Consumer protection in the financial sector has developed greatly in Hungary over the past few years. After the financial crisis in 2008, certain provisions have been amended or implemented in Hungarian legislation (also via EU laws) to prevent another financial crisis.
II LEGISLATIVE AND REGULATORY FRAMEWORK
The legislation related to consumer loans is rather fragmented; several laws and regulations are in force in respect of the existence and operation of the financial institutions providing loans for consumers. The following list of legislation is not exhaustive; however, it includes the most important provisions regarding consumer loans:
- Act CCXXXV of 2013 on Payment Service Providers;
- Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises (the Banking Act);
- Act CXXXIX of 2013 on the National Bank of Hungary;
- Act CXVI of 2012 on Financial Transaction Duty;
- Act CLXII of 2009 on Credit Provided to the Consumer;
- Act LXXXV of 2009 on the Pursuit of Payment Services Business;
- Act XLVII of 2008 on the Prohibition of Unfair Business-to-Consumer Commercial Practices;
- Act CLV of 1997 on Consumer Protection;
- Act XXV of 2005 on the Remote Selling of Financial Services;
- NGM Decree No. 56/2014 (XII.31.) on the information rules for consumer loans;
- NGM Decree No. 61/2013 (XII.17.) on the maximum technical interest rate;
- Government Decree 536/2013 (XII.30.) on the detailed rules of the conditions of supplementary financial servicing;
- Government Decree 535/2013 (XII.30.) on the protection of IT systems of financial institutions, investment ventures and commodity exchange service providers;
- Government Decree 163/2011 (VIII.22.) on the disproportionately high monthly instalment payment in credit limit contracts connected to bank account credit;
- Government Decree 82/2010 (III.25.) on yield calculation and disclosure of deposit interest and securities;
- Government Decree 361/2009 (XII.30.) on the conditions of circumspect public credit providing and the inspection of creditworthiness;
- Government Decree 154/2009 (VII.23.) on the detailed rules of the requisition and redemption of the government joint and several guarantor related to housing loans;
- Government Decree 153/2009 (VII.23.) on issues prevailing in the financial sector and required for increasing the effectiveness of consumer protection;
- MNB Decree No. 58/2014 (XII.17.) on the required settlement regarding void contractual conditions of loan contracts and on the provisions of the consumer protection connected to the modifying of consumer loan contracts;
- MNB Decree No. 32/2014 (IX.10.) on the regulation of income prorated instalment payments and collateral instalments; and
- MNB Decree No. 28/2014 (VII. 23.) on the rules on the complaints management of financial organisations.
Along with the laws listed above, the guidelines issued by the National Bank of Hungary, in its capacity as financial supervisory authority (the Supervisory Authority) are taken into account in practice. Although guidelines are non-binding legal sources, they could be significant when the regulations of laws are vague or controversial. In such cases any interested party might formally request the Supervisory Authority to issue a guideline on its interpretation of certain topics.
National Bank of Hungary
Under Act CXXXIX of 2013 on the National Bank of Hungary, the Supervisory Authority exercises continuous supervision over the entities and persons covered by financial sector laws.
Within this framework, the Supervisory Authority monitors the activities of financial and capital market institutions, funds, insurance companies and financial infrastructure bodies both on-site and off-site, using the tools of prudential supervision, as well as market surveillance and consumer protection tools. If necessary, it might take any measures prescribed by law to make the financial sector participants comply with applicable laws. The purpose of the supervision is to ensure timely recognition and appropriate management of risks to avoid jeopardising the stability of the financial system and the confidence of financial intermediaries. The information obtained during the continuous supervision is included by the Supervisory Authority in the risk assessment. The data on risk and institutional assessment determine the method and the intensity of the supervisory treatment of a particular financial institution, as well as the scheduling and focus of further investigations.
The Supervisory Authority monitors the activities of the financial institutions in relation to preventing and combating money laundering and the financing of terrorism, and performs IT supervision. If immediate action is required, the Supervisory Authority may conduct targeted or on-site investigations.
Additionally, financial consumer protection is an important part of the Supervisory Authority's duties, as is market surveillance to eliminate unauthorised, unlicensed financial services. The Supervisory Authority takes actions to protect the rights of customers using financial services and issues guidance for service providers on responsible and fair behaviour. The Supervisory Authority is responsible for identifying market practices that are disadvantageous for customers.
In addition to litigation, consumers may turn to an out-of-court conciliatory body to settle a dispute with a financial institution.
In accordance with Article 24 of Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers,2 the National Bank of Hungary established the Financial Conciliatory Board (FCB) as a professional independent alternative forum for resolving disputes. The FCB was launched in 2010 and started to operate as of July 2011. The FCB is the Hungarian member of the FIN-NET.3
The powers and competence of the FCB cover contractual disputes between consumers and financial institutions (and other institutions supervised by the Supervising Authority) with a view to reaching an out-of-court settlement. To this end, the FCB must attempt to reach a conciliation agreement or, failing this, to adopt a decision to enforce consumer rights simply, efficiently and practically, and under the principle of cost-efficiency.4
Consumers may initiate an FCB proceeding provided they have attempted to settle the case directly with the financial institution, which must provide the FCB with its statement on submission, otherwise, in the absence of a negotiated settlement, the FCB shall issue a recommendation. The recommendation is not directly enforceable against the financial institution.
The decision or recommendation of the FCB is adopted without prejudice to the consumer's right to have a claim enforced in a court of law.
The binding decision or recommendation of the FCB may not be appealed, but annulment of the decision or recommendation by court order may be requested by either the consumer or the financial institution based on certain conditions.5
The most frequent payment methods in Hungary are:
- money transfer;
- authorisation for the execution for the transfer (collective, single, bill of exchange);
- cash substituting tools (debit card, cheque); and
- cash payment.
The settlement system used between the banks for settlement in Hungarian forints (through the Interbank Clearing System maintained by GIRO Zrt.) is the VIBER, which is a real-time gross settlement system; thus domestic money transfers are fulfilled within four hours.6 From 2 March 2020, the time limit of domestic money transfers will decrease to seconds, as all Hungarian banks must correspond with Single Euro Payments Area (SEPA) requirements.
In recent years the popularity of the pay pass (without using POS terminals) card has increased, and according to the latest report of the Supervisory Authority on the payment system, the state will promote use of this payment method. However, according to a report from the National Bank of Hungary, cash payments are still significant in their everyday use.
The e-money and the e-wallet are known by Hungarian law, but for providing such services, a special licence must be obtained from the Supervisory Authority.
IV DEPOSIT ACCOUNTS AND OVERDRAFTS
In Hungary, only banks licensed by the Supervisory Authority are entitled to receive deposits and other funds from the public and to provide for their own account.
Under a deposit account contract, the depositor may deposit a certain amount of money with the bank, and the bank undertakes to accept the money and to repay the same amount at a later date with interest.
Act V of 2013 on the Civil Code has relatively few provisions on deposit account contracts and distinguishes between fixed-term and non-fixed-term deposits.7 Such provisions are not mandatory: the parties might agree on other conditions. The following summarises the main provisions of the Civil Code on deposit accounts:
- In the case of fixed-term deposits, the bank must repay the funds held on the account upon maturity or as instructed by the depositor.
- The depositor may request repayment of the funds held in the account before the expiry of the term specified in the contract. In the absence of the depositor's request, the bank shall not be entitled to repay the funds held on the account before expiry.
- The funds not collected upon maturity shall be converted into a deposit of indefinite period.
- In the case of deposits for a non-fixed term the bank must promptly repay the funds held in the account as instructed by the depositor.
Although the Civil Code identifies only fixed and non-fixed terms, in market practice a distinction is made between deposit accounts on the length of the term of the deposit, the interest rate provided, and the break fees to be incurred in case of early termination, etc. The deposits for non-fixed terms are usually simple payment accounts, where the account holder bank provides interest.
There is a special deposit account, which is popular among long-term investors. In this case, a special deposit account shall be opened in Hungarian forints, where the consumer could deposit money only in the first year after its opening. Afterwards the deposited amount shall remain in the deposit account for five or more years. After the expiry of such term the depositor could request the refund of the deposit and the accrued interest. This special type of deposit is free from tax on interest.8
Since the base interest rate for the forint has decreased continuously from 2011 (currently it is 0.9 per cent), the deposit account has become less significant in the past few years.
i Protection of deposits
The National Deposit Insurance Fund (OBA) is a fund guaranteeing deposits, operating in accordance with Directive 2014/49/EU of the European Parliament and of the Council on deposit guarantee schemes.
Each bank operating or providing financial services in Hungary must join the OBA,9 which shall indemnify depositors if the licence of a bank where deposits are held were withdrawn by the Supervisory Authority because the bank can no longer be relied on to fulfil its obligations, or fails to pay any of its undisputed debts within five days of the date on which they are due or no longer has sufficient own funds (assets) for satisfying the known claims of creditors, and a dissolution or a liquidation procedure has been opened against such bank.
The maximum amount of the indemnification is €100,000 per person and per bank. This amount covers the principal and the interest deposited at the bank. If the amount to be indemnified is above this limit, the OBA shall not be liable for further compensation.10
The OBA shall pay compensation, up to €50,000 additionally, to natural persons for eligible deposits, provided that they were transferred to a discretionary account during a three-month period before the day of the opening of the compensation procedure and if the amount deposited originates from:
- the sale of residential property, or the sale of lease rights or any right of tenancy;
- benefits received upon the termination of employment or upon retirement;
- insurance benefits; or
- compensation received for criminal injuries or wrongful conviction.11
V REVOLVING CREDIT
Revolving credits are frequently used within the retail sector. These kinds of loans are provided for undefined purposes. The consumer may use the credit at his or her sole discretion. In general, these loans are non-secured, the proper examination of the creditworthiness of the consumer is the responsibility of the lender, which must have the applicable internal policies in place regarding credit risk assessment. Each examination shall be based on:
- the relevant internal policies;
- the information provided by the consumer;
- the creditworthiness of the consumer; and
- the information received from KHR, the official credit bureau system.
The result of the examination shall not be based only upon the collateral (if any) provided by the consumer.12
The overdraft loan and the credit card loan are the most common revolving credit types provided in Hungary. The overdraft loan is linked to a current account. In the case of credit card loans, the consumer shall not have its payment account at the card issuer bank. The repayment of the credit card loans might occur with money transfer, check payment, etc.
In both cases (credit card loan, overdraft loan) Decree 83/2010 (III.25.) on the calculation of the annual percentage rate of charge (APRC) shall apply in respect of the maximum possible interest rate. The maximum amount of the annual percentage rate shall be the effective base interest rate (published by the Supervisory Authority) plus 39 per cent in the case of overdraft and credit card loans.
In case of overdraft, the lender may not charge any fees for early repayment, and shall provide the consumer monthly with the information prescribed by the law.13
The overdraft and the credit card agreement may be extended as required by the parties. The method of the interest calculation shall be set out in the agreement. Regarding the interest conditions of such loans, the lender may not amend them unilaterally. In certain cases the lender may unilaterally amend the overdraft or the credit card agreement. In such cases, however, the consumer may terminate the agreement within 30 days from the acknowledgement of such modification.
VI MORTGAGE LOANS
The Hungarian mandatory rules of law are rather consumer-friendly regarding mortgage loans. As of 21 March 2016, many changes were implemented into the Hungarian legislation as a result of Directive 2014/17/EU of the European parliament and of the council on credit agreements for consumers relating to residential immovable property. For the main novelties, introduced by Act CCXV of 2015, which implemented the directive, see below.
The information provided to the consumer before entering into a mortgage agreement shall be personalised (tailor-made information), therefore any calculation shall reflect the factual financial situation of the consumer. The form the information must take shall be in accordance with the mandatory rules of law (set out in a decree issued by the National Bank of Hungary).
The draft of the mortgage loan agreement shall be handed over to the consumer at least three days before it is signed, and the consumer shall not accept the binding offer within this period, during which the lender is committed to its binding offer, but the consumer is not engaged to enter into the mortgage loan agreement. The lender shall keep its binding offer for 15 days.
The tie-in sale is prohibited in respect of the mortgage loans, the consumer has the right to enter into the mortgage loan agreement only and shall not be obliged to buy additional services.14 Package deals (i.e., another payment service with favourable price in case of entering into a mortgage loan) are not prohibited.
The main consumer-friendly amendment is that the consumer may amend the currency of the mortgage loan in each quarter with its unilateral statement to be sent to the lender, provided that the new currency is the currency of 50 per cent or more of the consumer's wage or assets and is the lawful currency of the territory of the consumer's residence at the time of entering into the mortgage loan agreement.
According to mandatory rules, the amendment of the currency shall not be deemed as an amendment of the original mortgage loan agreement, therefore if it was incorporated into a notarial deed, the amendment of the deed is not necessary.
VII OTHER AREAS
i Advertising of loans
The advertising of loans is strictly regulated by the respective consumer protection laws and regulations. Marketing material on any loan must be clear and firm.
The marketing materials published on the website of the lender must be perfectly legible (small print shall be avoided). The annual percentage rate must be highlighted, and the abbreviated term 'APR' shall be indicated. If any further figure appears in the advertisement related to the interest rate, or any costs, fees or consideration, the following information shall be included in the marketing communication:
- the rate and type of the interest;
- the remuneration, fees, costs and tax included in the total consideration of the loan;
- the maximum amount of the loan;
- the term of the loan;
- the annual percentage rate;
- the total amount to be paid by the consumer and the amount of the instalments; and
- if any further undertaking is required from the borrower (e.g., insurance), this obligation shall be indicated in the advertisement.15
In addition, an example related to the loan shall be introduced in the advertisement, the figures to be used in such example are prescribed by the respective government decree16 and currently correspond to a three-year term loan of 500,000 forints.
The official credit bureau system, KHR, is the only official credit bureau database in Hungary. It was launched by Act CXXII of 2011 on the credit bureau system. Regarding the information on the borrowers, the accession to the official credit bureau system is required by the mandatory rules of law for each financial institution.
Default under a loan or credit agreement shall be registered in the KHR by the lender, if the respective payment delay exceeds a period of 90 days, and the overdue and unpaid amount is higher than the actual minimum monthly wage, which is currently (as of 1 January 2019) 149,000 forints per month. This data will be registered and available in the KHR, irrespective of whether the consumer has given consent. Regarding the data protection, the consumers' consent for the transfer of personal data shall be given simultaneously when entering into a loan or credit agreement. If the consumer fails to give such consent, however, in the case of default, the lender must provide data to the KHR.
VIII UNFAIR PRACTICES
In 2019, the Supervisory Authority conducted inspections of market players to verify compliance, especially with the requirements applicable in the following fields:
- criteria regarding APRC;
- pre-contractual information duties of credit institutions in connection with consumer loan agreements;
- unilateral change on interest rates charged; and
- handling of complaints.
With respect to the rules regarding APRC, the Supervisory Authority typically found violation of rules related to the maximum level of APRC; and the indication of and communication regarding APRC.
Concerning the pre-contractual information duties of the credit institutions in connection with consumer loan agreements, the Supervisory Authority found several times that financial institutions had violated the applicable rules.
Furthermore, some of the financial institutions had also breached the rules regarding the unilateral change on interest rates charged.
In 2017, the Supervisory Authority introduced the certification mark 'qualified consumer-friendly home mortgage' to enhance competition, to procure for transparency as well as for lower interest rates, and to enable the consumers to compare the home mortgages offered by the different market players. The Supervisory Authority grants non-exclusive licence to financial institutions to use the certification mark if the tender of the respective market players was successful. For granting a licence, the home mortgage needs to meet several criteria, including terms and conditions applicable to the duration of the agreement, interest rates, fees, and information duties. The statistics showed that four out of 10 housing loans are qualified consumer-friendly home mortgage in 2018.
IX RECENT CASES
i Enforcement actions
The Supervisory Authority sanctioned the institutions by imposing a consumer protection penalty for infringements, detailed in Section VIII above, in a range between 300,000 and five million forints, depending on the seriousness of the infringement, and ordered them to satisfy the obligations immediately. For several irregularities found in connection with payment services, the Supervisory Authority imposed fines totalling 91.3 million forints on market players. The fine for excessive default interest and excessive APRC amounted to 13.9 million forints in one case.
ii Disputes before the regulator
The FCB is a forum to reach an out-of-court settlement of financial consumer disputes between Hungarian consumers and financial service providers. In 2019, the FCB published six (binding) decisions and (non-binding) recommendations regarding cases where it found that the applications of the consumers were well-founded. The decisions and recommendations adopted by the FCB in 2019 have not been subject to judicial review.
Settlement, conversion into forints and contract modification were still issues in connection with foreign currency-denominated loans before the Hungarian courts in 2018. The Court of Justice of the European Union made a decision under which the relevant Hungarian court is entitled to assess whether the information on conditions regarding the exchange rate risk was understandable and adequate. Although the interpretation of the Curia of Hungary (the Supreme Court) is that such decision does not change current court practices (including that the exchange rate risk is to be borne by the debtors), for the time being, it is uncertain how this judgment will affect future practice. Additionally, the private enforcement of the prohibition of unilateral fee increases resulted in litigation and noteworthy court rulings. Under the respective rules it is especially prohibited to unilaterally alter the interests and fees to the detriment of the consumer without a reason. The Supreme Court found that the alteration needs to be based on objective criteria.
In the autumn of 2018, the Hungarian parliament adopted the amendment to the Act on Home Savings and Loan Associations, which terminated the state subsidy for these associations. Prior to that, the home savings account holders benefited annually from state subsidies of 30 per cent of the amount deposited by them, and at the end of the contracted term a fixed-interest loan was available for supplementing the accrued amount to facilitate the purchasing of a house. The government emphasised that the money saved by this measure will be spent on the Family Housing Allowance, which includes a non-repayable grant up to 10 million forints and a state-supported credit facility for families who have at least two children. In the summer of 2019, the Hungarian government added extra support by providing a Family Housing Allowance to village family housing as well. The range of eligible settlements includes those villages with a population of less than five thousand whose populations decreased between 2003 and 2018, as well as villages that are situated in the most disadvantaged areas of Hungary.
Another significant programme launched in November 2019 – named 'consumer-friendly home insurance' – to enhance competition and transparency in the home insurance market after the success of the 'consumer-friendly home mortgage' programme. The National Bank of Hungary implemented strict requirements regarding claims, price changes, costumer information and minimum standards of sufficient basic insurance.
1 Melinda Pelikán is a senior associate and László Lovas and András Mozsolits are associates at Wolf Theiss.
2 'Member States shall ensure that adequate and effective out-of-court dispute resolution procedures for the settlement of consumer disputes concerning credit agreements are put in place, using existing bodies where appropriate. Member States shall encourage those bodies to cooperate in order to also resolve cross-border disputes concerning credit agreements.'
3 FIN-NET is a dispute resolution network of national out-of-court complaint schemes in the European Economic Area countries.
4 Paragraph 1 Section 96 of Act CXXXIX of 2013 on the National Bank of Hungary.
5 Paragraph 3 Section 116 of Act CXXXIX of 2013 on the National Bank of Hungary.
6 Subject to the exceptions in Chapter IV of MNB Decree No. 35/2017 (XII. 14).
7 Section 6:390 of the Civil Code.
8 Act CXVII of 1995 on personal income tax.
9 Subject to authorisation by the Supervisory Authority, branches of third-country credit institutions are not required to join the OBA if the Supervisory Authority considers that they have deposit insurance equivalent to the deposit guarantee scheme prescribed under Directive 2014/49/EU of the European Parliament and of the Council.
10 Section 214 of the Banking Act.
11 Section 214 A of the Banking Act.
12 Section 14 (1)–(3) of Act CLXII of 2009 on consumer loans; and Section 3 of Decree 361/2009 (XII.30) on the responsible examination of creditworthiness.
13 Section 19 of Act CLXII of 2009 on consumer loans.
14 Some exceptions are listed in Section 14/A of Act CLXII of 2009 on consumer loans.
15 Section 4 of Act CLXII of 2009 on consumer loans.
16 Section 9 of Decree 83/2010 (III.25) on the calculation of the annual percentage rate.