COMMERCIAL LAWS OF HUNGARY November 2011 AN ASSESSMENT BY THE EBRD

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1 COMMERCIAL LAWS OF HUNGARY November 2011 AN ASSESSMENT BY THE EBRD Office of the General Counsel

2 CONTENTS 1. OVERALL ASSESSMENT THE LEGAL SYSTEM CONSTITUTION AND COURTS RELATIONSHIP BETWEEN LEGAL TRANSITION AND ECONOMIC PROGRESS RECENT DEVELOPMENTS IN THE INVESTMENT CLIMATE FREEDOM OF INFORMATION EVALUATION OF SELECTED COMMERCIAL LAWS CONCESSIONS CORPORATE GOVERNANCE INSOLVENCY JUDICIAL CAPACITY PUBLIC PROCUREMENT SECURED TRANSACTIONS SECURITIES MARKETS TELECOMMUNICATIONS / ELECTRONIC COMMUNICATIONS...19 Basis of Assessment: This document draws on legal assessment work conducted by the Bank (see Hwww.ebrd.com/lawH) and was last updated during the preparation of the 2011 EBRD Strategy for Hungary, reflecting the situation at that time. The assessment is also grounded on the experience of the Office of the General Counsel in working on legal reform and EBRD investment activities in Hungary and does not constitute legal advice. For further information please contact Hltt@ebrd.comH.

3 1. Overall Assessment Over the past decade Hungary has introduced a number of notable reforms in its commercial legal framework. Since becoming a full member of the European Union in 2004, Hungary has been harmonising its laws with European Union legislation. Accordingly, the legal system has strongly evolved towards an internationally acceptable level and until recently Hungary has had an advanced set of commercial laws when compared to other transition countries. However, recently the European Union has expressed concerns regarding the new laws relating to the country's judiciary, central bank, and data protection agency. The matter is currently being discussed and if Hungary fails to respond to the Commission's concerns, it could be taken to the European Court of Justice or face fines. The Bank s assessments of commercial and financial laws in the region have revealed that in spite of favourable scores in such areas as public procurement, corporate governance and securities market, where the respective assessment results showed that the legislative frameworks are in high compliance with international standards, there is a room for improvement in a number of other areas. In particular, the Concessions Sector Assessment revealed that the Hungarian concession legislation is in medium compliance with international standards and practices and that the Concessions Act needs improvement in the areas of concessionaire selection, government support and the availability of financial instruments and security issues among others. Moreover, the 2009 Insolvency Law Assessment also rated Hungary s general insolvency law as being in medium compliance with international standards and revealed that there are material gaps in the law. In addition, the surveys of legal effectiveness conducted by the EBRD indicate that at times commercial laws may suffer as a result of not always being sufficiently accessible or through inadequate administrative and judicial support. Accordingly, the country needs to continue to strengthen the institutions upon which the smooth functioning of a market-oriented economy depends, i.e. ensuring the effectiveness of the laws. 2. The Legal System 2.1 Constitution and courts On 18 April 2011 the Hungarian Parliament adopted the new Fundamental Law of Hungary (Constitution). The new Constitution will enter into force on 1 January 2012 and will replace the existing Constitution that was originally adopted in Among the significant changes contained in the new Constitution are provisions intended to ensure fiscal discipline, such as limits on the size of the state debt. Supreme legislative power is granted to the 386-member unicameral National Assembly (Parliament), which elects the president of the republic, the Council of Ministers, the president of the Supreme Court, and the chief prosecutor. The state administration is headed by the Council of Ministers, which is chaired by the prime minister. The president, who may serve two five-year terms, is commander-in-chief of the armed forces but otherwise has limited authority. The right of the people to propose referendums is guaranteed. Hungary s judicial system consists of the Constitutional Court, the Supreme Court, regional courts of appeal, county courts and local courts. For commercial matters, the courts of first instance are the 2

4 local and county courts. Appeals from these lie to the regional courts of appeal located in Budapest, Szeged, Pécs, Debrecen and Győr, and thereafter to the Supreme Court. The Supreme Court of the Republic of Hungary sets guidelines based on principles for the judicial work of every court. The directives and decisions in questions of principle of the Supreme Court are binding on all courts of the country. The Constitutional Court oversees the constitutionality of legal provisions. Any law or legal measure found unconstitutional is annulled by the Constitutional Court. 2.2 Relationship between legal transition and economic progress Experience in the transition countries suggests that the degree of respect for the rule of law and progress in economic transition advance or regress hand in hand. Accordingly, it is fair to say that Hungary s future economic prosperity is dependent in part on further development of the legislative framework and sound implementation of the laws. Chart 1 Rule of law and progress in transition in the EBRD countries of operations 4 Slovak Rep Poland Estonia Hungary State of Economic Transition 3 2 Tajikistan Armenia Mongolia Montenegro Azerbaijan Bosnia & Herz Uzbekistan Kazahkstan Serbia Belarus Krygyz Rep FYR Macedonia Albania Turkey Ukraine Russia Georgia Moldova Latvia Lithuania Slovenia Croatia Bulgaria Romania Turkmenistan 1 Low Performing State of core commercial and financial law s High Performing Source: EBRD Transition Report 2010 Table 1.1; EBRD Composite Country Law Index, July 2011 Note: The horizontal axis measures the performance of commercial and financial laws. The vertical axis displays the EBRD transition index as an of transition indicators between 1997 and 2010 with 1 referring to very early transition stages, and 4 referring to an advanced transition level. 3

5 2.3 Recent developments in the investment climate Hungary has traditionally been a very attractive destination for export-oriented foreign direct investment from other EU countries, attracting in total about 3 per cent of GDP in foreign direct investment inflows in 2008, a figure that was sharply reduced in the recession of The Hungarian government views foreign investment as one of the priorities and provides a number of grants and incentives to both resident and foreign investors. For instance, the Hungarian Investment and Trade Development Agency has set up a one-stop-shop service for potential large investors and the government has developed a national development plan for facilitating investment in such key areas as tourism, infrastructure improvement, and encouragement of competitiveness and protection of the environment. Despite positive developments, there is room for improvement in the investment climate. In particular, a lack of transparency and corruption are the issues that have to be addressed in order to facilitate the investment processes. The Transparency International Corruption Perceptions Index ranked Hungary 50 th in its 2010 issue. The score has been declining for a couple of years now. Furthermore, the World Bank s Doing Business 2010 survey ranked the country at 47 (a slight decline from last year), with the tax system and investor protection flagged as problematic. Moreover, there are growing concerns regarding the speed of the judiciary and the slow pace of the judicial system is reported to be a deterrent for investors in the country. Recently passed controversial laws on the country's judiciary, central bank, and data protection agency may have an unfavourable impact on the investment climate in the country. The European Union has expressed concerns regarding the new laws and has proposed legal action, the first step in infringement proceedings. 2.4 Freedom of Information Hungary was the first country in Eastern Europe to adopt a Freedom of Information Law in In 1994 the Constitutional Court supported this progressive approach when it decided that the Law on State Secrets was too restrictive and a barrier to freedom of information. Since that time Hungary was seen as one of the most advanced countries in Europe as a result of these measures. However in June 2011 Hungary adopted a new law on data protection and freedom of information (Act CXII. On Freedom of Information).The act will enter into force on 1 January One of the major criticisms of the new law is that it replaces the role of the Data Protection and Freedom of Information Commissioner (the Commissioner) with that of the Data Protection Authority ( the Authority ). This change has been criticised as it is said by observers that the Authority will be less independent than the Commissioner and therefore less effective. These changes, as well as amendments to the constitution and proposed changes to media legislation has led NGO s such as Transparency International and Freedom House to rank them lower this year in their annual surveys of freedom and corruption, indicating that the country has taken a regressive step in this area over the past few years. 3. Evaluation of selected commercial laws The EBRD has developed and regularly updates a series of assessments of legal transition in its countries of operations, with a focus on selected areas relevant to investment activities: concessions, corporate governance, insolvency, judicial capacity, public procurement, secured transactions, securities markets and telecommunications. The existing tools assess both the quality 4

6 of the laws on the books (also referred to as extensiveness ) and the actual implementation of such laws (also referred to as effectiveness ). This section presents a summary of the results accompanied by critical comments of the Bank s legal experts who have conducted the assessments. All available results of these assessments can be found at Concessions The Hungarian government has a policy framework for improving the legal environment and promoting the concept of the Public Private Partnership ( PPP ) pursuant to which a PPP Task Force was set up by the Ministry of Economy and Transport in 2003 to include representatives of major public agencies and infrastructure line ministries as well as experts from private sectors. The main legislative act is the Law XVI of 1991 on Concessions (the Concessions Law ). Moreover, Act CXXIX of 2003 on public procurements (replacing Act XL of 1995) may be applicable to PPP projects other than concession. The 2007/08 EBRD Concessions Sector Assessment revealed that the Hungarian concession legislation is in medium compliance with international standards and practices (see chart 2 below). The Hungarian legislation does not provide a clear definition of concession. Since there is no formal definition of PPP either, several legal provisions may be relevant to PPP depending on the project s particulars. Concessions legislation in Hungary is two-fold: arrangements are governed by a combination of the Concessions Law and sector specific legislation, references to which are contained in the former. The Concessions Act provides an apparently exhaustive list of the activities/sectors where concessions arrangements are possible. Sector specific concessions legislation further defines concessions arrangements applicable to particular sectors and contains cross references to the Concessions Act. The Concessions Act contains rules on contracting arrangements, concession granting procedures and provides for the possibility of international arbitration for dispute settlement. It regulates the tendering process and also refers to a special tender law and to the relevant provisions of the Civil Code that are also applicable to a concession contract. Overall, the Concessions Act appears somewhat superficial and inflexible. In addition to an unclear concession definition other deficiencies include restricted assignment of concession rights to a third party, the absence of a stability clause, insufficient termination/compensation provisions and mechanism, pre-qualification procedure. These have been addressed by an EBRD-sponsored technical cooperation project requested by the Ministry of Economy and Transport in 2006/7. A comprehensive modern PPP Policy paper has also been drafted in consultation with the PPP Task Force for the Government to consider. However, unfortunately, neither the reviewed concessions law drafted under the project, nor the PPP Policy paper has been approved since. 5

7 Chart 2 Quality of concessions legislation in the EBRD countries of operations Montenegro FYR FYR * * Source: EBRD Concessions Sector Assessment 2007/08 Note: The various categories represent the level of compliance of a given country s legislation ( the laws on the books ) with international standards such as the UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects. The asterisk indicates in which category Hungary ranks. The Concessions Act needs serious improvement especially in the areas of concessionaire selection, government support and the availability of financial instruments and security issues, as well as the introduction of a pre-qualification procedure, a detailed procedure for requesting proposals and the regulation of unsolicited proposals. In addition, the assessment has revealed that the policy and institutional framework needs to be revised (see Chart 3 below). 6

8 Chart 3 Quality of concessions legislation Hungary (2007/8) Hungary International Standards Policy Framework 100% Settlement of Disputes and Applicable Laws 80% 60% 40% Institutional Framework 20% Security and Support Issues 0% Definitions and Scope of the Concession Law Project Agreement Selection of the Concessionaire Source: EBRD Concessions Sector Assessment 2007/8 Note: The extremity of each axis represents an ideal score in line with international standards such as the UNCITRAL Legislative Guide for Privately Financed Infrastructure projects. The fuller the web, the more closely concessions laws of the country approximate these standards. 3.2 Corporate governance The legislation dealing with corporate governance is contained in Act IV of 2006 on Business Associations, as amended. The Act regulates the rights and obligations of shareholders and directors in the decision-making processes of companies formed under Hungarian law. Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings, as amended regulates the procedures for registering and winding-up companies and provides some redress mechanisms against certain dominant shareholder and/or board abuses. Furthermore, Corporate Governance Recommendations approved by the Budapest Stock Exchange on 11 March 2008 provide corporate governance principles which listed companies are required to implement under the so-called comply or explain mechanism. 7

9 The 2007 EBRD assessment on corporate governance showed Hungary being in High Compliance with the OECD Principles of Corporate Governance, the highest ranking of all EBRD countries of operations (see Chart 4 below). The assessment evidenced no major shortcomings in the relevant framework (see Chart 5 below). According to the information available from the EC Commission (8 April 2011), Hungary appears to have duly transposed all Acquis Communautaire in the field of company law. Corporate governance legislation in Hungary is therefore in line with EU standards. The 2008 Corporate Governance Recommendations require companies listed on the Budapest Stock Exchange to comply with the code or explain the reasons for non compliance. As evidenced by a study ordered by the EC Commission in 2009, the Hungarian regulator (HFSA) has not been very active in the field of corporate governance yet. In this respect, it is expected that the HFSA develop a practice on enforcing corporate governance issues. With specific reference to corporate governance of banks and following the recent financial crisis, financial supervision should be strengthened by enhancing the powers of the financial supervisor to avoid abusive practices and excessive risk taking. Chart 4 Quality of corporate governance legislation in the EBRD countries of operations * Source: EBRD Corporate Governance Sector Assessment 2007 Note: The various categories represent the level of compliance of a country s legislation (the laws on the books ) with international standards as set out in the OECD Principles of Corporate Governance. The asterisk indicates in which category Hungary ranks. 8

10 Chart 5 Quality of corporate governance legislation in Hungary (2007) Ensuring the basis for an effective corporate governance framework 100 Hungary International standards 80 The Responsibilities of the Board The rights of shareholders 20 0 Disclosure and Transparency The equitable treatment of shareholders The role of stakeholders in corporate governance Source: EBRD Corporate Governance Sector Assessment 2007 Note: The extremity of each axis represents an ideal score, i.e., corresponding to OECD Principles of Corporate Governance. The fuller the web, the more closely the corporate governance laws of the country approximate these principles. 3.3 Insolvency Bankruptcy and insolvency in Hungary are governed by the Act on Bankruptcy and Liquidation Proceedings (49/991) (as amended). The 2009 Insolvency Law Assessment rated Hungary s general insolvency law as being in Medium Compliance, with a score of 72% (see Chart 6 below). Despite this sound overall rating, there are material gaps in the law. There remains scope for improvement in dealing with the assets of the estate and in particular the requirements for the debtor and third parties to maintain and deliver up assets of the insolvent estate. Furthermore, it has been identified that the legislation dealing with the provision of information to creditors and the independent analysis of a reorganisation plan is weak and requires improvement. The largest single issue is with respect to reorganisation proceedings. The Assessment found that the rules regulating the commencement of proceedings are the most comprehensive (see Chart 7). According to the World Bank (2010) less than 1% of companies which enter into insolvency proceedings continue as a going concern in other words, business rescues are very rare. The World Bank visited Hungary in May 2010 to meet with officials to discuss the improvement of Hungary s insolvency regime. The World Bank made a number of recommendations, largely aimed at increasing the number of rescues. To date, no follow up actions have been made by either the World Bank or the Hungarian government. 9

11 The EBRD s Insolvency Officer Assessment (part of the general insolvency law assessment) indicated Very Low Compliance with the EBRD Office Holder Principles, with a score of 47%. We note that this could be further improved by introducing formal qualifications and professional standards and rules of ethics. In addition, a reform of the fee structure is probably required to ensure that the right incentives are in place for insolvency administrators to generate value for stakeholders. The World Bank s Doing Business survey notes that insolvency proceedings cost much more and recover much less than similar proceedings in OECD countries, although they appear to be completed within a reasonable time frame. Furthermore, there is no personal bankruptcy regime in Hungary. We recommend that Hungary take steps in order to improve the rate of business rescues. Such steps could include: allowing the law to permit expedited restructuring proceedings, introducing a comprehensive moratorium and providing for a comprehensive high priority stay on all creditor action upon the opening of bankruptcy proceedings. With regard to insolvency administrators, we recommend that Hungary introduces formal qualification requirements and a code of standards and ethics for the insolvency profession, enhance insolvency administrator s powers to obtain information and company assets from third parties and introduce a personal bankruptcy regime. Chart 6 Quality of insolvency legislation in the EBRD countries of operations * Source: EBRD Insolvency Sector Assessment 2009 Note: The various categories indicate the level of compliance of each country s legislation (the laws on the books ) with international standards, such as the World Bank s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems, the UNCITRAL Working Group on Legislative Guidelines for Insolvency Law, and others. 10

12 Chart 7 Quality of insolvency legislation in Hungary (2009) Hungary International standards Commencement of proceedings Terminal/liquidation processes Treatment of estate assets 0 Reorganisation processes Treatment of creditors Source: EBRD Insolvency Sector Assessment 2009 Note: The extremity of each axis represents an ideal score, i.e. corresponding to international standards such as the World Bank s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems, the UNCITRAL Working Group s Legislative Guidelines for Insolvency Law, and others. 3.4 Judicial Capacity Hungarian courts are generally regarded as being impartial and independent, and posing no obstacle to business. However, the speed of judicial proceedings remains a concern. This is reflected in the most recent EBRD World Bank Business Environment and Enterprise Performance Survey (BEEPS), where only 5% of surveyed respondents expressed the view that the court system was fast. This is typical of survey results for Central Europe; where court-users increasingly have higher expectations of what their court systems should be able to deliver. The National Council of Justice is the body responsible for the administration of the court system. This body consists of 15 members including judges and the Prosecutor General, the President of the National Bar Association, the Minister of Justice and 2 members of the Parliament. The Council proposes candidates for judicial appointment to the President of the Republic. Initial appointments are for a period of three years. The Council is responsible for the supervision of judges' work as well as judicial training. 11

13 3.5 Public procurement Public procurement in Hungary is regulated by the Act CXXIX of 2003 on Public Procurement (PPL), (amended on several occasions) and secondary legislation (Government Decrees and Ministry of Justice and Law Enforcement Decrees). In the EBRD 2010 assessment the Hungarian PPL scored high to very high compliance in the region (see Chart 8 below). The PPL provides for modern, uniform, and comprehensive regulation, in accordance with the EU PP Directives. PPL clearly promotes transparency, integrity and competition in public procurement ( 90% compliance rate) (see Chart 9 below). Hungarian PP policy is focused on adopting transparency and integrity safeguards and providing significant enforcement instruments; it is less comprehensive when it comes to PP efficiency instruments. Chart 8 - Quality of Public Procurement legal framework in Hungary as compared to other EBRD countries of operation Meets 100 International standards Does not meet International 0 standards Turkmenistan Uzbekistan Azerbaijan Takijistan FYR Macedonia Krygyz Rep Bosnia & Herzegovina Poland Kazakhstan Ukraine Estonia Moldova Mongolia Romania Armenia Serbia Slovak Rep Belarus Croatia Russia Slovenia Bulgaria Latvia Lithuania Turkey Albania Georgia Montenegro Hungary Source: EBRD Public Procurement Assessment 2010 Note: The score represents the level of compliance of the country s legal framework with international standards such as the revised UNCITRAL Model Law on Public Procurements. Hungary is highlighted in comparison with other countries. The PPL provides for a dedicated public procurement enforcement mechanisms and remedies system. The PPL balances administrative and civil aspects of the PP framework. In addition, the PPL stipulates that PP remedies should be simple, quick and inexpensive. The PP framework follows the principle of proportionality, distinguishing short and long term contracts, small and high value contracts, as well as providing for different procurement procedures suitable for different contract types. 12

14 The Hungarian PPL is based on sound principles and in the 2010 assessment no major weaknesses, (a score of below 50% compliance rate), were identified. However, marks for efficiency and economy of the PP process are relatively low (see Chart 9), due to insufficient adoption of the procurement efficiency instruments in the regulation of pre-tendering and post-tendering phases. In certain aspects the PPL is outdated; electronic communication is not mandatory and the PPL does not require procurement monitoring and administration. Chart 9 - Quality of Public Procurement legislation Hungary (2010) Enforceability Accountatibility 100% 80% Integrity Hungary International Standards 60% Flexibility 40% Transparency 20% Stability 0% Competition Uniformity Economy of the process Proportionality Efficiency of the public contract Source: EBRD Public Procurement Assessment 2010 Note: The extremity of each axis represents an ideal score in line with international standards such as the revised UNCITRAL Model Law on Public Procurement. The fuller the web, the more closely the pubic procurement laws of the country approximate these standards. 13

15 Local PP practice in Hungary received high scores in the 2010 assessment (an of above 75% compliance rate) and is perceived to be transparent, competitive and well managed. Local contracting entities supplement the PPL with internal procurement rules. There are appropriate procedures in place to plan procurement, manage the PP process and monitor delivery of public contracts. There are no elements of PP practice scoring below a 50% compliance rate in Hungary; however, several implementation gaps were identified, as the scores on the quality of local PP practice are generally lower than for the quality of the legislation (see Chart 10 below). In spite of very high marks, Hungarian PP legislation could improve by adopting some procurement efficiency and economy measures and increasing the accountability of contracting entities. Communication rules are outdated and there is no general requirement to publish all tender documents and procurement reports on the contracting entity s website. Integrity and economy of the PP process could be improved in practice. The local PP practice survey revealed gaps in institutional capacities and in implementing integrity safeguards and PP efficiency instruments. Chart 10 - Hungary - Quality of local procurement practice (2010) Enforceability Accountatibility 100% 80% Integrity Hungary International Standards 60% Flexibility 40% Transparency 20% Stability 0% Competition Uniformity Economy of the process Proportionality Efficiency of the public contract Source: EBRD Public Procurement Assessment 2010 Note: The extremity of each axis represents an ideal score in line with international standards such as the revised UNCITRAL Model Law on Public Procurement. The fuller the web, the more closely the public procurement practices of the country approximate these standards. In the 2010 assessment Hungary scored a very high compliance rate and achieved the highest result among all of the EBRD countries of operation in the quality of the legal PP framework. The Hungarian institutional framework is comprehensive; no substantial gaps were identified. The PPL 14

16 embraces both transparency and integrity safeguards and efficiency instruments; however, the Hungarian PP regulation is not the most modern in the EBRD region and still somewhat bureaucratic. In addition, in the assessment of the quality of local PP practice the Hungarian practice scored a 78% compliance rate (high compliance), significantly lower than in the assessment of quality of PP legislation (very high compliance). These results suggest that further work could be done to improve the quality of local practice; there are substantial gaps in the implementation of laws and institutional framework capacities. Finally, local PP practice in Hungary scored a 33% compliance rate in the PP sustainability survey. These marks are similar to the scores of other EU Member States in the EBRD region, but could be improved. 3.6 Secured transactions The applicable legislation in the securities transactions field is as follows: Articles of the Civil Code (Act IV of 1959 as later amended by Act No. XXVI of 1996 and Act No. CXXXVII of 2000), to be replaced by Sections 4:94-4:170 of the new Civil Code (not yet entered into force, see below), which provide the basic legal framework for security over movable and immovable assets. Act XXX of 1997 on Mortgage Loan Credit Institutions and on Mortgage Bonds. Act on Real Property Registry (CXLI of 1997). The legal regime for taking security over property was due to undergo a complete reform when the new Civil Code was meant to enter into effect on 1 May 2010 and 1 January 2011, which includes a whole new set of provisions. However, in its decision of 26 April 2010, the Hungarian Constitutional Court ruled that the Act on the entry into force of the new Civil Code was unconstitutional, due to the fact that the sixty-day deadline by which the authorities and all interested parties should have examined the new provisions was excessively tight. Thus, there is still some uncertainty as to the application of the new legal provisions. Since 1996, Hungary had equipped itself with a comprehensive, flexible and modern system for charging all kinds of assets. Registered charges over movable (tangible) assets have been registered in the centralised electronic Charges Registry, which has been operating since May 1997 by the Hungarian National Chamber of Public Notaries. Over the years, improvements had been brought to the law. The range of collateral that can be taken has increased and charges over pools of fluctuating assets are now possible. Foreclosure rules have been substantially simplified, and out-of-court enforcement (for example by the creditor selling directly the collateral to get repaid) is now possible and is reported to work well. Finally, the treatment of secured creditors in the case of the debtor s insolvency has been significantly improved. 15

17 The new Civil Code reform has maintained the key structure of the legal system whilst introducing some important changes: - The same general provisions govern the taking of security on real (immovable) and personal (movable) property (although there is a separate statute on the land register). Differentiation, where necessary, is made on the level of particular provisions. - The new provisions now compel the Chamber of Notaries to enable free on-line searches of the register and have also abolished notarisation as a mandatory precondition to registration. - New provisions on consumer protection restrict the scope of security rights that could be granted by individuals acting outside their business or professional activities. - The rules over enterprise charges have been slightly developed. The Hungarian credit reporting system consists of the private credit bureau, BISZ Zrt. There is no public credit registry in Hungary. BISZ Zrt. operates the Central Credit Information System (CCIS), the Credit Reference, and Credit Bureau services. The CCIS is a self-contained database operated jointly by over 450 financial institutions and banks in Hungary, managing the customer and agreement data which they submit to it, and providing credit information to support their application assessment processes. Credit Reference is a new positive credit information sharing service in Hungary, which registers the data and credit agreements of retail loan customers. BISZ Zrt. launched Credit Reference in 2009 as the first voluntary positive consumer credit information sharing service in Hungary. The service aims to enable both consumers and banks to benefit from the advantages of positive credit histories. Using Credit Reference allows financial institutions a more accurate assessment of the creditworthiness of individuals applying to them. This may simplify application assessment, enabling banks to offer better terms to customers with good credit histories, who present low risk. As of 11 June 2010, creditors domiciled in EU Member States other than Hungary have become eligible to subscribe to the CCIS if they provide crossborder services in Hungary, and enterprises engaged in commercial lending have also become eligible as of the same date. Recommendations include: - revising and clarifying the insolvency legal framework so that the procedures for municipalities align with procedures for companies; - improving private placement rules by amending the requirement that the issuer and the distributor finalize all terms seven days before purchasing the securities; and - eliminating overlaps and gaps that have resulted from the implementation of EU directives. Other long-term recommendations include: - enacting a law governing securitization; - developing standardized documents to be used for derivative transactions between local counterparties; - removing barriers to local debt issuance; and - improving the enforcement of payment obligations. 16

18 Main policy recommendations: From the EBRD point of view, the most important bottleneck of the secured transactions system concerns charges over immovable property (mortgages). Although they are, by and large, governed by a set of market-oriented provisions working efficiently, there are serious bottlenecks to the system, in particular: - the time required to register a mortgage, which is unduly long - the costs associated with the creation of a mortgage, again comparatively high for the region - the inefficiency of the enforcement process, due to the enforcement costs (again, very high) and the fact that the property is rarely sold at market value. With the country keen to re-assess its mortgage market (badly hit during the financial crisis because of significant foreign currency exposure) and strengthen the secondary mortgage market, these aspects should be addressed. 3.7 Securities markets The applicable legislation on securities markets is as follows: - Act CXX of 2001 on the Capital Market, which has been adopted by the Hungarian Parliament in order to promote the development of the Hungarian capital market, to ensure that transparency, to improve investor's protection and the efficiency of the supervision of capital markets; - Act CXXXVIII of 2007 on Investment Firms and Commodity Dealers, and on the Regulations Governing their Activities, which aims to align Hungarian legislation with the Acquis Communautaire; - Act CXXXV of 2007 on the Hungarian Financial Supervisory Authority, which establishes a regulatory regime for the supervision of market participants and regulates the legal status and powers and authorisations of the Hungarian Financial Supervisory Authority. The 2007 EBRD assessment on securities markets showed Hungary in High Compliance with the IOSCO s Objectives and Principles of Securities Regulation (see Chart 11 below). The assessment has however identified some flaws in the areas of clearing and settlement and secondary market (see Chart 12 below). In particular, the assessment has revealed that the Capital Markets Act does not specify some aspects of trade confirmation and delivery versus payment. Also, the assessment has identified that a trading system does not exist in Hungary. Furthermore, the statutory provisions do not provide a comprehensive list of requirements in connection with an application by an exchange or trading system for authorisation or licensing. Hungary has also transposed a substantial part of the relevant Acquis Communautaire within its national legislation, but in May 2010, the European Commission formally requested Hungary to comply with its obligation to implement the Markets in Financial Instruments Directive (MiFID). According to the EC Commission, Hungary incorrectly transposed a number of provisions linked to definitions, market transparency, the passporting of investment firm authorisations and investor protection. As a result, Hungarian companies do not have the possibility to provide their services in other Member States. Furthermore, investors are not able to enjoy the same level of competitiveness and protection in financial markets as elsewhere in the EU. 17

19 The recent financial crisis highlighted flaws in the Hungarian financial sector posing substantial risks to financial stability. Financial supervision should be strengthened by enhancing the powers of the financial supervisor to avoid abusive practices and excessive risk taking. Chart 11 Quality of securities market legislation in the EBRD countries of operations * Source: EBRD Securities Markets Sector Assessment 2007 Note: The various categories represent the level of compliance of a given country s legislation (the laws on the books ) with international standards such as the IOSCO Principles. The asterisk indicates in which category Hungary ranks. 18

20 Chart 12 Quality of securities markets legislation in Hungary (2007) Financial Instruments Regulator Hungary International standards Self Regulatory Organisations 60 Money Laundering Issuers and Disclosure Accounting Collective Investment Schemes Clearing and Settlement Market Intermediaries Secondary Market Source: EBRD Securities Markets Sector Assessment 2007 Note: The extremity of each axis represents an ideal score in line with international standards such as the IOSCO Principles. The fuller the web, the more closely the country s securities markets laws approximate these standards. 3.8 Telecommunications / Electronic Communications The Sector is governed mainly by the Electronic Communications Act 2003 (the 2003 Act ), together with applicable amendments and subordinate legislation. The 2003 Act harmonised Hungary s electronic communications legislation with that of the European Union (EU) as part of the accession process whereby Hungary became a member state of the EU. The 2003 Act primarily deals with Internet regulation, Significant Market Power (SMP) obligation regulation, carrier selection, costing methodology, number portability regulation and institutional issues. The Act has been amended and supplemented since to keep up with developments at the European level. The 2008 EBRD Telecommunications Regulatory Assessment has revealed that the only issue that needs to be improved is the regulation of dispute resolution and appeal (see Chart 14 below). The electronic communications sector in Hungary hosts an advanced, fully privatised and highly liberalised market. Though the market has undergone consolidation in recent times, in line with Europe-wide trends, numerous operators compete in the various sub-sectors. Hungary enjoys high Internet usage levels, with broadband representing the majority means of access. Hungary s mobile market is served by three competing network operators and, with general penetration levels have long hovered around saturation level, the key potential for growth is in the mobile broadband market (see Charts 14(a), 14(b) and 14(c) below). Hungary is an advanced market for electronic communications with all major and significant reforms to the market necessary to implement a private-sector led liberalised environment having already been implemented at the time of accession to the Union, or soon thereafter. In common 19

21 with most EU partners, among Hungary s challenges in the future is keeping pace with the evolving European framework and its implementation, ensuring an effective framework for local loop unbundling and sufficient incentive for investment into the new technology infrastructure necessary to enable wide-spread high-speed broadband connection. Chart 13 Quality of telecommunications regulatory framework in Hungary (2008) Interconnection and special access Regulatory independence Dispute resolution and appeal SMP and safeguards Market access (wired) Market access (radio) Source: EBRD Telecommunications Regulatory Assessment 2008 Note: The diagram shows the combined quality of institutional framework, market access and operational environment when benchmarked against international standards issued by the WTO and the European Union. The extremity of each axis represents an ideal score of 100 per cent, that is, full compliance with international standards. The fuller the web, the closer the overall telecommunications regulatory framework of the country approximates these standards. 20

22 Chart 14 Key indicators for Hungary (2008) 14(a) Fixed Network Penetration Fixed network penetration Hungary EU SEE CIS+M EU8 14(b) Mobile Network Penetration Mobile network penetration 85 Hungary EU SEE CIS+M EU8 21

23 14(c) Broadband Network Penetration Broadband access 0 Hungary EU SEE CIS+M EU8 Source: EBRD Telecommunications Regulatory Assessment 2008 Note: Key indicators for Hungary provide the fixed network penetration defined as active subscriber lines as a percentage of population, mobile network penetration defined as active pre- and post-paid subscribers as a percentage of population and the broadband network penetration defined as the number of access subscribers with speeds of 144k/bits or more as a percentage of population (broadband Network Penetration less than 1% is not shown on this chart). 22