This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Unhappy with being labelled the local scapegoats for the effects of the financial crisis, Hungarian banks and other retail financers have adopted a code of conduct to show goodwill towards distressed clients.

Background

In a retail market dominated by foreign currency loans, Hungarian customers were hit especially hard by the financial crisis. With banks raising interest rates and related expenses to counter the increased costs of funding, the retail financing sector was facing ever-increasing scrutiny by consumer protection organizations and the media. In particular, the banks' contractual right to unilaterally amend retail lending conditions became subject to widespread criticism.

The Hungarian government, understandably eager to introduce popular measures that had no direct negative effect on the budget, adopted an amendment to the Act on Financial Institutions aimed at limiting unilateral contract amendments, in particular the introduction of additional costs and expenses that clients have to bear. The Hungarian Financial Supervisory Authority (HFSA) was also vested with extensive competences as the consumer protection authority of the financial sector.

However, the rushed legislation, as stop-gap measures are wont to do, brought about more questions than answers. Furthermore, some banks did not hesitate to "invent" last-gasp extra expenses before the amendment entered into force, opening the floodgates for even more (well-deserved) public outrage. To ease the tensions, the major players of the retail lending market announced a self-imposed moratorium on unilateral contract amendments until the end of September 2009.

Birth of the Code of Conduct

In September 2009, following lengthy discussions between the Hungarian Banking Association, the major retail banks and the government, a code of conduct outlining the "principles of fair conduct by financial organizations engaged in retail lending" was published by the Hungarian Banking Association (the Code of Conduct)1. Already signed by financial institutions representing more than 95% of the retail lending market, the Code of Conduct is scheduled to enter into force on 1 December 2009.

Legal nature

As a tool of market self-regulation, the Code of Conduct itself is not a legislative instrument. Acceptance is voluntary for all financial institutions active in the retail market. However, under consumer protection laws, enterprises accepting a sectoral code of conduct are bound thereby and eventual breaches can be sanctioned by governmental supervisory authorities. In the financial sector the HFSA will monitor compliance with the Code of Conduct. Particularly noteworthy is the fact that the HFSA is entitled to levy fines of up to HUF 2,000,000,000 (ca. EUR 7,300,000) in case of a breach of the Code of Conduct for unfair market trade practices violating consumer pro-tection laws. The HFSA will also publish on its website a list of the signatories and a blacklist of "desperados", as well as guidelines for customers.

Key features

The declared primary aim of the Code of Conduct is to enhance (though some may consider "restore" to be a more appropriate term in this context) mutual trust between market players and customers by setting forth basic principles applicable for the whole process of retail lending, starting from the period preceding the conclusion of a lending contract and also covering the handling of payment difficulties and eventual enforcement.

The key principles are transparency, compliance and symmetry. Creditors are expected, in particular, to:

  • observe the customers' potential ability to perform their obligations;
  • develop transparent products, services, terms and conditions;
  • provide accurate and complete information to customers;
  • help customers base their decisions on long-term considerations; and
  • conduct customer relations in a cooperative, flexible and helpful manner.

The Code of Conduct also sets out detailed regulations on the unilateral amendment of existing contracts, focusing on providing a set of transparent and unambiguous conditions for such amendments.

The above principles are also applicable for distressed situations. The judicial enforcement procedure, in particular the enforcement of collateral on real property, is viewed as the ultima ratio in work-out scenarios.

The signatories have also undertaken to extend the moratorium on unilateral contract amendments until 1 December 2009.

Challenges

The Hungarian financial institutions hope to have weathered the first wave of the storm of public backlash by preparing and accepting the Code of Conduct. Naturally, the actual implementation of its attractive and popular policies will be the true test of whether the Hungarian financial sector can repair its somewhat damaged public image and regain the trust of its customers. In-house counsels and outside legal advisors alike will play a key role in translating the guiding principles behind the Code of Conduct into sophisticated, compliant and fair instruments that are mutually beneficial for both the customers and the financing institutions.

The declared primary aim of the Code of Conduct is to enhance (although 'restore' might be a better word) mutual trust between market players and customers.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Footnotes

1 Available online in English at http://www.bankszovetseg.hu/anyag/feltoltott/codeofconduct_10000312.pdf (www.bankszovetseg.hu/anyag/feltoltott/codeofconduct_10000312.pdf) .

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