THE HFSA’S FINANCIAL CONSUMER RISK...

THE HFSA’S FINANCIAL CONSUMER RISK REPORT

May 2012

May 2012 Financial Consumer Protection Risk Report

Hungarian Financial Supervisory Authority 2

Hungarian Financial Supervisory Authority H-1013 Budapest, Krisztina krt. 39 Mailing address: H-1534 Budapest BKKP Pf.: 777 Telephone: (36-1) 489-9100 Fax: (36-1) 489-9102 Web: www.pszaf.hu

http://www.pszaf.hu/



Table of contents

SUMMARY FINDINGS ........................................................................................................... 7

FINDINGS OF THE HFSA’S CONSUMER PROTECTION MONITORING

ACTIVITIES .......................................................................................................................... 12

I. FINANCIAL MARKET SECTOR ...................................................................................................... 12

1.1. Lending to households ................................................................................................................. 12

1.1.1. Main changes and characteristics of the household lending regulatory environment ............................................................................................................................ 12

1.1.2. Market trends ........................................................................................................................... 12

1.1.3. Key topic: collection, receivables management: the HFSA’s regulatory approach to receivables management ........................................................................... 22

1.1.4. Key topic: The consumer protection aspects of transparent pricing ................ 25

1.1.4.1. The key elements of new regulations on transparent pricing enacted on 1 April 2012, assessment from a consumer protection aspect ................................ 25

1.1.4.2. Diverse regulatory environment ................................................................................... 26

1.1.4.3. Impact of regulations on market supply .................................................................... 30

1.2. Household deposits, savings, account management and related services ............... 33

1.2.1. Changes in the regulatory environment ....................................................................... 33

1.2.2. Market trends .......................................................................................................................... 33

1.2.3. Identified problems and risk items .................................................................................. 36

II. INSURANCE SECTOR ......................................................................................................................... 38

2.1. Regulations ........................................................................................................................................ 38

2.2. Market trends ................................................................................................................................... 38

2.3. Insurance products ......................................................................................................................... 39

2.3.1. Life insurance products ........................................................................................................ 39

2.3.2. Non-life insurance products ............................................................................................... 41

2.4. Key topic: The growing weight of online sales and the appearance of new products

in the Hungarian insurance market ........................................................................................ 44

III. CAPITAL MARKET SECTOR ........................................................................................................... 45

3.1. Regulatory environment............................................................................................................... 45

3.1.1. Changes in regulations .......................................................................................................... 45

3.1.2. Regulatory outlook ................................................................................................................. 45

3.2. Market trends ................................................................................................................................... 46

3.2.1. Financial instruments trading, sales channels ............................................................ 46

3.3. Identified risks .................................................................................................................................. 48

3.3.1. High-leverage FX transactions ........................................................................................... 48

3.3.2. Liquidity risk of public real estate funds in customer informing ......................... 50

3.3.3. Further expected increase in the weight of online sales channels ...................... 50

IV. PENSION FUNDS SECTOR / PENSION SAVINGS ................................................................... 52

4.1. Regulatory environment ............................................................................................................. 52



4.2. Market trends .................................................................................................................................. 52

4.3. Identified problems and risk items .......................................................................................... 52

4.3.1. Need for attitude shaping .................................................................................................... 52

4.3.2. Rules of providing information on pension savings accounts ............................... 53

4.4. Consumer protection findings in relation to the transformation of pension funds

............................................................................................................................................................... 53

Annex .................................................................................................................................... 55

Money market ........................................................................................................................................... 56

Capital market ........................................................................................................................................... 61



Definition of acronyms used in this report Batv. AIFMCIF Act CXCIII of 2011 on Investment Fund Managers and Collective

Investment Forms 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

CFD CFD Financial contracts for difference Devizakölcsön tv. FX Loan Act Act LXXV of 2011 on the fixing of the repayment exchange rate of

foreign currency loans and the order of forced repossession of homes

EBA EBA European Banking Authority

EIOPA EIOPA European Insurance and Occupational Pensions Authority

ESMA ESMA European Securities and Markets Authority

Hpt. ACI Act CXII of 1996 on Credit Institutions and Financial Enterprises

KIID KIID Key investor information document

MABISZ MABISZ Association of Hungarian Insurance Companies

MiFID MiFID Markets in Financial Instruments Directive

NET NAMC National Asset Management Company Co. Ltd.

NYESZ PSA Pension savings account

PBT FAB Financial Arbitration Board

Psztv. HFSA Act Act CLVIII of 2010 on the Hungarian Financial Supervisory Authority

Ptk. Civil Code Act IV of 1959 on the Civil Code

TBSZ LTIC Long-term investment contract

TKM TCI Total Cost Index

UCITS4 UCITS4 Directive 2009/EC/65 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) and the related implementation directives and regulations

Vht. AJE Act LIII of 1994 on Judicial Execution



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: “…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 the aforementioned objectives, the HFSA prepares reports on financial consumer protection, which it publishes on its home page since 2011. Released every six months, the main objective of the Consumer Protection Risk Report is, first, to present and assess key systemic level developments, market trends and risk items of consumer protection relevance and, second, to identify supervisory steps and measures taken in response. The HFSA discusses risks pertaining to financial stability and the supervision of financial institutions in its Risk report, a regular publication of several years’ standing The target groups of analyses and statistics are 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. The HFSA prepares consumer protection risk reports twice yearly. The spring report sets forth a thorough, comprehensive analysis while the autumn report focuses on the most important consumer protection developments of the period concerned. The reports may also present similar developments belonging to the periods preceding or following the period under review.



SUMMARY FINDINGS

The main objective of the Consumer Protection Risk Report published in April 2012 is to identify issues in H2 2011 that represent high risks and that may have a significant impact from a consumer protection standpoint and to present the HFSA’s measures taken in response to these issues. In addition, the report discusses in detail some current issues that deserve special attention from a consumer protection viewpoint. Key topics of the H1 2012 consumer protection risk report:

Collection, receivables management: the HFSA’s regulatory approach to receivables management; The consumer protection aspects of transparent pricing; The growing weight of online sales and the appearance of new products in the Hungarian

insurance market.

Lending Households that became indebted mostly in foreign currency, owing to the significantly lower interest rates of such mortgages compared to forint loans, experienced a growth of their debt burdens in 2011, principally because of their exposure to exchange rate risks. The financial crisis in the euro zone led to increased sovereign risks, which in turn brought significant growth in risk premiums and contributed to the major appreciation of the CHF against the euro. Dramatically increased repayments became a problem for a growing number of debtors. Owing to rising risks and individual and institutional losses, responses and solutions to foreign exchange exposure were the focus of attention of consumers, lending institutions and fiscal policymakers alike. Throughout 2011, foreign exchange lending to households was not only a major problem from a financial consumer protection standpoint, but also became a key economic policy and social issue that impacted beyond individual and institutional frameworks owing to the large number and aggravated situation of those concerned.

Thus, legislation efforts became even more intense in H2 2011 in order to mitigate the aggravating debt burden problem associated with the foreign currency loans of households. The primary objective of consumer protection-related regulatory measures was to help foreign currency loan debtors and to protect homes. A number of legal regulations were passed, concerning, among others, the government-backed exchange rate fixing scheme; a quota system for the forced sale of residential properties; the final repayment of foreign currency loans at a fixed exchange rate; the central credit information system; the National Asset Management Agency; the subsidized interest rate for home purchases; the APR maximum and transparent pricing. The regulations enacted in 2012 brought significant changes to the eligibility requirements of the exchange rate fixing scheme, favouring consumers. Further, new regulations entered into effect concerning the option to convert foreign currency mortgages in default for over 90 days into forint loans. Until the end of February 2012, customers repaid more than 24% of foreign currency mortgages held by households, which amounted to HUF 5,611 billion as at 30 September 2011. These repayments took place in the form of final repayment at a discounted exchange rate and reduced the foreign currency exposure of households by one quarter. Debtors opting in to final repayment under the program enjoyed a total principal relief of HUF 370 billion, equalling an average debt relief of HUF 2.186 million per debtor. Average contract size equalled HUF 5.8 million at final repayment exchange rate and nearly HUF 8 million at market exchange rate. The averages suggest that final repayment also involved a mass number of low-amount (HUF 2-3 million) loans. This arrangement was a major help for 170,000 families and a final solution of the foreign currency loan problem for two thirds of them. In the HFSA’s opinion, exchange rate trends and the continued reduction of exchange rate risks remain key factors regarding the quality of the foreign currency loans portfolio that shrank after final



repayment, and the expected solvency of foreign currency debtors. Thus from a consumer protection angle, the successful restructuring of the remaining foreign currency loan portfolio via government-backed debt settlement schemes available to a wide range of consumers is of key importance. Institutions offer both government-backed programs and their own schemes to foreign currency mortgage borrowers. The renewed exchange rate fixing program offers two-stage protection against exchange rate impacts to foreign currency debtors who pay reliably and are not in default for over 90 days, along with the partial relief of payment obligations enabled by government-backed and institution-specific programs. At the same time, owing to the pool account loan, the arrangement conveys an unpredictable long-term risk associated with the future payment burdens of the loan part converted to forints below the maximum statutory exchange rate. For contracts in default for over 90 days, conversion into forint and the simultaneous partial debt relief may ease payment for borrowers. From a consumer protection standpoint, the conversion of foreign exchange loans into forint loans is not completely free of long-term risks and therefore requires continuous monitoring. According to our calculations, the government-backed payment relief programs aimed at helping foreign currency debtors may apply to as much as 90% of the portfolio measured at the end of September 2011 baseline, owing to the wide range of potentially eligible customers and the different financial position of the customer segments concerned. However, as not every eligible customer is expected to use the opportunity provided by laws, take up is estimated at around 70%. All in all, government programs offer some sort of relief for nearly every foreign currency debtor, significantly mitigating their exchange rate risks. Further, depending on the scheme used, debtors enjoy various degrees of debt relief. Payment difficulties are increasing for household forint loans, too, and the management of related problems is expected to come to the fore. In the case of forint loans, the timely application of traditional means of active receivables management and payment relief and the thorough knowledge of opportunities available for customers may aid effective management of consumer payment problems and prevent further portfolio deterioration. According to current expectations, once demand increase triggered by final repayment opportunities fades out, the same restricted loan supply and low loan disbursement levels seen in 2011 are expected in 2012. Stricter borrowing conditions brought about by portfolio deterioration are not expected to help new borrowing. Available product offerings on the market are not changing significantly. In the lending business line, institutional resources in 2012 will be used mostly for serving customers in relation to government-backed programs and managing defaulted loans. Stricter conditions for borrowing and, in respect of certain product types, the decreasing number of institutions that market them, along with reduced willingness to borrow may partially limit competition in the short run. While changes to product pricing practices may have a positive affect on transparency and simplicity in this environment, as a negative effect they may also increase prices through the interest premium charged on the reference rate.

Receivables management The HFSA’s experience shows that several consumer-related anomalies (consumer protection risks and violations of consumer interests) derive from the fact that receivables management is not regulated properly and sufficiently regarding consumer protection considerations. Legal regulations are missing concerning the minimum requirements of conduct with consumers, the scope of information to be provided to them, and the settlement obligations. The HFSA believes that proper regulations are needed to resolve these anomalies and therefore it compiled and submitted to legislators a comprehensive regulatory concept in March 2012. The rules of conduct outlined in the consumer protection chapter would set out requirements to receivables management institutions concerning their conduct with customers. In particular, these rules pertain to the way and frequency of contacting customers, the recording of telephone conversations and would require institutions to keep records of the receivables management process in order to enable



tracking and subsequent control. Informing rules are intended to help consumer decision-making. According to the concept, once default occurs, the receivables manager would provide the debtor with the necessary information step by step through the entire process.

Transparent pricing From a consumer protection standpoint, the detailed specification of rules for transparent pricing was a significant step forward; APR maximization reduces the exposure of customers and interest charges while linking pricing to a reference interest rate, whilst fixing the interest period at 3, 5 or 10 years makes pricing more predictable and clearer for customers. These rules clearly reduce the elbowroom of institutions regarding contract modification and pricing. In the HFSA’s opinion, legislation took a major step forward by enacting these regulations. However, further progress could be achieved by tightening regulations in order to prevent institutions from increasing surcharges upon customer defaults (or late property insurance premium payments) as allowed by law. In current general market practice, upon non-performance by the customer, financial institutions can compensate for their increased risks by charging default interest. The regulation of loan contracts with a fixed interest rate for a 3, 5 or 10-year period is also a step forward: It expanded the freedom of customers by enabling them to terminate their loan contracts free of charge, and to choose early repayment effective the next interest rate period. With a view to consumer protection, it would be worth contemplating the further specification of regulations by regulating in detail the reasons and objective circumstances under which a financial institution is entitled to change the interest rate unilaterally and adversely for the customer upon the cusp of the next interest period. This additional specification would be needed to ensure that the actual legal environment serves the original intention of legislators in terms of enforcing transparency.

Retail deposits, savings, account management In 2011, the rate of savings increased significantly. In parallel, access to household savings became increasingly important for service providers in H2 2011: competition for household funds intensified among financial subsectors (credit institutions, insurers, capital market and pension, healthcare and voluntary self-support funds) and the state. One sign suggesting intensified competition is the pricing trend of credit institution deposits and savings products. First, efforts to stimulate customer activity and new fund involvement became a priority again via the attractive pricing of certain products. Second, competition among service providers also manifests in product innovation in the launch of new, complex savings products. The growing supply of deposit products bundled with insurance offerings and the return of structured deposits are clear market trends. In the HFSA’s opinion, consumer protection concerns may arise in relation to complex savings products if the related customer information materials fail to highlight or insufficiently point out the complexity of these products and the associated risks. The HFSA identified the growing complexity of deposit products as a consumer protection risk as the inappropriate quality of information provided might increase the risk of mis-selling. In addition to savings, account products and related services also became more valuable for credit institutions. From a consumer protection standpoint, it remains a problem that the fee structure of account products and related services offered by institutions is opaque and difficult to compare. In order to inform customers, support conscious customer decisions and improve transparency, the HFSA began to implement an online tool that helps customer decisions by comparing account products and related services based on mandatory data provision by institutions. The number of branches is clearly decreasing and sales are shifting towards electronic channels. In the HFSA’s opinion, it may raise consumer protection concerns if traditional sales channels are losing ground owing to short-term, cost reduction considerations as this may lead to lower service quality and a growth of customer complaints.



Insurance sector In the insurance sector unit-linked life insurance products continue to dominate and gain further ground even though several consumer risks and anomalies are associated with these products. In order to mitigate these risks, the HFSA intends to orientate insurers by issuing a recommendation on unit-linked insurance offerings. Second, in order to promote opportunities to further develop the Total Cost Index (TCI), the HFSA drafted a consultation document proposing the elaboration of a general, interest gap-type cross-product and cross-sector indicator with standardized contents, the General Total Cost Index (GTCI). In the life sector, anomalies around loan collateral and repayment life insurance products continue to raise consumer protection questions. Concerning the former, the lack of regulations for group insurance contracts is a key issue while with the latter it is the service payment obligation of insurers upon the termination of employment on mutual consent. Regarding anomalies associated with offerings where unit-linked life insurance is bundled with property loans, which therefore convey money and capital market risks, the HFSA strives to set out customer information requirements in its recommendation on unit-linked insurance products. On the domestic market, the non-life sector continues to be characterized by intense competition that, in combination with lower risks in some subsectors, leads to a consistent decrease of average premiums. While this decrease may be considered favourable from a consumer protection standpoint, in the HFSA’s opinion it may also raise concerns about future service quality and financial coverage of insurance policies. For now, the online sale of insurance products is only typical in the non-life sector, while the use of this sales channel is limited in the life sector. Based on replies from market players, this is owing to the complexity of life insurance products. According to some insurers, the ratio of online sales will continue to increase in the near future, not only on the vehicle insurance market but also in other subsectors (home insurance, property insurance, travel insurance). Product innovation is moderate on the Western European insurance market, and even less so locally. In 2011, the domestic insurance market was dominated by product modification as opposed to product innovation. The most typical change was the adaption of existing products to online platforms. These product renewals mostly stemmed from pricing changes, the extension of risk scopes and the implementation of more flexible services.

Capital market sector The act on investment fund managers and collective investment forms passed at the end of 2011 brought about significant changes from an investor and consumer protection standpoint effective 2012 as it introduced the Key Investor Information Document (KIID) for public investment funds. The purpose of the KIID is to provide investors with key facts for informed decision-making in a concise, clear and understandable manner. The KIID and its proper use may be a great help during the sales process in finding the right products that fit the risk profile of customers. In the HFSA’s opinion, within capital market products, high leverage deals convey significant consumer protection risks as in extreme scenarios the leverage they involve may be one or even two hundredfold. With these contracts, it is of utmost significance that service providers only offer them to those retail investors that can handle the risks appropriately and whose risk profile matches these products. Based on information available to us, a relatively low number of retail customer used these services from providers licensed by the HFSA and the majority of these customers met the aforementioned criteria. At the same time, taking into consideration the high net loss figures, further steps are required. The HFSA intends to undertake an active, market-shaping role to ensure that customer ratings are as accurate as possible in the future. It is important that customers get information on the characteristics and risks of these transactions not only immediately prior to contract signing, but also on first contact. It is also important that they have constant access to such risk-related information as long as they use the service.



Therefore, the HFSA believes in 2012 it is necessary to publish a recommendation regarding high leverage transactions.

Pension funds sector As self support and long-term pension savings gain significance, it is important to provide additional support to pension saving efforts, to shape consumer attitudes by disseminating information and to encourage conscious pension planning. In addition to supporting pension savings in general it is also important to help customers make conscious choices when selecting a savings form and to ensure that their decisions are in line with their preferences.



FINDINGS OF THE HFSA’S CONSUMER PROTECTION MONITORING ACTIVITIES

I. FINANCIAL MARKET SECTOR

1.1. Lending to households

1.1.1. Main changes and characteristics of the household lending regulatory environment

Several regulatory measures were taken already in 2010 and in the first half of 2011 in order to cut back radically the continued growth of retail foreign exchange loans and thus the disbursement of new foreign exchange loans. Legislators de facto prohibited the latter by declaring a ban on registering mortgages on these types of loans

1.

A number of consumer protection regulations were enacted to mitigate consumer risk in relation to existing foreign exchange loans. One such set of measures significantly tightened the conditions of unilateral contract modification. Initiated by the HFSA, another measure required institutions to apply the middle rate upon the (early or final) repayment of housing mortgages. From a consumer protection standpoint, the new legal requirements that limit additional burdens on consumers, facilitate early repayment, extend loan terms or relate to the eviction moratorium are all steps forward. In H2 2011, legislation efforts intensified in order to alleviate aggravating debt service problems associated with the foreign currency loans of households. In particular, the objective of consumer protection-related regulatory measures was to help foreign currency loan debtors and to protect homes. Legal regulations were passed concerning, among others, the government-backed exchange rate fixing scheme; a quota system for the forced sale of residential properties; the final repayment of foreign currency loans at a fixed exchange rate; the central credit information system; the National Asset Management Company; the subsidized interest rate for home purchases; the APR maximum and transparent pricing. The regulations enacted in 2012 brought significant changes to the eligibility requirements of the exchange rate fixing scheme, favouring consumers. Further, new regulations entered into effect concerning the option to convert foreign currency mortgages in default for over 90 days into forint loans. A summary of the latest regulatory measures is set out in Table M1 in the Annex.

1.1.2. Market trends

Throughout 2011, foreign exchange lending to households was not only a major problem from a financial consumer protection point of view, but also became a key economic policy and social issue that impacted beyond individual and institutional frameworks owing to the large number and aggravated situation of those concerned. Households that became indebted mostly in foreign currency owing to the significantly lower interest rates of such mortgages compared to forint loans experienced a growth of their debt burdens in 2011, principally because of their exposure to exchange rate risks. The financial crisis in the euro zone led to increased sovereign risks, which in turn brought significant growth in risk premiums and contributed to the major appreciation of the CHF against the euro. Dramatically increased repayments became a problem for a growing number of debtors. Owing to increased HUF repayments and other reasons (e.g. employment trends, change of disposable income), the fast-paced growth regarding the number of customers in default and the volume of overdue retail housing loan debts continued.

1 This regulation was subsequently alleviated by legislators through an amendment to Government decree no. 361/2009 (XII. 30) on prudent retail lending and credit eligibility examinations.



At the end of 2011, the distribution of retail loans per foreign currency was similar to the ratios of June in the same year. Foreign currency loans continued to represent over 60% of total loans (with an approximately 90% dominance of Swiss franc loans). Calculated at an unchanged (2008) exchange rate, the total loan portfolio has decreased in the past two years. Similarly to the existing debt repayment trends seen in the previous period, households retained their net repayer position.

Chart 1

Source: HFSA – Credit institution figures

In line with applicable legal conditions, new disbursements were realized in forint. Within credit eligibility criteria, down payments and existing savings gained significance. In the last few months of 2011, the supply of certain product types decreased and the costs of already signed loan contracts went up. Owing to the final repayment scheme initiated by the government and developed for foreign currency debtors, the loan market was revitalized temporarily in November – December 2011. The volume growth associated with forint loans granted for final repayment was much lower than the portfolio decrease of repaid foreign exchange loans. By the end of February 2012, final repayment by customers was HUF 1,354 billion i.e. more than 24% of the total foreign exchange mortgages of households, (HUF 5,611 billion as of 30 September 2011). Final repayment is discussed in more detail later in this report.



Chart 2

Source: MNB – portfolio-weighted interest statistics. HFSA – Extraordinary data provision related to the final repayment of foreign currency loan contracts and the disbursement of forint loans to replace them.

According to current expectations, once demand increase triggered by final repayment opportunities fades, the same restricted loan supply and low loan disbursement values of 2011 are again expected in 2012. Stricter borrowing conditions brought about by portfolio deterioration are not expected to help new borrowing. Available product offerings on the market are not changing significantly. In the lending business line, institutional resources in 2012 will be used mostly for serving customers in relation to government-backed programs and managing defaulted loans.

From a consumer protection standpoint, issues that remain to the fore include the proper management of the remaining foreign currency loan portfolio after final repayment, the alleviation of consumer exposure to exchange rate risks, the successful restructuring of remaining foreign currency loans via government-backed debt settlement schemes available to a wide range of consumers and the management of growing payment difficulties that are increasing for forint loans, too. Defaulted and non-performing retail loans

By the end of 2011, the total value of defaulted retail loans increased to HUF 3,389 billion, representing significant, nearly HUF 442 billion, growth on the 30 June figure. The expanding default rate of the retail loan portfolio mostly stemmed from mortgage payment problems: 70% of defaulted loans are mortgages. The portfolio of loans in default for over 90 days also grew in H2 2011 to reach HUF 1,628 billion by the year-end. 67% of these loans are mortgages. In comparison to June figures, the highest growth within defaulted loans related to mortgages. Regarding other retail loans, the size of the defaulted portfolio stagnated. Within mortgages in default, foreign exchange loans represent the highest ratio and volume. However, as suggested by the remarkable growth of forint housing loans with a market interest rate and general purpose forint loans within the total portfolio in default for over 90 days compared to 30 June 2011 figures, the payment difficulties of forint loan debtors, like foreign currency loan issues, also call for attention from a



consumer protection angle. In particular, the volume and ratio of forint loans in default for over one year expanded remarkably in late 2011.

Chart 3

Source: HFSA - Total figures of commercial banks, credit cooperatives and financial enterprises aggregated by contract type

Chart 4

Source: HFSA - Aggregate figures of commercial banks, credit cooperatives and financial enterprises.



Renegotiated (restructured) loans

Contrary to former trends, restructuring (an official solution applied by institutions to manage customer payment difficulties) saw a slight decrease in H2 2011. As earlier, the majority (82.74%) of renegotiated contracts were mortgage contracts. All in all, as a payment default management tool, institution-initiated restructuring was not more significant in 2011 than in prior years. The number of contracts signed for the various debt relief plans offered by institutions also went down in Q4 2011, presumably because of the launch of similar government-backed programs.

Table 1 Value of renegotiated loans and their ratio to the total portfolio

Source: HFSA - Summary data of commercial banks, credit cooperatives and financial enterprises

Portfolio cleaning

In the past two years, the quantity of properties that served as collaterals to sold retail loan receivables was consistently around 1,500 per month. The number of housing properties subjected to foreclosure increased significantly in the autumn of 2011, from the former average monthly figure of 2,500 to 4,500, and then returned to the long-term average in November – December. The HFSA regularly publishes2 the statistics of the quota system launched in 2011. The statistics show that financial institutions use roughly 80% of their forced sale quote. With the finalization of the rules pertaining to the National Asset Management Company, quota utilization is expected to increase.

Government-backed debt relief programs

Owing to rising risks and growing losses at individual and institution level, the need to reduce the foreign exchange exposure of households became paramount. In the summer of 2011, mass consumer problems with foreign exchange borrowing along with the related role of financial service providers and institution system became a hot topic of daily public discussion. In the same period, a number of consumer protection measures were taken by regulators, aiming to help troubled foreign currency debtors and to protect homes.

Exchange rate fixing

Launched effective 12 August 2011 pursuant to the related law3, the exchange rate fixing program provided predictable repayments for a temporary period (not exceeding 36 months) for a specific subset of foreign currency loan debtors keeping them safe from the impact of forint/foreign currency exchange rate fluctuations. The HFSA’s H1 2011 consumer protection risk report4 discussed the consumer protection aspects of the program in detail. In relation to the program, the HFSA published on its website a detailed consumer protection guide and a calculation tool for exchange rate fixing, helping potentially eligible customers in informed decision-making. By the end of October, the calculation tool amassed 337,000 visits. Parallel to that, the HFSA sent out a CEO letter to financial institutions, pointing out the need for practices under which customized and clear information is provided to customers and preliminary information is granted on the interest calculation formula of pool account loans. Based on final data available to the HFSA, approximately 4,000 contracts were signed out of the roughly 6,900 applications submitted until 31 December 2011. The most probable cause of low participation is the final repayment program launched in September 2011. Customer interest in this scheme

2 http://www.pszaf.hu/bal_menu/jelentesek_statisztikak/statisztikak/kenyszerertekesites 3 Act LXXV of 2011 on the fixing of the repayment exchange rate of foreign currency loans and the order of forced

repossession of homes 4 The HFSA’s H1 2011 Consumer Protection Risk Report, pp. 19-21

http://www.pszaf.hu/bal_menu/jelentesek_statisztikak/statisztikak/kenyszerertekesites



increased again in the last weeks of 2011 and the new, substantially revised version of the program launched in 2012 is expected to provide debt relief to a wide range of foreign currency debtors. The rules of the new program (which offer even greater help than the first version) will automatically apply to the first 4,000 customers who opted in to the first version of the exchange rate barrier scheme.

Final repayment at a fixed exchange rate Demand for the final repayment option at a discounted exchange rate was far higher than for all other debt relief schemes. The act on credit institutions and financial enterprises5 (ACI) 2011 allowed retail customers to submit applications to join the program between 29 September and 30 December. In just a few months, final repayment at a fixed exchange rate reduced significantly the foreign exchange mortgage portfolio and thus the foreign exchange exposure of debtors. The biggest portfolio decrease was brought about in housing foreign exchange loans. Owing to the underlying conditions of the program, portfolio reduction mainly involved contract closing for debtors that had little or no payment difficulties.

Chart 5

Source: HFSA Until the end of 2011, a total of 273,488 customers indicated their intention to opt in. By 28 February 2012, final repayment successfully took place for 169,256 customers. 97% of contracts subjected to final repayment were Swiss franc debts (the ratio denominated in Euro and Japanese Yen was 1 % and 2 %, respectively). By the end of February 2012, customers repaid more than 24% of foreign currency mortgages held by households, which was HUF 5,611 billion as at 30 September 2011. Calculated at the final repayment exchange rate, the related payments were more than HUF 984 billion. With this single step, the value of total foreign currency mortgages held by households decreased to HUF 4,200 billion. Debtors opting in to final repayment under the program enjoyed a total principal relief of HUF 370 billion, equalling an average debt relief of HUF 2.186 million per customer. Average contract size equalled HUF 5.815 million at final repayment exchange rate and nearly HUF 8 million at market exchange rate. The averages suggest that final repayment also involved a large number of low-amount (HUF 2-3 million) loans.

5 Section 200/B of Act CXII of 1996



The majority (around 69%) of these debtors repaid their foreign exchange loans without using a forint replacement loan. Out of the total loans of HUF 426 billion applied for in relation to final repayment, institutions disbursed nearly HUF 313 billion to roughly 52,000 debtors by the end of February 2012. The size of replacement loans averaged HUF 6 million, i.e. customers mainly took out forint loans for the final repayment of relatively large foreign exchange debts. The average loan amount differed greatly by institution type: it was HUF 6 million at banks, HUF 5.4 million at credit cooperatives and HUF 17.8 million at financial enterprises. Consequently, customers intending to take out a large loan mostly turned to financial enterprises. The time of disbursement will greatly impact the future repayment amounts of forint replacement loans provided (average of HUF 6 million) as according to statistics, the interest rates of new forint loan contracts went up month by month in the period concerned.

Chart 6

Source: MNB

Regarding the quality of the remaining foreign currency loan portfolio after final repayment and the expected solvency of foreign currency loan debtors, exchange rate trends and the potential reduction of exchange rates are a key risk factor.

Exchange rate barrier – a new exchange rate fixing scheme This new exchange rate fixing program was launched in order to alleviate the burden increase stemming from exchange rate fluctuations. The goal of legislators with the related law was to manage the issues of foreign exchange borrowing, to dampen temporarily the impacts of significant exchange rate fluctuations, and thereby to make the financial obligations of foreign currency borrowers more predictable. The new law extended the duration of exchange rate protection from 36 months to a maximum of 60 months. Another significant change relates to the method of settling the repayment part above the fixed exchange rate. The new program distributes this burden between the debtor, the banks and the state. The first level of distribution involves the application of the following fixed exchange rates: 180 HUF/CHF for the Swiss franc, 250 HUF/EUR for the Euro and 2.5 HUF/JPY for the Japanese yen. When the fixed exchange rate is applied, the difference between the actual market exchange rate and the fixed exchange rate



is calculated in each month for both principal repayment and interest payments and the amount of the difference is transferred to the forint pool account. The exchange rate difference belonging to the principal element of the actual repayment is to be borne by customers while the difference belonging to interest payments are paid jointly by the government and the lending financial institution on a 50-50% basis. Consequently, the debtor is relieved from the obligation to pay this latter amount. Another safeguard for consumers is the use of maximum exchange rates, in particular 270 HUF/CHF for the Swiss franc, 340 HUF/EUR for the Euro and 3.3 HUF/JPY for the Japanese yen. Above these rates, debtors are not required to pay even the exchange rate difference for the principal part. This risk is run by the state. The key elements of the arrangement are summarized in the chart below:

Chart 7 Key elements of the exchange rate barrier mechanism

This double safeguard system provides tangible protection to participants against the repayment-boosting impact of exchange rate fluctuations. For customers that skipped final repayment and remained foreign exchange debtors, the new rules associated for pool account generation offer predictable repayments during the 5-year “protection period” that are far lower (by approximately 30%) than under the previous program. Second, the repayable amount also decreases owing to the partial relief of interest and handling charges. In case foreign exchange rates remain at the high level of recent months over the long run, some risks may also evolve in addition to short term benefits. Such risks could emerge if future repayments of the forint loan deriving from the pool account balance and that of the foreign exchange loan leads to a higher aggregate repayment

Case 2: higher than the maximum exchange rate

+

Case 1: lower than the maximum exchange rate

Current market exchange rate is

Exchange rate difference = market exchange rate – fixed exchange rate, of which

Chargeable to debtor: principal-related part

Chargeable to the government and the financial institution:

interest-related part

Exchange rate difference = maximum exchange rate – fixed exchange rate, of which

Market exchange rate – maximum exchange rate: Chargeable to the state

Chargeable to debtor: principal-related part

Chargeable to the government and the financial institution:

interest-related part



burden to debtors after the protection period. Recognizing the possibility of this risk, the government offered to take over from debtors the payment obligation above the “maximum exchange rate” as defined in the law. Thus in extreme scenarios the exchange rate risk is now run by the government.

Interest subsidies Interest subsidies to support home purchases Interest subsidy to support home purchases will be equally available for buying housing property that is under a defaulted or terminated mortgage, for indebted buyers to purchase a smaller home and also for loans taken out to replace foreign currency loans. Concerning the latter, this form of support is only available if the lender agrees to remit 25% of the loan that was converted into forints.

A number of government-backed or institutional solutions are available to tackle in part or in full the problems of foreign currency mortgage loans that convey the risk of long term indebtedness and high exposure for consumers. In the case of foreign currency loans still in place after final repayment and not in default for over 90 days (including customers not in default at all) the exchange rate barrier mechanism may help. For customers in default for over 90 days, the conversion of the loan into forint and the simultaneous remittance of a part of the debt may provide relief. It is important that customers who fell in default in excess of 90 days after 30 September 2011 should reduce the default below 90 days and use the exchange rate barrier facility. This is because those who do not achieve this and whose 90-day default occurred after the statutory date of loan conversion into forint (30 September 2011) will also be ineligible for the 25% debt remittance option. These customers can resort to the payment relief solutions offered by institutions.

National Asset Management Company The law regulating the programs of the National Asset Management Company (NAMC) has been in effect since 1 January 2012. The role of the NAMC is to help those mortgage debtors that are most in need – i.e. those that consistently fail to meet their payment obligations. Subject to certain conditions, the NAMC may purchase the home of these debtors, enabling them to stay in their property as tenants. An important element of this scheme is that once the NAMC buys the property, debtors should not owe any additional debt on it to the financial institution, i.e. the remainder of the debt should be remitted. As and when the person’s financial position is restored, the property can be repurchased. Properties serving as collateral for foreign currency or forint mortgages can equally be eligible for the program, regardless of whether the underlying contract is for a housing loan or a general purpose loan. As an important criterion, this program is only available for properties for which the financial institution already terminated the loan contract owing to excessive defaults and assigned the collateral property for foreclosure. Lenders assign properties for foreclosure quarterly, based on a quota specified in law. According to plans, the NAMC can buy 8,000 properties until the end of 2012 and up to 25,000 by the end of 2014. Based on the quota reported by financial institutions, the maximum number of properties that can be assigned for foreclosure was approximately 100,000 in December 2011. With a view to these figures, a narrow subset of defaulted debtors, i.e. only those really in need, can count on settling their

situation with the help of the NAMC. The HFSA has prepared a thorough online consumer guide6 to the NAMC.

Expected impacts

6 http://www.pszaf.hu/fogyasztoknak/hitelek/fizetesi_nehezsegek/NET.html

http://www.pszaf.hu/fogyasztoknak/hitelek/fizetesi_nehezsegek/NET.html



The table below summarizes the expected impacts on the related portfolios of laws aimed at aiding almost the full spectrum of foreign currency debtors. With a view to the number of potentially eligible customers, calculations show that until the end of 2012, these measures may not impact more than 90% of the end of September 2011 portfolio. Some market estimates suggests that the actual impact will be smaller, as not every eligible debtor will use these opportunities, but nonetheless will reach at least 70%. The government-backed schemes vary in terms of the foreign currency loan risk they tackle (exchange rate risk, foreign exchange interest rate risk) and the method by which they alter the debt amount. Another positive impact is that in the case of conversion to a forint contract, the new rules on transparent pricing must be applied upon contract modification and thus the protection provided by the new rules will prevail through the rest of the loan term. All in all, the exchange rate risks of debtors concerned decreases significantly. Depending on the scheme used, debtors were granted various degrees of debt remittance.

Table 2 Impact of government measures on the foreign exchange loan portfolio

Except for the data on final repayment, the table shows minimum and maximum estimates based on eligible portfolios for each program and the related anticipations of market players. The actual and expected impact of individual programs is calculated for the HUF 5,611,140 million retail foreign exchange mortgage portfolio as of 30 September 2011, a date before the launch of the government programs, as any subsequent portfolio change figure would reflect the impact of the measures.

Summary, identified risk items

Institutions offer both government-backed programs and their own schemes to foreign currency mortgage borrowers. With a view to the remaining foreign currency loan portfolio after the final repayment option and the deteriorating composition of certain forint loans compared to the June 2011 status, the effective management of payment difficulties will also remain a priority in the coming period. The renewed exchange rate fixing program offers two-stage protection against exchange rate impacts and the partial relief of payment obligations enabled by government-backed and institution-specific programs. At the same time, owing to the pool account loan, the arrangement conveys an unpredictable long-term risk associated with the future payment burdens of the loan part converted to forint. In the case of forint loans, the timely application of traditional means of active receivables management and payment relief, and the thorough knowledge of opportunities available for customers may aid effective management of consumer payment problems and prevent further portfolio deterioration. From a consumer protection standpoint, the conversion of foreign currency loans into forint loans may also convey certain long-term risks. New forint loans have a higher charge, which may lead to higher repayments. In case the lender institution exercised the term extension option upon conversion, the debtor is exposed to additional burdens not only because of the longer term but also owing to the higher total repayable amount. Still, the extension of the loan term is an extraordinary help to debtors in their current situation.



Stricter conditions for borrowing and, in respect of certain product types, the decreasing number of institutions that market them, along with reduced willingness to borrow may partially limit competition in the short run. While changes to product pricing practices may have a positive affect on transparency and simplicity in this environment, as a negative effect they may also increase prices through the interest premium charged on the reference rate. This phenomenon deserves constant attention from the HFSA. The lending policy of certain credit institutions focused on premium customer segments (high income customers with significant own resources and high quality collaterals) may pose further borrowing difficulties for consumers not fulfilling these criteria. Presumably this latter group of consumers will only be able take out loans at higher risk premiums and with multiple collaterals, or only have access to low amount loans.

1.1.3. Key topic: collection, receivables management: the HFSA’s regulatory approach to receivables management

The HFSA’s experience shows that several consumer-related anomalies (consumer protection risks and violations of consumer interests) derive from the fact that receivables management is not regulated properly and sufficiently regarding consumer protection considerations. The HFSA’s H1 2011 consumer protection risk report7 already called the attention to these discrepancies. It is obvious that the rules on payment defaults and receivables management set out in the code of conduct for financial organizations engaged in retail lending (Code of Conduct) are not sufficient. Legal regulations are missing concerning the minimum requirements of conduct with consumers, the scope of information to be provided to them, and the settlement obligations.

Owing to under regulation, the principle of fair and cooperative conduct is breached on several occasions in the receivables management and receivables trade market. In addition to professional players, the market is witnessing unethical practices and conduct that verges on the criminal, and receivables managers that often harass debtors. These claims are supported by submissions to the HFSA and its civil consulting network about overdue debt. The growing number of claims also underscores the need for consumer protection regulations: in 2010 and 2011, the quantity of these claims doubled.

The HFSA believes that proper regulations are needed to resolve these anomalies and therefore it compiled and submitted to legislators a comprehensive regulatory concept in March 2012. One key consideration and guideline that prevailed throughout the concept elaboration process was that legal security of lending and financing processes and a predictable legal environment are indispensable for an effective economy and economic growth. A precondition includes respect for private property, freedom of contracts, the mandatory force of contracts and society’s confidence in these basic tenets. The concept would build regulations on three cornerstones:

protection of rightful debtor (consumer) interests (transparency, fair procedure, fair information, etc.),

respect of lender interests, sustaining guarantees for prudent lending (the enforceability of undisputed, overdue receivables on signed contracts is a fundamental lender interest),

regulations must suggest contracts are obligatory and that the parties must comply with the conditions set out therein (“pacta sunt servanda” principle).

The HFSA’s receivables management concept rests on three pillars:

(1) The legal concept for receivables management, for the sake of market cleaning, redefines the scope of receivable buying and receivables management as financial activities; it would introduce mandatory HFSA licensing and stricter operational requirements for receivables management companies.

7 Financial consumer protection risk report, H1 2011, pp. 22-25



(2) The consumer protection chapter of the concept would set out rules of conduct for receivables management companies in order to eliminate consumer anomalies and would require the regular and thorough informing of consumers. The proposal also calls for the extension of provisions set forth in the Code of Conduct and their elevation to legal provision status.

(3) The third pillar includes the HFSA’s proposals on improving the effectiveness of judicial foreclosure proceedings by making them faster, more effective and more cost efficient through amending Act LIII of 1994 on Judicial Execution and the related provisions, accordingly.

Consumer protection rules are not only needed for the enforcement of primary consumer protection considerations. Compliance may indirectly encourage cooperation and consent between the parties (beneficiary and obligor) and help settle financial debts with desirable outcomes.

This risk report focuses on presenting the consumer protection part of the concept. The consumer protection part of the concept pertains to the management of receivables from financial services and sets out consumer protection requirements for receivables management institutions from the moment a default occurs to the collection of receivables, keeping in mind the requirements of gradation and proportionality.

Regarding their role, the proposed consumer protection regulations can be divided into two groups: rules of conduct and rules of informing. The rules of conduct outlined in the consumer protection chapter would set out requirements to receivables management institutions concerning their conduct with customers. In particular, these rules pertain to the way and frequency of contacting customers, the recording of telephone conversations and would require institutions to keep records of the receivables management process in order to enable tracking and subsequent control. The law would provide a 15-day grace period to the debtor following the sale of receivables to pay the debt without any additional costs. Foreclosure could only be initiated once this grace period is over without success. The regulations would require institutions to examine8 the possibility of bridging solutions in the case of mortgages. The proposed rules would allow the receivables management institution to decide on the bridging solution based on a check of the customer’s income and financial position. The HFSA also proposes the new regulations should require receivables management institutions to carry out settlement with the customer. Accordingly, the proposal sets out the detailed rules for settlement during the receivables management process, specifying the minimum contents of the settlement notice and the obligation to reimburse the customer for the residual value. Receivables managers are required to publish the rules of keeping contact with and informing customers along with the fees and costs charged during the procedures. Informing rules are intended to help consumer decision-making. According to the concept, once default occurs, the receivables manager would provide the debtor (and other consumers concerned) with the necessary information step by step through the entire process. According to the proposal, the receivables manager would be required to send out to the debtor several notification letters during the default period. E.g. the first letter should go out within 15 days after the occurrence of the default, then before the termination or after the transfer of the contract. These rules could ensure that the debtor regularly receives information on the debt and the elements thereof through the entire period of the default. This way, the debtor can track the changes of the debt and make informed and responsible decisions on how to manage the default. In addition, the receivables manager would be required to inform the debtor on the related charges, the rules of accounting for debts, the legal consequences of termination, the expected receivables

8 Naturally it does not mean that institutions would be required to provide bridging solutions. Yet they would be

required to examine whether they can provide such facilities in the framework set by their business policy.



management steps, the bridging options available to the customer (including government-backed programs), and the potential sale (transfer) of the receivables and settlement. The law would only set the minimum content of notification letters. The HFSA believes it could help the standardization of information provision by preparing two sample information letters which receivables managers would be required to attach to the notification letters sent to debtors (upon default and prior to contract termination). Further, the concept regulation also proposes that the receivables manager should inform the debtor on the outcome of the examination regarding the availability of a bridging solution. For mortgage contracts, the law should require the receivable manager institution to inform the customer on the option to sell the collateral property alone / jointly (where consent can be reached between the parties).

The initiatives outlined above intend to provide clear, verifiable requirements for the risk items embedded in the receivables management process. The scope of the consumer protection regulations proposed by the HFSA would encompass all receivables manager institutions, including - financial institutions that perform receivables management on their own right regarding the loans they provided, - receivables managers that perform receivables management based on a service contract for the lender financial institution, and - receivables buyers that carry out receivables management on their own right following the transfer of receivables. These consumer protection regulations would apply to the management of overdue receivables from financial services contracts9, noting that in some cases stricter consumer protection rules apply to the management of receivables from mortgage contracts. With a view to the considerable volume of defaulted loans, the proposal envisages that these would-be consumer protection rules should also apply to contracts in default upon the entry into effect of the new rules, whilst providing sufficient preparation time for institutions. Simultaneously to the enactment of the proposed new regulations, the HFSA would specify additional detailed rules in recommendations, providing institutions with consumer protection considerations to help design their receivables management procedures. One such recommendation could elaborate on the principle of fair and cooperative conduct or specify desirable and avoidable conducts in the receivables management process. The majority of avoidable conducts are definitions of typical examples of forbidden [unfair, deceptive and aggressive] behaviour as per the act on the prohibition of unfair business-to-consumer practices. In order to promote the quickest possible cleaning of the market and to strengthen the protection of consumers, the HFSA will publish in a recommendation its proposed detailed rules on receivables management until its legal and consumer protection concept on receivables management is approved. The HFSA will issue the draft recommendation for consultation.

9 At the same time, keeping its mandate in mind, the HFSA has called the attention of legislators that it is also

necessary to regulate the management of receivables deriving from non-financial services, preferably along similar guidelines.



1.1.4. Key topic: The consumer protection aspects of transparent pricing

1.1.4.1. The key elements of new regulations on transparent pricing enacted on 1 April 2012, assessment from a consumer protection aspect

The changes

10 to regulations that entered into effect on 1 April 2012 were intended to enact requirements

for transparent pricing. First, they maximized the APR for certain loan types and, second, they amended to provisions in the ACI on unilateral contract modification11. According to the explanation to the law, the objective of legislators was to increase the transparency of mortgage pricing. Further, the “new pricing rules enable customers to make informed borrowing decisions by comparing the various loan products of credit institutions.” From a consumer protection aspect, the detailed specification of rules for transparent pricing was a significant step forward; APR maximization reduces the exposure of customers and interest charges. As decided by legislators, the legal provisions on unilateral contract modification by financial institutions were tightened further. Effective 1 April 2012, the amended law specifies the exclusive method of interest rate change for mortgage loan contracts. Pursuant to the new provisions, in the case of loan contracts secured by a property mortgage, financial institutions can change interest rates based on a reference interest rate. If no reference interest rate is specified, the interest rate period is fixed at 3, 5 or 10 years as stipulated in the loan contract. Further, the law declares that with mortgage loan contracts, financial institutions are not allowed to charge any regular fees or costs on top of interest as long as the consumer performs in compliance with the contract, and is not allowed to offer discounted interest rate upon contract signing. From a consumer protection standpoint, the stipulation of pricing linked to a reference interest rate in a law is a major step forward and harmonizes with thoughts on the need for transparent pricing outlined in former HFSA consumer protection risk reports

12.

Linking pricing to a reference interest rate, whilst fixing the interest period at 3, 5 or 10 years makes pricing more predictable and clearer for customers. These rules clearly reduce the elbowroom of institutions regarding contract modification and pricing. The prohibition of charging any regular fees and costs on top of interest and of offering a discounted interest rate for a limited period of time all reduce the exposure of customers and the charges payable. The new rules enable customers to evaluate specific offers from institutions prior to making a choice between loan products. They can compare the offerings of various institutions and make responsible decisions on the loan product that best suits their needs based on the reference interest rate and the fees charged by banks. Pricing with an interest period fixed at 3, 5 or 10 years is also considered a step forward by the HFSA. This new pricing approach makes it easier for customers to exercise their right of termination or changing banks (through early payment or loan replacement) before the next interest period in case the interest rate is changed unfavourably for them.

10

In order to provide for the conditions of transparent pricing, effective 1 April 2012, Act CXLVIII of 2011 on the Amendment of Financial Regulations in Connection with the Restriction of Credit Interest Rates and Annual Percentage Rate and for Ensuring Transparent Pricing Mechanisms amended the ACI. 11 In accordance with the agreement made between the Government and the Hungarian Banking Association and pursuant to paragraphs (2)-(3) in Section 181 of Act CXCIII of 2011 on Investment Fund Managers and Collective Investment Schemes, the new provisions entered into effect on 1 April instead of 1 January 2012. 12 The HFSA’s Financial Consumer Protection Risk Report, H2 2010, page 6; Financial Consumer Protection Risk Report, H1 2011, pp. 12-13



A) Pricing with a reference interest rate The related section of the ACI specifies the reference interest rates (3, 6, 12-month BUBOR, EURIBOR, LIBOR) to be applied with mortgage loan contracts and stipulates the detailed rules of pricing based on a reference interest rate. The law only allows the unfavourable change of the interest surcharges upon non-compliant performance by the customer, cases of which the ACI specifies in detail. Compared to former rules, the new laws represent a major step forward. At the same time, in current general market practice, upon non-performance by the customer, financial institutions can compensate for their increased risks by charging default interest. By allowing the institution to increase the surcharge on top of that, regulations enable providers to cause disadvantage to the debtor in two ways for a single breaching of contract. Further progress could be achieved by changing regulations in order to prevent institutions from increasing surcharges upon customer defaults (or late property insurance premium payments) as allowed by law.

B) Pricing with a fixed interest period Regarding loan contracts secured with property mortgage (hereinafter mortgage loan contracts), the other pricing option is to fix the interest rate period at 3, 5 or 10 years as specified in the loan contract. The new regulation of loan contracts with an exchange rate period fixed at 3, 5 or 10 years (hereinafter: fixed interest period contracts) represents progress from a consumer protection aspect because this pricing approach is more transparent and predictable for customers. The new regulation also gives customers more freedom by enabling them to terminate the loan contract and choose early repayment free of charge upon the cusp of the next interest period in case the interest rate is changed adversely for them. With a view to consumer protection, it would be worth contemplating the further specification and tightening of regulations by regulating in detail the reasons and objective circumstances under which a financial institution is entitled to change the interest rate unilaterally and adversely for the customer upon the cusp of the next interest period.13 For customer information purposes, the HFSA published on its home page an informative guide to transparent pricing.14

1.1.4.2. Diverse regulatory environment

In essence, the new rules on pricing based on a reference interest rate or a fixed interest period are applicable to contracts signed after 1 April 2012. The new regulations enable customers with an existing mortgage loan contracts to initiate contract modification by 31 August 2012 in order to switch to the new pricing mechanisms. Financial institutions are not allowed to reject customer requests for contract modification or re-contracting. In fact, institutions are subject to a contract modification obligation. Further, they are not allow to charge fees, charges or commissions for changing, extending or replacing a contract.

Regarding the existing loan portfolio (unless the customer initiates the modification of his mortgage loan contract), the rules from before 1 April 2012 shall continue to prevail. The provisions of the Code of Conduct remain in effect for all retail loan types in respect of the institutions that signed it. At the same time, the Code of Conduct also includes out-dated regulations, with many of its provisions having been made irrelevant by subsequent amendments to laws.

13 Section 210 of the ACI shall not be applicable to loan contracts secured with property mortgage. The new regulations have overruled paragraphs (1)-(4) in Section 210/A. 14

http://www.pszaf.hu/fogyasztoknak/hitelek/korultekinto_hitelfelvetel/atlathato_arazas.html



While the positive changes in regulations must be underlined, having reviewed the legal environment in effect before 1 April 2012 and the ACI provisions that entered into effect on that day, it is fair to say that a convoluted legal environment evolved in respect of unilateral contract modification. Such rules are illustrated in Tables 4 and 5 below.



Table 3 Rules pertaining to unilateral contract modification in effect before 1 April 2012

Contract type Act on Credit Institutions and Financial Enterprises Government decree

Code of conduct

15

unilateral contract modification adverse

for the customer, pricing principles

16

unilateral contract modification

adverse for the customer

17

methods of interest rate

change, reference

interest rate18


change, fixed interest

period19

conditions of interest rate

change20

(reasons list)

unilateral contract

modification adverse for the

customer

Loan contract signed with a consumer

applicable not applicable not in effect, not applicable

not in effect, not applicable

not applicable

applicable

Financial lease contract signed with a consumer



not applicable

applicable

Housing mortgage contract signed with a consumer

not applicable applicable not in effect, not applicable


applicable applicable

Financial housing lease contract signed with a consumer

not applicable applicable not in effect, not applicable



General purpose mortgage contract signed with a consumer



not applicable

applicable

15 Overwrote the provisions of the Code of Conduct on several occasions 16 ACI, Section 210, paragraphs (3)-(5) 17 ACI, Section 210/A, paragraphs (1)-(4) 18 ACI, Section 210/B, point (3) a, in effect since 1 April 2012

19 ACI, Section 210/B, point (3) b, in effect since 1 April 2012

20 Government decree no. 75/2010 (XII.15)



Table 4 Rules pertaining to unilateral contract modification effective 1 April 2012

Contract type Act on Credit Institutions and Financial Enterprises Government decree

Code of Conduct

21

unilateral contract modification adverse

for the customer, pricing principles

22

unilateral contract modification

adverse for the customer

23


change, reference

interest rate 24


change, fixed interest

period25

conditions of interest rate

change 26

(reasons list)

unilateral contract

modification adverse for the

customer

Loan contract signed with a consumer

applicable not applicable, not in effect

not applicable

not applicable

not applicable

applicable

Financial lease contract signed with a consumer

applicable not applicable, not in effect

not applicable

not applicable

not applicable

applicable

Housing mortgage contract signed with a consumer

not applicable not applicable, not in effect

applicable applicable (no reference to

Government decree)


Financial housing lease contract signed with a consumer


not applicable

not applicable


General purpose mortgage contract signed with a consumer


applicable applicable (legal provisions to limit contract modification are

missing)

not applicable

applicable

21 The provisions in the Code of Conduct were overwritten by laws on several occasions 22 ACI, Section 210, paragraph (3)-(5) 23 ACI, Section 210/A, paragraphs (1)-(4), overruled effective 1 April 2012 24 ACI, Section 210/B, point (3) a; applicable to contracts signed after 1 April 2012 or contracts changed until 31 August 2012 (ACI, Section 234/H, paragraphs (1)-(2)

25 ACI, Section 210/B, point (3) b; applicable to contracts signed after 1 April 2012 or contracts changed until 31 August 2012 (ACI, Section 234/H, paragraphs (1)-(2)

26 Government decree no. 275/2010 (XII.15) on the conditions of unilateral changes to contractual interest rates



The tables above illustrate that regulations generated a confusing situation where the rules of unilateral interest rate change are unclear in the case of mortgage (housing and general purpose) loan contracts with a fixed interest period, as described below:

a) regarding housing mortgage loan products, the ACI fails to declare the applicability of Government decree no. 275/2010. (XII.15.);

b) general purpose mortgage loan contracts are out of the scope of this government decree; c) for general purpose mortgage loan contracts, solely the provisions on unilateral contract

modifications set out in the Code of Conduct are relevant; d) ACI provisions on pricing principles are only applicable to loan contracts (unsecured loans) and

financial lease agreements (ACI, Section 210) signed with customers, but not to mortgage loan contracts.

Therefore, in the HFSA’s opinion, it is advised to supplement and further specify the legal provisions pertaining to the pricing of mortgage loan contracts with a fixed interest period so that it harmonizes with the original intent of legislators. The reasons are as follows: Formerly the provisions of the Code of Conduct and the ACI’s guarantee rules on pricing principles and the “reasons list” had to be applied together in the case of general purpose mortgage loan contracts. With the new regulations, the aforementioned ACI provisions are not applicable; institutions are only bound by a Code of Conduct as no laws stipulate preconditions for interest rate changes. As a result, regulations concerning the method and scope of interest rate changes for general-purpose mortgage loans with a fixed exchange rate period are only set out in the Code of Conduct, a result of self-regulation in the sector. It should also be mentioned that the new laws do not stipulate explicitly the mandatory application of the “reasons list” (Government decree no. 275/2010 (XII.15)) for mortgage loan contracts with a fixed interest period. In order to implement in full the intent of legislators to ensure transparency, the existing legal environment calls for supplements. Therefore, in order to prevent future violations of customer interests and to provide for the consistency of regulations, the HFSA already initiated the further specification of regulations and the elevation of the rules set forth in the Code of Conduct to legal provision status.

1.1.4.3. Impact of regulations on market supply

Another reason that makes the establishment of a proper regulatory environment indispensable is that institutions shape their pricing practices and policies with a view to and compliance with legal provisions After the enactment of the new law, the HFSA closely monitored the pricing practices of financial institutions and the conditions of newly sold loan products. We found that legal provisions already impact the market before they would officially enter into effect. Based on information available to the HFSA from data provision by institutions, it is clear that new, compliant products and product conditions appeared gradually

27 on the retail forint loan market, seemingly as part of an

adaptation process, after the enactment of the new law. Pursuant to the new regulations introducing the maximum APR, the APR of loans provided by institutions must not exceed the central bank interest rate by more than 24 percentage points. This rule equally applies to mortgage loans, consumer loans and vehicle loans. In the case of current account loans, credit card loans and consumer loans granted for the purchase of durable consumer goods and similar items, the maximum APR is set at 39 percentage points above the central bank interest rate. Based on available data,

27

The postponing of the new law’s entry into force from the original 1 January 2012 date to 1 April 2012 helped preparation.



the level of compliance with APR requirements was at least 90% at the end of March 2012 in the case of most product types available on the market. Apparent exceptions include personal loans and credit card products.

Chart 8

Source: HFSA

Although according to interest rate statistics

28 on contracts signed in specific months, the weighted

average interest rate of personal loan contracts signed in Q4 2011 reflects a definite decrease, new APR regulations may mostly bring tangible pricing limitations to short-term personal loans, in particular quick loans. The reason is that in the case of small loans granted with a short term, the existing 46% APR cap may become effective easily owing to charges independent of the loan amount. Therefore, in particular institutions engaged in personal lending and the credit card business must actively review their current terms and conditions and align them to the new regulations.

The HFSA will continue to monitor closely the real-life application of legal provisions aimed to ensure pricing transparency and will take actions as necessary upon detecting non-compliant practices.

In the case of mortgage loans, the pricing rule that requires the application of a reference interest rate or the fixing of the interest period while eliminating all additional interest-type charges also strives to improve transparency. In addition, the new legal provisions prohibit the offering of discounted interest rates for limited periods.

28

Source: MNB



Chart 9

Source: HFSA



1.2. Household deposits, savings, account management and related services

1.2.1. Changes in the regulatory environment

From a consumer protection aspect, there were no significant changes in regulations in respect of deposits or account management in H2 2011.

1.2.2. Market trends

In 2011, the rate of savings increased significantly. As previously, the bulk of savings of Hungarian households are held in deposit products offered by credit institutions. Within the financial assets of households, the ratio of deposits continued to grow in H2 2011. Within deposit and other money market savings, simple, short-term deposit products have remained a significant subset. At the same time, access to household savings became increasingly important for service providers: competition for household funds intensified among financial subsectors (credit institutions, insurers, capital market and pension, healthcare and voluntary self-support funds) and the state.

Chart 10

Source: MNB



Chart 11

Source: MNB

In 2011, owing in part to liquidity and profitability considerations and in part to the decreasing risk tolerance of service providers, the liabilities side activities of credit institutions gained significance. On the retail market, institutions are expected to strive to exploit the business potential of liabilities products in order to offset the setback in lending deriving from lower demand and other factors. On the supply side, one manifestation of this is that the business policy decisions of financial institutions are not only targeted at new deposits but also at retaining existing customers and encouraging the use of other banking services. Pricing, encouragement of customer activity It is apparent that the number of products with a high, special offer interest rate is growing on the market. In the case of simple deposit products, this was not the only change: products where the higher, special interest rate is offered for newly deposited funds that generate portfolio increase have again come to the fore. However, generating new deposits relies on ever more sophisticated practices than before: with several products, eligibility for the special interest rate not only requires the depositing of new funds but also more active current account usage or the use of additional account-related services on the part of the customer. Nevertheless, a higher, special interest rate was available on several products in H2 2011, too, for customers committing to more active account usage or to the use of account management services they did not have before placing the deposit. The following unique factors also contributed to new forint deposit placements in late 2011: conversion of foreign currency deposits to forint deposits owing to the extraordinary exchange rate; temporary depositing of amounts raised from the termination of other investment or savings products in order to finance final mortgage repayment; and the payment of year-end bonuses. The remarkable increase of the average interest rates of deposits placed for less than one year was another sign of intensifying competition after July 2011, reducing the gap between 3-month BUBOR and the average interest rate of deposits. The interest rate increase in this product segment at the end of 2011 and in early 2012 indicated further intense fund collection efforts.



Chart 12

Source: MNB

In order to help preliminary information gathering by customers and to increase transparency, the HFSA operates a deposit and savings finder tool on its website since the summer of 2011. The tool contains information drawn from the mandatory data provision of institutions on time deposit products, bundled products, the deposit portion of long-term investment contracts (hereinafter LTIC) and savings accounts. Products, innovation As a consequence of intensifying competition for household savings, the role of innovation (like that of attractive pricing) became more significant, leading to the launch of new types of deposit products. Clear market trends in Hungary include the widening selection of deposit products bundled with investment products, and the return, and modification to include new product features of structured deposits In the case of products bundled with investments, the core deposit product is supplemented with an investment product. Within these products, investment funds remained the most frequently used type of investment in H2 2011. The bonds of specific credit institutions and unit-linked life insurance offerings continued to represent nearly identical portions of bundled products, but their share was much lower than that of investment funds. Furthermore, few products involved other investment assets, e.g. structured bonds or mixed life insurance offerings. Structured deposits mostly sold to retail customers are becoming increasingly popular in Hungary. In addition to extensive heterogeneity, the main characteristics of these products can be summarized as follows: These deposits belong to one of the following two types:

o institutions set minimum framework conditions in advance and then specify several product parameters (e.g. term, interest rate, market reference index) in the actual contract based on individual customer needs;

o institutions publish an offer specifying all product features and conditions in advance. The products are typically available in forint, euro or US dollar; The term is between 1 and 3 years; terms shorter than 1 year are the most frequent options. In many cases, the minimum amount to be deposited is calculated in two ways: an initial amount is

set for entering the scheme and the amount to be deposited by individual customers is also defined; The launch of the scheme is conditional as the minimum required capital must be collected at

institution level; There are no standard or typical practices for setting the market reference index and thereby the

interest rate. It may be linked to forint exchange rate fluctuations against a foreign currency, to



various reference indices or to movements of specific stock price(s). Consequently, returns on structured deposits may vary significantly.

Account management Regarding account management, the related services and debit card offerings, trends started in the past twelve months continued in the period under review. In line with the HFSA’s expectations, parallel to the growing importance of household funds, account products and the related services also gained significance for institutions as they represent business lines that generate important fee-based revenues. With the number of bank branches decreasing and internet penetration increasing29, electronic sales channels grew in importance.

1.2.3. Identified problems and risk items

Rules of informing in respect of long-term investment contracts The HFSA elaborated consumer protection principles and requirements for tackling the risks identified in its H1 2011 financial consumer protection risk report30 in respect of long-term investment contracts, in particular informing obligations, and published these in CEO letter no. 1/201131 on the consumer protection aspects of pension savings accounts and long-term investment contracts. In the HFSA’s opinion, it is of outstanding importance that financial institutions inform their customers with the utmost care about the features and risks of LTICs, and about the related taxation laws both before contract signing and before the planned termination of the contract. Complex savings products In the HFSA’s opinion, the impartial informing of customers in relation to deposits bundled with investment products continues to raise consumer protection issues, and so do certain features of these products, especially the different level of risk associated with deposits and investment products and the time horizon of investments. Another problem is that customers only face the long-term nature (with e.g. a 20-year life insurance) and actual risks (possibility of losing the principal, fluctuating returns) of investment products subsequently. However, the HFSA also found positive changes in 2011 in the informing practices of some institutions in respect of bundled products32. In the HFSA’s opinion, consumer protection concerns may arise in relation to structured deposit products if the related customer information materials fail to highlight or insufficiently points out the complexity of these products and their associated risks. Furthermore, it can also cause problems if credit institutions give the name “deposit” to their structured products where the payback of invested capital is not guaranteed even if a pre-defined, fixed interest will be paid at the end of the term.

The growing complexity of deposit products may also pose consumer protection risks as the lack of quality information provided may increase the risk of mis-selling, especially if sales volumes of these products takes off. Therefore, it is of utmost importance that financial institutions inform their customers with due care about the features and risks of these products. The HFSA monitors the practices applied at institutions on an ongoing basis and, if lacking, formulates sound and exemplary consumer protection practices that the institution can then follow.

29 This is also supported by Charts M.3 – M.7 30 The HFSA’s H1 2011 financial consumer protection risk report, page 27 31 http://www.pszaf.hu/data/cms2325103/vezkorlev_11_2011.pdf 32 The HFSA found that certain institutions drafted their product information and/or terms and conditions with a view to the informing and cautioning practices set out in the Deposit and savings finder program on the HFSA’s website.

http://www.pszaf.hu/data/cms2325103/vezkorlev_11_2011.pdf



Risks associated with complex savings products are identified in a report33 drafted by the consumer protection working group of the European Banking Authority (EBA) as a key European product innovation trend that deserves consumer protection attention. The review of the MiFID directive is currently underway. In order to implement EU-wide, standardized investor protection, the scope of the draft directive is planned to be extended to structured deposits so that such products are subject to the same informing, sales and procedural rules as investment offerings. The underlying rationale is that with a view to their main features, structured deposits qualify as investments rather than deposit products. From a consumer protection standpoint, the HFSA considers this a forward-looking regulatory initiative. With a view to expected changes in European regulations, the HFSA contemplates recommending to institutions the application of investor protection rules set out in the MiFID for the sale of financial products (including, among others, the rules on informing and obtaining information) also for structured products. This approach could ensure that the consumer protection objectives set by the HFSA are quickly enforced on the Hungarian market. Sales channels, account management It may raise concerns if the shift in sales channels (e.g. the decreasing number of branches where customers are received) is accompanied by lower availability for consumers and lower service quality. This trend in itself may foreshadow the growth of customer complaints.

A significant portion of customer complaints about account management submitted to the HFSA in H2 2011 concerned service quality, administrative errors and the extent of fees, commissions and charges. Within complaints submitted to institutions in the period under review, the ratio of complaints about banking card transactions and account management significantly exceeded the same ratio within claims submitted to the HFSA: at institutions, this ratio was 40% of total customer claims and thus represented roughly 62,000 customer complaints. Most of these were about balance statements and order fulfilment, record keeping and administrative errors, and the rate of commissions, fees and charges.

It remains a problem that the fee structure of account products and related services offered by institutions is opaque and difficult to compare. Customers continue to receive little information34 on the conditions of changing service providers.

In order to inform customers, support conscious customer decisions, encourage competition and improve transparency, the HFSA began to implement an online tool that helps customers choose an account product and the related services. The program will draw information from mandatory data provision by institutions, similarly to the Loan and lease product and Deposit and savings product selection tools already available on the HFSA’s website. In the course of elaborating the application, the HFSA regularly consults with the Hungarian Banking Association. Until the December 2012 program launch, the HFSA will regularly publish updated product comparison tables on its website. The tables will compare the account management offerings and related products (debit cards, electronic banking services) of key financial institutions, also outlining the main product parameters.

33

http://eba.europa.eu/Publications/Consumer-Protection-issues/Financial-Innovation-and-Consumer-Protection.aspx 34 This is also supported by a related survey published by the European Commission in February 2012 (http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/164&format=HTML&aged=0&language=EN&guiLanguage=fr).

http://eba.europa.eu/Publications/Consumer-Protection-issues/Financial-Innovation-and-Consumer-Protection.aspx

http://eba.europa.eu/Publications/Consumer-Protection-issues/Financial-Innovation-and-Consumer-Protection.aspx

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/164&format=HTML&aged=0&language=EN&guiLanguage=fr

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/164&format=HTML&aged=0&language=EN&guiLanguage=fr



II. INSURANCE SECTOR

2.1. Regulations

From a consumer protection aspect, the most significant change in regulations was the enactment of Decree no. 21/2011 of the Ministry for National Economy on the bonus-malus system, the rules of rating in the system and issuing claim history certificates, effective 1 July 2011. The introduction of the accident tax effective 1 January 2012 also deserves mention.

2.2. Market trends

Total premium revenues in the insurance sector amounted to almost HUF 815 billion in 2011, 3.29% down on the previous year’s figure. Traditional life insurance and non-life revenues equally showed a declining trend (with the latter, MTPL and Casco products were the main revenue deteriorating factors). In the life sector, moderate growth continued to be limited to unit-linked life insurance products. As before, the majority (nearly 55%) of total insurance sector revenues continue to derive from life insurance offerings. Looking at the entire sector, 70% of premium revenues concentrate at the six largest insurers

35.

Market concentration is much stronger in the non-life sector (with the top 5 insurers representing 78% of premium revenues). Concentration in the life sector is lower. The chart below shows premium revenue trends in the life and the non-life sector. In the life sector, the ratio of regular premium products is extremely high. Furthermore, from the point of view of consumer protection it is of outstanding importance that the vast majority of revenues from single premium contracts come from unit-linked insurance offerings.

Chart 13

35 AEGON, Allianz Hungária, Generali-Providencia, Groupama Garancia, ING, UNIQA



Source: HFSA

2.3. Insurance products

Insurers responded sensibly to the domestic insurance market’s arrested development. Insurers mostly attempted to offset the near-stagnation by making alterations to existing products, expanding new business lines, and moderating entry into foreign markets. In the spring of 2011, the HFSA published an analysis titled “The Hungarian insurance market on an international benchmark”36. The document attempts to show, and explain where possible, the differences and similarities between the Hungarian and international insurance markets. The analysis found that in an international comparison, demand for Hungarian insurers’ products is average and in line with Hungary’s overall level of development, and that there is room to increase the insurance penetration rate in the future. The insurance sector’s ability to attract customers depends on customer satisfaction with services, which in turn is highly impacted by the features of products offered by insurers. The analysis discusses the option to standardize retail insurance products as a potential tool to promote new insurance contracts. The HFSA intends to elaborate further concept plans in order to enable the comparison of retail insurance products and to improve product transparency.

2.3.1. Life insurance products

Unit-linked insurance products continued to gain ground at the expense of traditional, mixed life insurance offerings. In 2011, as much as 67% of life insurance premium revenues came from unit-linked insurance.

a. Unit-linked insurance products

Regarding unit-linked life insurance products, former financial consumer protection risk reports37 discussed extensively the risks and anomalies stemming from the complexity of the product, the interest in sales and the related pressure, and from the opaque fee structure. In order to reduce consumer risks, the HFSA strives to elaborate forward-looking solutions in cooperation with the Association of Hungarian Insurance Companies (MABISZ) in respect of the topics outlined below. Regarding consumer risks associated with unit-linked life insurance products, the HFSA reviewed the option of issuing a supervisory recommendation for the related offerings. In preparation for this effort, the HFSA gathered the findings of inspections carried out since 2009 along with those identified discrepancies and negative practices that irritate customers the most. In order to resolve the identified problems, the HFSA intends to orientate insurers by issuing a recommendation on unit-linked insurance products. The elaboration process will involve extensive consultations with professional associations and organizations. The expected release date of the recommendation is Q3 2012. In an effort to diminish consumer risks concerning the comparability of unit-linked life insurance premiums and to foster the further development of the total cost index (TCI), an indicator developed in a self-organization effort within the sector, the HFSA drafted a consultation paper titled “About the general total cost index for savings and investment products” which it published on its website.

38

Further development envisages comparability with other savings and investment products offered by various finance subsectors that compete with unit-linked insurance offerings. Therefore, the HFSA proposed in the consultation paper the elaboration of a general, interest gap-type cross-product and cross-sector indicator with standardized contents, the General Total Cost Index (GTCI). The HFSA is

36

http://www.pszaf.hu/data/cms2302995/mo_bizt_piac_nemzetkozi_osszevetes.pdf 37

The HFSA’s Financial Consumer Protection Risk Report, H2 2010, pp. 37-38; the HFSA’s Financial Consumer Protection Risk Report, H1 2011, pp. 28-29 38 http://www.pszaf.hu/bal_menu/szakkonz/hazai_konzultaciok/szakkonz_2011/koltsegmutato_111109.html

http://www.pszaf.hu/data/cms2302995/mo_bizt_piac_nemzetkozi_osszevetes.pdf

http://www.pszaf.hu/bal_menu/szakkonz/hazai_konzultaciok/szakkonz_2011/koltsegmutato_111109.html



currently assessing the responses submitted in the public consultation process. While the vast majority of respondents do not object to the introduction of the GTCI, further harmonization is expected regarding the topic before a final stand is adopted.

b. Loan collateral/repayment insurance products

Loan collateral insurance may serve as collateral for debts arising from a loan: if the debtor is unable to make repayments, the insurer takes over this burden or the settlement of the debt, provided certain conditions are fulfilled. While this product arrangement protects consumer interests, it also conveys several cumulative risks, as discussed also in the H2 2010 Financial Consumer Protection Risk Report39. The source of the problem is the fact that these contracts are mostly concluded in the form of a group insurance contract but applicable laws fail to provide rules for this form of insurance. One feature of these arrangements is that the insurance contract is actually concluded between the insurance company and the lender institution. This raises consumer protection concerns, as there is no relationship between the consumer (the insured party) and the insurer when the contract is signed: the declaration of joining the insurance contract is made at the financial institution. What is especially problematic is that this declaration is often incorporated into the loan contract, leaving no choice for the customer on whether to take out loan collateral insurance or not. Furthermore, owing to the nature of the underlying legal relationship, the consumer as insured party is not informed properly upon contract signing, often not being informed even of contract terms and conditions. It especially raises concerns that consumers are not informed of the option to terminate the contract within 30 days after being notified of contract conclusion. The reason is that pursuant to applicable provisions40, the insurer is not required to call the attention of the insured to this option, unless the insured is a private person. (Group insurance contracts are not only applied with loan collateral or repayment insurance, but with a number of other products, e.g. group accident insurance taken out for banking cards.) The HFSA welcomes that the technical draft of the new Civil Code

41 strives to settle the problem of

missing regulations for group insurance contracts, an issue already raised in former financial consumer protection risk reports. First, the draft attempts to regulate this form of insurance by introducing and defining a new term and, second, it enables the extension of the obligation to inform the insured also to the contracting party. In the commenting phase of the Civil Code amendment process, the HFSA submits comments and proposals to the draft in an effort to ensure that the final version will bring a real solution to identified anomalies. One risk identified in respect of loan collateral insurance for loss of employment relates to scenarios where employment is terminated on mutual agreement between employer and employee. In this case, some insurers only make service payments if such mutual agreement was based on reasons listed in the general contract terms and conditions (e.g. reorganization, headcount reduction, termination of business without legal successor, lasting disability of the employee). Thus, in a similar scenario, consumers must be very careful to make sure that the reason specified as the cause of terminating their employment on mutual agreement is also listed under eligible reasons in the insurance contract, as the insurer can only make service payment if this requirement is fulfilled. The HFSA is not in a position to interpret the contract and specify its legal effects, i.e. to declare the insurer’s payment obligation under consumer protection proceedings. Only civil courts are entitled to do this, but consumers can also turn with such problems to the Financial Arbitration Board (FAB), an alternative forum for settling disputes.

The FAB issued a press release42

calling the attention of consumers to the general lessons from legal disputes related to loan collateral and repayment insurance products that offer coverage in the case of

39 The HFSA’s Financial Consumer Protection Risk Report, H2 2010, pp. 38-39 40

IA, Section 167 41

The technical draft of the new Civil Code (which also includes amendments that affect contracts signed with financial organizations) was prepared by the Civil Law Codification Editorial Committee and then published by the Ministry of Public Administration and Justice in the spring of 2012. The bill is expected to be submitted to the government and then to Parliament in May. It may be passed in the autumn and then enter into effect after a one-year preparation period. 42 http://www.pszaf.hu/hirek_ujdonsagok/11_09_21-PBT-munk_nelk_bizt.html

http://www.pszaf.hu/hirek_ujdonsagok/11_09_21-PBT-munk_nelk_bizt.html



unemployment. The press release also advised customers to specify the reason of terminating employment in the declaration of mutual consent, as insurers will only consider the termination of employment an insurance event (and take over the payment obligation) if this condition is fulfilled.

c. Loans bundled with unit-linked life insurance

Property loans bundled with unit-linked insurance continue to convey integrated risks. The penetration of these products is illustrated in the chart below:

Chart 14

Source: HFSA – Cumulated quarterly premium revenues.

The H2 2010 Financial Consumer Protection Risk report analyzed the integrated risks of property loans bundled with unit-linked insurance products. These risks stem from the fact that the money and capital market risks also arise in respect of insurance products. If the situation on money and capital markets remains unfavourable in the long run, the endowment of the debtor’s unit-linked insurance does not cover fully the loan principal or does not cover it at all. Unit-linked life insurance contracts without capital/return protection or guarantee represent a major risk and so do similar contracts where the investment units were typically not invested in balanced and safety-oriented asset funds.

In order to call the attention of the public to consumer risks, the HFSA is about to formulate informing requirements in an upcoming unit-linked recommendation. The document will call on insurers to specify clearly the capital and return protection

43 facilities that may be undertaken in the investment

policy of investment funds and to indicate it consistently in the name of the asset fund.

2.3.2. Non-life insurance products

In the domestic market, the non-life insurance sector remains characterised by intense competition. In combination with diminishing risks in some subsectors (e.g. MTPL), competition resulted in ongoing premium decrease and thus an additional decline in revenues.

43 Based on paragraphs (6) and (7) in Section 132 of the Insurance Act



The decline of non-life revenues accelerated; revenues fell from HUF 395 billion in 2010 to HUF 370 billion in 2011. The factors that adversely impact the vehicle market linger on, causing further contract portfolio shrinkage in most subsectors. Competition in the vehicle insurance market continues to be fierce. Owing to this and to diminishing risks, decreasing average premiums is typical. While the decline of average premiums in the non-life sector can be considered beneficial from a consumer protection standpoint, in the HFSA’s opinion it may raise concerns concerning future service quality.

Chart 15

Source: HFSA

a. Motor third party liability insurance (MTPL) With the enactment of the decree44 on the bonus-malus system, the rules pertaining to rating and to the release of claim history certificates effective 1 July 2011, insurers are no longer required to issue a certificate of claim history and bonus-malus rating after the termination of the contract. In order to enable the management of data in a transparent manner, paper-based certificates have been replaced with the electronic claim registry system. The purpose of establishing the Centralized Claim History Inventory System (Hungarian acronym: KKNYR) was to enable insurers to use claim history data more effectively for risk-based premium calculations. When a new contract is signed, the insurer determines the preliminary bonus-malus rating based on a declaration by the vehicle operator. If no such declaration exists, the contract is preliminary assigned to the A00 class. Paper-based certificates are only acceptable in relation to insurance contracts taken out subject to obligations set in another Member State. For these insurance contracts, insurers are required to accept the claim history certificates. Pursuant to the decree referenced above, the insurer must retrieve historic data regarding the operator’s bonus-malus rating from the electronic claim history inventory system. According to regulations, if the data needed for rating a contract cannot be identified in the electronic claim history system within sixty days after the commencement of the insurance period, the insurer must assign the contract to the A00 class and set the premium accordingly, irrespective of the former bonus rating. The HFSA feels this regulation fails to observe sufficiently the interests of vehicle operators, and therefore initiated the amendment of it at legislators. The amendment proposed by the HFSA suggests that in case the insurer is only able to find the data needed for bonus-malus rating after sixty days following the beginning of the insurance period, it should be still required to re-assign the contract and re-calculate the premium based on the new information. The new rating and premium shall be in effect retrospectively from the commencement of the insurance period. As a new obligation, the accident tax was introduced effective 1 January 2012. Vehicle operators must pay this tax via their insurers. The MTPL premiums announced at the end of October 2011 did not yet

44 Decree no. 21/2011 (VI.10) of the Ministry for National Economy



include the 30% accident tax which insurers calculated and billed to customers subsequently after January 2012. The responsibility of collecting the new tax rests with insurers.

The HFSA provides concise information to consumers on the rules pertaining to the new tax on its website in a document titled “What you should know about accident tax”

45. The material points out that failure

to pay the accident tax is especially risky as the law requires insurers to credit received payments first to accident tax and then to premium balances. Consequently, a negative balance may occur, leaving the insurance uncovered. Even if the customer merely fails to pay properly, e.g. by paying an amount that is lower than the sum of the premium plus the accident tax, it may lead to the termination of the insurance contract.

Campaign on year 2012 MTPL premiums Competition on the MTPL market has remained intense owing, among other factors, to the fact that change of service providers by customers is greatly encouraged by the transparency and comparability of premiums and the availability of various premium calculation tools. All this is a favourable development from a consumer protection aspect. Based on the HFSA’s findings

46, in the course of the MTPL campaign on year 2012 premiums, vehicle

operators signed a total of 1.026 million new contracts (including 116,000 fleet contracts). The number of operators that actually changed insurers was around 738,000 as 288,000 customers signed a new contract with their existing insurer. The trend of fewer and fewer customers changing insurers in the campaign period year by year continued: in 2009, 1.5 million new contracts were signed; in 2010 this was down to 1.23 million, and last year less than half as many customers changed insurers as in the peak year. Similarly to previous years, the decrease of premiums was also observed during the latest campaign, with the average premium decrease at 11.5%.

In the course of its inspections of MTPL campaigns, the HFSA reviewed the premium rate announcements of insurers. With a view to revealed non-compliances, the HFSA obliged seven insurers to publish the offending sections of their year 2012 MTPL premium announcements with revised and compliant content Following the publication of premium announcements on 30 October 2011, the HFSA reviewed on multiple occasions the MTPL premium calculation tools on the websites of those independent insurance intermediaries with significant market power, and compared the premiums calculated there with the rates announced by insurers. The HFSA found differences at several independent insurance intermediaries between the premiums calculated with their online calculation tool and the premium rate tables announced by insurers in national dailies. Furthermore, the HFSA found that market players constantly make adjustments to eliminate differences in premiums calculated with online tools so that discounts offered by insurers are applied accurately. Therefore, the HFSA called on the independent insurance intermediaries concerned in a CEO letter to make sure that the operation of their premium calculation tools complies with the requirement to provide appropriate, correct and comprehensive information to consumers. With a view to the high number of consumer complaints about claim settlement procedures, the HFSA elaborated a consultation paper titled “About potential improvements to the claim settlement practices of insurers”

47. The consultation document included proposals on the following: supplements to

existing legal provisions; regulation of the authority registration of claim experts and the requirements applicable to them in laws; introduction and regulation of the so-called claim settlement consultant role; introduction of a new legal institution called collective claim representation. The HFSA currently assesses opinions submitted in response to the public consultation initiative.

45 http://www.pszaf.hu/fogyasztoknak/tematikus_oldalak/kgfb/baleseti_ado 46 http://www.pszaf.hu/hirek_ujdonsagok/12_02_17-KGFb_atkotes.html 47 http://www.pszaf.hu/bal_menu/szakkonz/hazai_konzultaciok/2012/karrendezesi_gyakorlat_120214.html

http://www.pszaf.hu/fogyasztoknak/tematikus_oldalak/kgfb/baleseti_ado

http://www.pszaf.hu/hirek_ujdonsagok/12_02_17-KGFb_atkotes.html

http://www.pszaf.hu/bal_menu/szakkonz/hazai_konzultaciok/2012/karrendezesi_gyakorlat_120214.html



2.4. Key topic: The growing weight of online sales and the appearance of new products in the Hungarian insurance market

In order to monitor and identify consumer trends and innovations, the HFSA contacted the consumer protection contact person of 10 insurance companies in February 2012. The purpose of the exercise was to gather information on the sales processes, sales channels and marketing tools applied at these institutions, and to learn of their recent campaigns, planned or completed product-related and other innovation efforts. As part of the exercise, the HFSA requested insurers to complete a questionnaire designed with a focus on assessing the ratio of online sales in the insurance market. The replies to the questionnaire show that in the life sector, sales via tied agents, banks and multiple agents are the most typical sales channels. In the non-life sector, insurers mostly sell their products through brokers. This is especially apparent on the MTPL market. Concerning the domestic insurance market, online sales is only typical in the non-life sector. For the time being, this sales channel is used little in the life sector. Based on the replies of market players, the main reason given is the complexity of life insurance products. However, several insurers expect the online channel may also appear in the life segment in the medium term, while one insurer is preparing for the online launch of a unit-linked life insurance product in 2012. The replies from insurers suggest that the ratio of online sales is expected to increase in the non-life sector in the near future, not only for vehicle insurance but in other subsectors as well (home insurance, property insurance and travel insurance). Insurers carry out research and surveys on an ongoing basis in order to identify customer needs and preferences as accurately as possible. Today the internet is the primary information-gathering platform for retail customers and it is an increasingly accepted sales tool. However, one insurer highlighted in the reply that personal consultation is extremely important during the sale of life insurance products and thus the role of multiple agents in the life sector may be retained in the future. Insurers mostly use online and direct marketing platforms and tools for advertising. Respondent insurers also mentioned the printed press, financial papers and the special sections thereof, the storefront of bank branches, flyers, billboards and radio and television ads. Concerning the focus of campaigns launched in H2 2011, most insurers mentioned the advertising of non-life products. The most typical campaign topics were travel insurance, home insurance, the year-end MTPL offerings and Casco insurance. Nearly all insurers advertised these products in their campaigns while one insurer also mentioned its self-support products in this context. Instead of any significant product innovation, product modifications were dominant on the domestic insurance market in 2011. The most typical was the adaption of existing products to the online platform. The main driver behind product renewal moves was pricing, extension of risk scope and service flexibility improvement (development of assistance services of some sort). The insurers we contacted strive to assess customer needs. Several insurers mentioned that they examine feedback received from customers and introduced complaint management systems in order to utilize the information drawn from complaints for shaping their product development and sales processes. Furthermore, insurers provide information and decision-support materials on their websites to assist customers. The growing online presence of service providers may increase transparency. However, this trend may also raise consumer protection issues; with online sales, the need for assessing customer requirements and informing customers properly is even more acute.



III. CAPITAL MARKET SECTOR

3.1. Regulatory environment

3.1.1. Changes in regulations

At the end of 2011, Parliament passed Act CXCIII of 2011 on Investment Fund Managers and Collective Investment Forms (AIFMCIF). From a consumer protection standpoint, the most important change brought about by the act is the introduction of the Key Investor Information Document (KIID) for public open-end investment funds, as part of harmonization with EU legislation. Pursuant to the new regulation, the key investor information document must not exceed two pages. It presents to investors in a strictly regulated manner the investment policy of the fund concerned, its historic performance, the costs and fees chargeable to the investment fund and its risk and profit profile. Fund managers must initiate the modification of their rules of business in relation to these changes by 31 May 2012 at the latest. The introduction of the KIID is of outstanding importance from an investor and consumer protection aspect. The purpose of the KIID is to provide investors with key facts for informed decision-making. The former short prospectus was not suitable for this as its language was overly technical and its length exceeded 20 pages. Another aspect that underscores the KIID’s significance is that it is a “pilot” project in investor protection and EU legislators intend to introduce it also for other investment products later on (e.g. for unit-linked life insurance offerings). The KIID and its proper use may be a great help during the sales process in finding the right products that fit the risk profile of customers. Where proper sales practices are applied, these dimensions are taken into consideration upon the assessment of customer needs and product offers are tailored accordingly.

In order to fulfil its investor protection objective, the KIID must comply with the following rules in addition to having compliant content. It must compress information in a way that key product features and risks are mentioned in the

document in a clear and easy to understand manner; The document must look attractive and important, and should be clearly distinguished from

marketing materials throughout the sales process; the salesperson that interfaces with the customer must call the customer’s attention to it;

The document’s wording should avoid the use of technical and legal terms; where this is not possible, explanations must be provided;

The KIID must be designed with the target customer segment in mind, i.e. investors with average financial knowledge reading about investment funds for the first time.

In order to assist implementation in Hungary, the HFSA will issue a recommendation on this topic in H1 2012.

3.1.2. Regulatory outlook

The European Commission issued its proposed amendment to Directive 2004/39/EC or Markets in Financial Instruments Directive that regulates capital markets (MiFID2)48. The main consumer protection implications of the proposal are as follows: The proposal intends to authorize the European Securities and Markets Authority (ESMA) to ban certain products or services temporarily on grounds of investor protection considerations or in order to ensure the proper operation of the market.

48

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1219&format=HTML&aged=0&language=EN&guiLanguage=en





The proposal would also broaden significantly the range of instruments subject to a mandatory appropriateness test. In case a financial instrument contains an embedded derivative or if its structure is considered overly complex, the test will be mandatory. The detailed regulations will be elaborated in the implementation regulations with contribution from the ESMA. According to the proposal, in the course of granting investment consulting services, the service provider will be required to communicate whether they do this in an independent capacity. Investment consulting is considered independent if the entity providing it is not paid a commission, or if it represents a sufficiently large number of instruments (that represent the market). The Council and the European Parliament will discuss the proposal later this year and implementation in member states will take at least two years.

The planned regulatory changes suggest that product security will gain importance and regulatory authorities will be given mandates to enforce it. The extension of the range of offerings qualifying as complex products is a response to market trends that led to the proliferation of structured products in a number of Western European countries. Some of these products include derivative elements where limited access to the underlying asset prices reduces transparency or where the high number of conditions that impact product cash flows resulted in a highly complex structure. We do not think that the offering of such products in Hungary would expand significantly in the short run. However, we believe it is important that service providers take into consideration before every product launch the transparency and clarity of the product, keeping in mind the average financial knowledge of Hungarian retail investors.

3.2. Market trends

3.2.1. Financial instruments trading, sales channels

Compared to 2010, the turnover of credit institutions from trading on commission increased by 11.2% in 2011 to HUF 19,615 billion. For investment enterprises, growth in the same period was nearly 16.2%, with turnover amounting to HUF 33,896 billion. In line with former trends, the main source of growth (+12.3%) for credit institutions was prompt securities orders while at investment enterprises derivatives trading on the OTC market grew extraordinarily (+63.65%), mostly owing to orders completed in H2 2011. A closer look at the reasons behind significant turnover increase on OTC markets (Chart 16) reveals that FX futures trading turnover49 was huge in H2 2011, whilst the volume of stock futures and index transactions decreased in the last months of the year.

49 If we were to eliminate the data of a single company that traded CDFs (contracts for difference) and began providing data in August 2011, the turnover of OTC derivatives would reflect much slower growth in H2 2011.



Chart 16

Source: HFSA – All investors considered

In order to survey the role of sales channels concerning financial instruments sold to retail investors, the HFSA approached 12 domestic investment service providers with a questionnaire. Survey results show that 37% of OTC transaction orders were executed via online applications in 2011, making it the number one sales channel. Sales at branches were second with 35%.

Table 5 Share of sales channels by revenues, financial instruments sold to retail investors

Source: HFSA

It is also remarkable that the volume of online sales is also growing on the regulated market, although telesales still take the lead. At credit institution providers, the online channel ratio is typically lower (5-20%) and branches represent the dominant sales channel. At investment enterprises figures vary far more, with the online channel between 40 and 60%. There is one specific service provider that sells almost exclusively via the online channel. When evaluating these results, it must be noted that a significant portion of derivative sales take place via online applications which increases the use of the online channel. The 2012-2014 forecasts received from service providers in the questionnaire shows that all market players expect gradual growth in the significance of online sales. At credit institution providers, the increase is expected to equal a few percentage points while the many investment enterprises believe that even annual growth of 4-5% is possible. The survey also indicates that parallel to the growing significance of the online channel, the role of online advertisements is also growing within marketing activities.



In H2 2011, while the number of intermediaries used by investment enterprises kept growing, the amount of commissions paid dropped. As agent commissions closely correlate with intermediated contracts, the primary cause of the decrease is the lower number of such contracts.

Chart 17

Source: HFSA

3.3. Identified risks

3.3.1. High-leverage FX transactions

The H1 2011 financial consumer protection risk report50 discussed in detail the characteristic features and risks of high-leverage transactions available via online platforms. In H2 2011, the HFSA carried out a survey in the form of extraordinary and regular data provision, assessing the related transactions of Hungarian investment enterprises and credit institutions that provide investment services. The periods serving as a basis for the survey were the first two months (extraordinary data provision) and the last quarter (regular data provision) of 2011. After the first survey, the HFSA issued a summary thereof in a press release along with a warning51, published an informative guide for investors52 and an informative short film about high-risk investments53. The ESMA also released a warning54 on this topic, cautioning consumers of the activities of unlicensed companies and outlining the main risks of these transactions. Approximately 40% of the OTC futures transactions of investment enterprises shown in Chart 16 involve leverage of more than tenfold. Table 7 presents the key results of the two surveys for FX transactions. In the data provision exercise serving as a basis for the survey, institutions were required to report transactions involving at least

50 The HFSA’s H1 2011 Financial Consumer Protection Risk Report, pp. 35-37 51 Press release: http://www.pszaf.hu/hirek_ujdonsagok/magas_tokeattetel_111105.html 52 http://www.pszaf.hu/fogyasztoknak/befektetesek/online_bekehtetesek_kockazatai.html 53 http://www.pszaf.hu/fogyasztoknak/bal_menu/kisfilmek/kockazatos_befektetesek.html 54 http://www.esma.europa.eu/system/files/2011-412_hu.pdf

http://www.pszaf.hu/hirek_ujdonsagok/magas_tokeattetel_111105.html

http://www.pszaf.hu/fogyasztoknak/befektetesek/online_bekehtetesek_kockazatai.html

http://www.pszaf.hu/fogyasztoknak/bal_menu/kisfilmek/kockazatos_befektetesek.html

http://www.esma.europa.eu/system/files/2011-412_hu.pdf



tenfold leverage, and to disclose the profit and loss made on them along with certain key transaction features.

Table 6 High-leverage FX transactions, closed positions

Source: HFSA

Based on results, the net losses of retail customers totalled nearly HUF 6.9 billion in the ten months under review in 2011. The net losses of eligible counterparties was lower, HUF 3.5 billion in the period concerned, while professional customers realized net profits of almost HUF 1.9 billion. Changes in the number of customers show that investment enterprises had proportionately fewer customers in Q4 2011, owing mostly to significant customer base shrinkage at a single investment enterprise. As seen in Table 8, retail FX positions open as at 31 December 2011 had HUF 1.4 billion of unrealized profits and HUF 4.9 billion of unrealized losses 2011.

Table 7 High-leverage FX transactions, open positions

Source: HFSA



Reported data enable the calculation of the ratios of customers that made a profit or a loss in the periods concerned. In the January – September and October – December 2011 periods, 77% and 67% of retail customers, respectively, made a loss. There are significant differences that must be remembered when assessing the performance of the three investor categories. While the transactions of professional investors and eligible counterparties are usually driven, at least in part, by other financial factors (hedging or potential arbitrage purposes), retail investors are likely to use these transactions solely for speculation. In the data reports, the risk appetite categories applied by service providers to retail transactions can also be interpreted as customer ratings (e.g. conservative, balanced, bold). Therefore, it is apparent that institutions mostly provide service to customers who are considered to have the highest risk appetite. At the same time, the HFSA found that service providers only address formally and indirectly the customer’s knowledge of risks associated with high-leverage transactions when they fulfil preliminary screening obligations as per the AIFCD (eligibility and suitability tests). Owing to this reason among others, the HFSA surveyed the related market practices and initiated consultations55 as a result of which it will release a recommendation in the near future. Thus the HFSA intends to take an active, market-shaping role in ensuring that customer ratings become as accurate as possible in the future. At the same time, with a view to the significant risks and the corresponding high net losses, further steps are also necessary. It is important that customers get information on the characteristics and risks of these transactions not only immediately prior to contract signing, but also on first contact. It is also important that they have constant access to such risk-related information during their entire use of the service. As service providers that offer high-leverage transactions often promote their services at free seminars and in online advertisements (with links taking users to the provider’s website), they should reveal risks fully and comprehensively at those instances, as that is the point when the customer is first encountered. Even to learn about the quarter-to-quarter ratio of profitable and loss-making customer accounts can help greatly the informed decision-making of retail customers. This statement is available from their service provider. In addition to providing some degree of information on trading results, this arrangement would motivate service providers to obtain proper knowledge on trading and to learn similar trading techniques.

With a view to identified risks, the HFSA will publish a recommendation regarding high leverage transactions.

3.3.2. Liquidity risk of public real estate funds in customer informing

Simultaneously to the enactment of the AIFMCIF, the rules of liquidity management for public securities funds were amended as well. From a consumer protection standpoint, however, the related rules practically remained unchanged. With a view to consumer protection considerations, the HFSA believes it is very important that the customer information materials of public real estate funds (KIID, informative guide and other customer information documents) highlight the liquidity risks of these funds and the potential consequences of any substantial liquidity decrease on their part.

3.3.3. Further expected increase in the weight of online sales channels

The changing weight of online sales channels and online advertising requires service providers to pay special attention to understanding customer needs accurately prior to selling anything to them online,

55

http://www.pszaf.hu/bal_menu/szakkonz/hazai_konzultaciok/szakkonz_2011/nyilv_konz_20111221.html

http://www.pszaf.hu/bal_menu/szakkonz/hazai_konzultaciok/szakkonz_2011/nyilv_konz_20111221.html



and to repeat this exercise subsequently as the scope of online personal surveys is limited. In respect of sales through online platforms, the HFSA considers it good practice if information on the offered financial instruments and services is not only made available to customers via the online platforms immediately prior to contract signing but also on an ongoing basis. This is especially important where the customer orders the execution (forwarding) of the transaction, as in this case they conclude the deal independently. As another indication of the growing significance of online content, member states launched a joint investigation in 2011 under the European Commission’s coordination to survey56 service provider website contents regarding consumer lending. The survey found the majority of reviewed websites fail to comply with informing regulations. Although the exercise focused on consumer loans, it also points out that supervisory authorities must pay special attention to online sales channels and their contents..

56

For further details, please refer to: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/6&format=HTML&aged=0&language=EN&guiLanguage=en





IV. PENSION FUNDS SECTOR / PENSION SAVINGS

This report only reviews the developments and changes in the pension funds sector, as other subsectors (healthcare funds, voluntary self-support funds) did not see any significant events deserving comment from a consumer protection aspect. When assessing the consumer protection risks of the pension funds sector, we must bear in mind that the operation of the sector is characterised by a single product type and related sales model, under extensive regulation and supervision from the government.

4.1. Regulatory environment

Owing to powerful measures taken by the government in respect of the pension system, the mandatory pension fund system was transformed extensively in 2011. The size of the sector decreased substantially and the conditions of operation changed thoroughly. Point 4.4 below provides a brief summary of main consumer protection findings in respect of the transformation. Regarding regulations on voluntary pension funds, no significant change occurred from a consumer protection standpoint in H2 2011.

4.2. Market trends

The decrease of the number of voluntary pension funds continued in H2 2011. One voluntary pension fund with a small market share terminated operations by way of final settlement proceedings. Thus 57 voluntary pension funds were operational at the end of 2011, with an aggregate membership of almost 1,270,000. Based on total assets, the five largest voluntary pension funds represent 60% of aggregate membership. The membership of voluntary pension funds has been declining since Q4 2008 and this trend continued through H2 2011. The membership-based market share of institutions remained unchanged. Parallel to membership shrinkage, the value of payments was also decreasing since 2009, while the total amount of membership fee payments increased slightly (by around 1%) in 2011, especially in the second half of the year.

4.3. Identified problems and risk items

4.3.1. Need for attitude shaping

In its H1 2011 Financial Consumer Protection Risk Report, the HFSA pointed out57 that as the need for personal savings and long-term pension savings gains acceptance, pension saving plans must be supported with further incentives and the attitude of consumers must be shaped58. In part, attitude shaping can take place via the financial education of households. In addition to disseminating information, attitude shaping may become an important tool for improving the savings culture and for the encouragement of conscious pension planning.

In addition to supporting pension savings in general it is also important to help customers make conscious choices when selecting a savings form and to ensure that their decisions are in line with their preferences and risk tolerance.

57 H1 2011 Financial Consumer Protection Risk Report, page 42 58 Several market research papers point out that pension saving plans must receive support and that attitude shaping is necessary: http://www.bellresearch.hu/content.php?content=645, http://www.portfolio.hu/befektetesi_alapok/ongondoskodas/melyrol_indul_az_otp_ongondoskodasi_indexe_van_hova_fejlodni.152706.html.

http://www.bellresearch.hu/content.php?content=645

http://www.portfolio.hu/befektetesi_alapok/ongondoskodas/melyrol_indul_az_otp_ongondoskodasi_indexe_van_hova_fejlodni.152706.html

http://www.portfolio.hu/befektetesi_alapok/ongondoskodas/melyrol_indul_az_otp_ongondoskodasi_indexe_van_hova_fejlodni.152706.html



4.3.2. Rules of providing information on pension savings accounts

While it does not officially qualify as pension fund saving, the pension savings account (PSA) is also intended to encourage and collect pension savings. Regarding the management of PSA-related risks identified in the H1 2011 Financial Consumer Protection Risk Report59, the HFSA formulated consumer protection principles and requirements, especially in respect of informing obligations and published these in CEO letter no. 11/201160 on the consumer protection aspects of pension savings accounts and long-term investment contracts. In the HFSA’s opinion, it is of outstanding importance that financial institutions inform their customers with the utmost care about the features and risks of PSAs and the related taxation laws both upon contract signing and immediately prior to contract termination initiated by the customer.

4.4. Consumer protection findings in relation to the transformation of pension funds

After late 2010, the laws on the mandatory pension system and mandatory pension funds underwent further significant changes in 2011. One key change is that mandatory pension contributions deducted from incomes are channelled in full to the state-run social security system instead of being credited to individual member accounts at the mandatory pension fund, although members can make independent payments to their account. Further, mandatory pension fund members could decide until 31 March 2012 whether they want to sustain their membership or return to the state-run social security system. Members choosing to return to the state system could decide on withdrawing any amounts accumulated on top of the return guaranteed capital and the repayment of supplementary membership fees under similar conditions than those prevailing in early 2011. Examination of calculation methodologies The HFSA carried out several inspections at pension funds about the transformation of the system and the settlements upon the return of members to the state pension system61. When scrutinizing the compliance of the asset transfer, the HFSA also inspected the methodology of calculating the return guaranteed, and any additional capital. At four pension funds, the additional payment on top of the return guaranteed capital and the repayment of supplementary membership fees were suspended for a limited segment of members. The HFSA required the institutions concerned to recalculate payments to returning members in compliance with applicable provisions and to perform the related corrections as needed for the members concerned. As a follow-up to former inspections, an HFSA inspection is underway at pension funds focusing on the calculation of the return guaranteed capital and any additional amounts based on membership payments to the individual accounts of members returning to the state system, and verifying the repayment of supplementary membership fees paid up during membership. Claim trends The number of complaints submitted to the HFSA about the funds sector jumped in H2 201162, clearly in relation to the payments of amounts on top of the return guaranteed capital (known by the general public as the “real return”) and the repayment of supplementary membership fees. A considerable part of claims initiated the compliance check and verification of amounts additional to the return guaranteed capital as calculated by the respective pension funds. Several consumers complained about the accounting for and settlement of payments made by their employers. Further, several complaints were about the compliant fulfilment of the informing obligations of pension funds and about the inadequate availability of pension fund call centres.

59The HFSA’s H1 2011 Financial Consumer Protection Risk Report, pp. 42-43 60 http://www.pszaf.hu/data/cms2325103/vezkorlev_11_2011.pdf 61 The HFSA’s H1 2011 Financial Consumer Protection Risk Report, pp. 43-44 62 In H2 2011, the HFSA received 2,850 consumer claims about private pension funds, as opposed to a total of 88 in the first half of the year. 95.7% of these claims were about returns.

http://www.pszaf.hu/data/cms2325103/vezkorlev_11_2011.pdf



The HFSA is not authorized to decide disputes concerning the amount additional to the return guaranteed capital, supplementary membership fees and amounts credited to individual member accounts. If a former pension fund member does not accept the fund’s position regarding settlement, they must turn to the court to enforce the claim. Informing of customers, consumer protection requirements for institutions In order to inform consumers, the HFSA posted an informative guide on its website about the payment of additional amounts on the return guaranteed capital, and also issued a press release with similar information63. The HFSA also outlined requirements to institutions in a CEO letter64 concerning the bank transfer of membership payments to members returning to the state pension system and the cross-charging of expenses incurred on money transfer by post. As described in the document, the practice that the HFSA considered fair treatment on the part of institutions entailed the crediting of all discounts to customers that the pension fund obtained at the Hungarian Post or, in the case of bank transfers, at the participating banks regarding the related payments.

63 https://www.pszaf.hu/hirek_ujdonsagok/mnyp_kerelmek_int.html, https://www.pszaf.hu/data/cms2304467/GYIK_TB_mnyp_110823.pdf, https://www.pszaf.hu/hirek_ujdonsagok/11_07_19-mnyp-posta.html, https://www.pszaf.hu/fogyasztoknak/kiemelt_fogyaszto/mnyp_TB_GYIK/mnyp_TB_QandA.html 64 https://www.pszaf.hu/hirek_ujdonsagok/11_08_03-mnyp-PSZAF_elv.html

https://www.pszaf.hu/hirek_ujdonsagok/mnyp_kerelmek_int.html

https://www.pszaf.hu/data/cms2304467/GYIK_TB_mnyp_110823.pdf

https://www.pszaf.hu/hirek_ujdonsagok/11_07_19-mnyp-posta.html

https://www.pszaf.hu/fogyasztoknak/kiemelt_fogyaszto/mnyp_TB_GYIK/mnyp_TB_QandA.html

https://www.pszaf.hu/hirek_ujdonsagok/11_08_03-mnyp-PSZAF_elv.html



Annex



Money market

Table M1 Summary of money market regulations

Legal regulation Provision Effective

1. Act LXXV of 2011 on the fixing of the repayment exchange rate of foreign currency loans and the order of forced repossession of homes

Pool account loan Forced sale quota

12 August 2011 1 October 2011

2. Government decree no. 163/2011 (VIII.22.) on disproportionately high monthly repayment burdens in the case of credit line contracts for pool account loans

[Institution is] authorized to set unilaterally the term of the credit line contract and the monthly repayment amount for a pool account loan subject to the rules set out in this decree and taking into consideration the debt as at the closing date of fixed exchange rate application period.

24 October 2011

3. Amendment to Government Decree no. 361/2009 (XII.30.) on prudent retail lending and the assessment of credit eligibility

Specification of eligibility for foreign currency loans

5 July 2011

4. Act CLXX of 2011 on providing housing to natural persons unable to fulfil payment obligations arising from loan contracts

Legal status and responsibilities of the National Asset Management Company

1 January 2012

5. Amendment to Act CXII of 1996 (Section 200/B) on Credit Institutions and Financial Enterprises

Final mortgage repayment at a fixed exchange rate

29 September 2011

6. Act CXXII of 2011 on the Central Credit Information System

CCIS – positive debtor list 11 October 2011

7. Government decree no. 341/2011 (XII. 29) on Interest rate subsidization for home purchases

Forms of interest rate subsidization for home purchases

6 March 2012


Transparent pricing: pricing linked to a reference interest rate, pricing with a fixed interest rate period

1 April 2012


APR caps 1 April 2012

Laws enacted in 2012

10. Government decree no. 57/2012 (III.30) on reimbursement in relation to the repayment exchange rate of foreign currency loans and on supporting to public employees

Detailed rules on fixing the repayment exchange rate of foreign currency loans

1 April 2012



Government decree no. 72/2012 (IV. 12) on the extent of rent set based on the contract between the National Asset Management Company and the tenant and the conditions of consenting to change of homes

Detailed rules pertaining to the activities of the National Asset Management Company

13 April 2012

12. Amendment of Act LXXV of 2011 on the fixing of the repayment exchange rate of foreign currency loans and the order of forced repossession of homes

Extension of the exchange rate fixing scheme Conversion of the debt as per the loan contract into forint for foreign currency loan debtors who are unable to fulfil payment obligations in the long run

1 April 2012 1 April 2012

13. Government decree no. 26/2012 (III.6.) amending Government decree no. 341/2011 (XII. 29) on Interest rate subsidization for home purchases

Interest subsidy available for building and purchasing new homes or refurbishing existing homes

6 March 2012



Charts related to household lending

Chart M1

Source: HFSA, MNB

Chart M2

Source: HFSA



Charts on retail deposits, savings, account management and related services

Chart M3

Source: HFSA

Chart M4

Source:MNB



Chart M5

Source: KSH

Chart M6

Source: KSH



Capital market

Table M2

Source: HFSA

Chart M7

Source: HFSA



Chart M8

Source: HFSA

Chart M9

Source: HFSA



Chart M10

Source: HFSA

Chart M11

Source: HFSA



Chart M12

Source: HFSA

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