The HFSA’s Consumer Protection Risk Rep ort

July–December 2010

March 2011

1

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

2

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

3

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

4

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.

5

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.

6

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

7

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.

8

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.

9

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

10

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

11

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

12

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 (…).

13

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.

14

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

15

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.

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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.