The HFSA’s Consumer Protection Risk Report - alk.mnb.hu · EBA EBA European Banking Authority...
Transcript of The HFSA’s Consumer Protection Risk Report - alk.mnb.hu · EBA EBA European Banking Authority...
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T a b l e o f c o n t e n t s
FOREWORD 4
1. SUMMARY FINDINGS 5
2. THE HFSA’S CONSUMER PROTECTION ACTIVITIES AND THE TOOLS AT ITS
DISPOSAL 9
2.1. Supervision for consumer protection 9
2.1.1. Administrative procedures 9
2.1.2. Consumer protection monitoring 10
2.2. Regular and proactive supervisory communication 10
2.3. Informing customers, development of financial literacy 10
2.4. Efficient consumer protection regulations 11
2.4.1. Participation in the preparation of legal provisions 11
2.4.2. Right to issue decrees 11
2.4.3. Setting other standards and expectations 11
2.5. Other means of consumer protection 12
2.5.1. Enforcement of claims of public interest 12
2.5.2. Public actions: declaring general contracting conditions unfair 12
3. THE DOMESTIC REGULATORY ENVIRONMENT AND EXPERIENCES GAINED
FROM THE HFSA’S CONSUMER PROTECTION MONITORING 13
I. FINANCIAL MARKETS SECTOR 14
3.1. Lending 14
3.1.1. The main changes in the regulatory environment of lending 14
3.1.2. Market trends 18
3.2. Deposits and savings 27
3.2.1. Market trends 27
3.2.2. Identified problems and risk items 31
3.3. Account management and related services 33
3.3.1. Market trends 33
3.3.2. Identified problems and risk items 33
II. INSURANCE SECTOR 35
3.4.1. Regulation 35
3.4.2. Market trends 35
3.4.3. Insurance products 36
III. CAPITAL MARKETS SECTOR 42
3.5.1. Regulatory environment 42
3.5.2. Market trends 42
3.5.3. Identified problems and risk items 43
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4. EXPERIENCES OF THE HFSA’S CONSUMER PROTECTION PROCEEDINGS 45
5. 2011 OUTLOOK 47
5.1. New elements of effective consumer protection regulation 47
5.1.1. Recommendations 47
5.1.2. Consumer protection contact persons 49
5.2. Online comparison tools 49
5.3. Civil consumer protection network 50
5.4. European financial supervision and consumer protection 51
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Definition of acronyms used in the report
Hungarian
acronym
English
acronym
Definition
Bit. IA Act LX of 2003 on Insurance Companies and the Insurance Business
Bszt. AIFCD Act CXXXVIII of 2007 on Investment Firms and Commodity
Dealers, and on the Regulations Governing their Activities
BUBOR BUBOR Budapest interbank offered rate
EBA EBA European Banking Authority
EBKM APRD Annual Percentage Rate of Deposit
EHM APRS Annual Percentage Return on Securities
EIOPA EIOPA European Insurance and Occupational Pensions Authority
ESMA ESMA European Securities and Markets Authority
Fhtv. ACC Act CLXII of 2009 on Consumer Credit
Fttv. APUCPC Act XLVII of 2008 on the Prohibition of Unfair Business-to-
Consumer Commercial Practices
Gfbt. MTPL
Act
Act LXII of 2009 on Insurance Against Civil Liability Regarding the
Use of Motor Vehicles
Hpt. ACI Act CXII of 1996 on Credit Institutions and Financial Enterprises
Kgfb MTPL Motor third-party liability insurance
KHR CCIS Central Credit Information System
MABISZ MABISZ Association of Hungarian Insurance Companies
MiFID MiFID Markets in Financial Instruments Directive
MNB MNB National Bank of Hungary
PSZÁF HFSA Hungarian Financial Supervisory Authority
Psztv. HFSA
Act
Act CLVIII of 2010 on the Hungarian Financial Supervisory
Authority
Ptk Civil
Code
Act IV of 1959 on the Civil Code
Ptké. II DICC Decree No. 2 of 1978 on the implementation of the Civil Code
TBSZ LTIC Long-term investment contract
THM APR Annual Percentage Rate
TKM TCI Total Cost Index
Tpt. ACM Act CXX of 2001 on the Capital Market
UL UL unit-linked life insurance
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FOREWORD
According to Act CLVIII of 2010 on the Hungarian Financial Supervisory Authority
(hereinafter the HFSA Act and HFSA, respectively), the purpose of the HFSA’s activities is
to “…protect the recipient of service provided by financial organisations and to foster and
promote public confidence in the financial intermediation system.”
The HFSA’s mission, among others, include the following items: “…consistent and proactive
protection of the rights and interests of consumers who use the services of financial
organizations, establishment of a forum for settling consumer-related legal disputes,
improvement of the financial awareness of consumers and the strengthening of public
confidence in the financial intermediation system ….”
In the HFSA’s opinion, effective financial consumer protection is a crucial pillar of financial
stability; transparent products and services, fair and accurate information to customers,
responsible service providers and generally satisfied customers all form the basis of
confidence in the sector. For the HFSA, financial consumer protection is an integral and
inseparable part of traditional supervision. Prudential market supervision and consumer
protection mandates help strengthen financial stability and the expansion of financial
intermediation at single institution and systemic level.
In order to accomplish its objectives, the HFSA prepares reports on financial consumer
protection. Published every six months on the HFSA’s home page, the main objective of the
Consumer protection risk report is, first, to present and assess key developments, market
trends and risk items of consumer protection relevance and, second, to provide a summary of
findings gained by the HFSA in the course of consumer protection administrative proceedings
in the period concerned. In addition to these reports, the HFSA also publishes quarterly
statistics and summary reports on consumer complaints, consumer protection proceedings
and sanctions.
The target groups of analyses and statistics are as follows:
financial organisations and industry associations,
partner authorities, economic and political decision makers,
non-governmental organizations (NGOs),
media,
consumers,
European supervisory authorities,
international organizations,
certain partner supervisors and authorities within and outside Europe.
The HFSA is convinced that the publication of consumer protection reports and statistics
gives financial organizations direction, and also helps consumers find the information they
actually need.
The HFSA intends to communicate its consumer protection efforts regularly and
systematically. At the same time, the structure and emphasised points of individual reports
may change from time to time depending on developments in the period concerned and the
feedback the HFSA receives from the market.
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1. Summary findings
The HFSA’s revaluated consumer protection role
The role of consumer protection is of special significance owing to the asymmetry between
customer and service provider in terms of product knowledge, financial power, interest
enforcement capabilities and professional/legal expertise.
On the one side there are highly organized service providers with extensive professional
knowledge. On the other side there are the retail customers with imperfect financial
knowledge, regularly struggling with complex terms and conditions and often
incomprehensible cost structures. This asymmetry leads to consumer defencelessness that
is especially apparent in conjunction with financial matters.
The establishment and enforcement of effective consumer protection regulations by the
government and, on financial markets, by the HFSA are intended to right this imbalance.
Pursuant to the HFSA Act and in the context of the HFSA’s activities, a consumer is defined
as a natural person who is acting for purposes outside his trade, business or profession.
Due to the financial crisis and related losses, there is an increased number of consumers
disappointed with financial services and with specific players in the sector. This
disappointment, and the subsequent undermining of confidence in the system, stemmed from
the often incomprehensible or misleading information rendered by financial service providers
coupled with ill-informed consumer decisions. The loss of confidence and the large number
of disappointed customers erodes and undermines the stability of financial markets. Financial consumer protection helps strengthen confidence in the financial system by
fostering fair market behaviour and also serves the interests of market players.
The revaluation of the role of financial consumer protection in order to regain
confidence and restore stability is a global trend. In line with these international
developments, the legal empowerment, scope and applied toolsets of the HFSA’s consumer
protection function has been strengthened and extended significantly.
This reassessed financial consumer protection role also received special emphasis in the
HFSA Act that entered into effect on 1 January 2010 and spelled out the following under the
HFSA’s objectives: “The goal of the HFSA’s activities is to protect the recipient of service
provided by financial organisations and to strengthen public confidence in the financial
intermediation system.” With the subsequent amendment of the HFSA Act as of 1 January
2011, “protecting the interests of the customers of financial organisations”, thus consumer
protection was explicitly added to the wording of the law, adding further emphasis on this role
of the HFSA.
Raising confidence in financial services and service providers by growing the number of
satisfied customers can also bring improvement to the whole sector. An expanding customer
base using an increasingly wide selection of products fuels growth and expands business
opportunities and revenue-generating capabilities. It is the HFSA’s objective to see a
strong financial sector that is resistant to crises, boasts improving revenue-generating
capabilities while always acting in a fair, compliant and responsible manner with customers.
Another goal of the HFSA is to promote the adequate orientation of consumers and the
improvement of financial literacy in order to enable customers to make sound and careful
decisions when using financial products and services.
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Main consumer protection trends and issues in H2, 2010
2010 saw intensified regulatory activity. The principal goal of regulatory changes was to
dampen the negative impacts on consumers generated by the financial crisis and to attempt to
eliminate the majority of its causes. While consumer protection was reinforced, the playing
field of market players was narrowed significantly in a number of areas.
Most measures and regulations involved changes to the conditions of lending. The
significant cutback of foreign exchange lending (a loan type that carries significant risks for
retail customers), the alignment of indebtedness to the financial power of households and the
additional restrictions regarding unilateral contract modification brought on favourable
changes for customers, both jointly and as individual measures. The rescheduling or
replacement of problematic loans relieved certain financial difficulties. First and foremost
the restrictive measures passed in the period made housing loans safer and more
transparent.
However, the gradual modification of requirements resulted in a complicated regulatory
environment which is both difficult to understand and requires further harmonization
concerning the regulations on housing retail loans, other consumer loans and financial lease
arrangements. The amendments to laws overwrote or practically voided several provisions
of the Code of Conduct that had entered into effect on 1 January 2010. At the same time, the
regulatory benefits of the Code survived in respect of (non-housing) retail loan and
financial lease contracts. At the end of 2010, the HFSA proposed to the Banking Association
that the Code of Conduct should be reviewed and revised to reflect subsequent changes in
applicable legal provisions. In case the Code does not prove to be a sufficiently effective tool
regarding the remaining issues in its scope, the HFSA will initiate the transposition of these
provisions into laws, taking into account the temporary and insufficient nature of the Code as
a regulation.
Despite stricter new regulations, the interest rates of retail loans during the term are still
not sufficiently transparent. As a positive trend, though, an increasing number of products
linked to a reference interest rate appeared on the market. From a consumer protection
viewpoint, the growth of reference interest rate linked products which feature a fixed interest
premium during the loan term would considerably improve transparency and calculability.
The HFSA welcomes and promotes the launch and spread of such products and practices. The
establishment of the new APR decree also shifted the focus of regulations towards fostering
transparency and comparability. The same applies to the significantly stricter new provisions
that require the application of the foreign exchange average rate on a mandatory basis. This
latter regulation was passed on the HFSA’s initiative. The presence and consistent,
widespread application of various standardized indices – the APR for lending, the APRD for
deposit products, the APRS for investment products and the TCI on the insurance market –
provide the basis for consumer orientation.
The current low interest rate of traditional deposit products may make complex insurance and
investment products more attractive. In the HFSA’s opinion, in the case of deposit products,
bundled deposits may raise consumer protection concerns partly because of the deficiencies
and bias of the related communication and partly because of inherent product
characteristics (e.g. investment products are for the long-term but the risks associated with
them differ from that of deposits). Therefore, the HFSA considers it important to set
consumer protection principles and requirements (especially with regard to informing
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customers) for deposits that are bundled with investments in order to highlight the complexity
and risks of such products.
Regarding consumer protection issues with retail bank accounts, the HFSA found that the
fee structures of institutions are often far too complex and difficult to compare. Furthermore, financial organizations offer little help to consumers wishing to change service
providers.
There are no current legal provisions in Hungary regarding switching bank. However, the
Hungarian Banking Association’s Board of Directors issued a recommendation to facilitate
the changing of banks for retail account holders. Financial services providers were invited
to commit to the obligations on a voluntary basis. The HFSA regards all standards that have
been adopted as self-regulation and all practices compliant with those standards as forward-
looking, provided they are effective in reality and are accepted and applied across the market.
Yet, if experiences show that self-regulation does not fulfil its intended purpose, the HFSA
will then propose relevant changes to applicable laws.
In 2010, the growth of the “supply driven” life insurance market accelerated. This trend was
particularly apparent in the sales promotion efforts of insurers regarding single premium,
unit-linked insurance products. The sales push, however, conveys significant emerging
risks for consumers. One problem with unit-linked insurance products is that the insurance
intermediary may fail to provide comprehensive information to customers who may not be
sufficiently careful nor have a clear idea of the actual risks of the offering. Another problem is
that the fee structure of this product is often incomprehensible for the average customer and
thus comparing such offers is difficult.
The HFSA welcomes and supports the self-regulation efforts that started on the insurance
market (e.g. the launch of the Total Cost Indicator). However, a number of anomalies and
risks were identified in that sector and these issues will need to be resolved by new
legislation. Recently enacted regulatory changes in motor third-party liability insurance show
that collecting all information and products onto one website together with the option to
change service providers leads to a well-functioning, competitive market.
In the capital markets sector, the inconsistent quality of information given to customers
is a recurring problem: Potential product risks are not always pointed out clearly and hidden
risks are often not mentioned (especially in the case of bundled products).
Regarding investment services, applicable legal provisions do not contain as many and as
specific consumer protection elements as e.g. the new law on lending which sets out
detailed requirements on the mandatory method of informing customers and the objective
criteria and form of product information.
Therefore, some degree of standardization needs to take place regarding information
requirements and the classification and assessment of investor knowledge by institutions
in order to ensure that investor protection rests on coherent and consistently enforceable rules.
Complex bundled offerings that consist of products with different risk levels are
undoubtedly growing in popularity. Increased attention must be paid not only to
informing customers but also to assessing their financial knowledge and risk appetite
during the sales process. When informing customers, compliance with consumer protection
requirements must not be achieved simply by increasing the quantity of information provided.
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What is also vitally important is to ensure clarity of information and to verify it has been
thoroughly explained and comprehended.
The HFSA publishes various comparison tools and other online applications on its homepage
to promote transparency and to help customers make sound financial decisions. The loan and
lease product selection tool was launched in the summer of 2010 and upgraded on 15
February 2011. The deposit and savings finder tool will be available for the general public
in June 2011. The third program in this comparative applications toolset will be the account
packages and related financial services finder, with an expected launch date of early 2012.
The applications rely on data received under the mandatory data provision of institutions to
the HFSA which ensures that all used data are reliable, current and complete.
The HFSA monitors market trends from a consumer protection viewpoint and responds
to identified anomalies and risks with all means at its disposal. If necessary, the HFSA
launches administrative proceedings, submits proposals on legislation or new legal provisions
and issues decrees to restrict or ban certain activities.
However, identified consumer protection risks and anomalies highlighted that innovative
new solutions must also be applied both at domestic and at European level to strengthen
consumer protection and to protect the interests of financial consumers.
Such innovative new solutions include, among others, the elaboration of recommendations
to influence the behaviour of market players; the appointment of dedicated consumer
protection contact persons at institutions; the development and publication of
supervisory applications that support transparency and comparison and the exploitation
of synergies with the activities of non-governmental consumer protection organizations.
Participation in the consumer protection work of the three European Supervisory Authorities
set up in early 2011 also provides a great informational background to the HFSA along with
an opportunity to exchange experiences. Proactive participation in the European
Supervisory Authorities enables knowledge adoption and the harmonization of solutions
in order to ensure that consumers gain an identical level of protection established along
standardized guidelines throughout the EU’s internal market.
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2. The HFSA’s consumer protection activities and the tools at its
disposal
The key pillars 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, implemented partly through
consumer protection administrative procedures and through consumer protection
monitoring;
Regular and proactive supervisory communication;
Informing of customers, improvement of the financial literacy of households;
Channelling issues that raise civil law disputes into the right direction.
2.1. Supervision for consumer protection
The HFSA prepared its strategic consumer protection concept in August 2010, declaring
that one way of accomplishing the consumer protection objective laid out in the HFSA Act is
the “ongoing monitoring of the consumer environment and the needs of society
regarding consumer protection.”
2.1.1. Administrative procedures
As part of its consumer protection administrative role, the HFSA monitors compliance
with applicable consumer protection provisions on an ongoing basis. Therefore, the HFSA
has to launch consumer protection proceedings in the form of targeted or themed
investigations on its own initiative whenever it has the impression (based on consumer
protection monitoring findings, claims submitted to its Customer Service or on information
obtained from other sources) that a certain activity of a supervised institution needs to be
investigated (for compliance with consumer protection provisions set out in sector-specific
legal provisions). Consumer complaints i.e. claims, also trigger consumer protection
proceedings if they are a likely result of a violation of consumer protection provisions.
In case consumer protection laws specific to the financial sector are breached, the HFSA may
apply the following legal measures:
Consumer protection administrative proceedings
This is a procedure set out in the HFSA Act. It is launched based 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. If a violation of laws is detected during the process, the
proceedings will be concluded with a supervisory measure.
Administrative agreements
In certain cases when the non-compliant behaviour of an institution has caused losses to
consumers or resulted in a particular disadvantage for them, the HFSA Act allows the HFSA
to sign an administrative agreement. The HFSA is strongly convinced that a published
administrative agreement has a greater impact than a potential fine. A typical example could
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be a scenario when instead of imposing a minor fine, the HFSA would require the institution
in an agreement to indemnify its customers even for past non-compliances and to quit
practices that violate applicable laws.
2.1.2. Consumer protection monitoring
Consumer protection monitoring encompasses the ongoing monitoring of financial
market trends and of data received from institutions on request along with analysis of
consumer complaint statistics and other available information.
Similarly to prudential monitoring, efficient and credible consumer protection monitoring
is only possible if it is carried out along adequately selected priorities and with a focus on
high-impact problems.
Consumer protection monitoring focuses on
institutions, markets;
typical products and services used by a wide range of consumers;
charges, fees and interest rates applied to products and services;
distribution channels and processes;
customer information and advertising activities of market players,
each of which is selected based on the extent and scope of the related consumer protection
risks.
In addition to the elements outlined above, consumer protection monitoring also involves the
focused monitoring of the products and activities of new market entrant institutions over a
specific period of time and the monitoring of institutions that provide services in the form of
cross border activities.
With a view to European trends, special attention must be paid to the investor protection
aspects of consumer protection also on domestic financial markets. The weight of these
aspects is growing in correlation with the development of the Hungarian financial
intermediation system.
2.2. Regular and proactive supervisory communication
The regular and consistent communication of the aforementioned activities and
supervisory measures to the stakeholders is indispensable and also demanded by the
market.
Experience shows that publicity is one of the strongest means of consumer protection. When
communicating to an audience beyond the immediate circle of industry professionals, the
media offers the most efficient way of directing consumer attention to the results of consumer
protection efforts, identified risks, potential market anomalies and market players pursuing
unfair practices.
2.3. Informing customers, development of financial literacy
The development of consumer awareness and financial literacy is an important consumer
protection objective of the HFSA. Experience shows that a well-informed customer is less
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likely to become a victim of deceptive, unfair practices even when relatively complex
financial products are involved.
2.4. Efficient consumer protection regulations
2.4.1. Participation in the preparation of legal provisions
Pursuant to paragraph (5) in Article 2 of 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 institutions or
to the HFSA’s responsibilities and mandates.
2.4.2. Right to issue decrees
In order to ensure the secure operation of the financial intermediation system, effective 1
January 2011, the President of the HFSA has been authorized to issue decrees for all
supervised institutions that are licensed to pursue a certain activity. These decrees will then
remain in effect for a definite period which may not exceed ninety days and they may impose
a ban or restrictions on certain supervised activities, related services, contracting and product
distribution or they may make any of these subject to specific conditions.1
2.4.3. Setting other standards and expectations
Recommendations
Effective for a specific set of organizations and persons, recommendations represent a market
orientation and approach-shaping tool that principally serves the elimination of market
anomalies and the presentation and rollout of best practices. Consumer protection
recommendations provide integrated guidelines in accordance with applicable laws and set
additional consumer protection requirements that reach beyond the scope of legal provisions.
Furthermore, recommendations set out new standards to foster the enforcement of consumer
interests.
Recommendations are effective means of consumer protection as they raise attention and
allow gradual, flexible adaption by institutions. Recommendations are made available by the
HFSA to the general public.
Creation of other standards and rules
Another tool to set out standards which the HFSA expects compliance with is the so-called
“Dear CEO letters”. In these letters, the HFSA lays down principles which supplement legal
requirements. Declarations of opinion on consumer protection matters also provide
orientation to market players.
1 Paragraph (2) in Article 117 of the HFSA Act
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2.5. Other means of consumer protection
2.5.1. Enforcement of claims of public interest
The HFSA Act enables the enforcement of consumer claims based on civil law in case the
non-compliant practices of a service provider impact a wide but identifiable segment of
consumers. Enforcement procedures can only be launched if the institution has breached
industry-specific legal provisions or the applicable sections of the three consumer protection
laws that relate to the HFSA’s consumer protection proceeding and if the HFSA already
launched administrative proceedings within 3 years after the occurrence of the violation. One
special benefit of a claim of public interest is that it can be applied to demand indemnification
for a wide range of consumers while its main drawback is that the HFSA can only use it if the
customers involved have been identified.
In respect of enforcing claims of public interest, the new HFSA Act that entered into effect on
1 January 2011 significantly expanded the options available to the HFSA. E.g. the
enforcement of claims of public interest by the HFSA is no longer subject to the prior launch
of violation proceedings based on civil law claims of consumers. The new law also declared
that the HFSA may also take action to enforce the civil law claims if the claims related to
unfair general contracting conditions.
2.5.2. Public actions: declaring general contracting conditions unfair
Furthermore, the HFSA may also request the court to void any unfair contract provision that
has been added to a customer contract via the institution’s general contracting conditions.
The rules of filing a public action for declaring specific conditions unfair are set out in the
Civil Code. Pursuant to these rules, an organization specified in a separate law2 is also
entitled to request the court to void an unfair provision that was incorporated in the contract
via the general contracting conditions. The court ruling that voids any such unfair provision
shall be applicable to all parties who signed a contract with the provider that applied the
provision.
2 Pursuant to Article 5 of the DICC II (Decree No. 2 of 1978), the request for declaring void or unfair a general
contracting condition applied upon signing a retail contract or published for that purpose and the request for
banning the application thereof (…) may be submitted to the court by (…) the leader of an organ with
nationwide mandate (…).
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3. The domestic regulatory environment and experiences gained from
the HFSA’s consumer protection monitoring
Consumer protection monitoring is risk-based and focuses on high-impact problems. The
HFSA focuses on sectors, institutions and services which may convey risks by potentially
triggering significant negative impact on the financial position of consumers or a group of
consumers.
Institutions, products and services that may belong here
relate to a wide range of retail customers (consumers);
involve a large number of transactions;
the volume of individual transactions is significant and/or constitute a long-term
contractual relationship for customers;
major variances and fluctuations may occur in costs/returns;
regulations/market standards and the efficiency of competition are not satisfactory in the
market segment concerned;
transparency is moderate and opportunities to change service providers are limited;
are targeted at special, potentially disadvantaged segments of society;
are complex, bundled products;
have been subject to a number of consumer claims and complaints to the HFSA (and to
its customer service).
Based on the criteria listed above, the following items received special attention in the second
half of 2010: mortgage lending in the financial market sector (especially the banking sector),
bundled savings products, certain insurance products in the life sector and customer
classification and customer information in the capital markets sector.
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I. FINANCIAL MARKETS SECTOR
3.1. Lending
Based on the HFSA’s risk assessment, the position of the financial sector continues to be
stable with no threats in sight that could fundamentally endanger operations in the short term.
However, the outlook for the domestic financial sector and the international environment
remains uncertain and involves significant risk. Uncertainties concerning global prosperity,
funding costs and the capital markets are of utmost importance, as is the low profitability of
Hungarian financial services providers and the continued unfavourable position of debtors.
The latter is critical as many households are highly indebted and have limited debt service
capability. Furthermore, the asset quality of loan market service providers continues to
deteriorate, albeit at a decelerating rate, whilst the loan market is characterized by significant
volume decrease. This seriously hinders any real economy upturn and deteriorates the position
of financial services providers and their customers via direct and indirect impacts.
Before looking at the main trends of the household lending market in H2 2010, we must
briefly discuss the legal environment as it had considerable influence on developments.
3.1.1. The main changes in the regulatory environment of lending
Unilateral contract modification
The provisions on unilateral contract modification in the Act on Credit Institutions were first
modified on 1 August 2009 due to the financial crisis and then the August provisions were
further specified in an amendment that entered into effect on 1 January 2010. As a result of
these changes, significantly stricter conditions apply to the unilateral modification of loan
contracts or financial lease contracts signed with customers when the change is
unfavourable for the customer. Pursuant to these provisions, customer loan or financial
lease contracts can be modified adversely for the customer exclusively in respect of the
interest rate, fees and charges. It was declared that no other condition (even the list of
circumstances that may cause such unilateral modification) could be changed unfavourably
for the customer. As a new element in the regulation, it was declared that no new fee or
charge is allowed to be introduced during the contract term and that the calculation
method of specific interest rates, fees or charge elements as defined in the contract cannot be
changed in a manner unfavourable for the customer3.
Signed in September 2009, the Code of Conduct on the principles of fair conduct by
financial organizations engaged in retail lending also entered into effect on 1 January 2010
(hereinafter the Code of Conduct). It set out principles that reach beyond the scope of legal
provisions and not only address desired lender behaviour prior to contract signing, the
handling of payment difficulties of customers and conduct in relation to foreclosures but also
stipulates the unilateral change of the retail loan contract or financial lease agreement in
respect of interest rate, fees and charges. The Code of Conduct also specified the list of
3 ACI, Article 210
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reasons with conditions that must occur before the institutions signing the Code of Conduct
are allowed to change the interest rate in the retail loan contract or financial lease agreement.
The Code of Conduct was elaborated after the financial crisis by the authorities (including the
HFSA) with the involvement of the Banking Association, as an attempt to come up with a
quick solution. In the finance world, codes of conduct typically function as a means of self-
regulation and are usually not elaborated by regulators or supervisory authorities. The Code
of Conduct was a temporary solution at the time. Some of the requirements therein have
been incorporated into legal provisions effective January 2010.
In H2 2010, Act XCVI of 20104 further tightened the conditions of unilateral contract
modification. This law added further requirements to the related provisions of the Act on
Credit Institutions declaring5 that housing loan contracts or financial lease agreements
concluded with consumers must not be changed by financial institutions in a manner that is
disadvantageous for the customer. Any contract modification contrary to this provision
shall be null and void. Pursuant to the new law, financial institutions can change retail
housing loan contracts or financial lease agreements adversely for consumers only in respect
of the interest rate and only if the conditions stipulated in Government Decree no. 275/2010
(XII. 15.)6 apply. Another new regulatory element was the declaration of the customer’s right
(with exceptions specified in the law) to withdraw from the contract free of charge in case
the retail loan contract or financial lease agreement is modified unilaterally and adversely for
the customer (in respect of interest rate, fees and charges). It was also declared in the law that
any such unfavourable contract modifications (with duly specified exceptions) must be
published in an announcement 60 days before the contract modification takes effect and
that the customer must be notified by mail on the change and the expected amount of
payments after the change takes effect.
Interest rates, fees, exchange rates and their calculation method
Effective 1 March and 11 June 2010, respectively, new rules entered into effect with Act
CLXII of 2009 on Consumer Credit. Besides the new provisions on information obligations
and avoidance, another new element in the Act was the stipulation of early repayment rules
for loan contracts concluded after 1 March 2010. Pursuant to these rules, the consumer shall
always be entitled to repay the entire loan or a part thereof. The Act explicitly specified the
maximum early/final repayment fee at 1%, 2% and 2.5%.
On the HFSA’s initiative, Act XCVI of 2010 imposed further limitations on the maximum
early repayment fee of housing mortgage loans.7 In the case of loan types and with
exceptions specified in the law, the fee charged to the customer must not exceed 1% or 1.5%
of the amount repaid early.
As a result of the ACC, the rules of APR calculation8 changed in June 2010: a number of
new cost items were added to the calculation formula. This way, since 11 June 2010, all fees
4 Act on the amendment of certain financial laws in order to help financially troubled retail housing loan
borrowers 5 ACI, Article 210/A
6 Government decree on the unilateral modification of contractual interest rates
7 ACC, Article 25 (4)
8 Government Decree no. 83/2010 (III. 25.) on the definition, calculation and publication of the Annual
Percentage Rate indicator
16
payable by the consumer (e.g. the cost of property evaluation) in relation to a loan contract
(and a financial lease agreement) must be taken into account in the APR calculation along
with the costs of any loan-related supplementary services provided they are known to the
customer and if the use of these services are required by the creditor as a precondition to the
loan contract (e.g. bank account maintenance charges). Another new element in APR-related
regulations was the replacement of the former 360-day baseline with 365-days9. This way,
a 365-day baseline has become generally applicable both for loan and deposit products,
eliminating the former asymmetry which was unfavourable for customers.
On the HFSA’s initiative, the conversion rate to be applied in the case of foreign exchange
loans was defined10
in a legal provision effective 27 November 2009. This regulation
considerably narrowed the scope for financial institutions to define a conversion rate. Thus,
when converting monthly repayments, fees and charges set in a foreign currency, institutions
must use their own foreign exchange average rate or the official exchange rate set by the
National Bank of Hungary. This rate must be applied also in the case of the full or partial
early repayment of a debt when the customer initiates such repayment.
Furthermore, the amendment to the Act on Credit Institutions effective 27 November 2010
also declared that in case a retail loan contract or financial lease agreement is cancelled, the
financial institution must not charge default interest, fee, charges or commissions after
the ninetieth day following contract cancellation in an amount exceeding the interest
charge and handling fee in effect on the day before the date of cancellation.11
Also on the HFSA’s initiative in response to consumer experience, it was declared that
financial institutions and payment institutions must not charge any additional fees to
consumers for handling complaints.12
Prevention of excessive indebtedness
Effective 11 June 2010, Government Decree no. 361/2009 (XII.30.) on prudent retail lending
and the assessment of credit eligibility has banned purely collateral based lending and
requires the credit eligibility check of natural person customers on a mandatory basis in
each and every case. The credit eligibility check must be based on the credit eligibility limit
derived from the income position of the household concerned. The credit eligibility limit
shows the maximum monthly repayment amount which the debtor can safely finance from his
income. When calculating the credit eligibility limit, repayments for the customer’s existing
borrowings must also be taken account. The purpose of this measure was to ensure that the
debt burden of the borrower harmonise with his household income.
Another important element of the decree was setting limits on maximum property loan13
and
vehicle loan14
amounts, and on maximum vehicle loan terms. The decree set out
9 Paragraph (2) in Article 5 of the APR decree: The formula set out in Annex 1 shall be applied with a view to
the following: (…)
d) one year shall be considered consisting of 365 days (or 366 days if it is a leap year), 52 weeks or twelve
months of equal length. Each such month must be counted as consisting of 30.41666 days regardless of whether
it is a leap year or not; (…)” 10
ACI, Article 200/A; 11
ACI, Article 210/A, paragraphs (5)-(6) 12
ACI, Article 215/B, paragraph (14)
17
mandatory ratios between collateral property value and exposures and vehicle market value
and exposures, respectively. These ratios varied per transaction type and foreign currency.
In order to curb foreign exchange lending, it was declared15
that apart from exceptions
specified in the applicable law, properties owned by natural persons cannot be mortgaged
(and thus such mortgage cannot be recorded in the property registry) to serve as collateral
for receivables owed to creditors on the borrowings of natural persons (excluding private
entrepreneurs) if the amount borrowed was granted or recorded in foreign currency
under a (foreign exchange-based) loan contract.
Helping out financially troubled retail housing loan debtors
Several requirements were enacted to help out financially troubled retail housing loan debtors.
In August 2010, the extension16
of the eviction ban until 15 April 2011 was announced.
Pursuant to the 16 March 2011 resolution of the Parliament, the ban has been repeatedly
extended until 1 July 2011.
In order to protect housing loan debtors in default, the law declares that in case a customer is
in default for at least ninety days with mortgage loan repayment, he may request the
one-time extension of the loan term with a maximum of 5 years. Creditors must not reject
these requests without solid reasons. In the case of housing mortgage loans, creditors must
not charge any fees or charges for the extension of the term if no term extension took
place within 5 years after disbursement.17
The regulatory environment detailed above clearly shows that regulations on the retail
lending sector became increasingly strict in 2010, ultimately leading to the tightening of
lending conditions, the prevention of further excess indebtedness of households, the
significant cutback of foreign exchange lending and restrictions on unilateral contract
modification during the loan term.
For existing contracts, the conditions of unilateral contract modification by institutions
were tightened. In early 2010, the applicable rules (including the Code of Conduct) specified
the conditions for the unilateral modification of loan contracts and financial lease agreements
concluded with any consumers, whereas the tightening of regulations in the second half of
2010 related to the unfavourable modification of housing loan contracts or financial lease
agreements concluded with consumers. With the latter set of rules, legislators strived for
further reducing the defencelessness of consumers. Furthermore, in respect of foreign
exchange loans, the new regulations enacted in H2 2010 stipulated applicable conversion
rates that were favourable for customers.
However, the gradual modification and tightening of relevant requirements resulted in a
complicated and unclear regulatory environment: changes to regulations practically
overwrote and voided several provisions of the Code of Conduct. At the same time, the
13 Government Decree No. 361/2009 (XII.30.), Article 6
14 Government Decree No. 361/2009 (XII.30.), Article 7
15 The Civil Code and the Act on the Real Estate Registry was amended effective 14 August 2010
16 Act LIII of 1994 on Execution by Court, Article 303
17 The new Article 28 (4) of the ACC
18
regulatory benefit of the Code is still in place regarding retail loans as the new provisions
enacted in H2 2010 applied exclusively to the unilateral modification of retail housing loan
contracts and lease agreements. Guiding principles and provisions for the modification of all
other loan contracts and financial lease agreements concluded with natural persons continue
to be set out in the Code of Conduct (through the specification of the list of reasons) and the
HFSA can hold institutions accountable for compliance with these provisions and sanction
non-compliance. At the end of 2010, taking into account the changes to legal provisions of
consumer protection relevance, the HFSA suggested that the Code of Conduct should be
reviewed and revised by the Banking Association.
In case the Code of Conduct does not prove to be sufficiently effective in respect of the
issues in its scope, the HFSA will initiate the incorporation of its remaining provisions
into laws due to the temporary nature and insufficient regulatory power of the Code of
Conduct.
The requirements in the Government Decree on prudent retail lending (credit eligibility limit)
greatly tightened the rules on credit eligibility checks, credit eligibility limits and, in the case
of various foreign exchange loans, the maximum borrowable amounts. All these factors
contributed to the significant setback of lending.
Also in respect of new contracts, the focus of regulations shifted towards ensuring
transparency and comparability. With passing the ACC and the new APR decree, the
intention of legislators was to ensure that customers are given adequate information in
advance. Thanks to the new regulations, customers must be informed of the product and the
related conditions. Second, based on the APR which includes nearly all relevant fees and
charges, consumers can now compare the prices of various products.
3.1.2. Market trends
Regarding retail lending market trends in H2 2010, factors that had a profound impact on
lending by credit institutions included deteriorating profitability, a significant drop in the
volume of lending activities, the increase of rated portfolios and adaptation to restrictive
regulations. By tightening the conditions on lending, participants in the sector aimed to
decrease the chance that new loans become problematic.
The low number of new contracts and the related lower volume of loans resulted from the
tighter conditions on lending18
in the period concerned (the only reason that the HUF value of
foreign exchange loans did not reflect a significant decrease was the increase of the related
exchange rates).
18 Provisions of Government Decree no. 361/2009 (XII. 30) on prudent retail lending and credit eligibility
assessment
19
Chart 1
Source: HFSA – based on end-of-period data of joint stock corporation banks
Chart 2
Source: HFSA – based on end-of-period data of joint stock corporation banks
These factors determined lender behaviour in respect of both new contracts signed in the
period concerned and the handling of existing loan portfolios.
20
Existing loan portfolios
The problems that characterized the period under review were especially apparent in the case
of long term foreign currency-based loans with high principal, primarily mortgage loans.
Mortgage loans
The deterioration of the existing rated portfolio was principally caused by the persistent
increase of HUF repayments of foreign currency loans – a factor that generated most of the
difficulties and threats for consumers. Recognizing the burdens on foreign exchange loan
debtors, lending institutions did not raise fee elements that have a direct impact on monthly
repayments (interest rate, charges). Where these fees were changed, it was mostly a decrease.
Consumers, however, did not feel the effect of these steps: throughout 2010, the forint amount
of repayments kept growing owing to the continual strengthening of the Swiss franc.
The increased forint amount of repayments was in the main caused by the revaluation of debt
principals. Interest rate changes had a lower impact only. As an external factor, the market
exchange rate will remain a key factor in shaping the forint amount of repayments. Changes
in interbank money market interest rates which influence the interest rates of foreign
exchange loans represent a legally recognised cause for unilateral interest rate changes. Any
hike in the extremely low Swiss central bank base rate is definitely a risk as it may further
increase the burden on foreign exchange loan debtors.
Problems deriving from payment difficulties also impacted forint loans. Mortgage-secured
long-term loans are typically housing loans and due to the underlying subsidies they usually
involve more favourable conditions than foreign exchange loans, which are mostly general
purpose facilities (home equity loans). Consequently, changes in the repayment amounts did
not increase the debt burden of debtors dramatically. The majority of problematic contracts
relate to those customers that took out equity loans in addition to their existing housing loans.
Vehicle financing loans
Vehicle financing is a special market and 2010 was a critical year; car sales dropped as did
demand for vehicle financing loans. Barriers on the supply side included the significant
volume decrease of available (re)financing, the low capital supply of funding institutions and
the losses deriving from the growth of non-performing portfolios. Instead of new
disbursements, institutions focused on maintaining existing ones and managing payment
difficulties.
Whilst the ratio did not reach 10%, the significant growth of restructured loans within the
total vehicle loans portfolio indicated the severity of payment problems. Another sign of
portfolio quality deterioration was that the number of restructured loans in default for over 30
days and 90 days, respectively, went up significantly in Q4 2010.19
Due to the sales push and loose conditions formerly associated with lending, problems with
payment capabilities and willingness began to accumulate in relation to existing foreign
19 Source: MNB – Survey among lending executives on the lending practices of banks – Aggregated survey
results for Q2 2010
21
exchange loans. Making matter worse is that a significant share of contracts had 10-12 year
terms and, given the progressive depreciation rate of vehicles during the term, the sale of
repossessed vehicles did not cover the debt. Thus, customers not only lost their cars but also
had to pay the shortfall. Many customer complaints concerning vehicle loans related to this
issue.
Concerning new contracts, the problem outlined above is already resolved by the referenced
Government Decree no. 361/2009. (XII.30) which limits the maximum ratio of exposure
compared to the vehicle’s market value (similarly to mortgage loans) and also regulates the
maximum loan term.20
Accordingly, vehicle financing contracts signed after 11 June 2010
must not contain a loan term that exceeds 84 months at the time of contracting.
The fact that most car dealers have only a single financial service provider raises
concerns for the future. The HFSA believes, based on customer experiences, that under such
a system customers have no chance to choose a possibly more advantageous financing plan
from another service provider.
Information from customers shows that many car dealers often fail to comprehensively inform
potential debtors. This is definitely an objectionable sales approach. When debtors sign a
vehicle sales contract and financing contract at a dealership, it seems their decision is
primarily based on verbal information. In certain cases they face later a substantially higher
payment obligation and higher monthly payments than first agreed upon.
As market players expect an upturn on the vehicle financing market in 2011 both on the
supply and demand side, regulatory attention must be paid to these consumer protection
anomalies.
The HFSA will examine the possible ways of resolving the aforementioned consumer
protection issues in 2011.
Handling of financially troubled debtors
In the period under review, the main problem in managing existing retail loans was the
deterioration of rated portfolios. Overdue retail loans increased by nearly 20% in H2 2010
while the forint value of household debts decreased slightly. In the case of mortgage loans, the
growth of the overdue contracts was 42% while the total loan portfolio remained unchanged.
The continued deterioration of portfolio composition in terms of delinquencies also poses
significant risks.
20 Article 7 (1): In the case of forint loans provided for vehicle purchases, the value of the exposure as at the time
of credit application assessment must not exceed 75% of the vehicle’s market value or, in the case of financial
lease, 80% of it.
(2) In the case of euro loans or euro-based loans provided for vehicle purchases, the value of the exposure as
at the time of credit application assessment must not exceed 60% of the vehicle’s market value or, in the case of
financial lease, 65% of it.
(3) In the case of vehicle financing loans granted in a foreign currency different from that specified in
paragraph (2) above, the value of the exposure as at the time of credit application assessment must not exceed
45% of the vehicle’s market value or, in the case of financial lease, 50% of it.
(4) If the lender grants a vehicle purchase loan to a natural person in multiple currencies for the same vehicle,
the lower of the limits specified in paragraphs (1)-(3) above shall be applied to the entire exposure.
(5) The term of vehicle purchase loans must not exceed 84 months as at the time of contract signing.
22
The provision of accurate and understandable information to customers concerning the actual
debt size, the amount in delinquency if any, the consequences of late payment and the
potential steps to be taken may be an important means of managing payment problems on
existing loans.
The HFSA disapproves the practice described in consumer complaints that financial
institutions do not inform the guarantor/cosignatory and the mortgage obligor about any
overdue debts of the debtor. This way, these parties are only notified when the contract
is terminated, i.e. when they usually cannot do anything about the problem as the debt
amount has risen significantly due to the defaults on contractual fulfilment. By sending out a
payment notice only to the debtor and by not notifying the guarantor (mortgage obligor),
financial institutions do not breach their contractual obligations.
The lack of notification raises consumer protection concerns. If the obligors were sent a
payment notification, they could pay instead of the debtor, thus halting contract
cancellation and the increase of the debt from default interest charges.
To avoid that default interest triggered by payment difficulties would lead to a debt increase
that is unmanageable for the obligors, consumers are now protected by the formerly
mentioned limits21
which were built in the default interest calculation formula on the HFSA’s
initiative in H2 2010. In addition to these tools, the rescheduling or renegotiation of defaulted
contracts are also viable solutions for reducing the number of loans that could only be settled
by way of liquidating the collaterals stipulated in the contract.
Restructuring of loans
Last year the most frequent way of managing problematic long-term loan contracts with high
principal was loan restructuring. Institutions in the sector tried to decrease the number of
contracts in delinquency by extending loan terms or by offering grace periods. In Q4 2010,
the ratio or restructured loans grew above former expectations with the related indicators
going up from 5% to 6.1% and from 10.5% to 12.5%22
for housing mortgage loans and home
equity loans, respectively. According to forecasts, 10% of the total mortgage loan portfolio
might be restructured by the end of 2011.
The default statistics of restructured loans show that rescheduling is not a comprehensive
solution: the ratio of loans falling in default for more than 30 days after restructuring was
nearly 30% while that of restructured loans in default for over 90 days was 18% as at the end
of 2010. Credit institutions usually try to manage the issue by re-extending expiring grace
periods.
21 Pursuant to Article 210/A (5)-(6) of the ACI, following the ninetieth day after contract cancellation the
financial institution must not charge default interest, fee, charges or commissions in excess of the interest charge
and handling fee in effect on the day before the date of cancellation. 22
Source: HFSA
23
Replacement of loans
Due to problems with existing loan repayments, the option to replace loans has become a
key issue. Replacement may take place with the use of another product of the lending
institution designed for this specific purpose, or with the use of a similar product of another
lender. In the vast majority of cases, the actual replacement of loans is hindered by the
significant amount of additional charges. In particular, this is the case with foreign
exchange loans that have grown dramatically due to disadvantageous exchange movements.
To reduce conversion costs, institutions offer various discounts to decrease the initial charges
of the related products and thereby make this option affordable for customers.
Both rescheduling and replacement result in an extended repayment period and thus increase
significantly the amount that the consumer must pay the creditor during the loan term. These
arrangements primarily help reduce repayment burdens by aligning the repayment schedule to
the debt capacity of the debtor. If this incorporates a pricing scheme that makes interest
rate changes and other loan charges transparent then it can greatly contribute to
keeping contractual repayments within debt capacity limits. The implementation of
predictably changing pricing to portfolio elements that are not under replacement or
rescheduling can also reduce the probability of currently non-problematic contracts falling
into delinquency.23
This approach can often help contracting parties prevent or avoid the
burdensome administrational procedure and additional charges associated with loan
rescheduling and replacement.
New contracts – changing product offerings
When examining contracts signed in the second half of 2010, the most apparent change
compared to previous periods is the changed ratio of foreign exchange loans and forint
loans. Compliance with Government Decree no. 361/2009.(XII.30.) on prudent retail lending
and the assessment of credit eligibility not only made lending more secure but also impacted
considerably the volume of available loans. The limitation of exposure/collateral value ratios
and the consideration of the debt capacity of households resulted in a lower borrowable
amount per customer.
Parallel to that, credit institutions also tightened other loan eligibility conditions. In
combination with a decrease in demand, this resulted in the month-on-month decrease of
household borrowings in comparison to former periods.
The former dominance of foreign exchange lending came to an abrupt end.24
Swiss franc
loans practically disappeared and thus euro-based lending became dominant among non-
forint based and non-mortgage products. Within home equity loans, the former dominance of
foreign currency loans waned and was quickly replaced by forint loans.
Creditors further tightened the conditions of offered products. For new contracts, the pricing
trends of forint loans were favourable for consumers: by the end of 2010, the average
annual percentage rate in the sector for housing forint loans remained consistently below
10%. In addition to the launch of new products due to the setback of foreign exchange
23 Transparent and reference interest-based pricing is discussed in the subsequent parts of this chapter.
24 Due to the previously mentioned modification of the Civil Code
24
lending, changes on the supply side were also characterized by expectations of new
regulations (e.g. subsidized lending and state guarantees).
Property leasing
As a result of legal provisions that impose restrictions on mortgage lending, some market
participants may instead turn to property leasing.25
Since no mortgage is registered in the case of lease contracts, the new regulations that held
back foreign exchange lending did not hinder this property acquisition method. However, it is
important to mention that as with loans, credit eligibility requirements have also been
tightened for lease agreements. Today such credit eligibility assessment (i.e. the screening of
the customer’s financial position) is already mandatory for financial lease agreements to be
signed with natural persons. While formerly there were no legal restrictions regarding
downpayment upon property lease deals, current regulations declare that the value of a
financial lease granted in forint must not exceed 80% of the market value of the property. The
same mandatory limit is 65% of the property value for euro-based lease deals and 50% for
lease plans offered in any other currency, e.g. in Swiss franc26
.
Effective 11 June 2010, the APR must be calculated and disclosed also in the case of lease
schemes. This requirement is intended to facilitate the comparison of lease product prices.
The direct and indirect costs of lease deals are also increased by the fact that duties might be
payable twice on the leased property: first when lessor acquires the property and second when
the lease contract is closed in case ownership over the property is transferred to the lessee.
One important difference with lease deals is that during the term of the lease contract, the
property is in the ownership of the lessor so in case of payment defaults dwellers may become
ineligible to use the property much easier then with loans. In the case of property leases,
comprehensive and unbiased information provided to customers by service providers must
address this aspect.
As described above, several measures were taken in the second half of 2010 in order to
mitigate the difficulties caused by earlier market developments. These regulations had a
profound impact on both forint and foreign exchange retail loan contracts. Regarding the
growth of payment burdens changes of the interest rate and other regular and ad-hoc
fees and charges payable during the contract term are a decisive factor in both loan
categories. Concerning foreign exchange loans, when quantifying items calculated in a
foreign currency but payable in forint, the actual forint amount to be paid is impacted both
by the exchange rate and the type of the conversion rate applied. Out of these factors,
creditors can influence the interest rate and the type of the conversion rate but the market
interest rate is beyond their control.
According to market expectations, demand for retail loans will slowly increase and the current
restrained and careful lending policy of banks may become less tight regarding certain
25 Pursuant to the requirement set out in Act XC of 2010 on establishing and amending certain economic and
financial laws. 26
Pursuant to the provisions of Government Decree no. 361/2009 (XII. 30.) on prudent retail lending and credit
eligibility assessment
25
products in 2011. Based on experiences gained in 2010, the continuation of positive changes
would also help the nascent growth of retail lending. Such changes could contribute to the
prevention of future problems:
a)
Upon the disbursement of new loans and when handling issues with existing ones, special
emphasis must be put on providing thorough and comprehensive information. To this
end, since July 2010, the HFSA publishes detailed comparative information on all retail loan
and lease product offerings sold in the sector. The information is published in the Loan and
lease selection tool on the HFSA’s internet page for consumers. In February 2011, vehicle
lease schemes were also added to the tool and credit institutions operating in the form of
branch offices also came aboard regarding data provision. The database is based on
mandatory data provision and presents market offerings per thematic categories.
Important considerations regarding the provision and obtaining of information:
- Having understood the customer’s needs, institutions must present multiple products
from their offerings to help the consumer in making a decision.
- Credit institutions must provide assistance in assessing the real debt capacity of the
consumer.
- Meaningful information must be provided not only on the benefits but also on the
risks inherent to the offered products.
- In addition to information provided by the financing institution, other means must
also be applied to expand the financial knowledge of consumers.
- In particular, the taking out of large, long-term loans conveys high risks if the basic
product terms and rules are not completely clear for the contracting parties.
- Of the signatories of loan contracts, not only the debtor but also the cosignatory or
mortgage obligor (if different from the borrower) assumes significant risks.
b)
What might be important for consumers is the application of calculable loan charge elements
that vary between defined limits and the enforcement of pre-defined pricing principles with
as few variable elements as possible. The pricing approach that provides the highest level of
protection against unilateral contract modifications is the application of an interest rate that
may only change if an external factor beyond the creditor’s control changes.
As outlined earlier, regulations on the unilateral modification of retail loan contracts
were amended and tightened multiple times last year. From a consumer protection
perspective, this approach represents a major step forward. The tightened rules give
financial institutions less room for unilateral contract modifications (mostly in relation to
interest rate, fees and charges an in a manner unforeseeable to the customer). Ultimately,
contract conditions became more calculable during the loan term.
However, despite tightened rules, transparency did not increase: the pricing policy,
principles and methodology of institutions (in spite of mandatory publication and compliance
with it) and the interest rate of retail loans during the term are still not sufficiently
transparent for customers.
This problem may be alleviated if loan schemes that involve a reference market interest
rate gain in popularity. It is a positive trend that an increasing number of such loan products
have been launched recently.
26
The reference interest rate products currently available on the market are typically forint
loans with a 3/6/12-month BUBOR interest basis (according to estimates, their ratio within
the total portfolio is insignificant and does not even reach 5%). Regarding loan types, the
product mix is diverse: available products include housing mortgage loans, home equity
mortgage loans and debt settlement loans. The interest premium on these products is usually
fixed but some institutions reserve the right of unilateral interest premium modification also
in their contracting conditions. In other words, the interest rate can only be considered
constant during the interest period. At the end of each interest period the amount of
repayments may change due to the automatic change of the reference interest rate and the
potential change of the interest premium. The length of interest periods varies from one month
to 5 years.
Several solutions are offered on the market for keeping the amount of repayments constant
during the first period of the loan term: the interest premium is kept unchanged either during
the grace period or for a specific number of repayments or until specific point of time. There
is only a limited number of banking products which involve a constant interest premium
throughout the loan term and where only the change of the reference interest rate can
trigger a change in the interest. Without providing a full list, examples of banks that offer
reference interest rate products are: OTP Bank, K&H Bank, Budapest Bank, MKB Bank,
FHB Bank.27
The HFSA welcomes and encourages the appearance of loan products where interest is
linked to a reference interest rate. The launch and spread of these products may
decrease the interest rate risk of households as financial institutions would have limited
opportunities for unilateral contract modification and product pricing and interest rates
would become more transparent. Reference interest rate products increase
comparability as the “behaviour” of interest (and other charges) during the term is also
a decisive factor at the time of taking out the loan.
From a consumer protection viewpoint, transparency and calculability would be greatly
enhanced by the spread of reference interest rate products where the interest premium is
actually fixed and cannot be modified unilaterally during the entire loan term. If this interest
calculation approach was applied also with existing loan contracts and not only for new ones
(upon loan replacement and rescheduling) it could significantly improve the calculability of
the repayment burden for customers.
c)
Regarding the handling of contracts that have become problematic, foreclosure and the
liquidation of collaterals should be the last resort for both parties. It is important both for
consumers and lenders that the issue with the further fulfilment of payment liabilities is dealt
with meaningfully as soon as possible after the occurrence of payment difficulties. The
renegotiation of the contract that causes payment difficulties, the rescheduling of
repayment, the granting of a grace period, the extension of the final deadline of
repayment and the early involvement of the guarantor in problem handling all provide
an opportunity to manage temporary payment problems and to agree on repayments that
harmonise with the true debt capacity of the debtor.
27 The products mentioned here have been present on the vehicle financing market for years.
27
3.2. Deposits and savings
3.2.1. Market trends
A significant portion of household savings in Hungary is held in deposit products offered by
credit institutions. Besides their simplicity and extensive, easy accessibility, these products
are also popular because of the level of security they involve (predictable returns, deposit
guarantee).
The mix of deposit products and money market savings underwent a change in the second half
of 2010. First, the shift towards long-term savings and 12+ month deposits accelerated
during the last few months of the year as more and more banks introduced long-term
investment contracts (LTICs) and separate deposit plans. Second, sales of so-called bundled
or packaged deposit and investment products (hereinafter bundled deposits) continued to
increase.
3.2.1.1. Plain deposit products
In H2 2010, the following overall trends were seen regarding time deposits offered to retail
customers:
fluctuation or overall decrease of deposit interest rates, especially for short-term
and demand deposits;
while the interest rate remains unchanged, the required minimum deposit amount
per interest rate range goes up;
compared to existing deposits, credit institutions apply higher, “special offer”
interest rates for “new” deposits that bring on a portfolio increase.
In the case of retail time deposit products, unilateral contract modification initiated by the
service provider during the term is not a real issue as a decisive portion of these contracts
expires within one year. For deposit schemes (e.g. LTIC) that stretch beyond one year,
increasingly often service providers apply a pricing clause that is linked to some
reference interest rate.
28
Chart 3
Distribution of household deposits (retail and private entrepreneurs) per
remaining time to maturity
45.2% 46.2% 45.0% 45.2% 47.5%43.9%
40.5%
28.8% 28.0% 28.5% 27.5% 20.4%21.1% 26.2%
19.7% 19.3% 19.7% 20.1%24.5%
27.3% 25.4%
5.0% 5.2% 5.4% 5.7% 6.0% 6.2% 6.9%
1.3% 1.4% 1.5% 1.5% 1.5% 1.6% 1.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
06.30.2010 07.31.2010 31.08.2010 30.09.2010 31.10.2010 30.11.2010 31.12.2010
0-30 days 31-90 days 91-365 days 1-5 years over 5 years
Source: HFSA – based on data of joint-stock banks
In the case of new contracts, deposit interest rate trends visibly changed in H2 2010. While in
the first half of 2010 deposit interest rates followed the continual decrease of the 3-month
BUBOR and thus moved together with market changes, from June a noticeable gap evolved.
The margin resulting from the dramatic divergence of the related indicators in June (3-month
BUBOR 5.23 %, average deposit interest rate in the sector: 4.55 %) narrowed somewhat in
the last months of the year. Yet the gap is still a powerful indication that the sector improved
its profitability in H2 2010 by lowering interest rates.
29
Chart 4
Source: MNB, HFSA – based on data of joint-stocks banks and mutual savings association
Although the trend described above is unfavourable for customers, its impact can be mitigated
if consumers select products and services in a more thoughtful, analytical manner. By fuelling
competition, this may eventually lead to a pricing regime that is more favourable for
customers.
In order to promote market competition and increase transparency, at the end of 2010 the
HFSA began to publish regularly updated product comparison tables on its home page
providing an overview of savings products that involve an LTIC. In June 2011, the Deposit
and savings finder tool will be launched on the HFSA website. From May 2011, this new
tool will replace the product comparison tables published to date and will contain information
that institutions must submit under mandatory data provision.
3.2.1.2. Bundled investment and deposit products
As a result of market trends (including increased bank activity and a decreasing interest rate
environment), the sale of bundled savings products came to the forefront again on the
domestic market in H2 2010. Increased marketing efforts and an expanding range of
product offerings were witnessed, with the related products being offered by all significant
market players. In the HFSA’s opinion, bundled deposits convey higher risks for
consumers than traditional time deposit products.
The key features of bundled products sold on the domestic market are as follows:
part of the deposit expires within one year. For this part, the bank offers an
extraordinarily high initial interest rate as a “special offer”;
the deposit product is typically bundled with one, sometimes with two investment
products;
deposit products are typically bundled with various investment units, banking bonds and
unit-linked life insurance products of investment funds that belong to the financial group
concerned;
30
some credit institutions offer bundled products in pre-defined bundles while other
institutions only define the range of investment products from which the customer can
select one or more options;
distribution approaches regarding bundled products are diverse, too. E.g. if an investment
unit is subscribed to, the time deposit can be started on the day of subscription or not later
than the last working day before the end of the first interest period of a time deposit.
The HFSA carried out a survey among seven banks28
that have a dominant position on the
retail market. The survey focused on the sale of bundled products between December 2009
and December 2010.
Based on data available to the HFSA, within the total of 32 outstanding products, investment
funds of some sort were the most typical product type (they were part of 24 products) as of
the dates surveyed29
, whereas unit-linked life insurance offerings (found with eight
products), various banking bonds (found with seven products) and bundled deposits
represented a much lower amount. A minor part of outstanding bundled investment products
involved other investment assets, e.g. structured bonds (two products) or mixed life insurance
(one product). Customers had an option to choose from two or more investment products or a
combination thereof (on a mandatory basis) in the case of nearly one quarter (seven) of all
outstanding bundled products as of the dates surveyed.
Chart 5.a Chart 5.b
Distribution of investment product types of
outstanding bundled products containining
multiple investments per number of products
Investment
funds
6
Unit-linked life
insurance
4
Banking bonds
5
Other
structured
bonds
2
28 CIB Bank, Erste Bank, KH Bank, MKB Bank, OTP Bank, Raiffeisen Bank and UniCredit Bank.
29 31.12.2009, 30.06.2010 and 31.12.2010
31
Chart 6
Average value per 1 deposit
0.898 0.905 0.899
1.7211.829
1.948
0.000
0.500
1.000
1.500
2.000
2.500
31.12.2009 30.06.2010 31.12.2010
HUF million
Retail deposits Bundled deposits
Using the data at its disposal, the HFSA examined the average value per contract within the
total time deposit portfolio and within the deposit elements of bundled deposit products,
respectively. Only contracts in effect as of the specific dates were taken into consideration.
Regarding total time deposits, there is no significant difference between the values on the
different dates as the average value per deposit was around HUF 900,000 on all three days.
Regarding the deposit component of bundled deposit products, however, average value per
deposit was nearly double the value of the entire time deposit portfolio. Furthermore, the
average value per these deposits increased between the dates concerned while total retail
deposits stagnated. In other words, parallel to the decrease of simple deposit interest
rates, customers placed larger and larger amounts in bundled deposits and thereby
invested increasing amounts into investment products that involved higher risks.
3.2.2. Identified problems and risk items
In the HFSA’s opinion, consumer protection concerns in the case of bundled products may
primarily relate to the provision of incomprehensive and not sufficiently balanced
information to customers and to the characteristics of these products (e.g. investment
products are for the long-term and involve different risk levels than deposits).
The fact that institutions often fail to highlight properly the complexity and risk level of
bundled products when promoting and selling them may generate increased risks for
consumers. It can also be a problem that customers only face the actual risk of the investment
product and its long-term nature at a later point e.g. when returns fluctuate or when the
initially invested capital is at the risk of loss, or, say, e.g. in the case of a 15-year life
insurance scheme.
Therefore, the HFSA considers it important that consumer protection principles and
requirements (in particular requirements for informing customers) should be
32
formulated also for deposit products that are bundled with investment offerings, taking
into account the complexity and risks of these products.
During the EU regulatory process which involved the revision and amendment of directive
2004/396/EC on the markets in financial instruments (MiFID), the HFSA pointed out to
European legislators this issue of customer information and that the strict rules on informing
customers should also be extended to bundled products.
The European Commission is working on a new directive on packaged retail investment
products (PRIPs) as it considers the existing gap between sector specific regulations and sales
practices unacceptable. The directive would regulate among others the range of products that
belong to this category, i.e. the ones that are in-scope for the directive. In the HFSA’s
opinion, deposit products bundled with investment offerings are definitely in-scope.
The definition of packaged retail investment products in the consultation paper clearly assigns
unit-linked life insurance products into this category. On the domestic market, in line with the
increasing sales of bundled products, the volume of unit-linked life insurance sales is going
up or remains strong. Issues concerning unit-linked life insurance products and the HFSA
assessment of these problems are presented in detail in the Insurance section of this Report.
33
3.3. Account management and related services
3.3.1. Market trends
Regarding account management, the following main changes could be observed in the second
half of 2010. Service providers initiated these changes:
powerful preference / discouragement of certain customer groups and account usage
habits which may even cause significant differences in fees depending on expected
turnover and fee revenues;
appearance of new types of account packages (e.g. packages designed for active
customers who use their bank account often and have a minimum monthly income of
HUF 120 000 – 180 000, where a discounted fee is charged for account management
and certain related services);
various discounts are offered to encourage customers to use online channels and
services instead of visiting a branch office in person (most online accounts are free of
charge).
online banking services are promoted with various discounts (e.g. zero fee on transfers
initiated online);
service providers further decreased the interest rates of sight deposits.
Concerning account management, service providers typically raised the fees and charges for
existing products in line with the inflation rate in H2 2010. In addition, they also incorporated
external changes into the fees of account-related services (e.g. mailing costs, text messaging
charges).
Pursuant to paragraph (12) in Article 210 of the ACI, contracts must not be modified
unilaterally by way of introducing a new fee or charge element. Nevertheless, the official
lists of conditions published by institutions do include “new cost elements” for existing
products. In practice, institutions terminated the formerly provided discounts (HUF 0 cost
elements) and now charge the actual cost instead. In conjunction with the reshuffling of fees,
certain institutions charge new fees on new services that can be used in combination with the
bank account. However, these additional services are optional and can be chosen freely by the
customer.
On its website, the HFSA regularly publishes product comparison tables on account
management and related financial services (deposit cards and electronic banking services).
These tables present the products of the main service providers and outline the key features
and data of those products. In early 2012 the HFSA expects to publish on its website an
application to assist the selection of account packages and the related financial services
(following the same pattern as the loan and lease product selection tool and the deposit and
savings finder tool.)
3.3.2. Identified problems and risk items
The fact that the fee structures of institutions are often unclear and difficult to compare
has been identified by the HFSA as a consumer protection issue. The same applies to
changing between service providers.
34
The difficulties with the change of service providers do not relate to the actual changing
process but to the fact that customers know very little, or often nothing, about this option.
Therefore, the potential benefits of this option, in particular increased competition among
service providers, are limited.
Today there are no legal requirements in Hungary concerning the change of banks and the
related informing obligations. However, there is a recommendation issued by the Board of
Directors of the Hungarian Banking Association (Recommendation30
no. 6/2009) to facilitate
the change of bank accounts between banks which financial service providers were free to
sign up to on a voluntary basis (as of this date 15 institutions signed up31
). The HFSA regards
all standards adopted in the form of self-regulation and all practices compliant with those
standards as forward-looking, provided they are effective in reality and are accepted and
applied by a wide range of market players.
In the HFSA’s opinion, it would strengthen consumer confidence if as many as possible
financial institutions that offer retail bank accounts could sign the voluntary self-regulation. In
case financial institutions fail to comply with the commitments undertaken in these self-
regulations, the HFSA is entitled to enforce the provisions in the self-regulatory agreements
(Codes of Conduct) pursuant to Act XLVII of 2008 on the Prohibition of Unfair Business-to-
Consumer Commercial Practices. If experiences show that self-regulation does not fulfil its
intended purpose, the HFSA will propose relevant changes in applicable laws to legislators.
The general launch and spread of the so-called basic bank account product on the
Hungarian market would also increase market transparency and facilitate the change of
service providers. The basic bank account is a plain bank account provided by a financial
institution to a natural person. It features only the basic services (transfer, cash withdrawal)
but no overdraft or bank account credit and its costs are low. Today there is no generally
accepted account product on the Hungarian market which would comply with each of the
parameters described above. The European Union published a Report32
on the basic bank
account in July 2010 and elaborated a Consultation paper33
in the second half of 2010 which
provides ideas on a potential EU regulation on the matter.
The HFSA participates in EU consultations regarding the basic bank account and examines
the possibility of launching this product in Hungary.
30 http://www.bankszovetseg.hu/anyag/feltoltott/Bankvaltasi_kodex_10000316.pdf
31 Institutions that signed up to the recommendation: Allianz Bank, AXA Bank, Budapest Bank, CIB Bank,
Citibank, ERSTE Bank, FHB Commercial Bank, KDB Bank, K&H Bank, Kinizsi Bank, Magyar
Takarékszövetkezeti Bank [Bank of Hungarian Savings Cooperatives], MKB Bank, OTP Bank, Raiffeisen Bank,
UniCredit Bank. 32
http://ec.europa.eu/internal_market/finservices-retail/inclusion_en.htm 33
See link above
35
II. INSURANCE SECTOR
3.4.1. Regulation
Act LX of 2003 on Insurance Companies and the Insurance Business (IA) was amended on
multiple occasions in 2010. From a consumer protection viewpoint, the main changes were as
follows:
Effective 1 January 2010, the detailed rules of the complaint handling procedure of
insurance companies and independent insurance intermediaries (brokers and untied agents)
are regulated in the IA34
. The law sets out the rules of procedure, the related deadlines and the
obligation to draw up a complaint handling rules document and to maintain a registry of
complaints.
Effective 1 April 2010, the minimum content requirements of insurance contracts were
extended along with the related provisions35
. Pursuant to the new provisions, insurance
companies are obliged to specify in their contracting conditions what damages and expenses
they provide indemnification for and against what documents in case a damage event occurs.
The insurance company can only make service payments subject to the presentation of
documents that are necessary for evidencing the occurrence of the damage event and for
calculating the amount of service payment due. In respect of the reported damage event, the
insurance company must not link the due date of service payment to the completion of
criminal proceedings or offense procedures with a non-appealable ruling.
From a consumer protection perspective, the declaration of these requirements in a legal
provision is of outstanding significance, as previously the aforementioned rules could only
be enforced with reference to prior court practices and this hindered the enforcement of
consumer rights.
The law on motor third-party liability insurance was modified significantly. Details of the
new regulations are discussed in the motor third-party insurance chapter herein.
3.4.2. Market trends
The business performance of insurance companies deteriorated in 2010. Demand for
insurance products either continued to decrease or stagnated and any meaningful upturn was
limited to unit-linked investment products sold by insurance companies. As a result of weak
economic growth, reduced lending and a contraction in the housing and vehicle sales markets,
portfolio values and premium revenues continued to shrink both for life and non-life
products.
The level of concentration of the insurance market changed little in the past year. Market
concentration continues to be more significant in the non-life sector as the three most
significant market players generate 63% of total premium revenues. In the life sector this
same ratio is around a more moderate 42%.
34 Article 167/B
35 Paragraph (8) in Article 96
36
Despite unchanged concentration, a significant shift occurred in the market shares of
individual insurance companies in the life segment, mostly in relation to the sales of
increasingly popular single premium (mostly unit-linked) products. It is important to stress
that while campaigns and discounts for specific insurance products and also some main
products contributed significantly to the dynamic growth of certain insurance companies,
many of these booms are not sustainable in the long run.
3.4.3. Insurance products
Life insurance products
Typically, it was insurance companies with strong postal and bank sales channels that
performed well in the life insurance segment. As a general trend, life insurance products
(competing with bank savings) became increasingly attractive to consumers as deposit
interest rates went down.
a. Unit-linked insurance products
In 2010, the “supply driven” life insurance market increasingly gained ground. This trend was
especially apparent in the intensified sales promotion efforts of insurance companies
regarding one-off fee, unit-linked insurance products. The growing popularity of unit-
linked products was mostly generated by variants that feature short-term return protection,
more flexible maturity and repurchase conditions and a more modest risk element than
former products. As the deposit interest rates offered by banks decreased, these new products
were increasingly strong competitors of traditional money market products. However, the
pressure generated by the sales push conveys significant emerging risks for consumers.
One issue that occurs in conjunction with unit-linked insurance products is that the more
financially naïve consumer struggles with the inherent risks, often owing to the incomplete
and, or, incomprehensible information received from sales driven insurance intermediaries.
Another problem is that the fee structure of products is often unclear for the averagely
informed customer, thus making it difficult to compare offerings and alternative options.
In order to resolve the issue described above, insurance market players agreed to facilitate the
comparison of unit-linked life insurance products. To this end, in the form of a self-regulation
initiative, they established the Total Cost Index (TCI), which they agreed to publish for
their products on an ongoing basis.
The introduction of the TCI on the Hungarian market was ahead of the relevant EU
regulation. With the HFSA’s involvement and support, the Association of Hungarian
Insurance Companies (MABISZ) compiled the TCI Rules36
document at the end of 2009 to
strengthen and sustain consumer confidence in the insurance market. The standardized
index facilitates the cost-based comparison of unit-linked life and pension insurance
offerings. In the case of unit-linked products, the TCI index shows the approximate loss of
return that a consumer would suffer under specific conditions compared to cost-free returns.
The index is calculated using a pre-defined typical example representing the best
approximation of an average contract on the insurance market.
36 http://www.mabisz.hu/hu/tkm.html
37
Insurance companies37
that signed up to the Rules published the index for the first time in
January 2010 on their websites, on the MABISZ home page and in the customer information
booklets. In order to serve the interests of customers, insurance companies also joined forces
regarding the provision of information and standardised their forms, templates and the
contents of online and verbal information that they provide to customers. The responsible
bodies of MABISZ review TCI calculations once a year to ensure that the index has been
calculated in compliance with the rules.
The HFSA welcomes and supports self-regulation initiatives that are truly effective and serve
consumer protection objectives. The HFSA considers it important that the vast majority of
market players join these initiatives and apply it in day-to-day operations to improve
information flow and the comparability of products.
b. Payment protection insurance
Payment protection insurance is offered by an increasing number of insurance companies on
the market. Parallel to that, these products raise more and more concerns – at least that is what
the HFSA has seen based on submitted consumer claims. In most cases, these problems stem
from legal aspects yet to be regulated. What the HFSA sees is that financial institutions
widely use the legal arrangement known as the group insurance policy – not only with
payment protection insurance or other insurance products with a repayment purpose, but also
with group accident insurance offered with banking cards.
Most existing payment protection insurance agreements in Hungary were concluded in
the form of group insurance contracts. As a legal arrangement, the group insurance contract
is not mentioned explicitly in either the relevant sections of Act IV of 1959 on the Civil
Code (the Civil Code) or in the insurance act. This legal defect is a source of several
consumer protection problems.
The insurance contract is established between the insurance company that assumes the
risk and the financial institution that grants the loan (hereinafter the bank), i.e. the
contracting party to the insurance contract is the bank.38
From a consumer protection
perspective it raises concerns that there is no contractual relationship between the
consumer and the insurance company at the time of contract signing and that the
declaration of joining the group insurance contract is signed at the bank. It is especially
distressing that the declaration of joining is often incorporated into the loan contract text, i.e.
depriving the customer of the choice to decide whether he wants to take out payment
protection insurance at all.
The insurance premium is another problem, especially when it is aligned to a certain
percentage of the loan and when the loan is foreign currency based. The bank calculates
the insurance premium as a built-in element of monthly repayments. However, in these
37 http://www.mabisz.hu/images/stories/docs/tkm/csatlakoz%20biztosttrsasgok.pdf
38 The consumer joins the group insurance contract concluded earlier between the insurance company and the
bank by signing the so-called statement of joining upon entering the loan contract. In this scheme, the consumer
is an insured party while the beneficiary shall be the bank. Consequently, the consumer is not a contracting party
in this arrangement and he does not receive a policy either as pursuant to the Civil Code, the policy is to be given
to the contracting party, i.e. the bank.
38
scenarios, exchange rate fluctuations also impact the insurance premium. This is problematic
from a consumer protection point of view, especially when a settlement obligation is
generated between the parties. In real life, however, the insurance company or the bank
cannot repay the fee saying that it was incorporated into repayments in advance. In these
cases, the repayment of the premium entails a contract modification which generates
additional costs for the customer.
Payment protection insurance offerings distributed by foreign insurance companies in the
form of cross border services have proliferated recently. The enforcement of consumer
protection claims is a particular issue with these products.
The HFSA shall urgently review the options for resolving the consumer protection anomalies
outlined above and will initiate changes to regulations if necessary.
c. Loans bundled with unit-linked life insurance
Several consumer protection problems have been identified also in respect of loan products
bundled with unit-linked life insurance.
When these products are being sold, customers are often required to sign the life insurance
contract in advance and the loan application is only submitted to the financial institution
after the initial insurance contract is concluded. If the financial institution rejects the loan
application, the customer cannot back out from the life insurance contract. In other words, if
the credit rating turns out to be negative, the customer “gets stuck” in the unit-linked
insurance contract.
Even though the insurance act39
declares that natural person contracting parties to life
insurance policies are entitled to terminate the life insurance without explanation within
30 days following the receipt of information on contract conclusion, many consumers are
not aware of this option. Furthermore, very often a group insurance contract (as outlined
above) is signed in these agreements where the financial institution and the insurance
company are the contracting parties instead of the consumer. Therefore, one part of the
problem relates to the fact that the law only entitles natural person contracting parties to
withdraw from a contract within 30 days. With group insurance policies, this
requirement is obviously not fulfilled.
Thus, it is a case-by-case decision whether insurance companies release the customer from the
obligation without a financial loss or if they withhold the first premium instalment or
premium and thus the contract is terminated with a loss for the customer.
Payment protection insurance conveys further risks for customers. The reason is that the
underlying risks are integrated, i.e. money and capital market risks may also be assumed
through insurance sector products. If unfavourable money and capital market conditions
endure then at the end of the contract term the payments of the consumer (borrower) and the
value of the endowment policy upon maturity plus returns (i.e. the market value of the
consumer’s unit-linked account) might fail to cover in full the remaining loan repayments
(typically the loan principal). Furthermore, high risks are conveyed for customers by unit-
39 IA, Articles 96 (2) and 167 (2)
39
linked insurance contracts in particular which do not have capital and/or return protection or
guarantee, or they are not characterized by a balanced, conservative asset fund composition.
While sections 1 and m40
of the Code of Conduct II include requirements for lenders in
respect of the items outlined above, consideration should be given to the need for additional
regulations.
Non-life insurance products
The lasting crisis significantly impacted the non-life insurance market in 2010. Demand in
this segment continues to fall, which suggests that the insurance financing capabilities and
willingness of households continue to decrease. Indeed, there is little chance for any
immediate expansion of the non-life market. The number of new contracts is limited and the
premium level of existing contracts may continue to decrease41
due to increasingly fierce
competition.
d. Motor third-party liability insurance (MTPL)
Regulation
The rules on motor third-party liability insurance (MTPL) changed significantly in 2010.
Effective 1 January 2010, the former Government Decree42
was replaced by Act LXII of 2009
on Insurance Against Civil Liability in Respect of the Use of Motor Vehicles (MTPL Act).
Detailed regulations are set out in separate decrees: Ministry of Finance decree no. 19/2009
regulates the issuance of claim history certificates, the bonus-malus system (no claims bonus)
and the classification of customers therein while Ministry of Finance decree 20/2009
regulates vehicle categories.
As before, insurance companies are required to publish by 30 October each year the premiums
they plan to apply in the following year. However, as an important new requirement in the
new MTPL Act, the insurance period is no longer linked to the calendar year. Instead, as
a main rule, it is for the 12 months after the beginning of risk assumption as specified in
the contract. The contract shall be subject to the premium rate in effect on the first day of the
insurance period, i.e. this rate shall apply to the contract until the next anniversary. However,
year-end campaigns are only replaced slowly by the system of optional year-through changing
between insurance companies. The reason is that new contracts can only be signed after an
existing vehicle is sold or upon the purchase of a new vehicle. Naturally, a new policy can
40 Code of Conduct II
l) When selling loan products that are bundled with savings (e.g. unit-linked insurance), an example must be
used to call the customer’s attention to the risks of these products, in particular to the fact that if returns on the
savings part end up below expectations, payments by the customer may not cover either in full or in part the
required repayments.
m) In case the granting of the loan is subject to taking out a life insurance for the purpose of payment protection
(excluding the scenario when the customer takes out life insurance for the purpose of taking out a loan prior to
submitting a loan application), this should only take place after the credit eligibility assessment exercise ended
with positive results, as a prerequisite of loan disbursement. It should be avoided that the customer takes out life
insurance unnecessarily in case of a rejected loan application. 41
Source: MABISZ 42
Government Decree no. 190/2004 (XI.8.) on mandatory liability insurance to be taken out by the keeper of the
vehicle
40
also be taken out if the person of the vehicle’s keeper changes or if the previous contract is
terminated on mutual agreement.
Another change as per the new law is that by default, the vehicle’s keeper stated in the
registration card shall be the entity required to take out liability insurance. This obligation
shall only pass on to the owner if no keeper is recorded in the registration card, i.e. this
provision eliminates the former either-or option in this respect.
Furthermore, the MTPL Act declares that in addition to optional termination upon the end of
the insurance period, the insurance contract can also be terminated anytime on the mutual
agreement of the parties.
The law also stipulates several new informing obligations. Except for policies terminated by
way of insurance premium non-payment, insurance companies are required to inform the
keeper in writing on contract termination and the bonus-malus classification within 30 days
after termination. As an obligation for insurance companies, it has been declared that insurers
must inform the contracting party by the 50th
day prior to the last day of the insurance period
about the insurance anniversary and the premium expected in the next insurance period based
on the premium chart.
Experiences gained in the MTPL migration period
Competition among insurance companies for customers continues to be fierce. First, new car
sales fell as a result of the financial crisis, thus fewer new contracts were generated. Second,
an increased number of owners officially relinquished use of their vehicles as their financial
circumstances worsened.
As in the previous year, the MTPL premiums announced for 2011 in the autumn of 2010
involved a complex system of discounts. Online comparison tools available on the websites of
insurance brokers assist the comparison of premiums and the choice between products.
In order to improve and ensure the transparency of information given to consumers, MABISZ
also took an important step in the autumn of 2010 with the establishment of their own
Premium navigator tool43
. With the MABISZ Premium navigator tool, consumers can
compare the MTPL premiums charged by Hungarian insurance companies without having to
use the service of an insurance broker. During the 2010 campaign, nearly 100,000 customers
used the tool. As the change of MTPL contracts is no longer restricted to the year-end,
customers have continued to use this tool.
Based on data reported to the HFSA, new MTPL contracts were signed for 1,316,885 vehicles
of which 317,356 were returning customers. The number of customers that actually changed
their insurance provider was 999,529 (representing a 35,000 decrease on the previous year).
This figure is extremely high considering there are just four million cars in total in Hungary.
Last year’s campaign was the second busiest on the MTPL market to date, surpassed only by
the 2009/2010 campaign.
43 http://www.mabisz.hu/hu/dijnavigator.html
41
The average “premium raise” reflected by MTPL premiums announced for 2011 was
-6.7%, which, in fact, represented a significant premium decrease. At the insurance
company44
with the largest market share, the change of premium equalled -14.6% which had a
significant impact on the market average.
The premium decrease seen in the 2010 campaign fits the recent trend; the ongoing decrease
of MTPL premiums across all vehicle categories is a general phenomenon. It is clear that
besides price competition, increased transparency and the easy comparison of products
also drove the premium decrease. Due to complex discount schemes, an increased number
of customers turned to online premium calculation tools and changed insurance companies
when they found better offers.
44 Allianz Hungária Biztosító Zrt.
42
III. CAPITAL MARKETS SECTOR
With a view to European trends, special attention must be paid to consumer-oriented
investor protection also in respect of domestic financial markets. Parallel to the
development and convergence of the Hungarian financial intermediation system, the weight
of investor protection is expected to increase.
3.5.1. Regulatory environment
It is true of the Hungarian market that the increasing supply of investment products is
accompanied by growing retail demand. At the same time, consumer protection regulations
are far less comprehensive in this area as in e.g. lending.
A significant portion of the regulatory environment for capital market products and the
provision of capital market services is made up of laws that represent the domestic adaption of
EU legislation. The provisions of the latter have been adopted in Act CXX of 2001 on the
Capital Market (ACM) and Act CXXXVIII of 2007 on Investment Firms and Commodity
Dealers, and on the Regulations Governing their Activities (AIFCD).
In addition, the HFSA published several recommendations and CEO letters in respect of the
investment sector in recent years. One such publication that has direct relevance for customers
is HFSA Recommendation no. 1/2006 on the principles applicable in the course of informing
clients using investment (asset) management services. From a consumer protection
viewpoint, no mentionable change occurred in H2 2010 regarding the capital market
regulations outlined above.
At the same time, the EU Commission is already working on the revision of the MiFID, the
transparency directive and other investor protection directives.
When reviewing the capital markets sector from a consumer protection viewpoint, it is
important to point out that in accordance with the customer rating categories defined in the
MiFID, the term “retail customer” (retail investor) is used in a broader sense in the regulatory
environment of capital markets (and, accordingly, in real life practices as well) than suggested
by the definition of consumer as per the HFSA Act45
. Regarding investment services, the term
“retail” customer may not necessarily refer to a natural person. In a consumer protection
context, the HFSA always means a natural person when using the term “retail investor”.
3.5.2. Market trends
Contrary to the unchanged nature of the regulatory environment, the range of products
available on the investment market did change in the second half of 2010. Some reshuffling is
also visible among institutions that are licensed to provide investment services (investment
enterprises and credit institutions providing investment services). In the period under review,
a series of mergers began and some new institutions were licensed to enter the market. As a
result, 40 service providers were engaged in trading as at the end of 2010.
The transformation of the pension system is also expected to impact capital market players.
We expect further mergers and a decreasing number of participants on the market.
45 As per Article 64 (2) of the HFSA Act, a consumer is defined as a natural person who deals with finances
outside the scope of his job or business activities.
43
Institutions that provide investment services seem to increasingly specialize regarding the
customer segment they serve: Some focus on retail investors, others private banking
customers, local governments, etc.
It was apparent in H2 2010 that service providers aimed to sustain or expand the necessary
transaction and portfolio volumes in order to maintain profitability. Therefore, the sector was
generally characterized by increasingly fierce competition regarding products,
commissions and premiums and by the expansion of agent networks. In addition, the
promotion of electronic sales and trading channels was also an observable trend
(iFOREX).
The launch of new products, in particular the appearance of new investment funds also
deserves mentioning. When measured by the number of investment funds, guaranteed funds
clearly top the “popularity chart”. What this may foreshadow is that for some retail
investor sub-segments, guaranteed funds may take the place of deposit products which are
more secure but entail a lower interest rate.
3.5.3. Identified problems and risk items
Based on the changes we see in the transaction process and in product trading, the following
risk items can be identified in respect of retail investors:
Due to decreasing deposit interest rates, increasing focus on investment products that
offer higher returns but also involve higher risks. The launch and promotion of LTIC
accounts may also contribute to this trend;
Intensified sale of bundled products, with an expanding range of product offerings and
increasingly complex schemes, where some products in the investment part may
include risks that the majority of retail investors cannot assess in advance (e.g.
derivative funds);
The significance of the credible completion of MiFID tests from an investor protection
viewpoint is not sufficiently known to customers;
The adequate assessment by institutions of MiFID tests completed by customers and,
based on that, the sale of products in compliance with fair trading practices;
Lack of transparency of sales channels – the type and quality of the relationship
between the service provider and its agent(s);
Increasingly aggressive marketing activity on the part of OTC trading platforms,
offering “get rich quickly” schemes to customers;
The increasingly dynamic growth of the number of OTC transactions, which consists
not only of the trading on own account of institutions (there are investment institutions
which only carry out orders on OTC trading platforms)
Online presence and trading targeted at retail investors (iFOREX).
The last two items listed above may convey serious risks for customers. From an investor
protection viewpoint, it is definitely a problem that investor protection rules are more
44
difficult to enforce in the case of trading on unregulated markets and the HFSA’s
intervention options are far more limited here. Customers joining these platforms are more
vulnerable. Therefore, in addition to administrative measures, the other means of preventing
the increase of consumer protection problems are intense warning and awareness
campaigns.
The other listed elements do not pose a direct threat for the time being which is also proved
by the statistics on customer complaints to the HFSA and the complaint statistics on
investment services which we receive from institutions. At the same time, in order to identify
potential anomalies in a timely manner, these trends must be monitored on an ongoing basis
by analysing and comparing short-term. Whilst the number of consumer complaints that relate
to the capital market and reach the HFSA made up only a fragment (2-3%) of total consumer
complaints in H2 2010, and although capital market-related complaints reflect a decreasing
trend, most of these few complaints concern significant financial loss.
From a consumer protection viewpoint, the identified problems could also be defined as lack
of adequate information or providing information.
In the capital markets area, unbalanced information is a recurring problem. It involves the
lack of the clear highlighting of potential risks inherent to the products or the downplaying of
these risks (typically in the case of bundled products).
These commercial practices constitute the violation of the applicable law, for Act CXXXVIII
of 2007 on Investment Firms and Commodity Dealers and on the Regulations Governing their
Activities explicitly requires that not only the benefits but the risks of the product must also
be presented in an adequate manner.46
At the same time, it is true regarding the legal environment that the paragraphs which
regulate the execution of transactions do not include as many and as specific consumer
protection elements for investment services as e.g. the law on lending (i.e. the ACC) that
entered into effect last year. The ACC stipulates in detail the required method of informing
customers, the criteria and form of presenting the product in an objective manner and the prior
demonstration of product features using an example with real figures.
Therefore, a certain degree of standardisation of information requirements and the
assessment of investor knowledge by institutions seems to be necessary also in respect of
investment services offered to a wide range of retail investors in order to enable the coherent
and consistent enforcement of investor protection considerations. These efforts, however,
must harmonise with EU initiatives.
46 In relation to this issue, a specific case is presented in the Annex hereto.
45
4. Experiences of the HFSA’s consumer protection proceedings
The amendment to the HFSA Act effective 1 January 2010 brought concept-level changes to
the complaint handling procedure. Since 1 January 2010, the HFSA reviews consumer
complaints in the framework of administrative proceedings. As a result, the HFSA can take
far more effective action in its consumer protection role against specific violations. In case of
the breaching of consumer protection provisions set out in sector specific laws, the HFSA
takes consumer protection measures against the financial organisation concerned and imposes
a fine.
Consumer protection proceedings as defined in the HFSA Act can be launched on the basis of
a consumer complaint (request), but the HFSA is also entitled to launch proceedings on its
own initiative (in order to investigate an irregularity of consumer protection relevance
detected by the HFSA as part of its consumer protection, market supervision or prudential
role). In order to verify compliance with consumer protection provisions, the HFSA can hold
targeted investigations at specific service providers or themed investigations involving
multiple service providers.
During the proceedings, the HFSA is required to clarify all facts and status information
comprehensively and prudently. Findings must be explained in detail and supported with
documents. As a final step in the proceedings, the HFSA prohibits the continuation of the
non-compliant conduct, requires the financial organization to eliminate the detected
deficiencies and makes the provision of services concerned subject to certain conditions until
compliance is restored, or simply bans the service and imposes a fine.
Using the breakdown presented below, the “Annex” to this Report outlines the key findings
of investigations of market relevance, presents specific cases that qualified as a major or
severe violation and also presents a statistical summary on consumer complaints:
1. Summary findings of the following consumer protection investigations with lessons of
general market relevance, launched on the HFSA’s own initiative:
Targeted investigation against Credigen Bank Zrt.
Investigation on compliance with the provisions of the Code of Conduct for
financial organizations engaged in retail lending;
Investigation on the information activities of financial institutions that joined
voluntarily the retail loan information system with a positive debtor list;
Investigation on the regulations of financial institutions on complaint handling
procedures (in particular the rules of complaint management);
2. Resolutions of key significance passed during consumer protection proceedings
launched on consumer request:
Due to violations of consumer protection provisions of sector-specific laws
o Deficiencies in the information provided
o Problems with complaint management
Due to unfair commercial practices
o Misleading information
o Misleading omission
46
o Aggressive commercial practices
o Other
3. Experiences with consumer complaints, statistics
Money market sector
Insurance sector
47
5. 2011 Outlook
The identified consumer protection risks and anomalies made it clear that in addition to the
traditional means of consumer protection, new solutions are needed (both at national and at
European level) for strengthening financial consumer protection and enforcing the interests of
financial consumers.
Such new solutions include, among others, the elaboration of recommendations suitable for
influencing the behaviour of market players, the appointment of dedicated consumer
protection contact persons at the institutions, the development and publication of online
supervisory applications that foster transparency and support the comparison of offerings and
the exploitation of synergies with non-governmental consumer protection organizations.
Participation in the consumer protection efforts of the three European Supervisory Authorities
set up in early 2011 also provides the HFSA with a great opportunity, a forum for exchanging
experiences and an information background.
5.1. New elements of effective consumer protection regulation
Effective financial consumer protection rests on the foundation of regulations, requirements
and standards that set out the “rules of the game” for service providers and thereby constitute
a safety net for consumers. These behaviour standards may be set out in laws or other legal
provisions but they may also be based on the self-regulation of market players.
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, the supervised institutions and to the HFSA’s responsibilities and mandates. The
HFSA supports and welcomes self-regulation initiatives that come from the market and
stretch beyond the scope of legal provisions. Furthermore, the HFSA also has proprietary
means at its disposal that are capable of influencing the behaviour of market participants.
5.1.1. Recommendations
Within the regulatory means at its disposal, the HFSA regards recommendations as market
and institution orientation tools that are particularly suitable for shepherding market players in
the desired direction, for resolving market anomalies and for fostering the rollout of favoured
best practices. A recommendation is a means that not only expresses the requirements set out
in laws but also provides guidance and an insight to future expectations. As regulatory tools,
recommendations offer the best approximation to the HFSA’s objective of establishing a
comprehensive set of consumer protection standards, recommendations and guidelines.
5.1.1.1. The objective of recommendations
The general objective of HFSA recommendations is to improve the predictability of the
enforcement of legal provisions by promoting the standardized application of laws within the
scope of the HFSA’s mandate. HFSA recommendations set out expectations and ethical
standards on top of the related legal regulations which are considered minimum requirements.
Although recommendations are not binding for financial organizations in the short run, the
HFSA checks compliance and convergence in respect of the recommendations and also
monitors these on an ongoing basis. When assessing financial organisations, the HFSA takes
into consideration behaviours that represent a departure from the expected sound practices
48
embodied in recommendations and also values real-life compliance with the expectations set
out therein.
5.1.1.2. General consumer protection recommendations in 2011
Based on international sound practices and parallel to the reassessment of its consumer
protection role, the HFSA issues a recommendation in the spring of 2011 setting out the
directions of development and targeted at orientating market player behaviour and shaping
their approach. This recommendation will be new fashioned on the Hungarian market as it
will feature the general characteristics of soft laws.
On the one hand, consumer protection recommendations set out guidelines summarizing the
traditional regulatory means of consumer protection in an integrated manner. On the other, in
line with these guidelines, they also set up market orientating consumer protection
requirements intended to foster the enforcement of consumer interests by exceeding the scope
of former guidelines and setting up additional standards.
The purposes of the General consumer protection recommendation:
• Protection of the consumer interests of the retail services of financial organisations;
• Fostering compliance with legal provisions that outline consumer rights or the desired
treatment of consumers,
• Enforcement of consumer interest and thereby prevention of potential subsequent legal
disputes between financial organisation and consumers,
• Mitigation of operational, reputation and legal risks,
• Promotion of stability, predictability and fair competition,
• Improvement and restoration of general public opinion (trust) regarding financial
organizations,
• Shaping the corporate governance and approaches of institutions.
The scope of the General consumer protection recommendation to be published in the spring
of 2011 will cover each player in all financial subsectors that provides services directly to
consumers. Due to the specific features of various services, general consumer protection
principles may occasionally include requirements that may be interpreted in different ways.
Therefore, the recommendation shall apply to those activities of financial organisations for
which the principles set out in the recommendation make sense, taking into account the
specific features of the service in question. As different laws apply to the individual financial
sectors, the principles formulated in the recommendation shall be considered applicable to the
activities of a financial organization if no stricter requirements are set forth for the same
activities in legal provisions.
The general consumer protection recommendation will apply to all supervised sectors.
The HFSA expects to supplement the general recommendation later with separate
recommendations that will apply specifically to the credit institution, insurance and
capital market subsectors.
49
5.1.2. Consumer protection contact persons
The amendment to the HFSA Act added a new obligation to sector specific laws effective 1
January 2011, declaring that financial organisations are required to appoint a consumer
protection contact person and report the name to the HFSA. As the law did not specify
accurately the responsibilities of the consumer protection contact person, the HFSA provided
guidance on its expectations regarding the contact person’s duties in Dear CEO letter no.
2/2011 on the responsibilities of the contact person in charge with consumer protection
matters.
In the HFSA’s expectation, the primary role of the consumer protection contact person
within the institution is ensure that the legal, supervisory and other criteria which serve to
preserve consumer interests are incorporated into the day-to-day operations and
practices of the financial organization. It is crucial that the contact person is granted
sufficient authorization and support within the organization for implementing a responsible
service provider approach that is based on a fair, stable partnership with consumers and relies
on persistent and mutual benefits. It is critical that this approach becomes an integral part
of corporate governance and conduct adopted by everyone in the organization from top
executives to front office personnel. Furthermore, this approach must also become an integral
part of each and every consumer-related activity of the financial organization.
In order to support the work of consumer protection contact persons from a professional
viewpoint, beginning in 2011 the HFSA will launch a regular series of consultations on
current financial consumer protection matters.
5.2. Online comparison tools
Seeking to promote transparency, comparability and to facilitate the financial decisions of
consumers, the HFSA has published various comparison tools and online applications on its
home page. The Loan and lease product selection tool for loans and financial lease products
was completed in the summer of 2010. The Deposit and savings finder tool will be made
available to the general public in June 2011. The Account packages and related financial
services finder tool is expected to be launched early 2012. These applications rely on data
received under the mandatory data provision of institutions to the HFSA which ensures that
all used data are reliable, current and complete.
The loan and lease product selection tool contains all retail loan products, including mortgage
loans, consumer loans, home equity loans and vehicle loans. The program also includes retail
vehicle lease and housing lease products.
Regarding the deposit and savings finder tool currently under development, Decree no.
3/2011 (II.28.) of the President of the HFSA on mandatory data provision regarding certain
deposit and savings products offered by credit institutions was announced in early 2011. This
data provision obligation encompasses a specific range of deposit and savings products, in
particular time deposits, long-term investment contracts (only when part of a bundled deposit
product), unit-linked deposit products and savings accounts.
50
The development of the Account packages and related services finder tool is expected to
begin in the second half of 2011. The concept and structure of this new program will mirror
that of the tools outlined above.
The purpose of the online comparison tools is to collect all current offerings from the
market on a single, easy-to-use online platform enabling the quick and easy comparison
of products. The user enters certain selection and sorting criteria, and the programs provide
information on the conditions of currently available products, listing products and service
providers that match the consumer’s specific needs.
The HFSA is convinced that these new-fashioned initiatives can help increase market
transparency and thereby encourage customers to change service providers. Furthermore,
these programs may also help market players assume more competitive pricing strategies
and focus on product innovation.
5.3. Civil consumer protection network
Besides regulatory and supervisory efforts, the provision of comprehensive and credible
information to consumers is another important means of consumer protection. To this end, the
HFSA initiated the establishment of a civil consumer protection network.
The objective of this network is to ensure that the independent and proficient financial
informing of consumers is not confined to the Consumer Service office at the HFSA’s
Budapest headquarters and that proficient consultation offices that meet the HFSA’s
professional requirements are in place in each region of Hungary. The services of these
network offices will be free of charge for consumers and the HFSA intends to make them the
local centres for obtaining reliable financial information. In other words, the HFSA steps
out of Budapest and becomes available locally also for provincial consumers.
Another key responsibility of the civil network will be to function as a preliminary filter
regarding customer claims of financial relevance. They will fulfil this role by either
dealing with consumer claims locally or by forwarding them to the right forum: primarily to
the service provider concerned, to the HFSA if it is an administrative matter, to the Financial
Arbitration Board if it is a unique legal dispute or to courts. The civil offices will gather cases
which the HFSA can investigate within the scope of its mandate and forward them to the
HFSA for further action. This arrangement will help consumers seek legal remedy for their
problems at the right place and it will also provide valuable feedback to the HFSA on
consumer problems in the various regions of the country. This way, the civil network will
help improve the financial awareness of consumers, enable quicker and simpler access to
information locally and will also enable the effective, smooth handling of consumer issues.
At the end of 2010, the HFSA invited tenders for the implementation of the network. The
project is founded from consumer protection fine revenues. The civil consumer protection
network will start operations in eight cities on 1 April 2011. In the HFSA’s opinion, the
consulting and preliminary filtering work of the civil network will also provide effective
support to the Financial Arbitration Board that is scheduled to start on 1 July 2011.
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5.4. European financial supervision and consumer protection
The renewal of the HFSA’s consumer protection role harmonises with the developments
at the European level, which brings important reinforcement also to future Hungarian
supervisory efforts. In early 2011, the new European financial supervisory structure and
cooperation framework47
was established within the European Union. Furthermore, the
mandates, objectives and activities were defined for the three sector-oriented European
Supervisory Authorities responsible for micro-prudential supervision within the
European System of Financial Supervision.
The regulations48
establishing the European Banking Authority49
, the European Insurance and
Occupational Pensions Authority50
and the European Securities and Markets Authority51
explicitly declare, “…the authorities shall form part of a European System of Financial
Supervision (ESFS). The main objective of the ESFS shall be to ensure that the rules
applicable to the financial sector are adequately implemented to preserve financial stability
and to ensure confidence in the financial system as a whole and sufficient protection for the
customers52
of financial services.”
These authorities take a leading role53
in supporting transparency, simplicity and fairness
in respect of retail financial products and services throughout the entire internal market.
The already specified responsibilities of the European authorities include the collection and
analysis of consumer trends, the follow-up of member state initiatives regarding
financial education, the elaboration of training standards for market players and the creation
of common disclosure rules.
As part of their consumer protection activities, the three European authorities shall monitor
new and existing financial activities. Furthermore, they may adopt recommendations and
guidelines with a view to promoting the safety and soundness of markets and the convergence
of regulatory practices. The authorities can also issue warnings if a certain financial activity
poses severe risks regarding the stable and predictable operation of markets.
The authorities treat financial innovation as a priority in order to establish a standardised
approach concerning the handling of new, innovative financial activities from a regulatory,
supervisory and consumer protection viewpoint.
Perhaps the strongest consumer protection role of the authorities is embodied in their right to
ban or restrict certain financial activities temporarily if these activities hazard the
integrity and orderly functioning of financial markets or the stability of a part or the whole of
the financial system within the European Union.
47 An article titled “Europe’s new financial supervision structure” published in the February 2011 newsletter of
the HFSA presents in detail the background and establishment of the new European supervisory structure and the
European System of Financial Supervision, the specific institutions and their mandates:
https://www.pszaf.hu/data/cms2290030/Hirlevel_2011.02_februar.pdf 48
http://eur-lex.europa.eu/JOHtml.do?uri=OJ%3AL%3A2010%3A331%3ASOM%3AHU%3AHTML 49
EBA 50
EIOPA 51
ESMA 52
Bond owners, pension system members, policyholders, beneficiaries, etc. 53
Consumer protection responsibilities are described in Article 9 of the regulations that established the 3
authorities.
52
The HFSA actively participates in the consumer protection work of each European
Supervisory Authority with a view to the fact that the objectives, mandates and activities of
these authorities and that of the HFSA as laid out in legal provisions are identical. This work
can foster the evolution of high quality, harmonised European consumer protection and assist
the rollout of proven financial consumer solutions applied in individual member states. It can
also help the HFSA learn and adapt sound practices which may further improve the
effectiveness of domestic financial consumer protection. Vice versa, sharing Hungarian
consumer protection rules and practices can contribute to the further development of high
level European rules and practices.