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Strengthened regulation of the Hungarian capital market

By Daniel Szabo & Erika Tomori
Posted: 8th December 2015 10:18
The Hungarian capital market in the last year was shaped by scandals.  At the end of February 2015 the Hungarian National Bank (“HNB”) as supervisory authority suspended and days later, withdrew the licence of Buda-Cash Brokerage House Ltd., one of Hungary’s oldest brokerage houses.  The HNB suspected that Buda-Cash falsified its financial data over a 15-year period.  The suspension also led to the liquidation of four banks that had close links to Buda-Cash.  In early March, the HNB suspended the license of Hungária Securities Ltd.  for similar reason.  A week later the activities of QUAESTOR Securities Ltd. were suspended as well.  Criminal procedures were initiated against executives of these companies for fraud and embezzlement.  The damage caused is significant.  In case of QUAESTOR, it seems that in a HUF 60 billion bond program the issuer accepted ‘oversubscription’ of approximately HUF 100bn, but the bonds for the oversubscribed amount have never been issued.
It seems that the companies manipulated their IT systems, falsified its statements and securities accounts.  The companies provided the clients fake confirmations of the executed transactions and submitted falsified data for the HNB. 
The above events resulted in significant legislative amendments: the powers of the HNB were strengthened and new rules on the compensation scheme were introduced. 
The Parliament adopted several technical amendments with the intention to increase the general ‘safety level’ of the capital market, to improve the control mechanism of the HNB by incorporating further checkpoints and strengthening internal processes and reporting requirements.  Furthermore, the HNB will conduct investigations more frequently: general investigation shall be held every three years. 
In order to reduce the possibility for fictitious accounts, compliance officers will be obliged to examine monthly the accounts of the client, and shall report to the HNB and to the board of the company.  The same goal led to new regulations relating to IT requirements.  The most important new rule in this respect is that the IT system may be examined by independent external auditors and the HNB will have direct access to the IT systems oh the brokerage firms through online gateway.
The managers of the investment companies will face higher professional expectations and stricter liability, the amount of fine against managers was increased from €65,000 to over €160,000.  The HNB wishes to enhance the level of transparency as well: all clients will have the right to access the balance of the securities account online, on the website of the HNB.  New rules were introduced in order to synchronize the data available to the central depository and to the HNB.
Besides changing technical rules, the Parliament also introduced a new compensation regime, tailor made for QUAESTOR.  The Investor Protection Fund (‘IPF’), in line with the European Union’s MiFID requirements, is an autonomous organization that provides limited property coverage funded primarily from the contributions paid by its members, if any of its members is not capable of performing its commitment to disburse clients’ assets.  The amount of compensation paid by IPF was increased from €20,000 per investor to €100,000 from 1 January 2016.  IPF will pay 90% of the portion of a claim exceeding HUF 1 million, the remaining 10% will be borne by the investor.  As IPF was not prepared for such large indemnifications, the Parliament made it possible for IPF to issue bonds in order to finance indemnifications.  The first issuance has already taken place.
Furthermore, for the compensation of clients of QUAESTOR a unique compensation regime was introduced, the so called QUESTOR Fund.  If the special statutory preconditions of compensation are met, the clients are entitled to a compensation maximum in the amount of €100,000.  Such compensation is paid irrespective of the fact whether the clients would be eligible for compensation under the standard investor protection scheme.  The QUESTOR Fund would be financed from the loan provided by members of IPF.  However, these rules have not entered into force as the constitutionality of the law on QUESTOR Fund was successfully challenged at the Constitutional Court.  The Constitutional Court stated that the law is unconstitutional as it leads to discrimination between investors and the infringement of right to property.  According to the decision of the Constitutional Court of Hungary the legislation is not entitled to put an undue, unpredictable burden to the investment companies financing the compensation.  After the verdict of the Constitutional Court, the Government quickly announced that it will submit a bill to the Parliament which will provide for the compensation of the QUAESTOR victims.  It is expected that the new rules will be adopted by the Parliament in December 2015. 
The damage caused to the investors in 2015 was around €1bn.  It is still unclear to what extent clients will be reimbursed.  Several investment companies decided to terminate their activities and if the QUAESTOR Fund will be introduced, further companies will be forced to exit the market due to the financial consequences of the scandals.  However, the most important question probably is whether the trust in brokerage firms can be reinforced.

Dániel Szabó earned his law degree at the Faculty of Law and Political Sciences of Eötvös Loránd University in 1997. He was a member of the Bibó István College of Law, where he received tutorial education in the field of Civil and Commercial law (1993-1997). He joined Gárdos, Füredi, Mosonyi, Tomori Law Office in 1997 as an associate. In 2001 he became a partner. His primary practice areas are securities law, business law and corporate law. His professional experience includes provision of day-to-day legal services of brokerage firms, IT firms, local municipalities and licensing of banking and capital market participants. 

Dániel can be contacted on +36 1 327 7560 or by email at 

Erika Tomori earned her law degree at the Faculty of Law and Political Sciences of Eötvös Loránd University in 1986. She received a diploma in Securities Trading in 1990. She continued her studies at the Academy of American and International Law (The Southwestern Legal Foundation), Dallas, Texas, US, in 1991. She received a certificate in Banking Law in the Postgraduate course at Eötvös Loránd School of Law 1995.  She started her career at the Financial Business Law Association. In 1992 she was one of the founding partners of Gárdos, Füredi, Mosonyi, Tomori Law Office. Her primary practice areas are banking law, securities law and corporate law. Her professional experience includes the representation of financial institutions in establishment and licensing, litigation, legal counseling and the representation of companies involved in issuance of securities. 

Erika can be contacted on +36 1 327 7560 or by email at

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