The Hungarian Government aims at tightening control over investment services providers.
By Gabriella Kopházi-Tóth, Senior Relationship Manager Hungary
A draft law that envisages stronger financial control has recently been presented. We have listed the main issues:
1. Compensation Fund for Questor’s clients suffered losses
According to the proposal, claims by financial and investment firms, which have paid an advance to the Compensation Fund for Questor’s clients that later on prove to be uncollectable, can be deducted from the firms’ corporate tax payable. If the claim is higher than the corporate tax payable in the given year, the difference will be allowed to be deducted from the corporate tax of the following year.
Claims which cannot be compensated through corporate tax deductions will be allowed to be deducted from the special tax of the financial institutions or the special tax of the credit institutions as well (as chosen by the tax payer).
2. Client information and sub-account at KELER
In order to increase awareness, i.e. to ensure that clients receive more information, the initial offer document (prepared at the time when securities are issued) will contain additional information about the issuer and also about sources where further information on the issuer (financial, legal and market data) can be found.
Account owners will have the possibility to check the actual positions of their securities accounts on a monthly basis through the Central Bank of Hungary.
Furthermore, the proposal prescribes that assets and liabilities deriving from spot, options and forward trades are to be managed separately on special purpose client accounts.
3. Investor Protection Fund (BEVA)
The compensation amount paid by the Investor Protection Fund (BEVA) will be increased to EUR 100,000 (from the current EUR 20,000). The extent of the compensation will not change, i.e. below HUF 1 million 100% compensation is paid, while above HUF 1 million only 90% of the claim amount is honoured.
In case the BEVA orders extraordinary payment for the members, the amount of the contribution shall not exceed the amount of the annual membership due.
The composition of the Executive Board of BEVA will be changed; in the future, members of the Executive Board will be:
- two persons nominated by the Minister in charge of regulation of the money-, capital- and insurance market
- one person nominated by the stock exchange and one by the CSD
- the executive in charge within the Central Bank for bailout related tasks
- two representatives of BEVA Members
- the Deputy Director of the Deposit Insurance Fund (OBA).
In the future BEVA will not be separately organised; execution of its operative tasks will be taken over by the OBA.
Its funding sources will be extended, bond issuance will be allowed with state suretyship under similar rules as with the OBA.
The proposal also prescribes that a license for central depository activities shall be limited only to companies with shares having at least HUF 1 billion in registered capital.
Upon request of the client the CSD shall keep the client’s securities on an individual segregated sub-account. This possibility shall be offered by the service providers pro-actively to their clients.
4. Auditors
According to the proposal certain companies/institutions shall be audited by a qualified member of the Chamber of Auditors or an auditor firm only.
Companies of public interest can be audited only by auditors having at least a HUF 100 million liability insurance policy. For audit firms this amount is HUF 500 million.
According to the proposal, no auditor or audit firm shall conduct audits on companies of public interest for a period longer than 5 years. 4 years must pass before the same auditor can enter into an agreement with the given company again.
5. Central Bank
In the future the Central Bank of Hungary (CBH) may grant bridge loans to BEVA just like those currently available for OBA.
The Central Bank is expected to put a greater emphasis on on-site audits. Comprehensive audits shall be conducted more frequently in the future and so called extraordinary target audits may be ordered in case of a suspected market abuse.
The key ways in which CBH is proposing stricter measures are:
- Strengthening and extending CBH’s rights in the areas of controlling and ordering actions
- Recommendations aiming to increase the level of safety within the capital market with a special focus on increased investor protection, transparency and the control of market players
- Broadening the number of control points within the process of capital market transactions to improve the framework via an early signal method that detects the intention of any market player to mislead customers and to conduct fraud
- Strengthening the requirements for internal policies and processes and reporting obligations to the supervisory authority.