSA. Therefore, upon receiving this request from the HFSA, the majority of issuers revoked their application and on one occasion the HFSA filed the case with law enforcement authorities on suspicion of attempted capital investment fraud.
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CONSuMEr prOTECTiON ‘Compliant, consumer friendly practices, the need for clear information and transparency of financial products, along with the operation of a quick and effective dispute settlement system are key areas in restoring consumer confidence.’
CONSuMEr pOLiCy
As a consequence of the 2008 financial crisis, effective financial consumer protection and its institutions are the focus of public attention. As is well known, the number of consumers disappointed in financial services and in financial sector players grew significantly owing to the crisis. Therefore, the revaluation of the role of financial consumer protection in order to regain confidence and restore stability has been a global trend in recent years.
Pursuant to the HFSA Act, the purpose of the HFSA’s activities, among others, is to “…protect the recipient of service provided by financial organisations and to foster and promote public confidence in the financial intermediation system.”
In order to implement this supervisory objective, legislators assigned a consumer protection authority function to the HFSA effective 1 January 2010. Since 2010, the HFSA’s consumer protection role, legal mandate and toolsets have been expanded and strengthened. In addition, beginning upon taking office in the summer of 2010, the current management of the HFSA has taken a series of measures that have proved successful. Such measures include organizational transformation; implementation of processes for managing consumer claims; regular themed and targeted consumer protection inspections; and renewed consumer protection communication.
In 2011-2012, significant changes in the legal environment also posed several challenges to the HFSA’s consumer protection activities. The HFSA needed to respond to these challenges effectively, professionally and with timely solutions.
The HFSA’s consumer protection function was further reinforced by the establishment of the three European Supervisory Authorities in 2011, as the Eu regulations establishing these authorities name consumer protection as a key supervisory task. Promoting the transparency and simplicity of consumer financial products and services is a declared objective of European authorities. Monitoring consumer trends, coordination of financial education initiatives and the elaboration of shared rules are all part of their responsibilities. These
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tasks fully harmonize with the HFSA’s mandate and endeavours. However, experiences to date show that the HFSA is one of the leading European institutions in consumer protection; in the past two years, several Hungarian initiatives and proposals were adopted internationally.
The HFSA’s consumer protection activities are carried out in a sector-overarching manner encompassing all organizations engaged in financial services and aiming to:
influence service provider behaviour with consumers, �
inform consumers and shape their approach, �
settle disputes. �
These three closely interrelated elements mutually strengthen the other’s impact and form the pillars of efficient financial consumer protection. Thus in 2012 the framework of the HFSA’s consumer protection role was shaped in a way that enabled the HFSA to elaborate harmonized, comprehensive consumer protection action packages regarding receivables management, complaint management and unit-linked life insurance. With these efforts, the HFSA orientates service provider behaviour through regulatory steps, and provides information to concerned consumer segments on the same topics.
The HFSA’s mission is to ensure that the financial sector is strong and resistant to crises, and that institutions use legal and fair means in their relations with consumers, acting fairly and responsibly. Thus in addition to complying with requirements concerning prudent operations, institutions must also observe consumer interests in their day-to-day operations. Further, key consumer protection tasks for the HFSA are to ensure a level playing field for consumers and to improve financial literacy; well prepared consumers that are fully aware of their rights are best positioned to represent and enforce their interests. Thus the HFSA believes that prudential and consumer protection roles mutually strengthen and complement each other, enabling the fulfilment of objectives set out for supervisory activities in the HFSA Act.
The achievements of recent years show that a gradually developing, increasingly fully-fledged system of consumer protection institutions and means has been set up within the HFSA. The challenge was new, but the HFSA’s consumer protection activities have by now become known and recognized by the wider public. The toolsets assigned by legislators render a mandate to the HFSA that covers the full spectrum of consumer problems. Thus a consumer protection institution system with a wide scope was established within the HFSA, in a manner that is considered cutting-edge even by international standards.
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ThE FOuNdATiON OF ThE hFSA’S CONSuMEr prOTECTiON ACTiviTiES ANd ThE TOOLS AT iTS diSpOSAL
The key means of accomplishing the consumer protection objectives laid out in the HFSA Act and the HFSA’s mission statement are as follows:
effective consumer protection regulations; �
supervision with a consumer protection focus through consumer �protection administrative procedures;
consumer protection monitoring to identify market trends and risks; �
regular and proactive supervisory communication, extensive informing �of customers;
informing of customers via the customer service and the civil network, �and
dispute settlement via the Financial Arbitration Board. �
Effective consumer protection regulation
Participation in the preparation of legal provisions, proposed amendments to laws
Pursuant to the HFSA Act, the HFSA is entitled to propose the drafting of new laws and has the right to comment during the preparation of decisions and legal provisions that relate to the financial intermediation system, to supervised organisations and persons or to the HFSA’s responsibilities and mandates. In recent years, the HFSA focused on topics most crucial to consumers, i.e. the problems related to foreign currency lending and the excessive indebtedness of households. At the HFSA’s initiative, legislators have already remedied several consumer problems with foreign currency lending by amending legal provisions. Thus stricter rules were introduced concerning unilateral contract modification, the fee charged for early repayment, the range of fees and costs chargeable in foreign currency and now the applicable conversion exchange rate is specified in a legal provision.
Transparent pricing �
The HFSA underscored on several occasions in recent years that in addition to significant regulatory progress, the further tightening of regulations is necessary concerning loan contracts to ensure transparent retail loan pricing. With the acceptance of the related proposal, the rules of transparent pricing were laid out in law in 2011. This is a significant step forward from
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a consumer protection viewpoint, because the rules in effect since April 2012 clearly reduce the elbowroom of institutions regarding modification and pricing for contracts signed after that date. At the same time, in order to promote the standardized interpretation of laws and market practices, the HFSA proposed that certain partial rules be further specified.
The legal regulations in effect since 1 April 2012 maximized the APR of credit contracts. Based on inspection findings, the HFSA initiated adequate modifications of laws pertaining to the APR cap in September in order to prevent the bypassing of the initial intention of said laws by granting “personal loan for product purchasing purposes”.
Similarly to previous years, the HFSA initiated the preparation or amendment of several laws in 2012 as well.
Receivables management �
After various investigations, the HFSA concluded that receivables management regulations are incomplete from a consumer protection viewpoint. Therefore, in order to resolve consumer-impacting problems in receivables management, in 2012 the HFSA elaborated and submitted to legislators a regulatory concept. The concept outlines proposals for regulating the organizational and operating conditions of financial organizations engaged in receivables management, and sets out conduct and informing rules of a consumer protection nature. A key element of the proposed package is to increase cooperation on the part of debtors and to strengthen mutually cooperative behaviour. As a non-binding requirement, the proposed regulation calls for the use of fair receivables management practices that are free of deception and psychological pressures.
The HFSA formulated consumer protection expectations concerning defaulted loan and receivables management in the form of recommendations for the market as a temporary solution until legal regulations are established.
Multi Level Marketing-type selling �
The HFSA underscored several times that the appearance of Multi Level Marketing (MLM) sales schemes13 in the marketing of financial products is especially problematic, since owing to the complexity of financial offerings the assessment of the consequences of consumer decisions is far more difficult than with simple consumer products. The HFSA proposed legislators extend the prohibition in effect in the funds sector to insurance products as well in order to eliminate the problem. This step would prohibit the use of methods in selling insurance products that would make joining a paid
13 A hierarchical, self-building network created for the trading of a specific product or service.
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distribution scheme the precondition of purchasing that product. The HFSA is firmly of the opinion that standardized legal regulations are needed in order to prevent the continued spread of that model.
Cooperation on consumer-related current regulatory matters
As a guest, the HFSA regularly attends the session of the Parliamentary Committee for Consumer Protection. In 2012, the HFSA participated in 17 committee sessions, contributing to discussions and submitting detailed comments on major issues such as the settlement of financially troubled debtors and payment relief plans.
Regular consultations with civil organizations
The HFSA regularly consults with civil and interest representation organizations (e.g. of those with disabilities) actively engaged in financial consumer protection. The purpose of this dialogue is to enable the HFSA to present key market trend experiences and the main consumer protection steps it has taken. The experiences of invited organizations may also provide important and useful input to the HFSA and other civil organizations for financial consumer protection.
The HFSA’s own consumer protection toolsThe HFSA’s reinforced toolset include regulatory tools of legal provision level and also non-binding regulatory means. With the simultaneous application of these two tools, the HFSA can elaborate comprehensive action packages in specific topics. The HFSA first applied this approach in the area of financial complaint management.
Presidential decrees �
A significant new element in the regulatory environment is that effective 1 January 2012, the HFSA is the independent regulatory organ responsible for the supervision, control and regulation of the financial intermediary system. using this mandate, the HFSA issued a total of seven presidential decrees14. 14 Decree no. 11/2012 (IX.11.) of the President of the Hungarian Financial Supervisory Authority on the provisions on complaint handling of investment fund managers.Decree no. 10/2012 (IX.11.) of the President of the Hungarian Financial Supervisory Authority on the provision on complaint handling of investment firms and commodity dealers.Decree no. 9/2012 (IX.11.) of the President of the Hungarian Financial Supervisory Authority on the provision on complaint handling of insurance companies and independent insurance intermediaries. Decree no. 8/2012 (IX.11.) of the President of the Hungarian Financial Supervisory Authority on the provision on complaint handling of occupational pension providers.Decree no. 7/2012 (IX.11.) of the President of the Hungarian Financial Supervisory Authority on the provision on the complaint handling of private pension funds.Decree no. 6/2012 (IX.11.) of the President of the Hungarian Financial Supervisory Authority on the provision on complaint handling of voluntary mutual insurance funds.Decree no. 5/2012 (IX.11.) of the President of the Hungarian Financial Supervisory Authority on the provisions on complaint handling of financial institutions, payment institutions and electronic money institutions.
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Covering each sector, the purpose of the decrees is to specify the detailed rules for the complaint management provisions of sector specific laws.
When elaborating the decrees, the HFSA took into consideration the experiences of consumer protection inspections and the complaint management recommendations of the European Insurance and Occupational Pensions Authority (EIOPA). The decrees entered into force on 1 January 2013.
Recommendations �
Parallel to the re-evaluation of its consumer protection role and in line with international practice, the HFSA elaborates and publishes recommendations outlining best practices to orientate the behaviour of market participants. First, recommendations are regulatory tools that are intended to promote the standardized application of laws and improve the predictability of such application. Second, recommendations may also contain non-binding requirements and standards of conduct over and above applicable legal provisions that serve as minimum requirements.
The HFSA’s Recommendation No. 1/2011 on the principles of consumer protection expected from financial organisations is a milestone in the sense that it laid the foundation and framework of the new generation of consumer protection recommendations. It outlined comprehensive considerations for the entire financial intermediation system in order to promote a change of approach towards the fullest possible protection of consumer interests. After laying out the general principles, the HFSA elaborated the following sector-specific recommendations in 2012 to orientate service provider conduct, further specifying expectations for specific areas:
- Recommendation No. 7/2012 (V.31.) to investment funds and their fund managers on the main principles of preparing and applying the key investor information document
The purpose of the recommendation is to implement the European Securities and Markets Authority’s (ESMA) recommendation for collective investment enterprises dealing with transferable securities on the key principles of preparing and applying the Key Investor Information Document (KIID). From a consumer protection viewpoint, the significance of the recommendation is that it urges the use of KIID. This harmonizes with the expectation set out in the general consumer protection regulation that service providers should draw up abridged, clear information materials about their products. The preparation of KIID is mandatory for investment funds. It contains the key characteristics of the investment fund in a manner that enables investors to understand the nature and risks of the investment product and to make informed decisions.
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- Recommendation No. 11/2012 (XI. 8.) on the complaints handling procedure of financial organisations
The HFSA considered it necessary to issue recommendations comprising best practices i.e. consumer protection expectations that cannot be captured in presidential decrees that serve to set out detailed and binding rules for complaint management. With this recommendation and the related decrees, the HFSA fulfilled the domestic implementation of the EIOPA recommendation, extending it to multiple sectors. The adoption and localization of the EIOPA recommendation did not mean any significant additional burden since the HFSA actively participated in its elaboration.
In its complaint management recommendation, the HFSA intended to present a set of orientating standards that are suitable (in addition to legal provisions and decrees) for shaping market player attitude and that can serve as a basis for implementing efficient complaint management practices observing consumer interests.
The principles laid out in the recommendation help eliminate the problems detected in the complaint management of institutions, clarify legal requirements and make complaint management practices consumer-focused. The most important new element in the recommendation is the requirement for institutions to identify recurring or systemic problems beyond taking care of complaints, and to manage the root cause of the latter in an effort to prevent future complaints.
- Recommendation No. 12/2012 (XI. 16.) on the treatment of customers with disabilities
Based on inspection findings, the HFSA deemed it necessary to issue a recommendation on promoting financial consumer treatment that ensures equal opportunities to customers with disabilities. According to the recommendation, it is not sufficient to ensure equal opportunities to customers with disabilities by equal treatment upon contract signing, customer informing, in barrier-free servicing and in the internal operation of institutions. These customers must receive additional services that actually deliver equal opportunities.
Thus the HFSA recommends financial service providers should apply the simplest possible contract conclusion option to customers with disabilities (e.g. preliminary appointment setting, laying out the contract in a private document with conclusive evidence instead of a notarial document). In the case of vision impaired customers, it is advised to read out the contract. Customers with impaired hearing should receive written information, or should be allowed to use a sign language interpreter. The recommendation calls on service providers to direct customer attention to administration
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options not requiring personal presence (e.g. internet banking, hotlines) and indicate which branches and ATMs offer barrier-free access.
- Recommendation No. 13/2012 (XII. 4.) on the application of the principles of prudence and consumer protection pertinent to unit-linked life insurance policies
In order to treat problems detected in relation to unit-linked life insurance products, the HFSA elaborated standardized guidelines that address both prudential and consumer protection aspects. The recommendation aims to reduce the anomalies deriving from the complexity of product structure, the complicated cost structure, product features and the incomplete informing of customers. From a consumer protection viewpoint, the recommendation focuses on the quality of information provided prior to contract signing. It stresses the importance of the supervisory expectation that states service providers should assess the customer’s actual, long-term burden-bearing capability and willingness to take risks. The HFSA considers it a best practice if the insurer makes sure - by way of a recorded phone call (within the 30-day cancellation period after contract signing) - whether the customer is indeed aware of their long-term obligations. The recommendation includes a series of provisions concerning unit-linked life insurance products of a loan collateral nature. The HFSA expects that the application of recommendations will improve the clear and standardized treatment of this product group and strengthen customer awareness and knowledge by giving them a clear picture at contract signing about the opportunities and risks associated with the product.
- Recommendation No. 14/2012 (XII. 13.) on consumer protection principles for collection practices of receivables collection organisations
The HFSA considered it important to outline consumer protection expectations in a recommendation until adequate legal regulations are established that harmonize with the HFSA’s regulatory concept developed in an effort to resolve consumer problems detected in the management of receivables.
The objective of this recommendation is to promote, and to provide the information necessary for, fair and cooperative behaviour.
Based on the recommendation, customers must be informed regularly from first default through the receivables management process until the debt is settled. The recommendations specify fair and cooperative behaviour during the management of receivables along several principles, e.g. professional diligence, provision of necessary information and graduality. In particular, it sets requirements about the method and frequency of information provision, the preparation of rules of business, record keeping
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and the method of keeping contact. One basic requirement is that debt managers’ behaviour should not be misleading or aggressive with the debtor during the management of receivables. Debtors should only be contacted between 8-20 on weekdays or in the morning on Saturdays (not more than three times a week per contract). Administrators representing the receivables management firm should identify themselves, their institution and the debtor each time they interact with them. They should always protect the consumer’s personal rights and banking secrets (third persons should not be informed even about the fact that a receivables management process is underway).
CEO letters �In 2012, several CEO letters of financial consumer protection relevance were issued:
- CEO Letter No. 9/2012 on conduct expected from the Hungarian branches of foreign financial enterprises seated in an EEA country
In order to enforce consumer rights in full, the HFSA laid out the standards of conduct that financial branches should apply in their interactions with customers. The circular points out that it is a fundamental requirement for the protection of host country consumers and the efficient enforcement of their rights that consumers have sufficient information before signing a contract with a financial branch on whether the branch acts under its own company name or signs the contract on behalf of its founder. The HFSA believes that relevant new provisions clarify the legal status of branches. Further, the provisions also make it clear that financial branches are entitled to obtain rights and undertake obligations under their own company name. What the HFSA expects from financial branches is adherence to their existing practice and to act in their own name when signing retail contracts with consumers instead of acting on behalf of their parent company.- CEO Letter No. 10/2012 on structured products, in particular structured deposits
The HFSA carried out a thematic survey of domestic credit institutions about structured deposits. The purpose of the survey was to get a picture of product features on the market, and the regulatory, sales, customer informing and product development practices of institutions. The HFSA used this CEO letter to call the attention of credit institutions and investment enterprises to risks identified during the survey and to informing practices expected by the HFSA.
- CEO Letter No. 11/2012 on supervisory expectations concerning MTPL insurance premium rate advertisements
With a view to violations of legal provisions detected upon the investigation of premium rate advertisements, the HFSA laid out consumer protection expectations concerning MTPL premium rate advertisements and specified best practices on premium discounts, deductibles, gift vouchers, discounts
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for taking out multiple insurance policies simultaneously, unit-linked products and changes in bonus-malus ratings. In the HFSA’s opinion, any commitment on the part of insurers to provide reimbursement for indemnity payments instead of the party at fault to exempt the latter from losing the bonus-malus rating is contrary to the provisions of the MTPL Act. The HFSA believes that the premium advertisement practice that sets additional bonus-malus rating categories beyond those set in the related legal provision is contradictory to the linear bonus requirement.
Consumer protection administrative proceedingsIn case of financial service-related complaints, consumers must first directly approach their financial service provider. They can only turn to the HFSA for legal remedy if the dispute settlement initiated with the service provider is unsuccessful. Trends concerning the number of complaints generated in the entire financial sector and submitted to the institutions are set out in the table below.
Table 7: Distribution of total consumer complaints submitted to financial institutions
Sector2011 2012 2012/2011
quantity distribution % quantity distribution
% %
Money market 220 413 79,4% 294 775 87,6% 133,7%
Capital market 1 071 0,4% 797 0,2% 74,4%
insurance 32 997 11,9% 36 668 10,9% 111,1%Funds 22 923 8,3% 4 457 1,3% 19,4%Total complaint cases
277 404 100,0% 336 697 100,0% 121,4%
Pursuant to the HFSA Act, the HFSA launches consumer protection proceedings on a claim or on the HFSA’s initiative in case the consumer protection provisions in sector-specific laws or other relevant legal regulations are breached. In 2012, the HFSA handled a total of 7,860 consumer claims. The total number of claims received by the HFSA in 2012 is summarized below.
Table 8: Distribution of total consumer claims submitted to the HFSA per sector
Sector2011 2012 2012/2011
quantity distribution % quantity distribution
% %
Money market 4 686 48,0% 5 553 70,6% 118,5%Capital market 72 0,7% 80 1,0% 111,1%insurance 1 783 18,3% 1 742 22,2% 97,7%Funds 2 974 30,5% 329 4,2% 11,1%Not categorized 238 2,4% 156 2,0% 65,5%Total number of claims 9 753 100,0% 7 860 100,0% 80,6%
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The number of consumer protection claims submitted to the HFSA in 2012 reflects a relative decrease compared to 2011. Considering that the quantity of claims related to final repayment jumped and that of claims pertaining to the transformation of the mandatory pension fund system multiplied in 2011, more moderate 2012 figures only reflect a relative decrease after the one-off wave of claims. When cleaned of one-off impacts, the number of consumer claims submitted to the HFSA actually went up y.o.y in 2012. The tables above clearly show that although institutions generated and received more claims last year than in 2011, only a smaller portion of them reached the HFSA. Thus we might say the efficiency of institutions in consumer protection and complaint management improved.Similarly to previous years, most claims (70.6%) submitted to the HFSA in 2012 related to the financial sector.The number of claims related to this sector was up by 867 compared to 2011. In relation to final mortgage repayment at a fixed exchange rate, in 2012 the number of claims pertaining to early and final repayment went up by nearly 72% on 2011, from 518 to 889.In the money market sector, most claims related to banks. However, it is remarkable that the quantity of claims about financial enterprises also represented a 15-20% ratio in 2012. Most such consumer claims submitted to the HFSA last year related to settlements, order completion, early and final mortgage repayment, quality of service, informing discrepancies and other administrational errors.The breakdown by product type reflects a similar trend as outlined above. The quantity of claims related to foreign exchange based housing loans showed an above-average (71.7%) increase in 2012. A similar jump could be observed with general purpose foreign exchange mortgages (59.4%).
Consumer protection inspectionsThe basis of inspections launched at the HFSA’s initiative in order to enforce compliance with financial consumer protection requirements:
the HFSA’s inspection target areas marked as permanent and current �supervision priorities;
trends and amendments to legal provisions that deserve attention �from a consumer protection viewpoint;
findings specified in consumer protection risk reports; �
anomalies identified in consumer claims submitted to the HFSA and �impacting a wide range of consumers;
mass claims submitted to the HFSA’s customer service and related to �the same topic; and
experiences gained from monitoring the advertisements of financial �organizations.
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In 2012, the HFSA’s consumer protection area launched 84 targeted and thematic administrative inspections at financial organizations in order to reveal and correct alleged high-risk practices that impact a wide range of consumers. Further, the HFSA also participated in 23 comprehensive inspections.
The second half of 2012 saw a decrease in the number of inspections launched on consumer protection claims concerning the final repayment of retail foreign currency mortgages at a fixed exchange rate. At the same time, inspections related to mortgage loans increased. These inspections scrutinized compliance with requirements on transparent pricing and unilateral contract modifications (especially interest rate increases) that are disadvantageous for the customer. Regarding foreign exchange loans, the HFSA not only initiated inspections to verify compliance with new legal provisions but also launched thematic inspections to promote the implementation of Parliamentary Decree no. 31/2012. (IV. 3.) OGY on government measures to prevent the foreign exchange indebtedness of households. In the course of these exercises, the HFSA examined the enforcement of provisions concerning transparent pricing. The clear purpose of those provisions is to enable customers to sign contracts with clearer wording than before that also make the consequences of interest rate changes more predictable.
The HFSA carried out a number of major inspections over the compliance of MTPL insurance premium advertisements. Following the introduction of the accident tax, the HFSA analysed on several occasions the related consumer information provided by insurers and insurance intermediaries.
Compliance with legal provisions on consumer complaint management was inspected in every sector.
Inspection priorities
Priorities of targeted and thematic consumer protection inspections in the money market sector in 2012
Complaint management practices of institutions, compliance with �response deadlines,
Implementation of final repayment at a fixed exchange rate, �Unilateral contract modifications that are adverse for consumers, �Sending out annual notifications and balance statements, �Information on payment relief options pertaining to certain loans, �Information on data transfer to the Centralized Credit Information �
System,Exchange rate and instalment calculation related to lending, �Compliance with the APR cap, �Transparent pricing, �unfair commercial practices, �
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Compliance with the customer informing obligations set out in Act �CLXII of 2009 on Consumer Loans,
Whether customers received the repayment instalment table upon �request during the contract term or in case of early repayment,
Practice of delivering cash substitutes and the related PIn codes to �customers,
Online and off-line advertisements of financial organizations. �
Priorities of targeted and thematic consumer protection inspections in the capital market sector in 2012
I � nformation provided to customers before contract signing and order fulfilment, execution of the MIFID test,
Enabling ex-post checking of customer orders. �
Priorities of targeted and thematic consumer protection inspections in the insurance sector in 2012
I � nspection of MTPL premium advertisement campaigns,Compliance with complaint management and response deadlines, �Practices of sending out premium payment notifications, �Customer informing practices in relation to unit-linked insurance �
products,Practice of sending out cancellation notices, �Sending out rulings concerning indemnification claims. �
Priorities of targeted and thematic consumer protection inspections in the funds sector in 2012
Inspection of customer informing activities of funds, �
Inspection of complaint management practices of funds. �
Major consumer protection administrative proceedings launched at the HFSA’s initiative in 2012Transparent pricing
In the framework of thematic inspections, the HFSA paid special attention to compliance with requirements on transparent pricing. The obvious purpose of these provisions is to enable customers to sign clearer contracts, and with more predictable consequences regarding interest rate changes. On multiple occasions, the HFSA identified unfair commercial practices concerning compliance with these rules and imposed fines of HUF 4.5 million.
APR inspection
The HFSA also examined compliance with APR cap rules by way of thematic inspections. The APR cap maximizes the fees chargeable for specific loans. The good news is that the practice of the vast majority of institutions was
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found adequate by the HFSA; at the same time, minor administrative errors were detected.
Charging a conversion fee, unilateral fee raiseThe thematic inspection at Raiffeisen Bank Zrt. found that the bank violated a fundamental consumer protection provision of the Credit Institutions Act when it charged a conversion commission equalling 1 percent of the instalment and the handling fee upon the repayment of foreign exchange mortgages in forint. The bank misinterpreted the tightened legal provision that prohibited the conversion fee and believed said prohibition must only be observed if the central bank’s middle rate is applied but not if the bank’s own middle exchange rate is used. Further, the bank also misinterpreted the law when it believed that conversion fee termination is only applicable to contracts signed beyond 30 days after the legal provision was proclaimed (27 november 2010). The illegally charged conversion fee generated addition revenues of HuF 289.46 million for the bank from a total of 26,277 consumers. Therefore, the HFSA obliged the bank to refund HuF 290 million to the consumers concerned by 31 October 2012 and imposed a consumer protection fine of HUF 80 million on the institution.
Unlawfully charged early repayment feeIn a targeted inspection against the Hungarian Branch of AXA Bank Europe SA, the HFSA reviewed the institution’s activities since 13 December 2010 concerning the early repayment of housing and general purpose mortgage loans. The inspection was launched with a view to consumer claims and found that the branch violated several provisions of the consumer loans act. Many customers were required to pay the 3-4 percent early repayment fee on the borrowed amount even when they would have been entitled to a much lower fee or exemption. The branch was found to have charged a total amount of HuF 43.8 million of illegal additional charges as early repayment fee on 380 customers. Further, the inspection found that in its terms and conditions announcement for 12 loan products, the branch only waived the early repayment charge upon the full repayment of contracts signed after March 1 2010. In fact, the consumer loan act provides exemption in the case of all partial early repayments after 13 December 2010, provided the remaining debt is below HuF 1 million and no early repayment was made in the previous year. This exemption from charges is independent of when the contract was signed. By providing misleading information on early repayment fees, the branch’s conduct was suitable to persuade customers not to submit an early repayment request to the bank and thus not to exercise their rights provided by law. Owing to these violations of laws, the HFSA imposed total consumer protection fines of HUF 6 million on the branch. Further, by way of this targeted inspection, the HFSA could represent the interests of nearly 400 consumers and obtain a refund of illegally charged amounts by requiring the branch to pay back HuF 44 million.
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Management of receivables
At its own initiative, the HFSA carried out a targeted consumer protection inspection at EOS Faktor Magyarország Zrt. The purpose of the inspection was to reveal whether the commercial communication of the financial enterprise with customers was compliant with laws in the course of collecting debts associated with financial services.
In its resolution concluding the inspection, the HFSA underscored that the short text (SMS) messages sent by the financial enterprise to customers (e.g. “In your own interest, I am expecting an immediate call from you”, “In order to avoid legal proceedings, pay by the deadline” or “Would you like us to take forced measures against you?”) were of a threatening nature and thus likely to put customers under psychological pressure and thereby disturb consumer decision making. By envisaging forced measures or other (e.g. police or criminal) proceedings, the wording of these messages might raise fear in consumers, and have a malign influence on their decisions regarding form and manner of payment obligations or on potentially disputing the debt amount claimed by the financial enterprise. The more than 102,000 messages sent to 61,500 consumers violated the legal provisions that prohibit aggressive commercial practices.
The branch violated the same legal provision by sending out open postcards with illegal messages to 31,000 consumers. The postcards were mailed in the process of collecting debts from financial services and contained implicit threats like “In your own interest, we expect an immediate call from you”. These implicit threats were also suitable to distort consumer judgement and influence their decisions unfairly in relation to the fulfilment of payment obligations.
The HFSA regarded these actions as extremely severe violations of laws on the part of the financial enterprise, as a consumer under debt collection proceedings is already under psychological pressure and perceives aggressive debt collection steps negatively. In the HFSA’s opinion, the messages sent out by the financial enterprise were suitable to raise fear and may exercise an especially adverse psychological impact on consumers under debt collection proceedings, owing to the extremely sensitive and helpless situation of such consumers. The HFSA believes that any threatening communication that raises fear puts the consumer under amplified psychological pressure. Therefore, the HFSA forbid the continuation of the illegal practices for the financial enterprise and imposed a consumer protection fine of HUF 10 million.
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Major consumer protection administrative proceedings launched on consumer claims in 2012
MTPL campaign
The HFSA inspected the premium rate announcements published on 30 October 201215 by the 15 insurers providing MTPL insurance. Owing to the detected consumer protection anomalies, the HFSA passed a total of 17 resolutions against 13 insurers and one insurance intermediary, and imposed fines on two insurers16. With a view to violations of legal provisions pertaining
15 With a view to significant changes in legal provisions that also affect the method of announcing premiums, premium announcements linked to specific calendar days took place for the last time in 2012. The announcements were published in two national dailies and on the insurers’ website.16 Aegon Magyarország Általános Biztosító Zrt., Wáberer Hungária Biztosító Zrt.
Deceptive advertising and customer information from institution engaged in cross-border activities
The HFSA inspected the advertising and customer recruitment activities of Admiral Markets AS, an investment enterprise operating in Hungary in the form of cross-border activities. In particular, the HFSA scrutinized the company’s direct marketing offers and the content of information materials presented on the service provider’s Hungarian-language website. Admiral Markets’ home supervisor, the Estonian supervisory authority, also participated in the exercise. The inspection found that the institution sent out emails urging addressees to consider moving their deposits from Hungarian financial institutions to foreign bank accounts, in particular to those opened by Admiral Markets in Germany, stating the latter is safer than domestic deposits. Envisaging the indefinite limitation or termination of access to deposits by authorities for an uncertain period of time was suitable to motivate customers to break up their tied deposits ahead of time and to transfer their deposits abroad. This behaviour and information provision on the part of the investment enterprise was sufficient to confuse consumers and thereby to limit significantly the freedom of choice and behaviour of consumers regarding their deposits. Further, the HFSA found the enterprise stating falsely on its Hungarian-language website that their activities in Hungary are carried out with “HFSA approval”. By using the word “approval”, the investment enterprise created the false impression that its business activities in Hungary were licensed by the HFSA. However, pursuant to applicable laws, the HFSA only registers rather than licenses institutions that provide cross border services; The activities of these institutions are overseen by their home supervisor. Therefore, the HFSA imposed consumer protection fines of HUF 2,000,000 and sent a specific notification of the resolution to the Estonian supervisory authority.
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to the bonus-malus system, the HFSA prohibited the sale of supplementary bonus protection products at four insurers17. These products are designed to exempt the vehicle’s operator from the financial consequences of being downgraded in bonus ratings. In the case of one insurance intermediary18, the HFSA prohibited the continuation of unfair commercial practices concerning bonus-malus schemes.
nine insurers were found by the HFSA to have diverted from applicable provisions on bonus-malus schemes when announcing premium multipliers for unique contracts in their premium rate tables. The HFSA obliged these institutions to announce new, compliant premium rates. non-compliant information was detected in the premium rates of ten insurers19, thus the HFSA required these insurance companies to publish announcements with contents that properly inform consumers.
The HFSA outlined additional consumer protection concerns about premium advertisements in a CEO letter to nine insurance companies and the Association of Hungarian Insurance Companies (MABISZ).
Owing to anomalies detected upon the investigation of premium advertisements (collection and management of personal data not closely related to factors that directly impact the MTPL premium or help assess the risks of participation in traffic, e.g. size of home, highest education and income of customer, etc.) the HFSA turned to the national Authority for Data Protection and Freedom of Information. Further, in order to clarify the legality of market practices that raise tax regulation issues, the HFSA also initiated proceedings at the national Tax and Customs Administration of Hungary.
After inspecting the premium rate announcement practices of insurers, the HFSA reviewed the MTPL calculator tools on the websites of independent insurance intermediaries that represent significant market weight. Then the HFSA compared the premiums calculated with those tools to the premiums calculated based on the corresponding premium rate announcements. With a view to discrepancies detected upon this exercise, the HFSA forbid the continuation of non-compliant practices for nine insurance intermediaries and obliged them to alter the online calculation tools operating on their websites in accordance with the provisions applicable to the insurance business.
The HFSA sent management letters to 14 insurance intermediaries calling on them to pay special attention to informing customers in an adequate, fair and comprehensive manner.17 KÖBE Közép-európai Kölcsönös Biztosító Egyesület, Generali-Providencia Biztosító Zrt., Genertel Biztosító Zrt., Wáberer Hungária Biztosító Zrt18 Netrisk Első Online Biztosítási Alkusz Zrt.19 Genertel Biztosító Zrt., MKB Általános Biztosító Zrt., Uniqa Biztosító Zrt., K&H Biztosító Zrt., Signal Biztosító Zrt., Aegon Magyarország Általános Biztosító Zrt., Wáberer Hungária Bizto-sító Zrt., UNION Vienna Insurance Group Biztosító Zrt., KÖBE Biztosító Egyesület, Magyar Posta Biztosító Zrt.
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Accident tax
Following the introduction of accident tax on 1 January 2012, the HFSA launched consumer protection inspections on several unique cases where contracts slid into “premium not settled” status because the insurance anniversary was not on the first of the year. The HFSA performed several checks on the website of insurers and insurance intermediaries to verify that accident tax was duly shown under insurance premiums. These checks also examined whether insurer websites provide general information to consumers on the accident tax. The HFSA informed the professional associations concerned about inspection results, asking for their action to ensure that the MTPL calculation tools on the websites of both insurers and insurance intermediaries set out clearly and separately the accident tax to be charged.
Imposed consumer protection fines
upon detecting the breaching of consumer protection provisions or supervisory resolutions passed during consumer protection inspections, the HFSA may impose a fine on non-compliant financial organizations.
In the course of proceedings carried out in 2012, the HFSA imposed total consumer protection fines of HUF 219,150,000. This relatively high figure shows that discrepancies occurred in the operation of financial service providers that call for intensified attention from the HFSA. At the same time, the amount of fines imposed is in no way a suitable basis to conclude that financial service providers generally fail to act in accordance with consumer protection laws, as the related HFSA resolutions always sanctioned specific conducts and practices of individual institutions.
Resolutions arising from cooperation with the Financial Arbitration boardThe Financial Arbitration Board (FAB) has been operating effectively beside the HFSA for more than one and a half years. The FAB and the HFSA complement each other: proceedings that can be initiated at both forums enable timely remedy to almost the entire spectrum of financial consumer right encroachments. For in the course of its consumer protection procedures, the HFSA assesses whether the financial organization’s conduct or failure to take certain action led to a non-compliant situation and may impose a fine if sanctions are necessary. The FAB, however, scrutinizes the encroachment of consumer rights deriving from the breaching of the contract signed with the customer and seeks remedy for it mainly by attempting to forge an agreement. FAB procedures can be initiated by the consumer using a financial service in order to settle a civil law claim against the financial organization. Through its impartial operation, the FAB serves consumers by investigating and clarifying
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civil law claims as quickly as possible. It attempts to settle disputes mainly by negotiating an agreement between the parties; if this fails, the FAB makes a decision on the case in order to enforce consumer rights. The FAB’s operation is simple, fast, effective and cost efficient as a decision is made within a relatively short time. The FAB can only take action if the consumer already tried to settle the case directly with the service provider before submitting a claim to the FAB. Thus FAB proceedings are launched following a written consumer request.
In the course of proceedings aimed to settle a financial consumer dispute, the financial organization is bound by an obligation to cooperate. In practice, this means the organization must submit all documents requested by the FAB and attend hearings during the procedures, i.e. to demonstrate conduct expected by the Board. Accordingly, the financial organization must not refuse to cooperate, it must make the statements as required by the FAB and must attend the hearing. In case the financial organization violates the obligation to cooperate, the HFSA may launch consumer protection actions against it based on a mandate rendered by law.
When setting the amount of fines imposed in relation to this topic, the HFSA weighed whether the efficient operation of the financial arbitration system was restricted by the financial organization’s failure to cooperate with the FAB and to act as requested in subsequent notices. Effective proceedings are hindered or defeated if the financial organization fails to make a declaration during the proceedings, or does not attend the hearing held by the FAB. This is because the hearing provides an opportunity to clarify disputed issues between the consumer and the financial organization and for the parties to attempt to reach an agreement.
under the framework of consumer protection proceedings launched at the HFSA’s own initiative, the supervisory authority had to take measures at the FAB’s request on eight occasions in 2012. As a consequence of these exercises, total fines of HUF 6,300,000 were imposed owing to failures of financial organizations to fulfil their cooperation obligations in the course of proceedings brought before the FAB to resolve legal disputes with financial consumers.
The FAB draws up separate reports on its activities; they are published (in Hungarian) on the FAB’s website at http://www.pszaf.hu/pbt/bal_menu/eves_tajekoztato.
Public actions and enforcing claims of public interestIn relation to detected violations of legal provisions, the HFSA launched several lawsuits in 2012 in order to enforce the civil law claims of consumers.
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In the claim of public interest submitted against Axa Biztosító Zrt. (Axa Insurance Co. Ltd.) in Q2 2012, the HFSA requested that certain provisions in the insurer’s general terms and conditions should be declared unfair. The HFSA’s claim objected that according to the general terms and conditions, Axa Biztosító Zrt. only reimburses the costs of healthcare services after an accident abroad if the insured party reports the insurance event within 24 hours. According to the terms and conditions, in case the insured party fails to fulfil this obligation, the Insurer would only pay for medical and healthcare costs up to EuR 1,000 or uSD 1,000. In the civil lawsuit launched against Axa Biztosító Zrt., the court of first instance ruled in the HFSA’s favour on 12 December 2012.
The HFSA also prepared a claim of public interest against Santander Consumer Finance Zrt. In the claim, the HFSA requested the court declare that the financial enterprise charged a fee unlawfully for sending out annual balance statements. According to the HFSA, the underlying general terms and conditions (rules of business) on which such charges are based are unfair. Further, the claim aimed to have the enterprise pay back all unlawful charges totalling HuF 36 million to all consumers concerned. The HFSA found that based on the general contract terms and conditions applied at the institution between February 2005 and July 2012, the institution charged a HuF 750 fee for each annual balance statement letter sent out. This practice violated the Credit Institutions Act and restricted the right of consumers to gain information free of charge.
Regarding earlier claims of public interest submitted by the HFSA, the courts ruled against five financial organizations in 2012 in relation to such claims. In the lawsuit against CIB Bank Zrt., the HFSA disputed the institution’s move to waive all liability for banking card transaction losses above the basic limit if the customer changed the transaction limits for said card. According to the non-appealable ruling of the Metropolitan Regional Court, the HFSA won the lawsuit. Regarding the lawsuit against Magyar Ingatlanhitel Zrt. (Hungarian Real Estate Loans Co. Ltd.), the Budapest Metropolitan court ruled in favour of the HFSA on the majority of the case’s counts. In this claim, the HFSA sought to have the court declare the unlawfulness of several practices: having customers give up certain rights in a manner contrary to laws, the option of financial organizations to step back from contracts before disbursing loans and charging various excessive fees to consumers. Similarly, the lawsuit launched against Pesti Hitel Zrt. (Pest Loan Co. Ltd.) was also successful. This claim related to a number of topics: unfair general terms and conditions; consequences of backing out from the contract; disproportionally wide range of reasons for immediate contract termination; having debtors give up rights; and citing an illegally wide range of options for unilateral contract modification in contracts. Both the Budapest Metropolitan Court and the subsequent non-appealable court ruling declared in the HFSA’s favour.
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Consumer protection monitoringConsumer protection monitoring entails the ongoing tracking of financial market and consumer trends, the monitoring of data received from institutions on request and the analysis of data retrieved from consumer claim statistics and other information. The HFSA prepares a financial consumer protection risk report on the related findings of every six months, and publishes the statistical summary of consumer claims on a quarterly basis.
Consumer protection risk report
The main objective of the Consumer protection risk report is to identify high-risk and high-impact developments of consumer protection relevance and to present the HFSA’s response measures. The report pays particular attention to the most important consumer protection developments of the period concerned. The monitoring of consumer markets and the resulting conclusions help the identification of risks that impact a wide range of consumers. These findings are then incorporated into targeted and thematic administrative consumer protection inspections and are also utilized in the preparation of legal provisions.
Regular and proactive supervisory communication – informing customers via contemporary channels In addition to consumer protection monitoring and reducing violations of legal provisions, improving the financial awareness and literacy of consumers are also key communication objectives.
Publicity is the best and strongest tool in expanding the coverage of consumer protection. The media is the most effective way of calling the attention of consumers to the accomplishments of consumer protection activities, identified risks, potential market anomalies and players that pursue unfair practices. Regular communication regarding the aforementioned phenomena and the supervisory steps taken is indispensable, and is also expected by the market.
To this end, the HFSA issued a dedicated press release in 2012 on each resolution passed in major consumer protection proceedings and on consumer protection steps taken (decrees, recommendations, risk reports).
In addition, the HFSA set up a dedicated consumer protection page on its website, providing consumers with easy access to clear, structured information materials, product tables and calculation tools in order to help them make informed decisions.
The HFSA also provides information to consumers in the framework of comprehensive consumer protection campaigns, focusing on specific topics and using various communication channels simultaneously.
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In relation to issues of key importance, the HFSA published detailed consumer information materials on its website:
In case of payment difficulties �
The HFSA published practical advice to debtors struggling with payment difficulties on payment defaults and the termination of loan contracts. The HFSA also presented detailed information on debt settlement arrangements available from financial institutions and solution options offered by the state. Examples include the “home creation” plan that involves subsidized interest rates and the renewed exchange rate fixing option. These facilities are presented in detail (complete with a summary of frequently asked questions) along with the operation and tasks of the national Asset Management Agency.
In order to help cooperation on the part of debtors and to make them more informed, the HFSA published the two sample information letters advocated in the recommendation on the management of receivables. Service providers must make available these information letters to debtors after they default and before their contract is terminated, but the letters also provide useful information to all consumers struggling with payment difficulties.
MTPL �
In relation to the changes in MTPL insurance regulations as a key topic, the HFSA published detailed information in the consumer protection section of its website, also outlining the material new elements of MTPL insurance.
Account products and the related services �
Simultaneously to developing the bank account selection tool, the thematic page on bank accounts and banking cards was updated and supplemented.
Internet-based product selection programs �
The HFSA developed several freely accessible online comparison tools and calculation applications in 2011 (Deposit and savings finder tool: BMK; Loan and lease product selection tool, exchange rate fixing program: HLV). These tools help customers with their choice between basic financial products based on the parameters they enter. In 2012, two new calculation tools were added to the HFSA’s online applications.
Bank account selection program �
According to HFSA findings that harmonize with several EU studies, the fee structure of financial service providers’ account products and payment
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services are complex and often opaque, making them difficult to compare for consumers. All this often hinders the change of service providers and market competition, while the financial transaction levy in effect since 1 January 2013 generated greater differences in the pricing of financial services than before.
In order to establish transparency and comparability, the HFSA launched a bank account selection tool on its website at the end of 2012. The interactive online application makes comparable the conditions of forint current accounts, debit cards and domestic forint payments, thus promoting competition between service providers for the benefit of consumers.
What makes these online programs unique even in a global comparison is that they use up-to-date information gained from mandatory data provision of institutions. Thus it is the institutions’ responsibility to make sure that customers can always select from the latest product offerings. If an institution fails to fulfil this data provision obligation, it will be sanctioned by the HFSA pursuant to the data provision decrees. The data reports submitted by institutions based on these decrees help render credibility to the HFSA’s online product selection and calculation tools.
Household budget calculation program �
A simpler version of this calculation tool was already available on the HFSA website. At the end of 2012, the program was upgraded with new functionalities, content and format. The new household budget calculation program may help households struggling with payment problems in reviewing and ranking their revenues and expenses.
Point of orientation for the consumer contact persons of �institutions
The HFSA also set up a dedicated platform for the consumer protection contact persons of institutions, presenting in one place all topics of consumer protection relevance that institutions must pay special attention to (consumer protection laws, presidential decrees, recommendations, CEO letters, official rulings, sample information letters, reports and analyses).
Publications �
In addition to regularly updated website contents, five new publications were released in 2012 on the following topics: Centralized credit information system; Everyday savings; Options for troubled debtors; What to do in case of financial complaints; and The financial consulting office network. Available to consumers typically in the branches of financial organizations and in post offices, these publications also help disseminate financial knowledge and improve financial literacy.
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Short informative videos on financial subjects �
To help improve the financial literacy and information of households, in 2011 the HFSA inaugurated a series of 16 animated short videos presenting the very basics of finance. The series continued in 2012 and covered 16 new topics. As part of a comprehensive consumer protection campaign, short videos were prepared about the Financial Arbitration Board procedure; the annual percentage rate; the Centralized Credit Information System; recommended steps in the case of payment difficulties; and the use of the HFSA’s online applications (household budget calculator, bank account selector, loan and lease product selection tool, deposit and savings finder program).
Cooperation to develop financial literacy
In addition, the HFSA actively participated in the “Everyday finances consumer educational program”20 (MPP), a comprehensive financial literacy improvement initiative launched in 2011 and continued into 2012. The program is an exemplary joint effort of the public sector (HFSA, MNB) and 21 financial institutions, aiming to shape the attitude of retail customers concerning finances and to improve their financial knowledge.
Informing consumers via the HFSA’s customer service
The HFSA’s customer service underwent significant development in recent years. The HFSA established a modern waiting area for customers, with barrier-free access, a separate entrance and a customer queuing system. Aiming to minimize waiting times for visiting customers, an online appointment reservation tool is scheduled for implementation in 2013.
In 2012, the HFSA’s Customer service received a total of 46,695 inquiries from customers seeking information on specific financial products and financial consumer protection regulations. Of the total, 4,600 visited the HFSA’s customer service in person.
20 The program was supported by the following 21 financial institutions: Aegon Biztosító, Allianz Bank és Biztosító, Aviva Biztosító, Budapest Bank, CIB Bank, CIG Pannónia Bizto-sító, Citibank, Erste Bank, FHB Bank, Fundamenta-Lakáskassza, Generali-Providencia Bizto-sító, Groupama Garancia Biztosító, K&H Bank, Mastercard, Országos Takarékszövetkezeti Szövetség, OTP Bank, Patika Egészségpénztár, Magyar Posta Biztosító, Raiffeisen Bank, Taka-rékbank, Uniqa Biztosító.
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Chart 3: number and distribution of inquiries to the HFSA Customer Service (2012)
Main inquiry topics per sector:
Money market sector
In 2012, a significant increase was seen in the number of customers �struggling with payment difficulties and inquiring about options to restructure their contract with the bank;
Some customers turned to the HFSA’s customer service with questions �and problems about management of receivables and forced collection;
Late in the year a remarkable increase was witnessed in the number of �inquiries about the unilateral interest rate and fee raises of institutions;
In the same period many customers inquired at the HFSA about the �transaction levy.
Capital market sector
A substantial number of customers turning to the HFSA requested �information on customer identification questions and the informing procedure as per MIFID rules.
Insurance sector
Owing to data harmonization, the new centralized claim history �registration system launched in 2012 caused temporary difficulties to customers who changed insurers during the year. This issue generated a large number of customer service inquiries in the first quarter of the year;
It was difficult for customers to understand that they must also �pay accident tax on top of insurance premium to make sure that their
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insurance contract is fully paid up. In some cases, notification letters about non-payment failed to reach customers in time. Many of these customers were informed only months later that their insurance contract was terminated owing to non-payment;
Customers also often asked for information on the expiry of their life �insurance contracts.
Funds sector
Owing to the transformation of mandatory pension funds, inquiries �were received on an ongoing basis about surviving funds and the rules of final settlement.
Informing consumers via the civil consumer protection networkPursuant to the provisions of the HFSA Act, the HFSA can spend revenues from fines imposed during consumer protection proceedings on improving the financial literacy and awareness of consumers. The establishment and operation of a financial consulting network of national coverage with professional and financial support from the HFSA is a significant accomplishment in serving financial consumers and represents exemplary cooperation between the authority and civil organizations. The HFSA’s goal in setting up the consulting network was to take independent and proficient financial consumer informing services beyond the Budapest-based HFSA, and to make sure that professional consultation offices that meet HFSA expectations are in place in each region.
Originally, the financial consulting network began operations at eight locations in early April 2011. However, after positive performance assessments and favourable feedback from consumers, the network was extended to eleven additional county capitals for two years (Békéscsaba, Debrecen, Eger, Győr, Miskolc, Nyíregyháza, Pécs, Székesfehérvár, Szeged, Szombat-hely and Zalaegerszeg), making financial consumer protection even more comprehensive.
With the extension, access to financial consumer protection has been made easier and available for consumers in the entire country. The network offers free-of-charge advice on financial contracts and issues, provided by legal and finance professionals who are proficient in enforcing consumer claims. In addition, consultants can effectively orientate customers to the right places to find legal remedy to their problem, sparing them the burden of multiple administration rounds. Thus the offices also function as a “preliminary filter” whereby complaints are forwarded to the competent forum (financial service provider, FAB, court). The benefits are not only local, as there will also be
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an upstream information flow from the offices, enabling the HFSA to hear of consumer issues emerging in various regions of Hungary and to launch inspections directly or take action about matters that are within the scope of its mandate.
In the first year of its operation (April 2011 to March 2012), the network handled nearly five thousand customer inquiries via the financial consulting offices at eight county capitals. Consultants referred 250 consumers to the HFSA, the authority to take action in case financial consumer protection rules are violated, while 589 consumers were referred to the FAB, the body in charge of contract-related legal disputes. The launch of court proceedings was recommended to customers in 596 cases.
By April 2012, i.e. in the three quarters after the extension of the network to eleven offices, the number of consumer inquiries was over 4,800. In most cases, the consultants provided legal advice about money market matters, helped with writing applications and granted lifestyle advice to consumers struggling with payment difficulties. In an effort to effectively enforce consumer claims, consultants referred consumers to the HFSA and the FAB on 106 and 288 occasions, respectively, and proposed the initiation of court proceedings in 110 cases.
Implemented under the HFSA’s professional control, this project further enhances the already existing consumer protection synergies between the HFSA and nGOs and, with the involvement of the FAB, makes the protection of financial services users even more comprehensive. Further, it lessens the Budapest-centric nature of financial consumer protection.
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LiCENSiNg
Money market licensing
Credit institution licensingThe number of participants in the credit institution sector decreased in 2012: two credit institution branches (HSBC Bank Plc, Budapest Branch and Crédit Agricole Corporate and Investment Bank’s Hungarian branch) terminated operations, while no new credit institution was founded and no new player entered the market.
Two mergers impacting the composition of banking groups took place in 2012: five subsidiaries of ERSTE Bank Hungary Zrt. merged into Erste Bank Hungary Zrt. effective 31 December 2012, and two subsidiaries of Kereske-delmi és Hitelbank Zrt. merged into Kereskedelmi és Hitelbank Zrt. effective 30 September 2012.
Three mergers affecting savings cooperatives were licensed last year; the purpose of each merger was to offset losses, improve operating efficiency, cut costs and simplify group governance.
The ownership structure of multiple credit institutions underwent changes last year. MFB Magyar Fejlesztési Bank Zrt. (MFB Hungarian Development Bank Co. Ltd.) bought German credit institution DZ Bank AG’s direct participation of over 33% but below 50% in Magyar Takarékszövetkezeti Bank Zrt. (Hungarian Savings Cooperative Bank Co. Ltd.). Pursuant to paragraph 5 of Act XLV of 2012 amending specific laws in relation to the exercising of ownership over Magyar Export-Import Bank Zrt. (Hungarian Export Import Bank Co. Ltd) and Magyar Exporthitel Biztosító Zrt. (Hungarian Export Credit Insurance Co. Ltd.), these two 100% state-owned institutions transferred shares representing 75% minus one vote to the Hungarian State free of charge. Thus the minister responsible for international economy and development of the Carpathian Basin Economic Area became eligible to exercise owners’ (shareholder) rights over Magyar Export-Import Bank Zrt.
In February 2012, Sberbank of Russia purchased 100% of the shares of Austrian credit institution Volksbank International AG and thus obtained an indirect equity stake in Volksbank International AG’s subsidiaries, including the Hungarian entity, Magyaroszági Volksbank Zrt. This transaction was Sberbank of Russia’s first significant acquisition outside the Community of Independent States.
Within customer portfolio transfers licensed in the credit institution sector,
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one item that deserves mention is that the Hungarian Branch of BnP Paribas entered into a business unit transfer agreement with ERSTE Bank Hungary Zrt. and ERSTE Befektetési Zrt. (ERSTE Investments Co. Ltd.). The transaction involved the transfer of deposit, loan and investment portfolios.
For savings cooperatives, the use of pawnbrokers as key intermediaries remained an important source of revenue, thus many savings cooperatives resort to this option. The unusually high number of licensing requests received by the HFSA in relation to pawnbroker contracts and contract modifications is a clear sign of this trend. Otherwise, credit institutions mainly use key intermediaries for debt collection. The related licensing applications represented a significant volume in 2012.
In 2012, the number of credit institutions, payment institutions and electronic money institutions seated in the European union and reporting the start of cross-border services [in Hungary] increased slightly over the previous year. Of such newly launched cross-border services, those reported by credit institutions continue to represent a significant quantity. However, the number of service launches reported by electronic money institutions multiplied compared to 2011. The number of similar reports from payment institutions (that mostly deal with cash transfers) also went up.
Licensing financial enterprises and independent intermediariesThe decreasing trend seen in 2010-2011 regarding financial enterprises seems to have stopped in 2012: the number of foundation and operating license applications reflected slow growth during the year, especially in the last six months. Most companies newly licensed by the HFSA were mainly engaged in debt purchasing. Further companies were licensed to provide loans, cash and financial leasing services without business limitations and to provide loans against pledged property collateral.
using the opportunity made available in the Credit Institution Act since 1 January 2010, EKT International Investment Zrt. was granted an operating licence as a financial enterprise engaged solely in group financing activities.
In 2012, the HFSA revoked the operating licence of three financial enterprises at their request: Cooper Ingatlanfinanszírozási Zrt., (Cooper Real Estate Financing Co. Ltd.), VIV Faktor Zrt. and Amana Credit Zrt. In the first two cases, the HFSA initiated liquidation proceedings, while in the case of Amana Credit Zrt. it ordered final settlement.
Regarding independent intermediaries, the HFSA found several that decided to return their operating licence, especially towards the end of the year. The main reason cited by the companies concerned was the collapse of successful
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intermediation activities. Multiple agents continue to represent the largest segment of independent intermediaries. The number of key intermediaries and brokers on the market is much lower.
Capital market licensing
The number of new entrants in the capital market sector was similar to the previous year. The Brokernet group set up its investment enterprise, Quantis Alpha Zrt; GlobalFX Investment Zrt. was established and received a licence for portfolio management activities.
One event of key significance was the foundation of Magyar Posta Befekte-tési Zrt. (Hungarian Post Investment Co. Ltd.). Legal provisions do not allow Magyar Posta Zrt. (Hungarian Post Co. Ltd.) to provide investment services directly, and therefore the Post established its 100%-owned investment enterprise. The company will mostly trade government securities and will use its parent’s post office network (as a tied agent).
new players also came aboard in the investment fund management sector: Equilor Alapkezelő Zrt. (Equilor Fund Manager Co. Ltd.), a firm in the majority ownership of Equilor Befektetési Zrt. (Equilor Investment Co. Ltd.); and VM és VM Befektetési Alapkezelő Zrt. (VM and VM Investment Fund Management Co. Ltd.) a former investment enterprise that became an investment fund manager by way of transformation. In 2012, the HFSA carried out the compliance verification exercise of investment fund managers; the exercise was concluded with HFSA resolutions declaring compliance with the AIFMC for all 34 existing investment fund managers. The new regulation made the appointment or selection of certain senior executives of investment fund managers also subject to licensing. The transformation of investment enterprises into investment fund managers is a new phenomenon on the market. In addition to VM és VM Befektetési Alapkezelő Zrt., Pannónia Befek-tetési Szolgáltató Zrt. (Pannonia Investment Services Co. Ltd.) also applied for an investment fund management licence, which they received in early 2013. As investment fund managers can also provide certain investment services, these companies initiated the extension of the scope of their activities while retaining investment service provision. They cited expected profit increase as the reason for transformation into investment fund manager firms.
In addition, 14 new venture capital fund manager companies were established, a significant increase on previous years, in an endeavour to participate in the new Széchenyi Venture Capital Programs tender.
Another key licensing task in 2012 related to the transfer of clearing activities from KELER Zrt. to KELER KSZF Zrt., thus a license was required for the extension of the latter’s activities to include clearing. In practice, this change means that
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KELER Zrt.’s activities are now restricted to repository tasks while KELER KSZF Zrt. performs settlements and functions as guarantor. This division of labour is expected to become final in 2013 when KELER KSZF Zrt. obtains a license for settlement activities as per EMIR.
The number of market exits is decreasing; in four cases, operating licenses were revoked on request. Two of these companies were investment enterprises: Atticus Investments Befektetési Tanácsadó Zrt. (an investment consulting firm) and FundConsult Befektetési Zrt. (an investment firm), while the other two were venture capital fund managers.
insurance licensing
The number of insurance companies seated in Hungary decreased by one in 2012, with the merger of two life insurance firms (Victoria-Volksbanken Életbiztosító and ERGO). No new insurance company was founded and no operating licence for insurance activities was issued in 2012.
Last year only one insurance activity modification licence was issued by the HFSA. A life insurance corporation (CIG Életbiztosító) was licensed to do busi-ness in the “Illnesses insurance” subsector. The company applied for this licence in an effort to exploit new business opportunities rendered by tax allowances on health insurance that companies can purchase and provide for their employees free of tax and levies effective 1 January 2012.
Similarly to 2011, the vast majority of operating licences issued to insurance companies for other activities directly related to insurance pertained to the operation and maintenance of insurance activities within specific groups.
Two resolutions approving portfolio transfers were issued last year. The most significant of these was entailed the transfer of Victoria-Volksbanken Bizto-sító Zrt.’s entire accident and home insurance portfolios (covering “Accident”, “Fire and natural disaster” and “Other property damages” branches).
The HFSA confirmed to the Austrian supervisory authority the reported foundation of ERGO Versicherung Aktiengesellschaft Hungaria Branch on 27 July 2012. The branch was registered in the registry of companies on 25 September 2012. After the Austrian supervisory authority informed the HFSA that the capital position of ERGO Versicherung Aktiengesellschaft is adequate even with the requested portfolio transfer, the HFSA approved the transfer of the Insurer’s entire insurance portfolio to the Branch.
Within joint stock insurance corporations, the ownership structure of one insurer changed significantly. The Aviva insurance group decided to sell three of its Central European equity participations. Thus in addition to their subsidiaries in the Czech Republic and Romania, the shares of the Hungarian
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AVIVA Életbiztosító Zrt. (AVIVA Life Insurance Co. Ltd.) were sold. The buyer is the uS-based MetLife, Inc. and AHICO First American-Hungarian Insurance Zrt., a 100%-owned company of the uS-based subsidiary of MetLife, the American Life Insurance Company (ALICO). After the HFSA licensed the direct and indirect equity stake acquisition of AHICO and MetLife plus ALICO, respectively, and once the acquisition was completed, AVIVA Életbiztosító Zrt. changed its name to MetLife Biztosító Zrt. As Aviva Életbiztosító Zrt. came under the influence of another Hungary-based insurer, AHICO, the HFSA declared that these insurance companies are subject to consolidated supervision.
Entering into effect on 10 May 2012, Act XLV of 2012 induced changes in the ownership structure of MEHIB (Magyar Exporthitel Biztosító Zrt. – Hungarian Export Credit Insurance Co. Ltd.). The direct equity participation of Magyar Fejlesztési Bank Zrt. in MEHIB Zrt. ceased to exist and the Hungarian State went from 100% indirect owner to 100% direct owner of MEHIB. The person exercising owners’ rights changed too, as these rights were transferred from the minister for national development to the minister for national economy. In relation to the shift of ownership structure, corporate governance also underwent changes, triggering several licensing procedures. new members were appointed to MEHIB’s board of directors and supervisory board, and a new chief executive officer was appointed pursuant to a change in legal provisions effective 24 July 2012.
Licensing in the pension, healthcare and voluntary mutual funds sector
As in previous years, the number of funds continued to decrease in 2012 both in the mandatory and the voluntary subsectors. In the mandatory pension fund sector, the final settlement of two funds (QUAESTOR Magánnyugdíjpénztár and the mandatory pension fund of Életút Nyugdíjpénztár) was concluded in 2012. In addition, several mandatory pension funds are still under final settlement. As a result of these final settlements, the number of mixed funds comprising both mandatory and voluntary pension fund business lines decreased to four. After the termination of the mandatory business line, former mixed funds now operate as pure voluntary pension funds. Even the former market leader, OTP Mandatory Pension Fund, decided at its general meeting in December 2012 to undergo final settlement proceedings. The merger of four mandatory pension funds into other entities was also concluded in 2012.
In the voluntary funds sector, mergers only took place in the case of voluntary pension funds (Népszabadság Nyugdíjpénztár, Mobilitás Nyugdíjpénztár
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and Évgyűrűk Nyugdíjpénztár). Most terminations of business derived from decreasing membership and decreasing support from employers.
One new player entered the voluntary mutual fund market (Gondoskodás Önsegélyező Pénztár), but no foundation licence was issued to any other newly formed voluntary fund.
In relation to other licensing procedures, the HFSA licensed one healthcare fund to pursue additional enterprising activities. Many of the voluntary pension funds operating a selectable portfolio system requested the licensing of corresponding changes to their rules of business.
A former mixed fund, AXA Voluntary and Mandatory Pension Fund chose a different transformation option that is rarely applied in the funds sector: instead of merging fund business lines, they decided to separate them. As a result of the licensing procedure closed in 2012, the AXA Pension Fund was split into two independent funds, increasing the number of funds by one. However, what in fact happened is that the fund business lines of a former single legal entity split into two funds.
Licensing authority examinations for intermediariesThe HFSA licenses exam commissioners and organizations offering authority trainings and examinations for tied and independent insurance intermediaries and financial service intermediaries since 2008 and 2010, respectively. In previous years, the HFSA licensed a large number of examinations, training organs and exam commissioners, and thus the intermediary market became saturated. This is also shown by the significant decrease in the number of persons applying for authority exams in 2012 (from 26,000 to 16,000), in the number of newly registered training organizations (from 17 to 11), and only 25 exam commissioners requested registration as opposed to 132 in 2011.
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prudENTiAL LEgAL ENFOrCEMENT ‘It is a strategic objective of the HFSA to further improve the effectiveness of legal enforcement in order to protect the stability of the financial system and to restore confidence in it.’
release of rulings
When requested, the HFSA’s objective in issuing non-binding official rulings is to provide information on its official opinion regarding matters not regulated in law, or to highlight possibly contradictory or ambiguous legal provisions. Official rulings are typically issued in relation to the interpretation of legal provisions. They set out the HFSA’s opinion but have no binding power over other authorities or courts.
Through its official rulings, the HFSA continued to provide support to financial organizations and the users of their services. In 2012, the HFSA received 43 requests for official rulings regarding financial market rights enforcement, mostly relating to the following issues: calculation of own funds; limitation of investments; running large risks; foreign exchange lending and final repayment; outsourcing; and the calculation of capital requirement for exposures backed by property collateral.
In financial market licensing, 70 official rulings were issued in 2012. The main topics on which official HFSA rulings were requested were: definition of financial services, in particular lending; cash lending and debt purchasing within the latter; the identification of objective criteria that make a service or activity commercial; certain issues in relation to the issuance of electronic money, payment services, cross border services; and the prevention of money laundering.
In 2012, the HFSA issued 22 official rulings regarding capital market legal enforcement matters. As in previous years, the HFSA outlined in these rulings its orientating opinion, aiming to assist the interpretation of laws in relation to certain terms and provisions of capital market regulations (AIFCD, ACM), Act CXCIII of 2011 on Investment Fund Managers and Collective Investment Forms that entered into effect 1 January 2012 and, in this context, to Government Decree no. 345/2011 (XII. 29.) on the investment and borrowing rules of investment funds.
In capital market licensing only nine rulings were issued, much fewer than in 2011. These rulings typically concerned the status of foreign exchange contracts. The insurance legal enforcement area received 31 requests for
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official rulings in 2012, mostly in relation to mandatory MTPL insurance and insurance intermediation.
In 2012, the HFSA issued 18 official rulings for the voluntary and mandatory pension funds sector. The majority (10) of these rulings related to the final settlement of mandatory pension funds and the return of pension fund members to the social security pension system. Of the latter, most concerned settlements with members returning to the social security pension system (typically upon final settlement), and also asset transfers and the calculation of payments to returning members. One key issue was the procedure to be followed by mandatory pension funds when a member decided to return to the state pension system after final settlement was initiated at the private pension fund, in particular the transfer of member receivables to the Pension Reform and Debt Reduction Fund and service payment to the returning member. The interpretation of legal provisions concerning the retention of fund documents was another key topic.
Voluntary mutual funds mainly inquired in relation to the transformation of services before the age limit, in particular about the services they can provide. Concerning regulations pertaining to occupational pension service providers, the HFSA mostly received inquiries about retirement age limit and the validity of the resolution on pension eligibility.
Money and capital market legal enforcement
Money marketIn 2012, the HFSA’s money market legal enforcement area passed 83 resolutions after inspections (including 56 comprehensive inspections, 19 targeted inspections and 8 follow-up inspections). With only a few exceptions, the resolutions involved various supervisory measures owing to violations of legal provisions. In particular, these measures obliged institutions to fulfil certain requirements, to comply fully with legal provisions and to submit extraordinary data reports in order to eliminate discrepancies revealed by the inspections.
On 26 occasions, the HFSA imposed fines ranging from HUF 500,000 to 10,000,000 on institutions involved in violations.
In the case of credit institutions, the HFSA mostly imposed fines owing to the breaching of legal requirements related to the prevention and blocking of money laundering and terrorism financing. Compliance with these provisions was a priority in 2012 as well. In the case of financial enterprises, most fines were imposed because data reports were sent out late or with erroneous data content, or because the some of the indispensable personnel
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and material conditions of providing financial services were missing. When calculating the actual amount of fines, the HFSA took into consideration the weight and frequency of committed violations and set the fine in proportion to the magnitude of the institution’s activities and the severity of detected deficiencies.
The HFSA imposed supervisory fines on senior executives of inspected financial institutions and cautioned senior executives of seven additional financial institutions because of their failure to fulfil their legal obligations.
Banks
As part of supervising banks in 2012, measures taken by the HFSA against institutions related to the breaching of legal and internal rules on risk assumption, customer and partner rating, accounting and analytic records, and the management and record keeping of restructured loans. Further violations identified by the HFSA related to the content and method of data reporting, forced sale procedures, and the calculation of own funds.
In its resolutions, the HFSA called on several banks to reassign certain contracts to different categories in line with legal provisions based on supervisory findings and to set up adequate provisions. When calculating the capital requirement for lending risk, the HFSA required multiple banks to bring fully their practices in line with regulations, to enable in their IT systems the proper recording of exposures and collaterals for the compliant weighing of credit risk, the accurate calculation and review of property collateral values and to set up mechanized control points in those IT systems in relation to data entry. In relation to detected IT deficiencies, the HFSA called on institutions to provide for the protection of their vital business systems and IT infrastructure proportionately to risks, to prepare disaster recovery plans and to test that plan for all critical processes and systems.
In addition, some banks were cautioned because in the course of issuance activities they failed to fulfil their informing obligations in compliance with laws in relation to publicly traded securities.
When verifying compliance with legal provisions on the prevention of money laundering and terrorism financing during inspections, the HFSA identified violations of varying severity at nearly every bank. The most frequent problems in this field emerged in relation to beneficial ownership statements, for which the HFSA imposed fines ranging from HUF 500,000 to 3,000,000 on a total of four credit institutions. As part of measures to prevent money laundering and terrorism financing, the HFSA detected an especially severe deficiency at one bank: since the amended regulations entered into effect in 2007, the institution failed to implement an automated screening system that would ensure full compliance with legal provisions and effectively detect potential
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money laundering transactions. The bank performed manual control over the transactions, but with a view to the magnitude of the institution’s operations, this approach was not suitable for blocking and preventing money laundering and terrorism financing transactions. Another severe violation identified by the HFSA was that the bank only fulfilled reporting obligations about suspicious facts, data and circumstances that may refer to money laundering, especially with specific transactions of off-shore companies, with a significant delay as opposed to immediate reporting required by law.
Cooperative credit institutions
Most frequent violations revealed by comprehensive inspections at cooperative credit institutions related to risk assumption and management, collateral valuation, the management and recording of restructured loans and to accounting and analytic records. Another typical fault was that savings cooperatives failed to comply with legal and internal provisions on customer and contract rating and thus failed to charge sufficient impairment. In some cases, the HFSA called on savings cooperatives to strengthen the control function of their supervisory board, to regulate and document their processes in sufficient detail, to establish a risk management and internal control system that harmonizes with the risks of the savings cooperative’s activities and to implement a remuneration scheme that complies with legal requirements. In order to eliminate these deficiencies, among other measures the HFSA called the attention of cooperative credit institutions to reclassify contracts and charge impairment as necessary, to implement effective risk management procedures and an independent risk management unit within the organization, and to reinforce their internal control system.
In the course of inspecting cooperative credit institutions, the HFSA also scrutinized compliance with legal provisions on actions by senior management. In four cases, senior officials of cooperative credit institutions received a caution from the HFSA as they failed to act with the due care and expertise expected of their position. In another five cases the HFSA imposed fines owing to the severe and repeated breaching of legal provisions. In one such case, the HFSA carried out a targeted inspection at a savings cooperative to verify compliance with rules on reliable and prudent corporate governance. The inspection revealed significant corporate governance risks at the institution deriving from the conflict of interests between new members of the board and former members repealed by the general meeting, and also detected violations concerning the commencement and termination of membership and the maintenance of the members’ registry. These risks and violations jeopardized the stable and transparent operation of the savings cooperative and its compliance with laws and HFSA resolutions. In the resolution concluding the targeted inspection, the HFSA cautioned the chairman of the
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savings cooperative’s board and the company’s executive director because they breached the strict professional requirements applicable to their role and failed to exercise due care. In the resolution, the HFSA declared that the senior officials are liable for the fulfilment of all legal obligations pertaining to the credit institution and they are required to ensure that the operation of the institution they govern complies with all legal requirements and binding resolutions.
Financial enterprises
In 2012, the HFSA closely examined the capital position of financial enterprises. When monitoring capital position trends, the HFSA found that the equity of some institutions dropped below their subscribed capital or failed to reach the minimum initial capital required of financial enterprises. In these cases,
Major case
In its resolution dated 1 June 2012, the HFSA revoked the operating licence of the Soltvadkert és Vidéke Savings Cooperative and ordered the institution’s final settlement. This measure was taken because the savings cooperative lost its capital, its own funds became negative, destroying the institution’s operation and severely breaching the legal provisions on prudent operation. There was no realistic possibility to restore the savings cooperative’s capital position either by internal capital generation or by an equity raise.
After determining the actual size of the loss, the HFSA assessed the situation and examined what contagion effect the extraordinary measures triggered by the capital shortage may cause at related credit institutions. After analysis, the HFSA decided to simultaneously revoke the institution’s operating licence and order final settlement proceedings. This decision differed from former approaches and its purpose was to prevent an extreme deposit outflow and withdrawal of owner participations. This measure significantly decreased the uncertainty around the extraordinary actions taken against the institution and enabled the safeguarding of assets that serve as collateral for deposit holder indemnification.
In addition, the HFSA imposed fines ranging from HUF 3,000,000 to 10,000,000 on former senior officials of the company because they failed to take all actions suitable for restoring own funds while the savings cooperative was in a critical situation. In particular, the officials did not take the actions outlined in the restoration plan to settle the institution’s capital position, and failed to take proper measures to collect overdue receivables. The HFSA filed the case with the police and initiated criminal proceedings against the savings cooperative’s management on grounds of misappropriation and violation of accounting discipline.
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the HFSA called on institutions to reach compliance with legal requirements in respect of own equity.
Last year the HFSA revoked the operating licence of six financial enterprises, mostly because of fundamental deficiencies in the material and personal conditions of providing financial services, regular failures to provide data reports to the HFSA, and insolvency. In addition, the lack of membership in the Credit Information System was a key assessment consideration for the HFSA when passing resolutions against these institutions.
Capital market Resolutions concluding inspections
The HFSA’s capital market legal enforcement area passed 14 resolutions concluding inspections in 2012 (including 12 comprehensive and 2 targeted inspections). In 12 of these cases, supervisory action was taken owing to various non-compliances on the part of capital market institutions (investment enterprises, fund managers). Such supervisory action included warning, cautioning, or the requirement of extraordinary data reports from institutions to eliminate identified deficiencies.
On five occasions, the HFSA required institutions violating regulations to pay fines ranging from HUF 1 million to 10 million. One investment enterprise executive was given a warning owing to his failure to fulfil obligations set out in law. When setting the amount of fines, the HFSA took into consideration the weight and frequency of violations and aligned the fine to the magnitude of the institution’s activities and to the detected deficiencies. The HFSA closed two inspections without measures as no violation of laws was identified at the institutions concerned.
The typical reasons for supervisory measures were as follows: breaching of obligations pertaining to preliminary (pre-contract) information gathering on the financial conditions of would-be customers; violation of disclosure, announcement and customer informing obligations; breaching of legal provisions on outsourcing and data reporting to the HFSA; and deficiencies in financial statements and reports prepared by a senior executive responsible for compliance. Fines were imposed for violations of legal provisions deemed extremely severe by the HFSA. In particular, such severe violations included failures in customer identification to prevent money laundering and terrorism financing, deficiencies in suitability, fit and proper tests in relation to mandatory preliminary information gathering, and inadequate separation and management of customer assets (cash equivalents and financial instruments).
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Resolutions passed in continual supervision
Pursuant to the AIFMC that entered into effect on 1 January 2012 and after verifying compliance with it, the HFSA called on 23 fund managers in resolutions in the spring of 2012 to submit an auditor’s statement that provides sufficient certainty that their IT and inventory systems meet applicable legal provisions. As part of prudential rights enforcement in the capital market sector, the HFSA issued warnings in resolutions to five venture capital fund managers and two investment enterprises owing to late data reporting, and cautioned two investment fund managers to comply with legal provisions on the separated management of the financial assets owned by or owed to customers.
Insurance legal enforcementIn insurance legal enforcement, the HFSA issued 22 resolutions concluding inspections (19 comprehensive inspections and 3 targeted inspections) in 2012.
The results of inspections held at insurers offering motor third party liability (MTPL) insurance in 2012 mostly repeated previous years’ findings, often pointing out violations of provisions deriving from the late receipt or processing of insurance offers (compared to the commencement of coverage stated therein). The HFSA had to impose fines in each such case, and require insurers to ensure that their order processing and contract management systems are suitable, in every aspect, to absorb and process offers in due time, to manage the contracts generated from offers and to support the fulfilment of all notification and data reporting obligations. Further, these systems must also be enabled to support the insurer’s interactions with insurance intermediaries. Albeit not in relation to contract management, the HFSA also identified a noncompliant contract provision in the general terms and conditions of one insurer. Essentially, the provision declared that in case the customer failed to pay the separate premium of the comprehensive (Casco) insurance taken out for additional risks on top of the MTPL insurance, the result may be the termination of the latter even if all relevant premiums have been paid.
Comprehensive inspections at insurance companies selling life insurance, including unit-linked life insurance products, revealed several deficiencies also in 2012, leading to supervisory measures. Fines were imposed for violations whereby insurers, owing to shortcomings in their contract management systems, failed to act in compliance with their own contract terms and conditions when carrying out investments, deducting charges from customer accounts and distributing to other insured parties the bonuses of customers who lost that eligibility.
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In many cases the HFSA had to apply measures because of seemingly formal discrepancies in product plans. The reason is that product plans are the only comprehensive documents that outline all material (fundamental) attributes of the insurance product concerned. Therefore, it must provide the insurer’s managers and employees with a detailed and clear description of product terms and conditions and all methodologies applied with it in practice. The accurate, up-to-date documentation, change tracking and recording of each product in the product plans enables the subsequent retention of all product versions in a hard copy document (signed by the insurance company’s executives), indicating exact date when they entered into effect. This approach promotes the prudent governance of the insurance company and enables the subsequent verification of applied practices.
Agricultural insurance associations typically have low membership and represent insignificant market weight. The HFSA had to take measures upon several inspections at these associations. Although the detected violations posed hardly any threat to the safe operation of institutions and to the crop insurance market, they deserve mention owing to their high quantity. The underlying discrepancies related to elements of statutes, failures to announce obligations, and to the licensing of the re-election of senior executives.
2012 saw the increased presence of the phenomenon experienced in the previous year, namely that certain independent insurance intermediaries failed to fulfil certain requirements pertaining to their operations. In particular, such requirements include the maintenance of liability insurance coverage, the employment of a technical manager [i.e. a director charged with professional matters] and the obligation to keep equity above the share capital. The HFSA issued 36 law enforcement resolutions for the cessation of liability insurance coverage, 52 for failure to keep equity at the minimum level and 13 for the lack of a technical manager. In addition, the HFSA had to take measures against independent insurance intermediaries in 92 cases owing to their failure to fulfil their reporting obligations to the HFSA. Failures to meet obligations over a long period of time led to the withdrawal of the operating licence of independent insurance intermediaries in 34 cases. Excluding these providers from the insurance intermediation market was the only alternative available to the HFSA for eliminating noncompliance in respect of insurance intermediaries that did not respond to lighter measures.
Simultaneously to rejecting the second (supplemented) financial restoration plan submitted by the institution, the HFSA took measures against AIM Álta-lános Biztosító Zrt. (AIM General Insurance Co. Ltd.) restricting the entity’s right of disposal over its technical reserves and own funds owning to its financial problems. Further, the HFSA also ordered the submission and implementation of a financial plan that would eliminate the noncompliant
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situation within a month. In accordance with said financial plan, the company’s sole owner (Maclerdale Limited) decided to improve the company’s financial position by involving external capital and raising the firm’s subscribed capital through the issuance of new shares. Based on the size of the planned capital influx, the equity participation of new owners exceeded the qualified holding threshold; the transaction was subject to preliminary licensing by the HFSA. The HFSA granted this licence and thus two new Italy-based owners came aboard (Spazio Broker S.r.l. and Sigma Services & Consulting S.p.A.). However, based on data reports submitted to the HFSA we found that the implemented equity raise was not sufficient to stabilize the insurer’s financial position. Therefore, as an unprecedented move in its history, the HFSA declined to forward to competent member state supervisory authorities the institution’s report of pursuing cross-border activities in Spain and France and upheld the restrictions on the entity’s right of disposal over technical reserves and own funds. Finally, after suffering major and extraordinary losses in November and December 2012, respectively, the company exited the insurance market.
At one insurer, a series of frauds committed by the company’s tied insurance intermediary highlighted deficiencies in the company’s inventory and control system regarding forms subject to strict accounting. These detected registry and control deficiencies enabled a tied insurance intermediary to carry out a series of undiscovered frauds and thus damage customers for several years. Although the insurer could have revealed the fraud much sooner based on information available to it, the information was not assessed in due time.
Legal enforcement regarding pension fundsIn 2012, the HFSA issued 10 and 25 resolutions concluding comprehensive and targeted inspections at funds. All comprehensive inspections related to the voluntary funds sector while the HFSA performed targeted inspections solely in the mandatory pension funds sector.
Targeted inspections at mandatory pension funds
Targeted inspections at mandatory pension funds continued with and concluded the so-called phase III targeted inspections launched in 2011. These targeted inspections focused on the liquidity position of funds and the fulfilment of duties arising from laws that regulate the free choice of mandatory pension funds. Concerning liquidity position, the HFSA examined the compliance of asset transfers from pension funds, covering transfers to the Pension Reform and Debt Reduction Fund and payments to former members that chose to return to the state pension system. In addition to operating funds, the HFSA also carried out targeted inspections at funds that opted for final settlement or merger.
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The HFSA required one of these funds to credit to member accounts the HuF 265 charges formerly deducted from investment yields accumulated by individual members, and to thus recalculate the final balance of individual accounts. In another case, the HFSA required the fund concerned to revise the calculation of return guaranteed capital and the settlements with newly joining members. The HFSA required another fund to return in full all amounts recovered illegally from the Pension Reform and Debt Reduction Fund. However, the HFSA did not detect any severe violations of legal provisions during these inspections that would have called for strict action, e.g. the imposing of fines.
Targeted inspections regarding asset management at mandatory pension funds
In relation to concluding the 2011 inspections of mandatory pension fund investment costs, the HFSA also carried out targeted inspections at the asset managers of funds. The HFSA focused on whether the costs of the indirect investments placed via investment funds were in line with assumed costs of buying the underlying assets directly. Two of these inspections were closed in 2012. The HFSA found that indirect investments generated additional costs to members. Both fund managers repaid additional charges to pension funds.
Inspections at voluntary pension funds and proceedings carried out under ongoing supervision
Several voluntary pension funds were subjected to comprehensive and targeted inspections, with the HFSA scrutinizing compliance with legal provisions on the prevention of money laundering and terrorist financing and the fairness of indirect investment costs outlined above. In relation to the prevention of money laundering and terrorist financing, the HFSA issued binding resolutions to four funds owing to their failure to identify members adequately. Concerning the charging of indirect investment costs, the HFSA did not detect any severe violation of legal provisions. Minor fines were imposed by the HFSA on voluntary pension funds on two occasions.
under continual supervision, the HFSA sanctioned three funds. It revoked the operating licence of a healthcare fund while at two other funds it imposed sanctions owing to unauthorized ancillary business activities and noncompliant outsourcing.
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Legal enforcement concerning authority examinations for intermediariesThe role and significance of intermediaries in the financial sector is increasing. Intermediaries sell the products of their financial institution clients to consumers with whom they enter into direct relationships. More and more often intermediaries offer integrated products and product packages that relate to multiple sectors. It is a key interest of society and its consumers that consumer needs are fulfilled with high quality products and intermediation services and that intermediaries should be professionally trained persons with a sound knowledge of the financial and insurance products they offer.
Major case
One major event last year was the conclusion of the targeted on-site inspection at ING Befektetési Alapkezelő Zrt. (ING investment Fund Manager Co. Ltd.). The inspection scrutinized the legal compliance of asset management activities carried out by the fund manager for fund institutions. In 2010 and 2011, the HFSA detected the application of unreasonable indirect investment costs at four mandatory pension funds. The HFSA required these funds to repay the additional costs caused, then carried out targeted inspections at the fund managers of those funds examining the same topic. As a consequence of resolutions, the generated additional costs were repaid to members and the Pension Reform and Debt Reduction Fund. In the case of members returning to the state pension system, the repayable amount was paid out in the form of member payments, i.e. real yields, while in the case of remaining members the amounts were credited to their individual accounts.
In the 2012 resolution concluding the targeted inspection of InG Alapke-zelő Zrt., the HFSA declared the multiple violations of legal provisions on managing the assets of fund institutions. Such violations included e.g. the mismatch between the costs of direct and so-called indirect investments (i.e. those carried out via investment funds) and failure to comply with laws that require sufficient diversification in respect of pension, healthcare and mutual fund investments.
Further, the HFSA found that the fund manager invested in the assets of a specific issuer in excess of the 10% statutory limit and that it did not act in favour of fund members.
Therefore, the HFSA called on ING Befektetési Alapkezelő Zrt. to comply with the legal provisions pertaining to fund asset management and imposed a supervisory fine of HUF 200 million on the institution for violating these provisions. Later ING Befektetési Alapkezelő Zrt. filed a lawsuit against the HFSA resolution and legal proceedings are ongoing.
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To this end, legal provisions set certain professional suitability requirements. One option to obtain the necessary education is to attend and conclude the authority training provided by the HFSA to financial and insurance intermediaries. Obtaining the certification for intermediation activities is subject to the passing of the authority’s examination. One statutory objective of the HFSA’s activities is to ensure the prudent operation of the financial intermediation system, to protect the interests of those using the services provided by intermediaries and to strengthen public confidence in the intermediation system. In line with its declared objectives and within the limits of its statutory mandate, the HFSA checks compliance with legal provisions. Consequently, based on applicable regulations, the HFSA controls the compliance of authority exams organized and provided by registered training organs. In 2012, 16 on-site inspections were carried out and the activities of three commissioners were suspended for a period of two years owing to irregularities regarding the authority examinations.
using its statutory mandate, the HFSA appointed registered exam commissioners in 351 cases in 2012.
The HFSA issues a certificate to those that successfully pass the examination and, subject to their written consent, keeps a registry. One additional task for the HFSA is to issue replicas of certificates in case the original is lost or destroyed. In 2012, the HFSA had to replace certificates on several occasions.
In case of any alleged injustices occurring in relation to an authority exam, the parties concerned may file an objection. The HFSA examines the objection and notifies the complainant of the outcome. The HFSA will modify the exam result if the objection is accommodated. In 2012, 12 objections were submitted to the HFSA but only two were found valid.
In relation to authority exams, the HFSA is often approached with claims that can only be answered after the interpretation of laws. These issues entail the assessment of examination certificates confirming specific education, information on examination questions and the organization of exams.
Based on on-site and off-site inspection findings and demand from the intermediary market, there is an emerging need for re-regulating authority training and examinations, an endeavour also supported by the market and the sector’s interest groups. Within this re-regulation, the HFSA pays special attention to enabling authority examinations for individuals who are either partially or fully visually impaired, and has already elaborated the related examination rules.
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dOMESTiC COOpErATiON’In order to perform its tasks more efficiently and to achieve its objectives in a more timely fashion, the HFSA may enter into strategic cooperation agreements with eligible non-governmental organizations.’
Cooperation agreements
In 2012, the HFSA concluded two new cooperation agreements and renewed the text of two similar documents.
The purpose of the new cooperation agreement concluded with the Hungarian Energy Office in April was to exercise more efficient public regulation and control over natural gas and electric power market participants and their processes. The new agreement concluded with MnB and GIRO Elszámolásforgalmi Zrt. (Giro Settlements Co. Ltd.) in December enables smooth compliance with the regulations of Act XXIII of 2003 on Finality in payment and securities settlement systems (Tvt.), in particular the tasks related to payment restriction procedures and to the Interbank Clearing System (BKR) as designated system.
The cooperation agreement signed earlier with the Central Statistical Office (KSH) was reviewed and modified in February. The objective of the modification was to determine the framework and scope of information transfer that complies with the requirements of the national Statistical Data Collection Program (OSAP). The modification of the formerly concluded agreement with the Hungarian Competition Authority in July aimed to ensure the reliable, transparent operation of financial markets and strengthen trust in them, and to promote their development on the basis of fair competition.
Conferences, events
In 2012, the HFSA organized 76 events, with a total of 4,000 participants. The HFSA used the 2012 professional consultation sessions to inform the representatives of supervised institutions and other partners about major regulatory changes regarding financial markets; current issues related to the EU and the European supervisory authorities; findings of HFSA inspections; tasks related to the entry into effect of regulation 236/2012/EU on short transactions; the HFSA president’s complaint management decree and recommendation; and on other HFSA experiences and initiatives.
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The Hungarian Actuarial Society and the HFSA jointly organized a conference on the application and impact of the Gender directive that entered into force in Eu member states in December. Key topics at the autumn and spring conferences staged jointly by the Hungarian SEPA Association and the HFSA were the current issues of the Single Euro Payments Area (SEPA), focusing on the regulation concerning the SEPA final date that entered into effect in March 2012, on its further development and impact on payments in Hungary. The Financial Arbitration Board held a discussion session with the legal representatives of market players where it presented its experiences with operation from 2011, i.e. the board’s initial year.
In 2012, Financial Consumer Protection Offices were opened in six additional county seats: Békéscsaba, Miskolc, Nyíregyháza, Pécs, Szombathely and Zala-egerszeg. The grand opening of these offices took place in April and May and was combined with local press conferences.
21 international events were organized in 2012. In addition to receiving smaller international delegations, the HFSA headquarters also hosted the ESMA’s annual consumer protection seminar and the EBA’s annual IT conference. HFSA staff members presented the HFSA’s operation and supervisory experiences to visiting Korean and Chinese supervisory delegations on multiple occasions.
As a new member of the FIn-net network of alternative dispute settlement forums in the European Economic Area (EEA), the Financial Arbitration Board organized FIn-net’s annual meeting at the HFSA headquarters. Representatives from 24 countries attended the event.
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rEguLATOry TOOLS ‘It is a strategic objective for the HFSA to apply its regulatory role in a targeted manner in order to establish a transparent, quickly responding prudential regulatory system that serves the public good.’
hFSA decrees
The HFSA Act authorizes the HFSA president to issue binding legal standards on specific subject matters. In addition to preparing the data reporting decrees for supervised institutions, the HFSA’s legislatory efforts also focused on new areas, in particular to remuneration and complaint handling decrees. In 2012, the following 29 decrees were prepared and issued (including 14 amending decrees):
HFSA Decree no. 1. 1/2012 (II. 23) on the method and conditions of paying and calculating the supervisory fee.
HFSA Decree no. 2. 2/2012 (VII. 26) on data reporting obligations concerning a specific range of account products offered by credit institutions.
HFSA Decree no. 3. 3/2012 (VIII. 28) amending HFSA Decree 22/2010 (X.20) on the scope and way of mandatory data provision to the HFSA by electronic money institutions, payment institutions and the Hungarian branches of electronic money institutions and payment institutions seated in another Eu Member State or European Economic Area country, and by the institution operating the Postal Settlement Centre.
HFSA Decree no. 4. 4/2012 (IX. 7) amending HFSA Decree no. 26/2011 (XI. 24) on data reporting obligations concerning a specific range of products offered by credit institutions and financial enterprises.
HFSA Decree no. 5. 5/2012 (IX. 11) on the provisions on complaint handling of financial institutions, payment institutions and electronic money institutions.
HFSA Decree no. 6. 6/2012 (IX. 11) on the provisions on complaint handling of voluntary mutual insurance funds.
HFSA Decree no. 7. 7/2012 (IX. 11) on the provisions on the complaint handling of private pension funds.
HFSA Decree no. 8. 8/2012 (IX. 11) on the provisions on complaint handling of occupational pension providers.
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HFSA Decree no. 9. 9/2012 (IX. 11) on the provisions on complaint handling of insurance companies and independent insurance intermediaries.
HFSA Decree no. 10. 10/2012 (IX. 11) on the provisions on complaint handling of investment firms and commodity dealers.
HFSA Decree no. 11. 11/2012 (IX. 11) on the provisions on complaint handling of investment fund managers.
HFSA Decree no. 12. 12/2012 (IX. 21) amending HFSA Decree no 12/2011 (IX. 29.) on mandatory data provision by independent insurance intermediaries to the HFSA.
HFSA Decree no. 13. 13/2012 (X. 8) on the Presidential Award to be given by the President of the Hungarian Financial Supervisory Authority.
HFSA Decree no. 14. 14/2012 (X. 8) amending HFSA Decree no. 16/2011 (X. 7) on the required content of the actuarial report of insurers and on the related data provision obligations.
HFSA Decree no. 15. 15/2012 (X. 16) amending HFSA Decree no. 19/2011 (X. 20) on the data provision obligation of credit institutions.
HFSA Decree no. 16. 16/2012 (X. 16) amending HFSA Decree no. 20/2011 (X. 20) on the scope of data to be provided to the HFSA by financial enterprises and money market brokers and on the method of data provision.
HFSA Decree no. 17. 17/2012 (X. 26) amending HFSA Decree no. 11/2011 (VI. 27) on the data provision obligation of occupational pension fund providers.
HFSA Decree no. 18. 18/2012 (X. 30) amending HFSA Decree no. 21/2011. (X. 20) on the data provision obligations of healthcare and voluntary mutual funds.
HFSA Decree no. 19. 19/2012 (XI. 14) amending HFSA Decree no. 1/2012 (II. 23) on the method and conditions of paying and calculating the supervisory fee.
HFSA Decree no. 20. 20/2012 (XI. 14) amending HFSA Decree no. 27/2011 (XI. 30) on the data provision obligation of mandatory pension funds.
HFSA Decree no. 21. 21/2012 (XI. 14) amending HFSA Decree no. 5/2011 (III. 21) on the data provision obligation of venture capital fund managers and venture capital funds.
HFSA Decree no. 22. 22/2012 (XI. 14) amending HFSA Decree no. 6/2011 (III. 21) on the data provision obligation of investment fund managers and investment funds.
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HFSA Decree no. 23. 23/2012 (XI. 21) amending HFSA Decree no. 25/2011 (XI. 17) on the data provision obligation of voluntary pension funds.
HFSA Decree no. 24. 24/2012 (XI. 21) amending HFSA Decree no. 23/2011 (X. 25) on the data provision obligation of insurance companies.
HFSA Decree no. 25. 25/2012 (XI. 27) amending HFSA Decree no. 9/2011 (VI. 17) on the data provision obligation of businesses providing investment services, supplementary services to investment services and commodity exchange services.
HFSA Decree no. 26. 26/2012 (XII. 11) on the order of announcing MTPL insurance premium rates and the no-insurance fee calculated for a calendar year on the Hungarian Financial Supervisory Authority’s website.
HFSA Decree no. 27. 27/2012 (XII. 11) on the scope of data reportable to the Hungarian Financial Supervisory Authority on individuals at credit institutions and investment enterprises receiving remuneration in excess of HuF 300 million.
HFSA Decree no. 28. 28/2012 (XII. 12) on the scope of remuneration data reportable by credit institutions and investment enterprises to the Hungarian Financial Supervisory Authority.
HFSE Decree no. 29. 29/2012 (XII. 27) amending specific HFSA Decrees.
Based on the experiences gained since the HFSA Act entered into effect, Parliament further expanded the regulatory mandate of the HFSA president by amending applicable sector-specific laws. With a view to international trends, the range of mandates to issue decrees will be expanded further in the future.
recommendations
Recommendations are effective supervisory tools as they clearly set out expectations and the HFSA’s interpretation of laws. Recommendations are published by the HFSA, and in 2012 the HFSA issued the following 14 recommendations:
Recommendation no. 1. 1/2012 (I. 6) of the President of the Hungarian Financial Supervisory Authority on managing operational risks occurring during trading activities.
Recommendation no. 2. 2/2012 (IV.13) on the minimum requirements concerning requests to be submitted by insurers in relation to deviation from investment rules.
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Recommendation no. 3. 3/2012 (IV.13) of the President of the Hungarian Financial Supervisory Authority on the minimum format and content requirements concerning the business plans of insurance associations.
Recommendation no. 4. 4/2012 (IV.13) of the President of the Hungarian Financial Supervisory Authority on managing reinsurance.
Recommendation no. 5. 5/2012 (IV.13) of the President of the Hungarian Financial Supervisory Authority on the rules of repaying surplus returns.
Recommendation no. 6. 6/2012 (IV.17) of the President of the Hungarian Financial Supervisory Authority on managing underlying exposures under the framework of interpreting the rules of assuming large exposures regulation.
Recommendation no. 7. 7/2012 (V.31) of the President of the Hungarian Financial Supervisory Authority on the main principles of preparing and using the key investor information document to the fund managers of investment funds.
Recommendation no. 8. 8/2012 (VII. 11) of the President of the Hungarian Financial Supervisory Authority on cash lending by credit institutions via tied principal agents and against pledged collateral.
Revised recommendation no. 9. 9/2012 (VIII. 9.) of the President of the Hungarian Financial Supervisory Authority on the requirements concerning the dealings and investment decisions of entities engaged in investment management (asset management) and about managing risks.
Recommendation no. 10. 10/2012 (X. 5.) of the President of the Hungarian Financial Supervisory Authority on money market funds.
Recommendation no. 11. 11/2012 (XI.8) of the President of the Hungarian Financial Supervisory Authority on the complaints handling procedure of financial organisations
Recommendation no. 12. 12/2012 (XI. 16) of the President of the Hungarian Financial Supervisory Authority on treating customers with disabilities.
Recommendation no.13. 13/2012 (XII. 4) of the President of the Hungarian Financial Supervisory Authority on the application of the principles of prudence and consumer protection pertinent to unit-linked life insurance policies.
Recommendation no. 14. 14/2012 (XII.13.) of the President of the Hungarian Financial Supervisory Authority on consumer protection principles for collection practices of receivables collection organisations.
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CeO lettersIn addition to recommendations, the HFSA may also outline sound practices and conduct expected from market players in CEO letters. In 2012, the following 12 CEO letters were issued:
CEO Letter no. 1. 1/2012 outlines sound practices for the application of sub point 2 in point f) of paragraph (2) in Article 200/B of Act CXII of 1996 on Credit Institutions and Financial Enterprises. The presented good practices relate to the management of final mortgage repayment requests, the fulfilment of duties regarding the assessment and execution of loan applications for final mortgage repayment and a standardized sample declaration that is fully compliant with legal provisions, mutually accepted by all credit institutions concerned, and at the same time provides a legal guarantee for the fulfilment of final repayment obligations of the customer.
In CEO Letter no. 2. 2/2012 on the application of the new Act CXCV of 2011 on public finances, Act CXCIV on the economic stability of Hungary and the related government decrees, the HFSA called the attention of financial organization leaders to the changed legal environment.
In CEO Letter no. 3. 3/2012, the HFSA called the attention of leaders of credit institutions and investment enterprises engaged in securities account management and deposit management to the importance of full compliance with ownership verification requirements. This CEO letter was issued based on inspection findings and the share register maintenance personnel of issuers.
CEO Letter no. 4. 4/2012 called the attention of financial organization leaders to risks arising from the use of social media and public cloud services; to relevant Eu and domestic laws; to best practices; to data protection requirements; to the contents of the main service contracts; to the related service levels; and the interrelations between these factors.
In CEO Letter no. 5. 5/2012 on the requirements concerning service providers and trading partners used by certain financial organizations, the HFSA called the attention of the leaders of investment enterprises, credit institutions, investment fund managers, insurance companies and fund sector institutions engaged in investment activities to the importance of a careful and cautious procedure upon the selection of a third party service provider.
The HFSA issued CEO Letter no. 6. 6/2012 on the entry into effect or Regulation 236/2012/Eu on short selling and certain aspects of credit default swaps (CDS) and on the related changes and duties.
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In CEO Letter no. 7. 7/2012, the HFSA described best practices in informing professional customers and eligible partners expected from investment enterprises in the course of providing investment services.
CEO Letter no. 8. 8/2012 provided information on the deposit placement practices of healthcare funds (in line with the findings arising from ongoing supervision) and formulated proposals to the leaders of healthcare funds.
CEO Letter no. 9. 9/2012 outlined the conduct expected from the Hungarian branches of foreign financial sector businesses seated in an EEA member state.
Based on the findings of a thematic inspection carried out among 10. domestic credit institutions, the HFSA called the attention of credit institutions and investment enterprises offering structured products, in particular structured deposits, in CEO Letter no. 10/2012 to sound practices in regulations, sales, customer informing and product development.
In CEO Letter no. 11. 11/2012, the HFSA outlined non-binding requirements to insurers pertaining to MTPL premium rate advertisements based on applicable legal provisions.
In CEO Letter no. 12. 12/2012, the HFSA called the attention of credit institutions that the document issued by the national Deposit Insurance Fund titled “Description of the record structure of consolidated data” would be modified owing to amendments to Act CXII of 1996 on credit institutions and financial enterprises (ACI).
Methodology guidelines
Revised methodology guideline no. 1/2012 of the president of the HFSA addressed the minimum content elements of the deposit and portfolio management contracts of insurers. The methodology guideline reviews the criteria applicable upon the selection of the insurer’s deposit manager and portfolio manager and discusses in detail the necessary requirements of contracts to be signed with them.
The methodology guideline for the supervisory review and evaluation process – the SREP guideline – underwent significant rewriting in 2012, owing to three main factors. Significant changes occurred in the domestic and international regulatory environment, in risk management practices and in supervisory activities recently. Also calling for the updating of the guidelines was the need to elaborate and develop an efficient procedure, consistent methodology and solid official ruling based on inspection experiences gained to date. When reviewing the ICAAP guideline, the HFSA outlined more detailed
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guidance on what it considers acceptable methods for managing granularity when calculating the capital requirement for pillar 1 risks using standard approaches. Furthermore, the guidelines specify the notion of card acceptor risk and the document was completed with the rules of publication (Pillar 3) and EU and domestic legal provisions that entered into effect since the latest revision.
Methodology guideline no. 2/2012 of the president of the HFSA is intended to assist the announcement of the terms and conditions of retail account products sold by credit institutions. With this document, the HFSA provides flexible assistance to data providers in preparing their mandatory data reports to the HFSA as per HFSA Decree no. 2/2012 (VII. 26).
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iNTErNATiONAL COOpErATiON ‘The HFSA’s strategic objective is to actively participate in european and international regulation and supervision.’
Cooperation at European level
The European financial supervisory structureWithin the European System of Financial Supervisors (ESFS) established in early 2011, a two-pillar structure comprising a micro and macroprudential supervisory block was put in place. Micro-prudential supervision is the responsibility of the three newly established European supervisory authorities (European Banking Authority – EBA, European Insurance and Occupational Pensions Authority – EIOPA and the European Securities and Markets Authority – ESMA, altogether European Supervisory Authorities – ESAs) and the national supervisory authorities of Eu member states. Based on the regulations that established them, the objective of ESA activity is to intensify the operational efficiency of the internal market, especially through consistently high quality and effective regulation. In addition, the authorities must provide for the integrity and stability of the financial system, for the transparency of markets and financial products and for the protection of investor interests. With their operation, the authorities also strive to create a level playing field, prevent regulatory arbitrage and strengthen international cooperation among supervisory authorities. The ESA’s tasks also include the fostering of supervisory convergence and the provision of advice to Eu institutions in respect of issues in their sphere of responsibility.
With the establishment of the ESAs, Eu-wide micro-prudential supervision remains sector-oriented but the ESAs also set up a Joint Committee to ensure consistent supervision across all three sectors (banking, insurance and pension funds, and capital market) and to manage cross-sector risks.
Macro-prudential supervision is directed by the European Systemic Risk Board (ESRB), also a body established in 2011. The ESRB monitors and assesses financial stability risks arising from macroeconomic trends and the developments of the financial system as a whole; issues early warnings about potentially emerging systemic risks; and provides recommendations on how to treat identified risks. The ESRB’s objective is to prevent and mitigate systemic risks that threaten the financial stability of the European Union.
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The hFSA’s participation in the European financial supervisory structure
With the establishment of the new structure of European financial supervision in 2011, EU level institutions were set up for financial regulation and supervision, and cooperation among the national supervisory authorities of Eu member states was taken to a new level. Before 2011, this cooperation took place in the European supervisory committees. All this generated profound changes for the HFSA as well.
The HFSA made a series of strategic decisions also in 2012 in order to use available resources as efficiently as possible in its increasingly concentrated professional relations with the ESFS. In each case, thorough internal assessment precedes the selection of working committees and working groups in which participation offers the most significant results in promoting international efforts on the topic concerned and in respect of the HFSA’s own activities. The HFSA undertook an active role in the ESRB and in the decision-making bodies, professional committees and working groups of all three ESAs.
The European supervisory authorities and the ESRBEBA
HFSA staff members actively contributed to the professional efforts of the EBA and participated in the elaboration and assessment of professional materials on a regular basis. The EBA made significant progress in fulfilling its regulatory tasks: specific drafts were prepared in relation to the Single Rule Book (the document that implements standardized European regulation), and the CRDIV/CRR Technical Standards. In addition, the EBA also initiated fourteen professional consultations in 2012 (e.g. data provision on large exposure; draft RTS on own funds; assessment of the suitability of members of the management body and key function holders; amendment of the directive on conglomerates and the capital calculation methods applicable to them; capital requirements concerning CCP). In relation to (partially former) consultations, the EBA published six guidelines in 2012 (on advanced measurement approaches; on stressed value at risk; on the capital requirement of incremental default and migration risk; on the remuneration benchmarking exercise; on the data collection exercise regarding high earners; and on the assessment of the suitability of members of the management body and key function holders).
In supervision, the EBA focused on the crisis-triggered problems of the banking system. The recapitalization practice it initiated aimed to manage risks arising from sovereign exposures and to restore market stability and confidence.
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In 2012, agreements were made on the joint supervisory reporting framework and the EBA’s commitment to support consumer protection and supervisory colleges was strengthened further.
Fulfilling its obligations, the HFSA’s senior management participated in the sessions of the EBA’s Board of Supervisors in 2012.
EIOPA
The year 2012 saw preparations for the Solvency II directive. HFSA staff members actively participated in working groups and in the elaboration of draft technical standards and guidelines. They paid special attention to representing Hungarian national interests deriving from the HFSA’s host supervisor status. During the year, fifteen implementing technical standards and 36 related draft guidelines were prepared on eight topics. The final wording of these standards will be closed after the adoption of the Omnibus II directive. The subjects covered by these technical standards and the related guidelines include technical reserves, own funds requirement, full and partial internal models, evaluation of assets and liabilities over technical reserves and group supervision. In addition, the EIOPA submitted its advice to the European Commission on the review of the IORP directive (2003/41/EC) and launched the first quantitative impact study in the area of occupational pension provision. In June, the EIOPA published its first guidelines on consumer protection and complaints handling by insurance companies, which were implemented by the HFSA (see the Consumer protection chapter for details). Since then, these guidelines were made available in all official languages of the EU.
Fulfilling its obligations, the HFSA’s senior management participated in the sessions of the EIOPA’s Board of Supervisors in 2012.
ESMA
Similarly to the two other European supervisory authorities, efforts within the framework of the ESMA also tied up significant capacities at the HFSA. The ESMA made significant progress in 2012 concerning the supervision and registration of credit rating firms, as ESMA exercises direct supervision over these institutions in the entire area of the Eu.
The ESMA elaborated guidelines on systems and controls to be applied by trading platforms, investment enterprises and competent authorities in automated trading environments; on exchange traded funds (ETFs); in particular on repurchase and reverse repurchase agreements; on MiFID-related requirements serving consumer protection (suitability requirements and compliance function).
The ESMA elaborated regulatory and implementing technical standards on short selling and EMIR (Regulation 648/2012 Eu). In addition, the authority
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drafted a number of documents concerning the practical application of Eu-level legislation (EMIR, SSR, MiFID, AIFMD, PD, uCITS).
Further, the ESMA published a warning about the pitfalls of online trading and formulated a “Guide to investing” for investors.
The ESMA also published reports on the use of sanction by member states as per the “Market abuse” directive and on member state practices established in relation to the application of “sound practices” concerning prospectuses.
Fulfilling its obligations, the HFSA’s senior management participated in the sessions of the ESMA’s Board of Supervisors in 2012.
Joint Committee AMLC
The HFSA participates in the activities of the AMLC (Anti-money Laundering Sub-Committee), a body reporting to the Joint Committee that comprises the leaders of the three European Supervisory Authorities. In 2012, the AMLC prepared a sample agreement for cooperation between home and host supervisors21, aiming to maximize the latter’s involvement in home authorities’ supervisory proceedings and decisions pertaining to payment agents. Since its approval of the executive bodies of European supervisory authorities, the sample agreement was used in a number of agreements by national supervisory authorities. The committee prepared several surveys about current issues, from regulation of the identification of beneficial owners to the issuance of electronic cash equivalents, prepared analyses and issued proposals on resolving detected problems.
ESRB
The HFSA actively participates in the ESRB’s work at presidential, vice presidential and expert level. The leaders of national supervisory authorities and central banks meet four times per year in General Board sessions, while their vice presidents meet with the same frequency at Advisory Technical Committee (ATC) meetings. Regular discussion topics at these sessions include risks and vulnerabilities, the capital and liquidity position of banks, the ratio of non-performing and restructured loans and the key issues of financial stability. Further key topics relate to central counterparties, the risks of global (too big to fail) institutions, the sale of encumbered assets, and the regulation of money market funds.
In 2012, the ESRB released two recommendations (on the uS dollar denominated funding of credit institutions and on the macro-prudential mandate of national authorities) and a study on the relation of money market funds in Europe and financial stability. ESRB’s Advisory Scientific Committee
21 Supervisory Cooperation Protocol between “Home Supervisor” and “Host Supervisor(s) of Agents and Branches of Payment Institutions in Host Member State
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(ASC) contributed to debates about banking union proposals and issued reports on forbearance, resolution and deposit insurance.
The ESRB issued its first risk dashboard in 2012. As one of the ESRB’s most important outputs, the risk dashboard is a package of qualitative and quantitative indicators compiled in order to identify, measure and present all systemic risks.
Committee for the Prevention of Money Laundering and Terrorist Financing (CPMLTF)
The CPMLTF is a second level committee operated by the European Commission and established by the directive on the prevention of money laundering and terrorist financing (2005/60/EC). The committee comprises representatives of central governments and financial supervisory authorities owing to their joint responsibility for the topic. In 2012, the most important task of the committee was to elaborate together with experts of the European Commission the concept for the new Eu directive on preventing money laundering and terrorist financing. In addition to participating in the related debates, the HFSA also contributed to this effort by outlining a series of proposals. As Hungary is not a member of the Financial Action Task Force (FATF) that elaborates unified international standards against money laundering and terrorist financing, participation in the CMPMLTF is thus of special importance, as this is the forum where Eu member states discuss key issues before FATF sessions and where the European Commission formulates its opinion for those sessions. The most important issue of this topic was the content of new standards adopted by the FATF in 2012.
international cooperation outside the European union
IAIS (International Association of Insurance Supervisors)
In addition to attending the annual meeting of IAIS, the professional organization of insurance supervisory authorities from nearly 140 countries, the HFSA also participates in two of the organization’s four high committees. In the Technical Committee, the HFSA’s associate directly participates in the acceptance of international standards prepared by the subcommittees. In the Implementation Committee, the HFSA’s representative holds the vice president’s position and has a steering role in the dissemination of standards and the elaboration of the organization’s training strategy. Furthermore, the HFSA actively participates in the work of the Standard Observance Subcommittee, the body that elaborates the Peer Review methodology and carries out investigations. The 2012 peer reviews were already based on the
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revised Insurance Core Principles (ICP) adopted in September 2011. Based on the new ICPs, two peer reviews were held in 2012, one about supervision (ICP1&2) and another about group supervision (ICP 23). The HFSA participated in both peer review exercises. In 2012, the IAIS continued its efforts concerning the common framework for the supervision of internationally active insurance groups (ComFrame). The detailed document was elaborated along the concept prepared in the previous year and was issued for public consultation in the middle of 2012. Last year the IAIS also released for consultation the document on the methodology of defining global systemically important insurers (G-SIIs). This work is related to the FSB’s G-SIFIs.
IOSCO (International Organization of Securities Commissions)
HFSA managers and staff members followed the professional work of IOSCO also in 2012. The organization’s focus items were as follows: new standards pertaining to financial market infrastructure; data collection by data warehouses on OTC derivatives; standards regarding the regulation of OTC derivative market participants; principles for suspending the redemption of units of collective investment forms (investment funds); recommendation concerning the mandatory settlement of OTC derivatives; data reporting on systemic risks by hedge funds; credit default swaps (CDS); credit rating institutions; asset-backed securities (ABS); securitization and money market funds. 2012 saw the appointment of a new secretary general at IOSCO and the launch of a new organizational structure including a new governing body (IOSCO Board) and a unified working group structure. In addition, IOSCO intensified efforts in 2012 to have all its members sign the Multilateral Memo-randum of understanding on cooperation and exchange of information among supervisory authorities. The HFSA was represented at the IOSCO annual conference at senior management level and participated in the efforts of the Committee on Market Intermediaries (C3) at expert level.
OECD (Organisation for Economic Co-operation and Development)
In collaboration with other competent Hungarian authorities and the OECD and within the framework of reviewing the Hungarian economy in 2012, the HFSA participated in the provision of information to OECD experts about supervised activities and in the checking of draft reports. Of the OECD activities, consumer protection is directly related to the HFSA thus it actively participates in the related committee. The HFSA was represented at senior level at the session of the OECD’s Economic and Development Review Committee that inspected Hungary; The HFSA is also a member of the OECD national Council.
FSB (Financial Stability Board) Regional Consultative Group for Europe
The HFSA, the Ministry for national Economy and the MnB are all members of the FSB’s regional organization. The Hungarian authorities were represented
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at managerial level at the sessions and the HFSA president attended both meetings of the FSB European Regional Consultative Group in 2012.
At the April meeting of the consultative group, members discussed the FSB’s emerging political framework for the shadow banking system, in particular the interactions between banks, shadow banks and money market funds, the extension of frameworks for global systemically important financial institutions (G-SIFI) to domestic systemically important banks (D-SIB) and non-bank organizations, and the deleveraging process seen in the European financial sector along with the nature and impact of this process.
At the September session, the forum discussed the FSB-led initiative concerning the Legal Entity Identifier to be implemented for financial markets, the review of the LIBOR calculation methodology that is currently carried out by the British authority, experiences and implementation issues concerning the macroprudential frameworks and tools under elaboration, the current issues with the Basel Banking Supervision Committee’s framework for domestic systemically important banks, the impacts of new liquidity standards and the implementation matters of the crisis management regime for global systemically important financial institutions.
BSCEE (Group of Banking Supervisors from Central and Eastern European Countries)
The HFSA is a member of the Basel Consultative Group and also of the BSCEE, a regional organization of the Basel Banking Supervision Committee. The BSCEE held its 25th Annual Conference in Vienna in April 2012, where the HFSA was represented at presidential level. The topic of the conference included the basics of consolidated supervision, cross-border and home-host cooperation, Basel III implementation and the accession of Armenia to the BSCEE. In May, the BSCEE and the FSI (Financial Stability Institute) held a joint seminar titled “Basel III and the Supervision of G-SIBs”. Also in May a high-level meeting was held about strengthening the supervision of the financial sector and current regulatory priorities. under the aegis of the ICBS 17th conference, the BSCEE held its regional meeting in Istanbul where the HFSA president gave a presentation about learning from the crisis.
CESEE ISI (Central, Eastern and South-Eastern European Insurance Supervision Initiative)
This regional cooperation of insurance supervisory authorities was launched on the initiative of Austria and Hungary in 2011 and covers Central, Eastern and South-Eastern Europe. The primary purpose of the initiative is to promote cooperation and communication between the insurance supervisors of said regions, be they in an Eu or non-Eu country; to provide a forum in the form of conferences and workshops for discussing supervisory issues in the region;
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to provide an opportunity to participating authorities to learn about each other’s supervision techniques and experiences; and to help each other in the implementation of regulations and directives. The initiative held two meetings during the year, where representatives of supervisors from the 13 or 15 countries of the region held meetings about several topics (impact of the formation and change of systemic risks on the insurance business; challenges of insurance against natural disasters in Central and Eastern Europe; supervision of branches in the region; challenges of group supervision in the region; effective supervisory structure; banking insurance; alternative dispute settlement forums in insurance; life insurance products in the existing economic environment).
In addition to active participation (presentations, moderating panels) the HFSA also assists the forum’s operation by carrying out secretariat tasks.
V6 Financial Stability Meeting
The Financial Stability Meeting of V6 countries (Austria, Czech Republic, Poland, Hungary, Slovakia and Slovenia) took place in Prague in June. Key topics of the meeting included fiscal consolidation, the restoration of banks, definition and regulation of G-SIBs and D-SIBs, macro-prudential issues and the implementation of ESRB recommendations. The HFSA was represented at presidential level at the meeting.
Other events of international relevance
The HFSA international department continually monitors global public and private information sources and processes them immediately in order to inform HFSA management and staff.
As part of fulfilling its duties in the prevention of money laundering, the HFSA participated in the work of the Council of Europe’s Moneyval committee, contributed to the drafting of documents before and after Moneyval’s plenary sessions (in particular those necessary for the follow-up inspection of the country report on Hungary) and in the expert activities of the mutual assessment of member states. As part of these efforts, the HFSA has contributed to the implementation of topics related to Government Decree no. 1303/2011 (IX. 2.) on implementing the recommendation of Moneyval’s 2010 country assessment on Hungary, thus in the amendment of the Hungarian law against money laundering.
HFSA managers and staff members held several consultations and meetings with delegation and leaders of other national supervisory authorities and international organizations also in 2012, and gave presentations at various meetings and conferences at the request of partner supervisory authorities and other organizations. In the capacity of financial expert, an HFSA staff
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member named on Moneyval’s list of experts took part in the assessment of an Eu member state as part of the international assessment team.
Banking union, Single Supervisory Mechanism (SSM)
At the June 2012 meeting of the European Council, member states negotiated measures aimed to further enhance the Economic and Monetary union and decided on establishing the banking union, an initiative encompassing multiple elements. In this respect, the European Commission first elaborated the proposal package of the Single Supervisory Mechanism (SSM). The SSM comprises the banking supervisory authorities of all Eurozone countries; non-Eurozone countries can also participate in the mechanism if they sign a close cooperation agreement with the ECB.
The SSM is established partly through the amendment of the regulation on the European Banking Authority (EBA) and partly through the issuance of a new regulation on the connected supervisory tasks of the European Central Bank. As an element of the banking union, the SSM is inseparable from other concepts envisaging Eu-level bank settlement and resolution. These concepts will be defined later.
In December 2012, the ECOFIN council of ministers of economy and finance signed an agreement on the SSM pursuant to which trialogue negotiations started on the final elaboration of relevant legislation. The single supervisory mechanism comprises the ECB and the competent national banking supervisory authorities where ultimate responsibility rests with the ECB. Based on the draft regulations, the ECB will exercise direct supervision over all Eurozone banks, but in a differentiated manner and in close cooperation with national supervisory authorities. Tasks not covered by the ECB’s mandate will continue to be supervised by the national supervisory authorities (e.g. consumer protection, money laundering, payment services, branches of banks seated outside the Eu). The EBA’s role will remain to create a standardized book of rules and to ensure the convergence of supervisory methodologies applied by competent national authorities.
In order to avoid conflicts between monetary policy and prudential supervisory objectives, the tasks of the two areas must be separated almost hermetically within the ECB. As a new player in the decision-making process, the Board of Supervisors will be established and be charged to prepare supervisory resolutions. The Board’s draft resolutions shall be considered adopted unless the ECB’s Governing Council objects to them. non-Eurozone countries participating in the SSM will have full and equal voting rights in the Board. In order to promote equitable and efficient decision making in a single market, the EBA’s voting order will also be changed. Through these changes, member states participating in the SSM would not be in a position to influence
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disproportionally the decisions of the EBA Board of Supervisors.
The ECB will start fulfilling its supervisory tasks within the SSM in the middle of 2014, within twelve months after the regulation on the ECB enters into effect. The decision on Hungary’s potential accession to the SSM can only be made once the final texts of legislations and other components of the banking union are known, i.e. after the comprehensive weighing of benefits and drawbacks. Currently there is no pressure to make this decision as regulations allow member states outside the Eurozone to decide on accession to the single supervisory mechanism at anytime.
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MANAgEMENT OF ThE hFSA’S rESOurCES
‘As a budgetary organ, the HFSA manages public funds efficiently and transparently, along the equally important requirements of economy and effectiveness.’
hr policy, hr management
HR policyThe HFSA must possess at all times the necessary quantity and quality of human resources to perform its duties. Its staff must have adequate competences and must create added value. In order to retain and acquire from the market good professionals, it is essential that the HFSA has a modern HR toolset equivalent to that used in the private sector.
An important duty of the HFSA as an employer is to strengthen continually the commitment of employees, maintain a good working atmosphere and overall employee satisfaction, as the effectiveness and success of the HFSA’s operation depend on its staff.
In addition to complying with the numerous obligations set out in legal provisions, it is a key consideration for the HFSA to improve the efficiency of supervision and to apply HR-related rules optimally, in line with the organization’s characteristic features while exercising its mandates specified in the HFSA Act. The HFSA strives to retain well-functioning systems; to establish its own remuneration system; to gain approval for its own training system; and to keep applying and developing the proven elements of its job, competence, job description and performance assessment systems.
HR managementThe public official status and employment of staff members is regulated in Act CLVIII of 2010 on the HFSA (HFSA Act) and in two employment laws that took effect in 2012: Act CXCIX of 2011 on public officials and Act I of 2012 on the Labour Code.
As of 31 December 2012, the HFSA’s main headcount was as follows:
total approved number of staff: 530; �
number of management: 101; �
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number of supervisory advisors and senior advisors: 107; �
number of new entrants in 2012: 42 (23 for definite, 19 for indefinite �period);
number of leavers in 2012: 43. �
Corporate social responsibility is a very important element of the HFSA’s HR activities. Providing opportunities to young professionals to gain experience is part of these endeavours and it also serves as a recruitment channel for securing a new generation of supervision professionals. Since 2007, several fresh college graduates joined the HFSA on a scholarship, enriching its resources with fresh skills and approaches. In this program, under the guidance of a mentor, scholarship holders learn about the HFSA in each specific area and later become junior experts. The HFSA pays special attention to recognizing young talent with outstanding knowledge and skills and to offering them long-term employment.
Training, developmentIn order to fulfil requirements concerning day-to-day operations and other foreseeable needs, ongoing training courses and sessions form an integral part of the HFSA’s HR policy. Knowledge, experience and professional expertise are the sources of “human capital”, but the rational development and operation of this capital calls for significant investments.
Also observing the principles laid out in the Magyary plan, professional competence and commitment are key to the HFSA’s success in living up to its special status, and in meeting challenges generated by the financial sector at international and domestic levels.
In implementing the 2012 continued training plan, the HFSA took into consideration the conferences provided by the national university of Public Service. However, with a view to the special professional needs, the vast majority of trainings comprised international and internal professional courses customized to the HFSA’s needs. The external utilization of the HFSA’s intellectual capital is of key importance for rationalizing work processes, performing duties at the highest possible professional level and from an HR policy viewpoint. Presentations by our staff members are an excellent tool for this.
Participation in Eu and international training courses is essential to ensure high-standard and up-to-date supervisory work. In order to perform their duties at a high level, it is very important for staff members to actively participate in courses run by foreign partner supervisory authorities, the Eu and other international organizations. As guest presenters, the HFSA’s
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managers and associates often appear at international conferences where they share supervisory experiences from Hungary.
Comprehensive knowledge of risk management techniques and liquidity risks, deepening the knowledge of international regulatory standards and innovations are of key importance. In preparation for Solvency II and Basel III implementation, our associates attended various international conferences.
Our colleagues often participate in training courses held by the European supervisory authorities (ESAs), the FSI/BIS, Banque de France, De nederlandsche Bank, Deutsche Bundesbank, the IMF and the FED. They also attend international conferences of organizations relevant from the HFSA’s viewpoint (e.g. IAIS, IOSCO).
In addition, the HFSA paid special attention to supporting and monitoring employee participation in continued education courses required for the public official career model. The HFSA continually supports its staff members in applying for and preparing for mandatory examinations associated with their public official status.
In language training, the HFSA focuses primarily on developing technical language skills that are indispensable for this work. Business, law and IT language training courses for employees in English and German, and also English communication training are provided.
Table 9: Internally and externally organized training courses in 2012
Brief description of training Target groupEnglish, German technical language courses (32 lessons) All HFSA staff members
English technical language training(16 lessons) All HFSA staff membersCurrent issues of credit institution regulation and supervision in the European union (CRD IV) HFSA professionals
Demonstration of ERA and receiving systems SupervisorsRisk analysis in theory and practice HFSA professionalsSecurity awareness HFSA professionals
Solvency II data provision HFSA professionals specializing in insurance
System Access Manager (SAM) software training Staff members with a licensing role
Summary of current issues and professional experiences related to the financial and supervisory institution system of the uSA
Supervision Directorate staff members
The European Commission’s banking union proposal and its potential impact on the region and Hungary HFSA professionals
Official ruling finder application All HFSA staff membersChanging and transforming court ruling practices, court experiences HFSA professionals
Central Master Data Repository (KTA) All HFSA staff membersPublic official training of the National University of Public Service (conferences) Public officials
Conferences, continued training HFSA professionals
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In 2012, 6 staff learnt foreign languages based on a study contract (3 for sustaining language command, 3 for intermediate language exams), 5 attended certified accountant training with employer support, another 44 had a study contract aimed at obtaining qualification important for the HFSA, 7 were required by the employer to obtain certain qualification, and 198 attended conferences and other professional courses.
Distribution of resourcesIn order to improve efficiency and to rationalize supervisory processes and systems, the HFSA set up own its competence centres (EMIR, CRR/CRD IV, Solvency II, Combating money laundering and terrorism financing, etc.). It also reorganized several units owing to changed needs. The purpose of reorganization was to provide for sufficient human resources of adequate quality and quantity for the execution of core HFSA responsibilities. Therefore, the scope of responsibilities and processes of certain organizational units changed and new organizational units were established.
For the HR policy area, a key task was to provide for adequate headcount and to monitor it on an ongoing basis. After elaborating a proprietary resource methodology and to ensure the ideal distribution of resources, the HR policy area and the leaders of HFSA organizational units jointly determined the number of staff required for individual duties and enabled the continual monitoring of the availability of HFSA resources.
Selection policy
The HFSA’s recruitment policy functions through multiple steps. In today’s quickly changing and increasingly specialized world of finance, it is more and more difficult to find and select a workforce with the requisite professional knowledge. Therefore, suitable candidates are sought and integrated into the organization via multiple selection rounds. The effective operation of the selection system is supported by an application database that contains the resumé of candidates wishing to join the HFSA’s professional team.
In 2012, the HFSA published six job advertisements at the most popular job search sites. In the course of selection, the HFSA focuses on measuring personal and professional competences using various tests and competence-specific interviews. The selection system works in parallel with the competence-based job descriptions, i.e. with the job title system and the competence-based performance assessment system. Full competence is ensured via skills that are also used as a basis of recruitment, selection and continual performance assessment.
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internal regulation and organization development
Internal regulationThe HFSA considers it a priority to ensure that internal regulations establish the framework for work clearly, in harmony with each other and in compliance with legal provisions.
In 2012, 75 presidential directives were issued. Ten of these were new regulatory documents, while in 65 cases effective presidential directives were revised.
Seven of the new regulatory documents capture rules of procedure relating to the HFSA’s core activities such as the order of planning and back testing supervisory priorities; rules for using the alerting module; requirements concerning the service ID card; regulations concerning the inspection of premium rate advertisement; and the rules of public administration coordination. Further, the HFSA’s Code of Professional Conduct was prepared, along with a directive on specific rules, procedures and remuneration pertaining to HFSA employees and those employed on scholarship. A new presidential directive regulates the use of the new IT application serving to record the accounting documents of the Directorate of Finance.
As an employer, the HFSA places special importance on anti-corruption efforts and to ensuring that its associates comply with ethical standards. The HFSA formulated the Code of Professional Ethics and made compliance with it mandatory for its entire staff.
A regulatory map of internal regulations was prepared and published for HFSA employees, containing presidential directives per responsible [professional]. Thus presidential directives are now available for the HFSA community in a new grouping beyond the effective and archived inventory.
Internal control systemAs part of its internal control system, the HFSA established all procedures and internal regulations that ensure the compliance of all activities and that the principles of economy, efficiency and effectiveness are fulfilled.
The HFSA president established an adequate control environment that takes effect at each level of the organization, operates a process-based control management system, provides for the regular operation of control activities, and the operation of the organization’s IT, communication and monitoring system.
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utmost compliance with quality requirements is also supported by a quality assurance system that monitors and manages potential irregularities and instances of non-compliance.
In the course of audit exercises, the HFSA’s internal audit area continually assesses the operation of internal controls. In their reports and consulting activities, they formulate proposals on developing these controls and improving their efficiency. The efficiency of internal controls is also supported by built-in, preliminary, follow-up and management (FMC) controls.
Associates in charge develop the internal control system by managing internal operational risks applying a process-based approach and in an integrated manner. They review operational risks for the entire HFSA twice per year and take risk mitigating actions along the Risk management plan to manage the highest risks. The HFSA’s risk management system was designed with a view to the risk assessment and management findings of the IT security management system, further developing the latter.
The efficiency of the HFSA’s system is illustrated by the fact that the State Audit Office (SAO) twice requested the HFSA to assist in the design of their quality management system. The HFSA accommodated and supported this request by sharing experiences in order to disseminate quality management systems and to promote the transfer of sound practices within public administration.
The HFSA’s management focuses on the transparency and integrity of supervisory activities. In 2012, the HFSA voluntarily joined the Corruption Prevention in Public Administration Program launched by the Deputy State Secretariat for Strategy within the Ministry of Public Administration and Justice. The HFSA participates in the efforts and events of this working group and also contributed to the SAO’s 2012 Integrity Survey.
According to an internal survey of senior associates of the HFSA in August 2012, 79% of respondents were content with the performance of the quality management area. This result confirms that applied international standards effectively supported the HFSA’s internal control system also in 2012 via internal operational risks management, contribution to regulatory activities, internal audits that ensure the continual monitoring of processes, and a preventive approach to irregularities and non-compliance.
Internal auditInternal audit operates in the framework of a department that reports directly to the HFSA president, thus ensuring the functional independence of internal auditors.
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The legal provisions pertaining to internal auditing changed in 2012. Effective 1 January 2012, Government Decree 193/2003 (XI.26.) on internal auditing was replaced by Government Decree no. 370/2011 (XII.31.) on the internal control system and internal audit of budgetary organs. In accordance with the new government decree, the internal audit standards and existing methodology guidelines regarding Hungarian public finances were modified as well. To adhere to these changes, the head of internal audit elaborated a new internal audit manual and modified the department’s 2012-2015 Strategic Plan.
In 2012, internal audit work was split almost evenly between identification and consulting activities. Most audits were financial and regularity audits, while one regularity audit also entailed an IT audit.
The audits carried out in 2012 covered the following topics:
compliance with the public procurement act and the rules of �procurement (the audit was performed in 2011, but audit report finalization and action plan preparation stretched into 2012),
the H1 2011 financial statements (the audit was performed in 2011, but �audit report finalization and action plan preparation stretched into 2012),
checking of inventory taking (asset management), �
identification of factors to improve data quality in an IT module of the �HFSA (extraordinary audit),
use of revenues from supervisory fines. �
In addition, the audit of Credit Institution Non-profit Kft., a company under the asset management of the HFSA, was launched. This audit was suspended in early 2013.
None of the completed audits detected actions, failures or deficiencies that would have supplied a reason for criminal, violation, indemnification or disciplinary proceedings, and thus no individual was held accountable. In the completion of audit and consulting tasks, no conflicts of interests existed regarding either auditors or the head of internal audit.
Demand for the consulting activities of internal audit exceeded the previous year’s level in 2012, an indication of its increasingly preventive nature and popularity. Consulting mostly manifested in commenting on various internal regulations, draft legal provisions and amendments and methodology guidelines, in a total of 98 cases. In addition, three decision preparation documents were prepared.
The 2013 audit plan was based on the risk assessment of the HFSA’s operating processes and the analysis thereof also took into consideration
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earlier experiences. The annual plan was drafted in line with the Strategic Plan and proportionately to the auditor capacity of the department. Further, consideration was given upon planning to audits not performed in the previous year, to ensuring that audits are built on each other and to providing continuity between covered periods.
It must be mentioned that our auditors have an excellent working relationship with the legislative associates of the Ministry for national Economy. As members of the Internal Audit Working Group operated by the Ministry, HFSA staff members regularly participate in the assessment of regulations, recommendations and guidelines that determine the work of internal auditors.
In compliance with legal requirements, internal audit keeps records of action plans developed on the basis of external and internal audit findings and recommendations. As a best practice underscored in the SAO report, this is implemented in an IT system that the HFSA developed. By keeping track of the timely completion of action items specified in the action plans, internal audit contributes to the effective operation and development of the internal control system.
Organization development2012 brought a number of changes as several new legal provisions were issued that profoundly impact the HFSA’s operation. Accordingly, regulations with of HR policy nature had to be amended and aligned to the new legal environment. When amending internal regulations, the interests of associates and clarity were key considerations of the HFSA.
In 2012, the HFSA president changed the HFSA’s Rules of Organization and Operation (ROO) within his scope of authority and this was announced in the official gazette. The change was induced by internal reorganization. After the ROO was amended, new regulation documents were prepared and existing documents were reviewed on a tight schedule, partly owing to organizational changes and partly to observe change requests aimed at improving efficiency and effectiveness.
In May 2012, the external review of the ISO 9001:2008 quality management system and the ISO 27001:2005 IT security system was completed successfully, extending the HFSA’s certification for another year. These management systems were extended to the Financial Arbitration Board’s operation; the audit of this was also successful in respect of both standards.
Annual internal reviews represent a fundamental requirement in the certification of management systems. As part of this endeavour, 23 organizational units were subjected to a scheduled internal audit in 2012.
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At these units, the auditors ascertained the compliance of professional and support processes, the development of partnerships and the accomplishment of set development goals.
During 2012, the compliance of operations with IT security requirements was subject to audit scrutiny on an ongoing basis.
Communication: hFSA website, consumer informing, press
Communication, website, informing of consumersIn order to fulfil its mission, the key strategic endeavours of the HFSA’s communication are openness, proactive and planned approach, and regularity along with credible, fair and quick mediation of information. As a supporting activity to the HFSA’s professional work, communication assists the accomplishment of the institution’s strategic objectives by formulating and disseminating messages to market players and financial consumers in a clear manner. The HFSA employs all communication tools that serve the development of overall financial literacy. Within these tools, a priority role is assigned to efficient contemporary electronic solutions, thus the website (www.pszaf.hu) is of key importance. In 2012, the HFSA website had nearly 671,000 visitors and 11 million downloads from 160 countries.
In addition to changed content and expended services on the website, the methods of communicating the information changed direction, too. Although the HFSA website underwent a facelift in January 2009, it is approaching the end of its lifecycle. As online communication is developing continually, the solutions used must adhere dynamically to the changing news consumption and information gathering habits of users and to the evolving expectations of the target groups of supervisory information. Accordingly, web 2 tools (social media and video sharing sites) played a greater role in the HFSA’s online communication in 2012 than before. Online product selection applications were given a more youthful, more user-friendly appearance. Continuing with this approach, the HFSA smartphone application was made available to users in February 2013 and the graphic design of online platforms will be upgraded in the rest of the year.
To assist foreign currency-denominated mortgage holders, the HFSA released and distributed nationwide a publication titled Payment relief options to foreign currency loan holders, informing the consumers concerned on government-backed debtor rescue packages and similar options offered by banks. The HFSA also published an information booklet on the Financial consulting network, which already had 11 representative offices in 2012.
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Published in counties where the network is present, the booklet outlined the network’s profile and provided the contact information of its regional representative offices.
On the occasion of World Savings Day on October 31, the HFSA published on its website a consumer protection information document titled Everyday savings: illustrated with infographs, this visually impressive publication summarizes key information about savings and helps consumers find their way in the maze of savings options.
PressIn 2012, the HFSA received a total of 900 press inquiries. As a result of these inquiries and other information provision, a total of 6,336 news articles were published about the HFSA’s activities in the printed and electronic press. On 487 of these occasions, the media requested a personal briefing from the HFSA spokesperson.
The main issues and events related to the HFSA and supervised markets that received attention from the press in 2012 were as follows: final mortgage repayment trends; expected losses of credit institutions; consumer complaints and HFSA fines concerning final repayment; the stability of the banking system; potential freezing of bank deposits; the potential MnB-HFSA merger; green card and evidencing the possession of MTPL insurance abroad; the extension of the financial consulting network; launch of the HFSA’s claims of public interest and claim enforcement proceedings; the lessons of debtor rescuing; the legal provision maximizing the annual percentage rate (APR); loss-making mandatory pension funds; withdrawal of the operating licence of Soltvadkert és Vidéke Savings Cooperative; measures against Provident Pénz-ügyi Zrt. (Provident Financial Co. Ltd.); the role of the financial ombudsman; “bonus protection schemes” in MTPL premium rate advertisements; cross-charging the transaction levy to consumers; and HFSA measures against Zee Capital Zrt., New Chance Credit Zrt., the AXA branch, Raiffeisen Bank Zrt., ING Befektetési Alapkezelő Zrt. (ING Investment Fund Management Co. Ltd.) and EOS Faktor Magyarország Zrt.
under the HFSA’s coordination, the chairman of the Financial Arbitration Board presented the experiences of the institution’s 2011 operation at a press conference in February 2012. In late April and early May, the HFSA and its civil partner held a “road show” with joint press conferences in six cities where financial consulting network offices were opened. In early November, the HFSA president presented the HFSA’s november 2012 prudential risk report at a background briefing with media representatives. During the year, the HFSA issued 45 press releases to the media and also published them on its home page.
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IT prioritiesAs in previous years, priority is assigned to the implementation and operation of systems for receiving, processing, recording and sending out data, and of e-administration systems. These systems are also specified in the IT strategy that was prepared on the basis of the HFSA’s strategy. According to effective HFSA regulations, the IT Committee (IB) must discuss IT developments that significantly impact the HFSA’s work. The decision on proposals supported by the IB is made at the Management meeting.
The gradual, scheduled and reasoned rollout of e-administration has been under way at the HFSA for many years, giving due consideration to effective legal provisions on public administration proceedings at all times. First capital market disclosures were channelled to online platforms exclusively, then we introduced the receipt of e-signed documents in the data reports from supervised institutions. After that the ERA system was implemented to support contact keeping with supervised institutions, with continually expanded features and functions. A key step forward was the implementation and launch of the electronic notification repository where the HFSA can place documents to be retrieved by intended addressees (for the time being, this tool is only operational for some key partner institutions; later it will be made available to all supervised entities).
The transformation and data cleansing of the Central Master Data Depository (KTA) of the Komplex IT System (KIR), the system that stores and processes data provided by supervised institutions was started in 2011 and completed in Q3 2012. As a result of this project, the HFSA’s central master data management mechanisms (i.e. the KTA system and the related administrative processes) were transformed with a view to data quality management considerations and the option of linking to e-administration tools. Transformation also entailed data cleansing.
In order to implement operations and maintenance that ensures the optimal availability of mission-critical systems (MAXIREnD), we increased system availability by duplicating the running environment and changed to new, faster servers within the IT infrastructure. The final infrastructure was put in place in Q1 2012, including application developments needed for the optimum utilization of infrastructure items. Operating experiences to date are definitely positive: we succeeded in increasing availability in a cost efficient manner.
In addition, the following main development projects were carried out at the HFSA in 2012. Most served consumer protection purposes and promoted reliable and accurate information provision to consumers:
Household cost calculation program module: this application provides �useful advice to consumers so they can plan revenues and expenses within their budget.
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Support to MTPL premium liberalization: owing to amended legal �provisions on premium liberalization issued in 2012, the HFSA was assigned an important role in publishing premium rates. In order to ensure the seamless operation of the premium liberalization scheme by 2013, the HFSA carried out IT developments.
Online institution finder tool: in another effort to make consumer �informing more efficient, the HFSA reviewed the data on supervised institutions and other institutions interacting with the HFSA presented in multiple tables and under multiple search tools, then consolidated these data and made them retrievable under a new, single search tool.
preparation of laws
Participation in the preparation of lawsIn 2012, the HFSA participated in the assessment of 70 draft legal provisions and law harmonization proposals. Of these, the following bills, government decrees and ministerial decrees deserve special mention:
Bills
draft of the new Civil Code; �
draft of the new Criminal Code; �
on the third phase of the European union’s emission trading system �and related to the resolution on division of effort;
on electronic information security; �
on legal provisions pertaining to the enforcement of indemnification �claims based on MTPL contracts signed with MÁV General Insurance Association;
amending laws related to the implementation of Government Decree �no. 1101/2012 (IV. 5.) on measures required for increasing the government securities portfolio held by retail customers;
amending Act XLVIII of 1996 on Public Warehousing; �
on upgrading the legal provisions pertaining to Eximbank Zrt. and �MEHIB Zrt.;
amending Act CXXXVI of 2007 on the Prevention and Combating of �Money Laundering and Terrorist Financing and certain related laws;
on the postal services act; �
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on Hungary’s budget for 2012; �
amending Act XXXIV of 2004 on Small and Medium-sized Enterprises �and the Support Provided to Such Enterprises.
In 2012, the HFSA initiated amendments to legal provisions at the Ministry for national Economy and the Ministry of Public Administration and Justice on 30 occasions. The initiatives included a large (nearly 90-page) amendment proposal to sector-specific laws, including the ACI, the ACM, the Insurance Act and the AIFCD, among others. Concept-level proposals issued by the HFSA also deserve mention here. These proposals related to renewal and standardization of regulations on authority training for financial service intermediation and insurance intermediation; reviewing regulations on management of receivables; reviewing the regulations on the public duties of MABISZ; and enabling deviations from the e administration rules of procedure set out in the act on public administrative proceedings and services.
Lower level legal provisions (government decrees, ministerial decrees)
on amending Government Decree no. 195/1997 (XI. 5.) implementing �Act LXXX of 1997. on the Eligibility for Social Security Benefits and Private Pensions and the Funding for These Services;
on amending government decrees outlining specific accounting rules �in relation to the Act on Accounting;
on amending certain government decrees of financial relevance; �
on amending Government Decree no. 83/2010 (III. 25.) on the �determination, calculation and publication of the Annual Percentage Rate;
on amending Government Decree no. 288/2009 (XII. 15.) on Data �Collection and Transfer by the national Statistical Data Collection Program;
on amending Government Decree no. 366/2011 (XII 30) on liquidity �coverage requirements for credit institutions and on the maturity mismatch of foreign currency positions of credit institutions;
on amending Government Decree no. 114/2006 (V. 12) on the registry �of liquidators;
on amending the government decrees on e-administration in relation �to Act CXL of 2004 on the general rules of administrative proceedings and services;
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government decree on the detailed rules of e-administration; �
government decree on the appointment of organizations in relation to �e-administration;
government decree on regulated e-administration services and �mandatory services of the state;
government decree on benefits that can be provided to public �officials;
government decree on continued education in public administration; �
government decree on amending certain government decrees on �housing savings;
MfnE decree on the Financial Rights Ombudsman. �
The hFSA’s activities in data provision, data publication and risk monitoring
Effective 1 January 2011, point a) in paragraph (1) of Article 117 of the HFSA Act authorized the HFSA president to issue decrees specifying the detailed rules pertaining to the order, method, scope, form and time of fulfilling the data provision and reporting obligations of supervised organizations and persons. Data provision to the HFSA follows the following five principles:
Stability �
utilization of rationalization opportunities �
Provision of adequate preparation time �
Consultation �
Transparency �
With a view to these principles, 17 HFSA decrees on data reporting were amended in 2012, owing to changes in legal provisions and supervision needs. During the year, three new HFSA decrees on data provision were proclaimed.
The HFSA makes a conscious effort to limit any additional data provision burden on institutions to only absolutely necessary cases. However, the risks deriving from the quickly changing economic and market environment pose newer challenges to supervision as well, making the requisition of new information and data indispensable. A part of the requests for new information were already incorporated in the decrees on regular data provision, while other information was requested by way of resolutions and
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requests for extraordinary data provision. On 12 occasions, the HFSA required extraordinary data provision in circular resolutions to specific players of the supervised sectors.
Content-related questions received from data providers are answered at the HFSA via email addresses. This solution not only ensures answering of these questions but also assures data quality.
For each sector, the HFSA aggregates the information of public interest received under regular data provision and publishes it on its home page on a monthly and quarterly basis, in English and Hungarian. The purpose of this publication is to provide information to a wide range of analysts and interested parties on the activities of players on supervised markets and on market trends. Responding to requests, the HFSA also further extended the scope of time series in 2012. As a new element, the credit institution time series were extended with information on maturity transformation. The data of collateral housing properties selected for forced sale are published quarterly while data on repaying foreign currency loans at a fixed exchange rate are published monthly since March and July, respectively. Adhering to the diminishing role of mandatory pension funds, we narrowed the scope of related published information. Since 2012, the HFSA adds short written analyses to the time series.
The HFSA publishes data of public interest annually based on individual institutions’ audited financial statements (balance sheet, income statement). This data is published on the HFSA’s home page, in the so-called Golden Book.
As part of risk-based supervision, the HFSA operates a risk monitoring system that relies on quarterly data provision. In essence, the system measures the relevant risks of institutions in specific supervised sectors with a few properly selected and adequately weighted indicators. The methodology is revised annually in the first half of each year, when it is updated with the necessary modifications. The modifications carried out in 2012 were in line with the new information content of data reports.
Prior to the comprehensive risk assessment of supervised institutions, quarterly risk reports are generated for management. The purpose of these reports is to call the attention of management to institutions, within two weeks after their data provision, where actual indicator values led to a high-risk rating.
In 2012, the European Supervisory Authorities (ESAs) in cooperation with member state representatives (included that of the HFSA) continued with the elaboration of Implementing Technical Standards (ITS), i.e. drafts aimed to establishing reporting systems that have standardized content and format
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on an Eu-wide basis. Data reporting obligations ordered via the ITS will be directly effective in EU member states, without transposition into national legislation. The ESAs also provided an opportunity for public comments on these data reporting drafts in 2012.
The ITS encompass multiple topics per sector. In the case of credit institutions, standardized data reporting will be extended to the control of capital adequacy and leverage requirements, general financial information at consolidated level and the monitoring of liquidity and mortgage lending. Contrary to preliminary expectations, the EBA draft ITS requiring standardized data reporting could not be finalized and announced in 2012 because the adoption and proclamation of the underlying Eu regulation, the Capital Requirement Regulation (CRR), is delayed to 2013. Therefore, standardized data reporting is expected to be launched in 2014.
The existing data reports of credit institutions and investment enterprises to the HFSA already include reporting tables (COREP) that are harmonized at European level and scrutinize capital adequacy. The HFSA decided on the implementation of these at its own discretion in 2007. The new COREP data-reporting package, however, will enter into effect directly, without contribution from the national supervisory authorities (nSAs).
Similarly, the Financial Reporting (FInREP) tables containing IFRS-compliant financial information will also enter into effect directly, impacting banking groups subject to consolidated supervision. The harmonization of supervision methodologies calls for the review of the Hungarian regulatory environment. Therefore, the HFSA initiated in 2012 that the definition of capital adequacy rules for consolidated banking groups and the related data reporting to the HFSA should also be based on international financial reporting standards by the time the CRR takes effect. This initiative to amend laws was received positively by the Ministry for national Economy, thus it is expected to be implemented in 2014, depending on the CRR’s entry into effect.
In the insurance sector, the planned 1 January 2014 launch date of the new Solvency II regime is delayed owing to disputes in the Eu legislation approval phase. Thus the implementation of the joint data reporting system to be applied at member state level is running late as well. Standardized, Eu-level data reporting will be ordered in an ITS in the insurance sector, too. The data reporting draft ITS is being prepared with the HFSA’s active participation and under the direction of the EIOPA. Public consultation on the tables that will serve as annexes to the regulation was completed by 20 January 2012. More than 6,000 comments were received from experts and the draft tables are available on the EIOPA website. The draft ITS is also under elaboration; in addition to general provisions on reports, it will also include the main requirements concerning report completion.
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In order to assist domestic preparation, the HFSA organized an informative meeting in December 2012 to interested parties on the expected legal environment of data provision and on the reporting tables. At the meeting, the consultation option on the interpretation and completion of individual tables was announced.
The hFSA’s analysing activities
The analyses carried out by the HFSA are important components of effective risk detection and assessment and are also important for developing a proposal on the applicable risk management methods. The analyses of the HFSA are organized around the following topics and levels:
environment analysis – to gain an understanding of the international �and domestic trends, events and prospects of the political, economic and financial environment, including that of the market and institutional environment within the latter;
sector analysis – to reveal the overall trends and phenomena of the �financial sector and its subsectors (banks and specialised credit institutions, credit cooperatives, financial enterprises, insurers, investment service providers, fund managers and investment funds and pension, healthcare and voluntary mutual funds) and their distribution among institutions in order to assess outlooks and risks;
institution analysis – to understand the unique condition, operational �characteristics, effectiveness and risks of supervised institutions in order to obtain supporting information for prudential supervision;
market analysis – verification of compliance regarding products, �services and service providers present on the Hungarian market in order to inform customers and review how they are treated; and finally
consumer protection analysis – to reveal and assess systemic �phenomena, market trends and risk points of consumer protection relevance, presenting the related HFSA measures.
As part of these activities, the following duties were carried out in 2012:
a prudential risk report was drafted on two occasions; �
a financial consumer protection risk report was drafted on two �occasions;
the annual report on 2011 activities was prepared; �
an analysis titled “Balance sheet correction and lending contraction �in Hungary” was drawn up jointly with the MnB for the Financial Stability
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Board. The study covered the reasons behind the reduction in lending, its desired level and composition, impact on the economy and international experiences;
regular renewal of the sector-level risk map prepared for internal �purposes;
execution of analyses of international relevance, data and information �reporting, regular commenting on the working documents of the European Supervisory Authorities (EBA, ESMA, EIOPA), the European Systemic Risk Board (ESRB) and its Advisory Technical Committee (ATC);
preparation of flash analyses for the sector-specific time series regularly �published on the HFSA website;
extensively informing activities for specific international organisations, �credit rating agencies, European partner authorities and various market players (investors, etc.), and
execution of a substantial number of ad-hoc analyses to reveal and �assess risks that threaten the financial sector and to provide supporting information for supervisory decisions, regulatory proposals and proposed action plans.
Lawsuits
As of 31 December 2012, a total of 132 lawsuits and court procedures were under way against the HFSA. In another ten lawsuits (four as lawsuits of public interest, six as lawsuits for the enforcement of public interest) the HFSA acted as plaintiff.
The distribution per sector of the 142 lawsuits under way as of 31 December 2012 was as follows.
Table 10 a : Ongoing lawsuits by sectors
SectorLawsuits and
court procedures launched against
the HFSA
Lawsuits launched by the HFSA
Lawsuits of public interest
Enforcement of public interest
Banking sector 88 4 5Capital markets sector 14 0 0
Insurance sector 20 0 1Funds sector 10 0 0
In 2012, a total of 149 public administration suits and non-suit procedures, four civil lawsuits and non-suit procedures were launched against the HFSA. The
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HFSA launched two new lawsuits to enforce public interest. The distribution per sector of the 155 lawsuits and non-suit procedures launched against or by the HFSA in 2012 was as follows:
Table 10 b :Public administration suits and non-suits procedures launched against the HFSA by sectors
SectorLawsuits and court
procedures launched against the HFSA
Lawsuits launched by the HFSA to enforce
public interestBanking sector 115 1Capital markets sector 5 0Insurance sector 25 1Funds sector 8 0
In 2012, a total of 158 lawsuits and non-suit procedures reached a final conclusion. The distribution per sector of procedures concluded with a non-appealable ruling was as follows.
Table 10 c: Procedures concluded with a non-appealable ruling by sectors
SectorLawsuits and court
procedures launched against the HFSA
Lawsuits of public inte-rest launched by the
HFSABanking sector 110 2Capital markets sector 9 0Insurance sector 26 0Funds sector 11 0
The 158 cases that reached a final conclusion included 151 public administration suits and non-suit procedures. The HFSA won 146 of these and lost five. The HFSA also won the two concluded procedures to enforce public interest and the remaining five cases that involved a financial claim.
The HFSA’s financial management in 2012
Pursuant to the HFSA Act, the HFSA is a budgetary organ empowered with chapter (directing organ) mandates, with its budget forming a single section within Parliament’s budgetary chapter. The total expenditures and revenues in its budget can solely be reduced by Parliament.
In addition to the Budget Act and the HFSA Act, the legal framework for the HFSA’s financial management comprises the Act on Public Finances, the government decree implementing it, the Act on Accounting, the government decree implementing said act for general government organizations, plus the HFSA’s internal regulations.
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In Act CLXXXVIII of 2011 on the 2012 Budget of Hungary, Parliament approved of the HFSA’s total revenues and expenditures budget in the amount of HuF 10,247.1 million.
Revenues of the HFSAPursuant to the HFSA Act, the HFSA’s revenues consist of the supervisory fee, the fines imposed by the HFSA, administrative services fees and other revenues.
In 2012, actual financial revenues amounted to HUF 10,143.4 million, representing 93.8% of the 2011 figure of HUF 10,810.4 million.
The actual amount of supervisory fee revenues equalled HuF 9,109.1 million in 2012, reflecting a considerable 7.6% decrease from the 2011 amount of HuF 9,857.7 million.
Revenues from imposed fines also fell short of the 2011 figure of HUF 634.2 million and amounted to HuF 555.6 million. However, while a portion of these revenues was actually received, it cannot be considered final revenues available for use as the related amounts are subject to ongoing lawsuits.
While the surplus carried over from 2010 to 2011 equalled HuF 9,336.1 million, the amount carried over to 2012 was HUF 2,833.1 million. The difference in the surplus derives from the fulfilment of the HUF 7,232.5 million payment obligation to the central budget set out in the amendment to the 2011 Budget Act.
The HFSA’s total revenues (also including the used surplus appropriation amount) equalled HuF 12,357.3 million in 2012, representing a 36.7% decrease from the 2011 figure of HUF 19,527.9 million, owing to the reasons outlined above.
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Table 11 a : Revenues of the HFSA per appropriation in 2011 (HuF’000, %)
revenues (chapter total)2011
Original appropriation
Amended appropriation
Fulfilmentdistribution of fulfilment
1 2 3 4 5Procedural fees 01 0 191 439 198 781 1,0%
Supervisory fees 02 0 9 848 400 9 857 737 50,5%
Fines 03 0 620 400 634 180 3,2%
Invoiced and other revenues
04 10 278 000 13 651 14 728 0,1%
Funds received for operations from abroad
05 30 500 7 159 7 159 0,0%
Loans repaid 06 116 000 97 843 97 843 0,5%
Cash inflows in actual year (01+…+06)
07 10 424 500 10 778 892 10 810 428 55,3%
Appropriation surplus from previous year
08 0 9 336 076 8 743 507 44,8%
Pending, accrued and offsetting revenues
09 0 0 -25 966 -0,1%
"Consolidated" revenues (07+...+09)
10 10 424 500 20 114 968 19 527 969 100,0%
Transferred from institution 11 0 0 0 0,0%
Total revenues (10+...+11) 12 10 424 500 20 114 968 19 527 969 100,0%
Table 11 b : Revenues of the HFSA per appropriation in 2012 (HuF’000, %)
Bevételek (fejezet összesen)
2012 2012 fulfilment
/ 2011 fulfilment
Original appropriation
Amended appropriation
Fulfilmentdistribution
of fulfilment
1 6 7 8 9 10=8/4Procedural fees 01 150 000 121 684 124 576 1,0% 62,7%
Supervisory fees 02 9 642 300 9 090 454 9 109 147 73,7% 92,4%
Fines 03 300 000 540 045 555 585 4,5% 87,6%
Invoiced and other revenues
04 8 200 213 256 237 559 1,9% 1613,0%
Funds received for operations from abroad
05 0 0 0 0,0% -
Loans repaid 06 146 600 116 508 116 502 0,9% 119,1%
Cash inflows in actual year (01+…+06)
07 10 247 100 10 081 947 10 143 369 82,1% 93,8%
Appropriation surplus from previous year
08 0 2 833 123 1 919 969 15,5% 22,0%
Pending, accrued and offsetting revenues
09 0 0 -13 445 -0,1% 51,8%
"Consolidated" revenues (07+...+09)
10 10 247 100 12 915 070 12 049 893 97,5% 61,7%
Transferred from institution
11 0 307 400 307 400 2,5% -
Total revenues (10+...+11)
12 10 247 100 13 222 470 12 357 293 100,0% 63,3%
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The HFSA’s fee revenues per market sectorIn 2012, 74.7% of the HFSA’s revenues (70.3% in 2011) came from the money market sector. An additional 11.2% (11.7% in 2011) was received from capital market players, 10.8% (10.5% in 2011) from the insurance market and 3.3% (7.5% in 2011) from the pension, healthcare and voluntary mutual fund sector.
Table 12 a : HFSA revenues per market sector in 2011 (HuF’000, %)
Sector2011
Basic fee Variable fee
Late charges Total Distribution
1 2 3 4 5=2+3+4 6Money market 01 181 664 6 745 994 3 888 6 931 546 70,3%
Capital market 02 55 153 1 094 012 1 240 1 150 405 11,7%
Insurance 03 133 006 901 723 1 431 1 036 159 10,5%
Pension, healthcare and voluntary mutual funds
04 45 134 694 469 24 739 627 7,5%
Total revenues (01+…04) 05 414 956 9 436 197 6 583 9 857 737 100,0%
Table 12 b : HFSA revenues per market sector in 2012 (HuF’000, %)
Szektor2012
Basic fee Variable fee
Late charges Total Distribution
1 7 8 9 10=7+8+9 11Money market 01 180 357 6 623 956 2 210 6 806 523 74,7%
Capital market 02 52 408 964 751 843 1 018 002 11,2%
Insurance 03 130 160 850 590 600 981 350 10,8%
Pension, healthcare and voluntary mutual funds
04 37 531 265 168 573 303 272 3,3%
Total revenues (01+…04) 05 400 456 8 704 465 4 226 9 109
147 100,0%
Money market sector
While overall HFSA revenues from supervisory fees decreased, the largest and growing portion (from 70.3% in 2011 to 74.7% in 2012) was paid up by money market institutions, and nine tenths of money market revenues continue to come from credit institutions. The basic fee of money market institution represented an insignificant 2.6% of total fee revenues, thus from the viewpoint of total revenues, variable fees were decisive also in 2012.
Credit institutions that provide the vast majority of money market sector fees pay the variable part of the supervisory fee based on their capital requirement and the extent of their portfolio management activities. The fee paid after the capital requirement is a critical element and its basis reflected a decreasing trend in recent years. Capital requirement mostly depends on the risk-weighted exposure value of the asset portfolio. Although the average risk level of the asset portfolio did not decrease, its volume dropped. Thus the variable fee of credit institutions and total
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revenues received from them fell by 1% and 1.1% respectively, leading to a HuF 67.2 million revenue decline for the HFSA. Revenues from financial enterprises decreased by 10%, mostly owing to declining variable fees that followed the reduction in financing activities and total assets in the sector. Thus revenues from financial enterprises made up 7.9% of money market revenues in 2012, down from 8.6% in 2011. In nominal terms, revenues from the supervision of financial enterprises fell by HuF 59.8 million.
Table 13 a : Revenues from the money market sector in 2011 (HuF’000)
Sector/activity2011
Basic fee Variable fee Total1 2 3 4=2+3
Banks 01 76 000 5 675 076 5 751 076
Bank representative offices 02 650 650
Credit cooperatives 03 800 4 551 5 351
Branches of foreign financial institutions 04 2 000 244 574 246 574
Cash processing units 05 300 300
Payment institutions 06 402 373 775
Independent money market agents 07 200 200
Multiple money market agents 08 20 100 20 100
Money market agents 09 1 435 238 1 673
Financial enterprises 10 52 328 544 584 596 912
Currency exchangers 11 449 449
Savings cooperatives 12 26 600 276 598 303 198
Principal multiple intermediaries 13 400 400
Late payment charges 14 3 888
Total of money market sector (01+…14) 15 181 664 6 745 994 6 931 546
Table 13 b : Revenues from the money market sector in 2012 (HuF’000, %)
Sector/activity2012 2012
fulfilment/2011 fulfilmentBasic fee Variable
fee Total
1 5 6 7=5+6 8=7/4Banks 01 74 000 5 609 984 5 683 984 98,8%
Bank representative offices 02 400 400 61,5%
Credit cooperatives 03 800 4 585 5 385 100,6%
Branches of foreign financial institutions
04 2 000 235 653 237 653 96,4%
Cash processing units 05 300 300 100,0%
Payment institutions 06 600 290 890 114,8%
Independent money market agents
07 350 350
Multiple money market agents 08 25 100 25 100
Money market agents 09 449 449 26,8%
Financial enterprises 10 50 458 486 620 537 078 90,0%
Currency exchangers 11 250 250 55,6%
Savings cooperatives 12 25 200 286 824 312 024 102,9%
Principal multiple intermediaries
13 450 450
Late payment charges 14 2 210 56,8%
Total of money market sector (01+…14) 15 180 357 6 623 956 6 806 523 98,2%
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AnnuAL REPORT
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Capital market sector
Supervisory fee revenues from the capital market sector were down by 11.5% from the 2011 level in 2012. This trend mostly derived from the decline in fund management subsector revenues (fund managers and investment funds), which represented 89% of total fee revenues.
In the case of investment funds that generate 81% of total revenues from the sector, the decrease of net asset values was pivotal. This decrease was caused by the final repayment of foreign currency loans, the growth of government securities purchased by households and the redemption of investment units in relation to the transfer of mandatory pension fund assets (that mostly impacted private funds). The shrinkage of this business line also affected fee payments by investment fund managers as the size of managed funds also decreased. At the same time, fee revenues in the second half and especially in the last quarter of 2012 were improved by the significant growth of the net asset value of investment funds owing to favourable yields and net capital influx as the mood on the capital markets brightened.
Contrary to decreasing capital market revenues, the variable and supervisory fees grew by 15% and 127%, respectively. The former mostly derived from portfolio management fees of investment enterprises while the latter related to the activities of venture capital funds.
Table 14 a : Revenues from the capital market sector in 2011 (HuF’000)
Sector/activity2011
Basic fee Variable fee Total1 2 3 4=2+3
Commodity exchange service providers 01 600 600Investment enterprises 02 5 231 26 633 31 864Investment fund managers 03 7 000 87 936 94 936Investment funds 04 957 017 957 017Venture capital funds 05 8 186 8 186Venture capital fund managers 06 3 600 3 600Clearing house 07 2 000 7 600 9 600Securities agent 08 35 322 35 322Stock exchange 09 200 1 428 1 628Branches of foreign investment enterprises 10 800 401 1 201
Central counterparty 11 200 4 810 5 010Public bonded warehouse 12 200 200Late payment charges 13 1 240Total of capital market sector (01+…13) 14 55 153 1 094 012 1 150 405
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AnnuAL REPORT
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Table 14 b : Revenues from the capital market sector in 2012 (HuF’000, %)
Sector/activity2012 2012
fulfilment/2011 fulfilment
Basic fee
Variable fee Total
1 5 6 7=5+6 8=7/4Commodity exchange service providers 01 600 600 100,0%
Investment enterprises 02 5 000 31 695 36 695 115,2%Investment fund managers 03 6 800 77 807 84 607 89,1%Investment funds 04 822 841 822 841 86,0%Venture capital funds 05 18 585 18 585 227,0%Venture capital fund managers 06 3 200 3 200 88,9%
Clearing house 07 2 000 7 600 9 600 100,0%
Securities agent 08 33 408 33 408 94,6%
Stock exchange 09 200 1 396 1 596 98,0%Branches of foreign investment enterprises 10 400 1 219 1 619 134,8%
Central counterparty 11 200 3 608 3 808 76,0%Public bonded warehouse 12 600 600 300,0%Late payment charges 13 843 68,0%Total of capital market sector (01+…13) 14 52 408 964 751 1 018 002 88,5%
Insurance sector
Revenues from the insurance sector went down by 5.3% in 2012. The decline mostly stemmed from the 5.1% decrease of average solvency capital requirement and the 2.1% shrinkage of average technical reserves, the basis of supervisory fee payments. Thus the variable fee of insurers, which represent 86-87% of supervisory fee revenues from the sector, went down by 6%. In addition, the basic fee of insurance intermediaries fell by 14.1% owing to headcount reductions. At the same time, the increasingly popular transformation into branches saw the contribution to supervisory fees from the branch segment up a significant 27.4%, driving their share up from 2.5% to 3.4%.
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AnnuAL REPORT
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Table 15 a : Revenues from the insurance sector in 2011 (HuF’000)
Sector/activity2011
Basic fee Variable fee Total
1 2 3 4=2+3Brokers 01 29 075 50 29 125Specialised insurance consultants 02 1 200 250 1 450Insurance associations 03 1 166 21 396 22 562Insurance branches 04 26 000 223 26 223Insurance corporations 05 64 000 879 804 943 804Branch of independent insurance intermediaries 06 109 109
Tied insurance intermediaries 07 475 475Multiple insurance agents 08 10 981 10 981Late payment charges 09 1 431Total of insurance sector (01+…+09) 10 133 006 901 723 1 036 159
Table 15 b : Revenues from the insurance sector in 2012 (HuF’000, %)
Sector/activity2012 2012
fulfilment/2011 fulfilment
Basic fee
Variable fee Total
1 5 6 7=5+6 8=7/4Brokers 01 25 020 25 020 85,9%Specialised insurance consultants 02 1 050 1 050 72,4%
Insurance associations 03 1 299 20 138 21 437 95,0%Insurance branches 04 30 000 3 420 33 420 127,4%Insurance corporations 05 62 000 827 032 889 032 94,2%Branch of independent insurance intermediaries 06 391 391 359,3%
Tied insurance intermediaries 07 200 200 42,1%
Multiple insurance agents 08 10 200 10 200 92,9%Late payment charges 09 600 41,9%Total of insurance sector (01+…+09) 10 130 160 850 590 981 350 94,7%
Pension, healthcare and voluntary mutual funds sectorThe significant decline of fee revenues from mandatory pension funds continued in 2012 as well. The 86.2% decrease stemmed from the baseline impact and from the shrinkage of managed assets generated by the return of members to the state social security system. Revenues from voluntary pension funds were 3.6% down from the 2011 figure owing to a smaller asset portfolio of voluntary pension funds. Although revenues from healthcare funds and voluntary mutual funds grew by 1.8% and 3.3% respectively, their share in fund sector total revenues remained low, at 6.1%. Basic fee revenues went down as a result of the decreasing number of funds.
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AnnuAL REPORT
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Table 16 a : Revenues from the pension, healthcare and voluntary mutual fund sector in 2011 (HuF’000)
Sector/activity2011
Basic fee Variable fee Total
1 2 3 4=2+3Mandatory pension funds 01 36 000 461 907 497 907Voluntary healthcare funds 02 2 776 14 194 16 970Voluntary pension funds 03 5 539 218 139 223 678Voluntary mutual funds 04 818 230 1 048Occupational pension provider 05Late payment charges 06 24Total of funds sector (01+…06) 07 45 134 694 469 739 627
Table 16 b : Revenues from the pension, healthcare and voluntary mutual fund sector in 2012 (HuF’000, %)
Sector/activity2012 2012
fulfilment/2011 fulfilment
Basic fee
Variable fee Total
1 5 6 7=5+6 8=7/4Mandatory pension funds 01 28 923 39 765 68 688 13,8%
Voluntary healthcare funds 02 2 641 14 627 17 268 101,8%
Voluntary pension funds 03 5 306 210 250 215 556 96,4%Voluntary mutual funds 04 561 522 1 083 103,3%Occupational pension provider 05 100 4 104
Late payment charges 06 573 2391,2%Total of funds sector (01+…06) 07 37 531 265 168 303 272 41,0%
Revenues from finesThe HFSA is entitled to impose a fine on entities specified in the HFSA Act if it reveals during supervisory inspections that applicable legal provisions or HFSA resolutions were breached, bypassed, not fulfilled or fulfilled late. In 2012, the HFSA received HUF 555.6 million in fines, 14.1% down on 2011. Fines imposed and received upon consumer protection inspections make up 40% of total fines, owing to the HFSA’s active consumer protection efforts.
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AnnuAL REPORT
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Table 17: The HFSA’s revenues from fines (HUF’000)
Revenues from fines,
2011
Revenues from fines,
20121 2 3
Money market 01 36 892 48 742Capital market 02 168 246 50 064Insurers 03 28 936 36 306Pension, healthcare and voluntary mutual funds 04 1 356 201 257Supervisory fines (01+…+04) 05 235 430 336 369Fines imposed in consumer protection proceedings 06 398 750 219 216
Total fines (05+06) 07 634 180 555 585
Own account and other revenuesOwing to multiple factors, actual own account and other revenues increased significantly (by 1,613 %) in 2012. One such factor was the government support provided to liquidations carried out by Hitelintézeti Felszámoló Nonprofit Kft. (Credit Institution Non-profit Kft.) in strategic sectors. Central budget support was also secured by Government Decrees (HuF 180.6 million). Deducting central budget support, the actual 2012 figure is HUF 57 million, HuF 42.3 million up on the previous year. The majority of this growth came from membership fees returned from international organizations (ESMA, EIOPA): HuF 38.7 million, 67.9% of revenues. In addition, the HFSA successfully enforced penalty claims associated with defaulted (overdue) or non-compliant deliveries, realizing revenues of HuF 4.7 million.
The HFSA’s expendituresIn 2012, the HFSA’s budget equalled the original appropriation of HuF 10,247.1 million stated in the Budget Act. HuF 9,939.7 million was available for expenditures while HuF 307.4 million of equilibrium reserves was separated in its budget (as chapter-managed appropriation). The HFSA treated these equilibrium reserves as actual reserves through the year and did not use them.
The expenditure appropriation was supplemented by surplus amounts from the previous years equalling HuF 2,833.1 million.
Apart from fulfilling a payment obligation chargeable to 2011 to the central budget, the HFSA spent HuF 556.3 million less on its operations in 2012 than in 2011. The HuF 307.4 million money transfer within the chapter (to reserves) was part of this saving. The fulfilment of the HUF 7,232.5 million payment obligation in 2011 represented 74.2% of material and current expenditures and nearly 41.8% of the HFSA’s total expenditures (this amount was paid from reserves accumulated in 2011 and prior years.)
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AnnuAL REPORT
2012
Table 18 a : Expenditures of the HFSA per appropriation in 2011 (HuF’000, %)
Expenditures (chapter total)2011
Original appropriation
Amended appropriation
Fulfilmentdistribution of fulfilment
1 2 3 4 5Personnel-related expenditures 01 5 623 800 6 413 710 5 401 035 31,2% of which: - salaries 02 4 807 296 5 483 730 4 471 054 25,9%Contributions payable by employer 03 1 378 000 1 617 062 1 353 124 7,8%Current expenses 04 2 537 300 10 116 113 9 746 583 56,4% of which: - payment to central budget
05 7 232 500 7 232 500 41,8%
Transfer of funds for operations, other expenses
06 450 700 1 179 331 252 988 1,5%
of which: - transfer to chapter account
07 0 0 0 0,0%
Operating budget (01+03+04+06) 08 9 989 800 19 326 216 16 753 730 96,9%
Cumulative budget 09 328 700 626 752 451 851 2,6%Loans provided 10 106 000 162 000 107 799 0,6%Pending, carried over and offsetting expenditures
11 - - -22 735 -0,1%
"Consolidated" expenditures (08+...+11)-07 12 10 424 500 20 114 968 17 290 645 100,0%
Total expenditure (07+12) 13 10 424 500 20 114 968 17 290 645 100,0%
Table 18 b : Expenditures of the HFSA per appropriation in 2012 (HuF’000, %)
Expenditures (chapter total)
2012 2012 fulfilment
/ 2011 fulfilment
Original appropriation
Amended appropriation
Fulfilmentdistribution of fulfilment
1 6 7 8 9 10=8/4
Personnel-related expenditures
01 5 689 400 6 444 287 5 497 702 56,0% 101,8%
of which: - salaries 02 4 878 694 5 714 775 4 768 195 48,6% 106,6%Contributions payable by employer
03 1 395 700 1 859 460 1 417 657 14,5% 104,8%
Current expenses 04 2 181 800 2 681 582 2 085 008 21,3% 21,4% of which: - payment to central budget
05 0 0 0 0,0% -
Transfer of funds for operations, other expenses
06 608 700 1 814 738 538 206 5,5% 212,7%
of which: - transfer to chapter account
07 0 307 400 307 400 3,1% 0,0%
Operating budget (01+03+04+06)
08 9 875 600 12 800 067 9 538 573 97,2% 56,9%
Cumulative budget 09 251 900 338 303 216 996 2,2% 48,0%Loans provided 10 119 600 84 100 53 989 0,6% 50,1%Pending, carried over and offsetting expenditures
11 - - -346 0,0% 1,5%
"Consolidated" expenditures (08+...+11)-07
12 10 247 100 12 915 070 9 501 812 96,9% 55,0%
Total expenditure (07+12)
13 10 247 100 13 222 470 9 809 212 100,0% 56,7%
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AnnuAL REPORT
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Personnel-related expenditures and employers’ contributions
Within actual expenditures, personnel-related expenditures and the related charges represent 70.5%, up from 67.2% in 2011 (stripped of the payment obligation). The HFSA spent HuF 5,497.7 million on remuneration and benefits to personnel in 2012, 1.8% in excess of the 2011 amount.
The growth principally derives from year-through impact of the mid-year headcount increase of 25 in 2011 (establishment of the Finan-cial Arbitration Board with a staff of 20, insourcing of 5 maintenance personnel), from scheduled promotions and title awards as per the act on public servants, and from the utilization of appropriation for expanding employment on scholarship. In 2012, there was no salary increase at the HFSA.
Current expenses
Material and current expenses totalled to HuF 2,085.0 million in 2012, equalling 21.34% of total expenditures. When stripped of the payment obligation, this figure actually shows a HUF 429.1 million decrease on corresponding 2011 expenses. The 17.1% saving in expenses results partly from the HFSA’s consistent negotiation strategy with contract partners whereby instead of inflation-tracking service fees a reduction was achieved without compromising the quality of purchased services, and partly from the fact that contrary to prior years’ practices, the payment of international membership fees for 2013 was delayed to 2013.
Operating transfers and other expenditures
Actual operating transfers and other expenditures almost doubled from the 2011 level of HuF 252.9 million to HuF 538.2 million in 2012. This major increase stemmed in part from the increased financing need associated with the expanded activities of Hitelintézeti Felszá-moló Nonprofit Kft., a 100% state-owned company under the asset management of the HFSA, and partly from the HuF 307.4 million transfer to the equilibrium reserve (a chapter-managed appropriation).
Cumulative expenses
Cumulative expenses dropped to less than half of the 2011 figure, with the actual 2012 amount at HuF 216.9 million. The reason was that the IT hardware stock was partially replaced in 2011 and that a part of developments was implemented from own resources in 2012 (e.g. for
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the document management system, simultaneously to terminating the service contract with the contractor, HFSA staff members took over the related duties). Another reason for the difference between the years was the 2011 cost impact of six passenger cars purchased in a public procurement procedure.
Loans
Actual loans provided dropped to half of the 2011 amount (to HuF 54 million). The decrease derives from the fact that 2011 was an extraordinary year in this respect: identifying with wider endeavours to help foreign currency loan debtors, the HFSA established its own support system in H2 2011 for the employees concerned, offering them the opportunity to replace their existing foreign currency loans with a housing loan provided by the HFSA as employer in accordance with applicable laws.
The analysis of expenditures shows that the key items that profoundly determined the HFSA’s total expenditures in 2012 included personnel-related expenditures (headcount management, cafeteria, expense refunds), taxes, contributions and other payment obligations, and the costs of headquarters (real estate operation) that altogether made up 83% of total expenditures.
In 2012, the HFSA spent HuF 230.4 million on operating IT and communication systems; an additional HuF 127.5 million on development and support for the Komplex IT system; HuF 141.6 million on international membership fees; HuF 122.8 million on business trips abroad; and HuF 119.6 million on lawsuits.
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AnnuAL REPORT
2012
Table 19 : Institutional expenses of the HFSA per task (HuF’000Expenses (2012) Amount
use of external workforce 01 173
Housing support to employees 02 53 989
Hitelintézeti nkft 03 76 673
Payments to tenders 04 475
Payment of tender prizes from consumer protection fines 05 83 968
Headcount management 06 4 889 089
Advertisement and publication fees 07 944
Press and advertisement monitoring 08 5 320
Cost of lawsuits 09 119 599
Public procurement expenses 10 9 072
Quality assurance expenses 11 8 052
Complex information system (KIR) 12 127 465
Document management system 13 17 049
Other systems 14 67 874
Financial management system 15 11 700
Web portal 16 10 109
Info-communication operations 17 230 377
Real estate development 18 10 450
Fleet development 19 23 823
Real estate operations 20 857 776
Vehicle maintenance 21 52 829
Stationery and document form purchases 22 12 618
Other operational expenses (medicines, uniforms, etc.) 23 1 107
Postal services 24 22 443
Business trips abroad 25 122 284
International membership fees 26 141 598
Forms with HFSA logo 27 3 951
PR advertising, promotion, graphic design 28 1 453
Annual and other reports 29 2 669
Taxes, contributions and other payables 30 1 826 854
Entertainment (management) 31 2 147
Off-site meetings 32 220
Financial charges 33 6 653
Inventory taking, taxi 34 40
Other expenses 35 179 364
Medical screening and social benefits 36 61 741
Training 37 15 429
Early retirement 38 1 061
International cooperation, conferences 39 516
Professional cooperation, briefings 40 28
Other central events 41 5 062
Books, periodicals, on-line subscription 42 5 363
Translation, interpretation 43 10 349
Cafeteria 44 289 326
Expense refunds and in-kind benefits 47 244 892
International IT conference 49 484
ESMA conference 50 1 336
FIn-nET conference 51 1 039
OTP College 52 616
Accommodation on domestic business trips 53 11 509
Support to liquidation proceedings of strategically important business organizations 54 180 600
Pending, carried over and offsetting expenditures 55 -346
Total institutional expenses (01+…+55) 9 809 212
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2012
HFSA headcount
The HFSA’s total approved number of staff was 530 in 2012, the same as in the previous year. The average statistical number of staff was 562 (545 in 2011). The increase stemmed from the expanded opportunity to employ persons on scholarship and from the quick filling of vacant positions.
Expenditures from fine revenues
The regulations pertaining to the HFSA have been for years similar to the new provisions of the Act on Public Finances in effect since 1 January 2012. These rules declare that fines and the related default interest and charges imposed and collected by budgetary organs in the central subsystem of the general government must not be utilized at that organ, unless an exception is specified in law. Pursuant to Article 26 of the HFSA Act, revenues from supervisory fines must only be spent on purposes specified in law. The HFSA must not spend these funds on its own operations.
The HFSA charges revenues from fines to a dedicated settlement account held at the State Treasury. The opening balance of the account was HuF 1,039.9 million at the beginning of 2012. The main expenditures from fine revenues last year were as follows:
The HFSA paid special attention also in 2012 to informing the customers 1. of organizations and persons specified in Article 4 of the HFSA Act. After a public procurement procedure, the HFSA signed a two-year contract on the operation of a national civil financial consulting network on 20 March 2012. The objectives declared in the contract included the improvement of financial literacy and awareness of customers, enabling them to make informed and conscious decisions and to promote the representation of their interest by way of a national network of information centres. With a view to favourable experiences from the previous year, the HFSA signed a contract on 17 August 2012 for the second time with a partner selected in a public procurement tender to prepare a series of short consumer protection videos for the HFSA. The films were, and are still, aired on Hungarian State Television and are also available on the HFSA website. In 2012, these payments from fine revenues amounted to HUF 14.7 million.
Amounts paid from the fine revenues to support the operation of Hitel-2. intézeti Felszámoló Nonprofit Kft. (Credit Institution Liquidation Non-profit LLC.) equalled HuF 76.7 million in 2012.
The HFSA paid out HuF 23.8 million on contracts signed in relation to 3. tenders launched before 2012.
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AnnuAL REPORT
2012
Financing Hitelintézeti Felszámoló Nonprofit Kft. in 2012
The legal predecessor of Hitelintézeti Felszámoló Nonprofit Kft. (the Company), Hitelintézeti Felszámoló Közhasznú Társaság (Credit Institution Liquidation Public Benefit Company) was established by one of the HFSA’s legal predecessors, the State Financial and Capital Market Supervisory Authority. The Company is charged with managing the liquidation and final settlement of financial organizations specified in Article 4 of the HFSA Act, and to act as supervisory commissioner in respect of these entities.
Pursuant to Resolution no. 273/2008 of the national Asset Management Council, owners’ rights over the 100% state owned Company is exercised by the HFSA on behalf of the Hungarian State. In a contract signed with the national Asset Management Agency (MnV Zrt.) on utilizing equity participation, the HFSA committed to make available the required financial resources for ensuring the Company’s operation and the ongoing fulfilment of its public duties. The legal background of financing is currently set out in point c), paragraph (2) of Article 31 in the HFSA Act (revenues from fines imposed by the HFSA can be used to fund the liquidation or contribute to the operating expenses of a non-profit business organization established by the HFSA.)
In 2012, the HFSA spent HUF 222.4 million from its fine revenues to support the financial business line of the Company. Owing to the large amount of unplanned liquidation fee revenues it received, the Company returned a HuF 145.7 million part of the support to the HFSA. Thus the net amount provided from the HFSA’s fine budget was HUF 76.7 million in 2012, HUF 111.2 million below the 2011 amount.
In 2012, the Company was appointed as a state liquidator in Government Decree no. 358/2011 (XII.30) on appointing state liquidators for participation in the bankruptcy and liquidation proceedings of strategically important business organizations. Considering that the HFSA, as the exerciser of owners’ rights, is only allowed by applicable laws to provide direct financing in relation to the liquidation and final settlement of financial organizations and for the related supervisory commissioner activities, the HFSA initiated the involvement of other budgetary funds for financing state liquidation proceedings. Each HFSA initiative was accommodated; state liquidation duties were financed from public funds as itemized below.
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AnnuAL REPORT
2012
Table 20 : Financing liquidations by the state
Name of company
under liquidation by the state
Order concerning financing
MALÉv hungarian Airlines
Government Decree no. 1027/2012 (II. 14) ordered the reallocation of HuF 50 million from the Chapter "XLIII. Revenues and expenditures related to public assets" in Act CLXXXVIII of 2011 on the central budget of Hungary for 2012 to the HFSA.
Székesfehérvári Fűtőerőmű Kft. (Székesfehérvár heating power plant)
Pursuant to section 1 in Government Decree no. 1223/2012 (VII. 3), HuF 26.2 million was reallocated and transferred to the HFSA from the title "Extraordinary government measures”
Kapuvári hús húsipari zrt. (Kapuvár Meat processing Co. Ltd.)
Government Decree no. 1451/2012 (X. 16) as amended by Government Decree No. 1500/2012 (XI. 13) orders the one-off reallocation HUF 53.9 million from the reserves for extraordinary government measures to the HFSA for duties related to the liquidation of Kapuvári Hús Húsipari Zrt. "u.l." as a strategically significant business. The use of funds is subject to settlement and all unused sums must be repaid.
gyulai húskom-binát zrt. (gyula Meat processing Co. Ltd.)
Government Decree no. 1451/2012 (X. 16) as amended by Government Decree No. 1500/2012 (XI. 13) orders the one-off reallocation HUF 50.5 million from the reserves for extraordinary government measures to the HFSA for duties related to the liquidation of Gyulai Húskombinát Zrt. "u.l." as a strategically significant business. The use of funds is subject to settlement and all unused sums must be repaid.
The central support received (totalling HuF 180.6 million) was transferred to the Company and settled by the HFSA by the deadline stipulated in Government Decrees. Government Decree no. 341/2012 (XII. 5) terminated the Company’s appointment as state liquidator. The transfer of duties to the new state liquidator, a Nemzeti Reorganizációs Nonprofit Korlátolt Fele-lősségű Társaság (National Reorganization Non-profit LLC.) was completed in early 2013. The company duly reported on and settled with the HFSA all received funding, and the HFSA transferred unused funds (HuF 103,885,507) to dedicated central account as detailed below
Table 21 : Distribution of unused funds
Related Government Decree Subject of liquidation by the state
Date of transfer
Amount returned by
transfer (HUF)
Gov. Decree no. 1223/2012 (VII.3)
Székesfehérvári Fűtőerőmű Kft. (Székesfehérvár Heating Power Plant)
13.02.2013 4 289 732
Gov. Decree no. 1451/2012 (X.16)
Kapuvári Hús Húsipari Zrt. (Kapuvár Meat Processing Co. Ltd.) 05.02.2013 33 596 591
Gov. Decree no. 1500/2012 (XI.13)
Gyulai Húskombinát Zrt. (Gyula Meat Processing Plant Co. Ltd.) 05.02.2013 46 287 526
Gov. Decree no. 1027/2012 (II.14) MALÉV Hungarian Airlines 07.02.2013 5 306 490
Gov. Decree no. 1223/2012 (VII.3)
Székesfehérvári Fűtőerőmű Kft. (Székesfehérvár Heating Power Plant)
30.11.2012 14 405 168
Grand total: 103 885 507
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AnnuAL REPORT
2012
Appropriations surplus
At the end of 2012, the HFSA’s appropriations surplus was HuF 3,166.9 million, up by HUF 333.8 million on the 2011 figure (HUF 2,833.1 million). Of the 2012 appropriation surplus, HuF 1,618.7 million is already committed, thus the freely available surplus is HuF 1,548.2 million.
In addition to the institutional surplus, a freely available surplus of HuF 307.4 million was generated on the chapter-managed appropriation as equilibrium reserve required by the Budget Act.
Public procurement procedures carried out by the HFSA in 2012
A total of three public procurement procedures launched in 2011 were concluded in 2012; two were closed without success and one was concluded successfully with contract signing.
In 2012, twelve public procurement procedures were launched and a decision was reached in each case before the year-end. Ten procedures were closed successfully and eleven contracts were signed. Two procedures were concluded without success in 2012. Legal remedy procedures were launched in one case.
The procurement procedures were executed in part by the HFSA and in part by its contracted official public procurement consultant, OKFON Zrt., depending on the value limit set in the contract and the resources available at the HFSA.
Out of the public procurement procedures launched in 2012, seven reached or exceeded the EU threshold while five were national procedures.
In 2012, the HFSA signed contracts and/or orders with a total net value of HuF 79.2 million for goods and services listed as key items, all on the basis of frame contracts and/or frame agreements concluded with the Public Procurement and Supply Directorate General (KEF).
Table 22 : Public procurement procedures launched in 2011 and concluded in 2012
ID Subject, quantityDate of
contract signing
Net contract
value (HUF)
Organization carrying out procedure
KE 03/11Procurement of passenger cars
closed without success HFSA
KE 08/11Microsoft software licences
03.04.2012 41 876 500 HFSA
KE 10/11Supply of stationery and paperware (in quantities as needed)
closed without succes HFSA
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AnnuAL REPORT
2012
Table 23: Public procurement procedures launched in 2012
ID Subject, quantityDate of
contract signing
Net contract
value (HUF)
Organization carrying out procedure
KEunY 01/12
Establishment and operation of national financial consulting network 30.03.2012 126 163 872 OKFOn Zrt.
KnT 02/12 Procurement of passenger cars
Part 1: 21.05.2012 7 386 664
HFSAPart 2:
21.05.2012 11 474 976
KEunY 03/12 Mobile telecommunication services 21.08.2012
Based on actual use (estimate: HuF 60,236,222)
HFSA
KnT 04/12
System support to Cisco-based LAn networks, in particular maintenance, troubleshooting and trouble repair
28.08.2012
HuF 7,920,000 (may change depending on actually used consulting services)
HFSA
KEuT 05/12
Maintenance and outside warranty trouble repair, modification, new feature development and system support services for the Consumer Protection program (formerly Complaint Statistics)
closed without success OKFOn Zrt.
KEuT 06/12
Maintenance and outside warranty trouble repair, modification, new feature development and system support services for the System Access Manager (SAM) authorization management system and the Koordinátor IT operations support system
08.08.2012
based on ad hoc orders (estimate: 18,897,636)
OKFOn Zrt.
KEuT 07/12
Maintenance and outside warranty trouble repair, modification, new feature development and system support services for the Insurance Intermediary Training and Examination (BKKV HKKV) System
30.07.2012
based on ad hoc orders (estimate: HuF 18,897,636)
OKFOn Zrt.
KEuT 08/12
Maintenance and outside warranty trouble repair, modification, new feature development and system support services for the Registry Database (RegDB) system
07.08.2012
based on ad hoc orders (estimate: HuF 7,874,012)
OKFOn Zrt.
KnnY 09/12
Electronic legal and company information database service closed without success OKFOn Zrt.
KnnY 10/12
Maintenance and outside warranty trouble repair, modification, new feature development and system support services for the System Access Manager (SAM) authorization management system and the Koordinátor IT operations support system
08.08.2012
based on ad hoc orders (estimate: 18,897,636)
OKFOn Zrt.
KnT 11/12
Maintenance and outside warranty trouble repair, modification, new feature development and system support services for the Insurance Intermediary Training and Examination (BKKV HKKV) System
30.07.2012
based on ad hoc orders (estimate: HuF 18,897,636)
OKFOn Zrt.
KEuT 12/12
Maintenance and outside warranty trouble repair, modification, new feature development and system support services for the Registry Database (RegDB) system
07.08.2012
based on ad hoc orders (estimate: HuF 7,874,012)
OKFOn Zrt.
159
AnnuAL REPORT
2012
External audit of financial management and operations
In 2012, the HFSA’s financial management and operations were subjected to an external audit on one occasion. Following the fulfilment audit of the 2011 budget, the State Audit Office appended the following clause to its audit report:
“We have carried out the financial (regularity) audit of the Hungarian Financial Supervisory Authority’s 2011 financial statements and thereby we have gained sufficient and appropriate evidence that the 2011 financial statements were prepared in accordance with the provisions of Act C of 2000 on Accounting and Government Decree No. 249/2000 (XII.24.) on its implementation. The management of the institution’s finances and the utilisation of its appropriations complied with the rules on the financial management of budgetary institutions. The financial statements provide a true and fair view of the budgetary organ’s financial position.”
“Payment turnover data provide a true and fair view of finance management processes. The HFSA used appropriations in compliance with the mandates rendered by laws and legal provisions. The requirements of legality, transparency and accountability were fulfilled.”
“All elements of the internal control system function appropriately. Except for the order of documentation, regulations are adequate, duties and responsibilities are regulated in accordance with the organizational structure and in combination with human resources management constitute a risk-free control environment. Risk management exercised on the basis of the internal regulation of risk management is appropriate. The implemented scope and operation of control activities is adequate. The information and communication pillar do not convey risks. Internal audit performs the monitoring of internal controls at adequate standards.”
160
AnnuAL REPORT
2012
KEy EvENTS OF 2012 iN ChrONOLOgiCAL OrdEr
9 January � : The HFSA licenses Sberbank of Russia to buy indirect qualified holding in Hungarian Volksbank Zrt.
12 January � : ESMA publishes its first annual report on the supervision of credit rating agencies.
16 January � : The ESRB publishes recommendations on the financing of credit institutions denominated in uSD and on assigning macroprudential mandates to national authorities.
9 February � : The EBA releases a preliminary survey on the capital plans prepared by banks in relation to the EBA’s recapitalisation recommendation.
13 February � : The EIOPA publishes its 2012 action plan for supervisory colleges.
14 February � : The HFSA publishes a consultation paper about possible ways of improving the claim settlement practices of insurers from a customer viewpoint.
16 February � : The ESMA publishes draft regulatory technical standards on short selling.
12 March � : The HFSA holds professional consultations for healthcare and voluntary mutual funds about current issues, changes in data reporting, general meetings of funds, format and content-related requirements concerning financial statements, inspection and supervision focuses.
13 March � : The HFSA publishes the 2011 and 2002-2011 performance data of voluntary mutual pension funds and mandatory pension funds.
15 March � : ESMA authorizes the adoption of credit ratings issued in the united States, Canada, Hong Kong and Singapore by European credit rating firms.
19 March � : The HFSA holds professional consultations for voluntary pension funds about current issues, changes in data reporting, general meetings of funds, format and content-related requirements concerning financial statements, inspection and supervision focuses.
22 March � : IOSCO publishes updated systemic risk data requirements for hedge funds.
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AnnuAL REPORT
2012
26 March � :The HFSA calls attention to the importance of preparations for the new regulations of same-day transfers (InterGIRO 2).
4 April � : EBA releases its Basel III monitoring report.
11 April � :The HFSA and the Dutch supervisory authority (De nederlandsche Bank n.V.) make a joint decision on declaring InG Bank n.V.’s Hungarian Branch a systemically important branch.
18 April � : ESMA authorizes the adoption of credit ratings issued in Argentina and Mexico by European institutions.
26 April � : The ESMA publishes a report on the use of sanctions by member states as per the Market Abuse Directive (MAD – 2003/6/EC).
3 May � : The HFSA holds professional consultations about current issues related to the insurance sector (changes in laws, data reporting, inspection findings, preparation for Solvency II, international supervisory cooperation, consumer protection proceedings etc.).
18 May � : Postás Mandatory Pension Fund and Évgyűrűk Mandatory Pension Fund merge into Pannónia Pension Fund.
4 May � : The HFSA and the Irish supervisory authority (Central Bank of Ireland) make a joint decision on declaring Citibank Europe plc.’s Hungarian Branch a systemically important branch.
16-17 May � : The HFSA stages a national conference on the inspection findings gained at cooperative credit institutions (comprehensive inspections and SREP) and about the related HFSA expectations.
24 May � : The ESMA publishes its report on member states practices concerning the application of “good practices” in relation to prospectuses.
30 May � : Based on the drafts prepared by the ESMA, the European Commission publishes the first regulatory technical standards for credit rating institutions.
1 June � : The HFSA revokes the operating licence of Soltvadkert és Vidéke savings Cooperative and orders the credit institution’s final settlement.
5-6 June � : As home supervisor, the HFSA holds the first supervisory college session of the OTP group in 2012.
7 June � : The EIOPA publishes its H1 2012 financial stability report.
8 June � : The ESMA publishes a collection of links containing lists of investment enterprises, tied agents and uCITS fund managers seated in the European union.
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AnnuAL REPORT
2012
14 June � : The EIOPA publishes complaints handling guidelines for insurance companies.
19 June � : The methodology for rating institution protection systems is published on the HFSA website under ICAAP/SREP methodologies.
25 June � : The ESMA publishes its first annual report.
28 June � : The EBA releases its first annual report.
6 July � : The ESMA publishes two new guidelines related to MiFID and serving customer protection (suitability criteria and compliance function).
11 July � : The EBA releases annual report on the risks of the Eu’s banking sector.
The EBA releases report on the results of formerly ordered recapitalization.
12 July � : The ESRB publishes comments on systemic risks deriving from the ‘retailization’ of complex financial products.
20 July � : In a joint effort with the EBA and the EIOPA, the ESMA publishes the list of financial conglomerates.
23 July � : Closing of the phase III targeted inspection of mandatory pension funds launched in 2011.
26 July � : The ESMA publishes report on Greek government bond accounting practices.
2 August � : The ESMA, the EBA and the EIOPA jointly issue the Protocol for Supervisory Cooperation in the field of anti-money laundering.
9 August � : Release of the revised Methodology guideline no. 1/2012 of the HFSA president on the minimum requirements of deposit management and portfolio management contracts of insurers.
3 September � : The HFSA performs the assessment of institution protection funds/ integration systems based on the elaborated methodology for the first time in 2012. Results and the related additional capital requirements are published on the HFSA website.
10 September � : The ESMA issues warning to retail customers on the pitfalls of online trading.
20 September � : The HFSA approves the financial plan submitted by AIM General Insurance Co. Ltd., but then revokes the insurance company’s foundation and operating licence on 25 January 2013 owing to violation of laws, and orders final settlement proceedings at the institution.
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AnnuAL REPORT
2012
20 September � : The ESRB publishes its first risk dashboard.
21 September � : The HFSA licenses the merger of Victoria-Volksbanken Life Insurance Co. Ltd. and ERGO Life Insurance Co. Ltd.
27 September � : The ESMA publishes final regulatory technical standards and implementing technical standards pertaining to EMIR (Regulation 648/2012 Eu).
2 October � : The EIOPA publishes its first risk dashboard.
3 October � : The EBA publishes final report on the recapitalization of European banks.
9 October � : The IOSCO publishes recommendations on money market funds.
11 October � : The HFSA and the German supervisory authorities (BaFin, Deutsche Bundesbank) make a joint decision on declaring Deutsche Bank AG’s Hungarian Branch a systemically important branch.
15 October � : The HFSA sends CEO letter to 13 small and medium banks and branches discussing compliance with the content and format-related requirements of quarterly reports.
16 October � : The EIOPA launches its quantitative impact study in occupational pension provision.
18 October � : The HFSA takes measures against InG Investment Fund Management Co. Ltd.
19 October � : The HFSA rejects the financial restoration plan of AIM General Insurance Co. Ltd. and requires the insurer to draw up a financial plan.
The ESMA publishes a “Guide to investing” for investors.
23 October � : The Joint Committee publishes its advice to the Commission on the comprehensive review of the financial conglomerates directive.
25 October � : Proclamation of Act CLI of 2012 amending the order of MTPL insurance premium rate advertising.
25-26 October � : As home supervisor, the HFSA holds the second supervisory college session of the OTP group in 2012.
29 October � : The HFSA publishes on its website the fee charges of mandatory pension fund members.
31 October � : Credit Agricole Corporate and Investment Bank’s Hungarian Branch terminates operations.
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AnnuAL REPORT
2012
5-7 november � : The HFSA organizes a seminar of the IT supervisors of European supervisory authorities.
6 november � : The HFSA licenses MFB Zrt. to acquire a direct qualified holding in Takarékbankbank Zrt (a savings bank) and an indirect qualified holding in Banküzlet Zrt., Takarék Faktorház Zrt. (a factoring house) and Takarék Alapkezelő Zrt. (a fund manager).
9 november � : Act CLXII of 2012 on the rules of enforcing indemnification claims based on MTPL contracts signed with MÁV General Insurance Association.
14 november � : The Hungarian Development Bank acquires minority holding in Magyar Takarékszövetkezeti Bank Zrt. (Hungarian Savings Cooperative Bank Co. Ltd.)
16 november � : The EIOPA publishes guidelines on complaints handling by insurers and launches the related “comply-or-explain” procedure.
IOSCO publishes recommendations on securitization rules.
21 november � : The EIOPA’s second annual conference.
28 november � : EXIM Bank and the MEHIB Rt. launch integrated operations and Eximbank receives limited licence to collect deposits.
30 november � : With the amendment of Act LXXXII of 1997 on Private Pensions and Private Pension Funds (PP Act), the legal regulations on the Central Registry of Pension, Healthcare and Voluntary Mutual Funds (PKn) authorizing the HFSA to manage and record data in the PKn Central Registry of Pension, Healthcare and Voluntary Mutual Funds ceases to be in effect.
3 December � : Within the framework of market consultations, the HFSA informs the insurance sector on the results of the QIS2011 impact study and presents the data reporting tables to be used after the launch of Solvency II.
12 December � : The EIOPA publishes its financial stability report for H2 2012
13 December � : The HFSA holds a presentation at the conference of MANBESZ about insurance inspection findings.
14 December � : The HFSA holds a professional informing session on the procedure of publishing on its website the MTPL premium rates and the no-insurance fee calculated for the calendar year.
18 December � : Publication of the Call to businesses seated in Hungary
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AnnuAL REPORT
2012
(non-financial contracting parties) on sending to the HFSA informative data on OTC derivative contracts subject to EMIR.
19 December � : A multilateral cooperation memorandum of understanding is signed with Austrian supervisory authorities (FMA, Oesterreichische nationalbank) on supervising the Hypo-Bank Burgenland Banking Group (Sopron Bank).
20 December � : The EIOPA formulates is opinion on the interim introduction ofmeasures regarding Solvency II.
The ESMA publishes a statement on forbearance.
21 December � : The EIOPA publishes its second risk dashboard.
The EIOPA sends response to the European Commission’s consultation on the potential crisis management system of non-bank financial institutions.
23 December � : Article 131/A of the PP Act requires HFSA to transfer its PKn data sets to the national Pension Insurance Directorate by 15 January 2013.
28 December � : The HFSA licenses the portfolio transfer of Victoria-Volksbanken Life Insurance Co. Ltd. to the ERGO Versicherung Aktiengesellschalft Hungarian Branch.
166
AnnuAL REPORT
2012
ATTAChMENTS
i. Statistical summary of measures taken in 2012
Measures taken in the money market
Prudential measures 399
Resolutions concluding supervisory investigations 83Other prudential measures and resolutions 286Supervisory orders 64 Of which resolutions imposing fines 32Total fines (HUF) 87 300 000Market supervisory measures 17Measures owing to unlicensed activities 17 Of which resolutions imposing fines 11Total fines (HUF) 61 600 000Licensing measures 1141Licensing foundation of credit institutions 0Rejecting foundation of credit institutions 0Licensing operation of credit institutions 0Rejecting operation of credit institutions 0Revoking foundation licence of credit institution 0Licensing foundation and operation of financial enterprises 9
Rejecting foundation and operation of financial enterprises 0
Licensing operation of financial enterprise equivalent to credit institution and complying with prudential regulations
0
Resolutions resulting in changed scope of activities 9Approvals of election of executives 247 Of which for credit institutions 140Rejection of election of executives 0Approvals of modification of agency contract 283Licensing multiple principal intermediaries 3Licensing multiple agents 60Licensing brokers 3Approvals of use of intermediary 71Approvals of amendment to statutes 72Approvals of acquiring qualified holding 34Rejections of acquiring qualified holding 1Resolutions approving mergers, acquisitions and demergers 8
Resolutions related to the trading book 1
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AnnuAL REPORT
2012
Voiding licence to employ agents 18Resolutions revoking operating licences 47Resolutions approving calculation of capital requirement for operational risk 7
Approvals of other rules 9Resolutions related to consolidated supervision 12Approvals of early repayment of subordinated capital 4Approvals of asset transfers 7Resolutions regarding bank representative offices 6Supervisory orders 53Other resolutions 37Consumer protection measures 516Due to unfair commercial practices 127Due to violation of legal provisions on complaint management 283
Due to violation of periodic informing obligation 43Violation of banking secrecy 14Violation of legal provisions on customer protection in relation to the Central Credit Information System 7
Violation of legal regulations on payment transactions 4Violation of legal provision on retail loans 7Other 28Imposition of procedural fine in a supervisory order 3Amount of fines (HUF) 176 700 000Total resolutions and supervisory orders 2073Total fines (HUF) 325 600 000
Measures taken in the capital markets sector
Prudential measures 118Resolutions concluding supervisory inspections 14Other prudential measures, resolutions 104 Of which resolutions imposing fines 5 Supervisory orders 2Total fines (HUF) 23 000 000Market supervisory measures 58Measures due to unauthorized activities 4 Of which resolutions imposing fines 0Measures in relation to market fraud 8 Of which resolutions imposing fines 2International legal assistance procedures 3Measures related to the violation of legal provisions on acquisitions 3
Of which resolutions imposing fines 1Other procedures 1Measures relating to issuers 39 Of which resolutions imposing fines 11
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AnnuAL REPORT
2012
Total fines (HUF) 58 600 000Licensing measures 169Licensing activities 19Revoking activity licence 4Resolutions resulting in changed scope of activities 13Approval of other rules 10Approval of executives 57Approvals of acquisition of qualifying holding 8Supervisory orders 24Other resolutions 34Licensing measures in relation to securities issuance 804
Approving resolution in relation to the public issuance of investment units 62
Approval of supplements to prospectus of investment funds 2
Registration of investment funds 63Amendment of rules of management at investment fund 359Deletion of investment funds from registry 32Transformation of investment funds 6Merger of investment funds 2Approval of property valuer assignment 15Approval of deposit management contract’s entry into effect 16
Approval of the publication of prospectuses prepared for the public issuance program of securities 11
Approval of the publication of prospectuses prepared for the public issuance (public trading) of securities and for their launch on regulated markets
6
Approval of supplements to prospectus and fund prospectus 35
Exemption from informing obligation 6Approval of public purchase offer 1Suspension of trading on stock exchange 0Supervisory orders terminating procedures 0Approval of defence plan 116Approval of venture funds’ rules of fund management 1Registration of venture fund 1Approval of venture funds’ amended rules of fund management 13
Resolution with rejection 1Supervisory order terminating procedures 28Corrective resolutions/orders 0Deadline extension order 5Order assigning specialist 3Order to submit missing documents 4Summoning order 16Other resolutions/Supervisory orders 0
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AnnuAL REPORT
2012
Consumer protection measures 19Due to unfair commercial practices 3Other 16Fines (HUF) 6 800 000Total resolutions and supervisory orders 1158Total fines (HUF) 88 400 000
Measures taken in the insurance sector
Prudential measures 362Resolutions concluding supervisory inspections 22Revoking activity licence on HFSA’s initiative 34Other prudential measures, resolutions 306 Of which resolutions imposing fines 74 Total fines 33 900 000Market supervisory and licensing measures 342Measures due to unauthorized activities 0 Of which resolutions imposing fines 74Suspension of activity licence on request 1Approval of executives 84Approvals of divisional managers 88Approvals of acquisition of qualifying holding 7Revoking activity licence on request 36Approvals of portfolio transfers 2Inclusion in consolidated supervision 3Other resolutions 0Licensing foundation of insurance companies 0Licensing launch of insurance activities 0Licensing modification of insurance activities 1Licensing activities related to insurance activities 12Licensing independent insurance intermediation (broker, multiple agent) 28
Licensing principal agent 6Consumer protection measures 187Due to unfair commercial practices 64Due to violation of legal provisions on complaint management 43
Due to failure to send out indemnification proposal/ruling 4Due to failed or late sending of payment notification letter and due to late notification on contract termination due to non-payment
30
Due to lack of annual information with life insurance contracts 12
Due to failure to send out information on conclusion of life insurance contract 16
Violation of insurance secrecy 2Other 15
170
AnnuAL REPORT
2012
Imposing procedural fines in supervisory orders 1Amount of fines (HUF) 33 850 000Total resolutions and supervisory orders 891 Of which resolutions imposing fines 154Total fines (HUF) 67 750 000
Measures taken in the pension, healthcare and voluntary mutual funds sector
Prudential measures 138Resolutions concluding supervisory inspections 35Other prudential measures, resolution 102Revoking activity licence 1 Of which resolutions imposing fines 3 Fines 201 300 000Market supervisory measures 23Resolutions approving anti-money laundering rules 0Resolutions terminating activities 4Licensing launch of pension fund business line 0Approval of selectable portfolio system 13Approval of contract signed with real estate valuators 0Market supervisory orders 0Other resolutions 6Licensing measures 8Resolutions granting activity licence 1Approval of fund mergers 7Consumer protection measures 19Due to unfair commercial practices 3Due to violation of legal provisions on complaint management 9
Due to violation of provisions on commercial advertising 2
Due to violation of funds secrecy 1Other 4Amount of fines (HUF) 1 800 000Total resolutions and supervisory orders 188 Of which resolutions imposing fines 14Total fines (HUF) 203 100 000
171
AnnuAL REPORT
2012
Measures taken in relation to authority exams between 1 January and 31 December 2012
Insurance sectornumber of persons sitting for tied insurance intermediation examination 3809 Of which successful passes 2420number of persons sitting for independent insurance intermediation examination
5176
Of which successful passes 3102On-site inspection of insurance intermediation authority exam / training 8Registration of exam commissioner for authority-licensed insurance intermediation training
13
Deletion of exam commissioner for authority-licensed insurance intermediation from registry
0
Registration of training and examination organization (training organ) for authority-licensed insurance intermediation training
6
Deletion of training and examination organization (training organ) for authority-licensed insurance intermediation training from registry
1
Revoking insurance intermediary certificate 1Other resolutions/orders 0Total resolutions and supervisory orders 42Financial sectorNumber of persons sitting for financial services intermediation examination 7708 Of which successful passes 4452On-site inspection of financial services intermediation authority exam / training
8
Registration of exam commissioner for authority-licensed financial services intermediation training
12
Deletion of exam commissioner for authority-licensed financial services intermediation training from registry
3
Registration of training and examination organization (training organ) for authority-licensed financial intermediation training
5
Deletion of training and examination organization (training organ) for authority-licensed financial intermediation training from registry
2
Revoking financial intermediary certificate 0Other resolutions/orders 0Total resolutions and supervisory orders 75
172
AnnuAL REPORT
2012
ii. Number of supervised institutions as of 31 december 2012
Number of legal entity institutions and companies supervised in the money market sector
Market playersInstitutions
holding HFSA
licence
Institutions under
transformation
Suspended institutions
Institutions under
liquidation / final
settlement
Number of
revoked licences
Banks 29Branches 11Specialised credit institutions 8
Cooperative credit institutionsof which: savings cooperativescredit cooperatives
127
1234
Financial enterprises 251 10
Payment institutions Payment service providers
41
Financial enterprises subject to equivalent prudential regulations as credit institutions
3
Independent money market intermediaries, of which: principal multiple intermediaries multiple agents brokers
765
8
7498
Money market institutions total 1199 10
173
AnnuAL REPORT
2012
Number of legal entity institutions and companies supervised in the capital markets sector
Market playersInstitutions
holding HFSA
licence
Institutions under
transformationSuspended institutions
Institutions under
liquidation / final
settlement
Number of
revoked licences
Investment enterprises 24 3
Branch offices 2 1
Commodity exchange service providers 4 0
Investment fund managers 35 0
Venture capital fund managers 28 0
Venture capital firms 0 0
Credit institutions providing investment services
23 0
Intermediary as per the Investment Fund Managers Act
17 0
Tied agent 860 0
Capital market institutions total 970 4
Number of legal entity institutions and companies supervised in the insurance sector
Market playersInstitutions
holding HFSA
licence
Institutions under
transformationSuspended institutions
Institutions under
liquidation / final
settlement
Number of
revoked licences
Joint stock insurance corporations 29
Insurance associations 24Principal agents 0
Independent insurance intermediariesof which: brokers (firms)multiple agents (firms)
509
43475
Insurance consultants (firms) 17
Total insurance market 579
174
AnnuAL REPORT
2012
Number of legal entity institutions and companies supervised in the pension, healthcare and voluntary mutual funds sector
Market playersInstitutions
holding HFSA
licence
Institutions under
Suspended institutions
Institutions under
liquidation / final
settlement
Number of
revoked licences
Mandatory pension funds of which:Mandatory pension fund business unit of mixed pension
7
5
3of which:
mandatory pension fund business line:
2
Voluntary pension funds 51 6
Voluntary mutual funds 10 3
Voluntary healthcare funds 31
Occupational pension service provider
1 7
Funds total 94
19of which:
mandatory pension fund business line:
2
iii. Number of registered agents as of 31 december 2012
Companies Natural persons Total
Financial markets sectorTied intermediary 8945Capital markets sectorIntermediary as per the Investment Fund Managers Act 5 12 17
Tied agent 687 173 860Insurance sectorInsurance consultant * 17 3 20
Independent insurance intermediary* 6904 14601 21505
Tied insurance intermediary* 4733 14996 19729* Based on online insurance registry.
iv. The hFSA’s organizational structure (as at 31 december 2012)