REPORT on Activities of the Hungarian Banking Association 3rd Quarter 2004 Budapest, November 2004 2 CONTENTS I. PROFESSIONAL ISSUES ............................................................................................................. 3 1. 2005 tax laws .............................................................................................................................. 3 2. Consumer protection amendments to the Credit Institutions Act .............................................. 5 3. Credit information system .......................................................................................................... 6 4. Amendments to the Accounting Act (Act C of 2000) ................................................................ 9 5. Insolvency Act ............................................................................................................................ 9 6. Payments regulations................................................................................................................ 11 7. International Accounting Standards ......................................................................................... 12 8. Concept for a uniform legislation on co-operatives ................................................................. 13 9. Reporting requirements ............................................................................................................ 14 10. Public Private Partnership in educational infrastructure development .................................. 15 II. LOAN SCHEMES ....................................................................................................................... 16 1. Agricultural loans ..................................................................................................................... 16 2. SME lending ............................................................................................................................. 16 III. INTERNATIONAL COOPERATION ...................................................................................... 17 1. FBE Banking Supervision Committee - Capital Adequacy Working Group ........................... 17 2. FBE Fiscal Committee ............................................................................................................. 21 3. FBE Accounts Committee ........................................................................................................ 22 4. FBE Financial Markets Committee .......................................................................................... 23 5. FBE Communications Committee ........................................................................................... 24 6. European Payment Council (EPC) ........................................................................................... 24 7. European Committee for Banking Standards (ECBS) ............................................................. 25 IV. ASSOCIATION EVENTS ......................................................................................................... 26 1. FBE seminar for new and associate members on operations of the Banking Supervision Committee .................................................................................................................................... 26 2. Ombudsman report on banks' mortgage lending practices ...................................................... 26 3. Group4 Falck merger with Securicor plc ................................................................................. 27 4. Payment System Forum ........................................................................................................... 27 5. Hungarian Bank Card Forum ................................................................................................... 28 6. Information Society Inter-Ministerial Coordination Committee, IT Security Sub- Committee ...................................................................................................................................................... 28 3 I. PROFESSIONAL ISSUES 1. 2005 tax laws The proposed 2005 tax laws were sent by the Ministry of Finance for review in September. Here is a summary of our main comments: In relation to personal income tax we expressed our objection to the planned narrowing of tax benefits by abolishing tax allowances on long-term contracts, such as life insurance contracts, where banks and insurance companies have developed a variety of combined products, building on the tax allowances on insurance arrangements. We proposed that the tax allowances remain in force for existing contracts until their expiry. We also submitted comments on the regulations on fringe benefits and business presents. In relation to proposed amendments to the VAT Act we made observations regarding the group taxpayer option. Also, we proposed that the provisions for tax-exempt services in Point 6 of Schedule 2 to the VAT Act be adjusted to expressly provide that credit rating services related to lending are tax-exempt, in accordance with the provisions of the Credit Institutions Act. In relation to the Act on Duties we expressed our objection to abolishing duty allowances on plot purchases. We also challenged the fact that the duty base for flat sales related to exchange of flats would increase excessively and would thus hinder flat mobility. We also raised the issue of reducing the upper limit on duties for newly built real estates to half and expressed our objection to the plan to abolish the duty exemption for inheritance or gift of savings deposits, securities and business shares. Publicly offered securities (government securities, investment units, etc.) are popular liquid forms of investment among households and small investors. It would be unwarranted to limit these products, which are viable alternatives to savings deposits and deserve to be supported. Applying different duty rates would influence the structure of savings and thus, impact competition, which is unacceptable. The proposed changes could trigger a restructuring in the forms of savings, which would be undesirable. In relation to inheritance and gift duties we proposed that publicly offered securities continue to be duty-exempt. We filed a separate comment in this matter with the Administrative State Secretary, copied to the leaders of the parliamentary factions. We indicated that making the inheritance of savings deposits, securities and business shares dutiable would adversely affect savings; it would also impact on financing government debts through the purchase of government securities by investment funds. We indicated that making the inheritance of savings deposits dutiable would break a long regulatory tradition. We also indicated that the rates of duties in the current Duties Act are excessively high and the duty bands not wide enough. The duty bands for property acquisition are ad hoc, not based on uniform principles, and the value limits for preferential duty rates do not follow the inflation rate. We proposed that a 2% preferential duty be applied to acquisitions of flats that are satisfying minimum dwelling needs (up to HUF 10 million in value). (During the parliamentary debate, savings deposits were omitted from the items subject to inheritance duty). 4 In relation to the Act on Taxation Rules we proposed that taxpayers continue to be required to report their bank account numbers to the Tax Authority, given that businesses may have bank accounts abroad, as well. Government will impose a special tax on credit institutions and financial enterprises for a two-year period, for 2005 and 2006. Banks expressed their opinion that this special tax was unjustified and economically unfounded, but accepted the extra burden. Announcing the special tax for the financial sector, the Minister of Finance said there were other international examples for taxing banks at a different tax rate. We tried to gather information on practices in other OECD member countries and consulted with experts from international auditing firms. Also, using our FBE membership, we asked for information from other EU member countries through the FBE's Fiscal Committee. Answers to our questionnaire show that banks are typically not distinguished from other corporations in EU member states for the purpose of corporate taxation. Two minor deviations were indicated by two countries: there is a special tax imposed on revenues (mainly interest revenues) in Greece, but this tax can be offset against corporate tax; in Ireland, the banking sector is required to contribute EUR 300 million in the period between 2003 and 2005 (EUR 100 million in each year) as a sort of tax collateral and this amount is divided between banks based on their retail portfolios. To optimise the tax burden, the Association, availing itself of the option offered by the Minister of Finance and the Prime Minister, in collaboration with specialists from member banks developed a technical solution for this special bank tax, under which credit institutions and financial enterprises may choose between their interest margin or pre-tax profit to be the tax base (as opposed to the previous proposal, envisaging a net interest income tax as the only option). Accordingly, in 2005 and 2006 banks and financial enterprises will pay an extra 8% corporate tax or 6% of their interest margin as a special tax. When developing our proposal we looked into several alternatives, assessing the advantages and disadvantages of each option. Specialists from savings co-operatives and financial enterprises were also involved in the work. The proposal submitted to the government satisfies the government's revenue expectations and will contribute at least HUF 60 billion to the budget; the technical solution is in harmony with current domestic taxation practices and is supported by all financial institutions. (The Association's proposal with the option to choose was supported by the Ministry of Finance and the relevant legislation was passed). We proposed that development tax allowances in the Act on Corporate and Dividend Taxes be extended to development projects in banking. An important element in the legislation would be that the tax allowance would be tied to the development objective, not to the activities or sector classification of the institution. (The proposal was not supported by the Ministry of Finance and therefore, was not incorporated in the new legislation). We repeated our proposal to modify the definition of net sales revenues in relation to the financial sector in the 2005 local trade tax laws. We initiated that 2005 rules be applied to the 2004 financial accounts. The rules introduced in 2004 for the recognition of derivative transactions were disadvantageous for the banking industry, compared to previous years; the rules to be applied from 2005 to some extent restore the status quo but, in respect of the tax base, create a special situation for a year. We indicated that the definition for net sales 5 revenues in the 2005 legislation is a step forward but is questionable regarding the certification of the hedging nature of the transaction: no such regulation exists in international practice and, as has been indicated several times, the current regulation raises serious constitutional queries. The problem should be resolved through a proper definition of the tax base. (In the legislation passed, the definition for net sales revenues was favourably modified to allow trading transactions, too, to be recognised on a net basis. The Finance Ministry did not support our proposal for the new rules to be applied retrospectively to 2004.) In relation to the new VAT Act, in cooperation with the National Association of Securities Dealers we initiated that the ad hoc sale of securities or business shares be removed from the scope of activities falling under the VAT Act. Businesses often decide to place their liquid financial assets in different forms of savings facilities depending on the gains and risks involved. The proposed measure is injurious for those businesses who would like to sell their securities before maturity; furthermore, it is economically unjustified and disproportionate for savers and disturbs the development of the securities market. (Our proposal was accepted the scope of activities would remain unchanged in the new legislation for 2005) 2. Consumer protection amendments to the Credit Institutions Act The Ombudsman for Citizen Rights made a number of consumer protection recommendations to the competent authorities. Largely prompted by this, the Ministry of Finance drafted an amendment to the Credit Institutions Act to address the Ombudsman's recommendations and to adjust and complement the rules for the debtor database (BAR) in response to Hungarian Financial Supervisory Authority's requests concerning consumer protection. According to the proposal, in the case of mortgage loans the bank would be obliged to provide a risk statement on risks related to exercising the buying option and exchange rate risks related to foreign currency loans and this statement should be countersigned by the customer. Also, in case of exercising its buying option the bank should give the customer 90 days to try to sell the real estate collateral on his own. The proposal also contained provisions for claim enforcement rules to be stated in the banks' business terms and conditions. While agreeing with the Ombudsman's opinion regarding the need for measures to improve customer information, banks found the proposed regulation exaggerated and, in some aspects, incorrect. Regarding the risk statements it was raised that there are number of other significant risks facing the customers (interest rate, repayment, suretyship, pledge) and it is impossible to issue separate statements for all those risks. Notwithstanding, banks find it important that the risks statements have uniform contents to avoid customer arguments that the risk statement of another bank was much more elaborate and based on that he would not have taken the loan. Accordingly, we proposed that the risk statements be drafted and signed by a recognised professional organisation. We proposed the Hungarian Financial Supervisory Authority to take up this task (the Supervisory Authority did not refuse the informal request at that time). We also asked the legislators to allow for time for the preparations required. We expressed our objection to an extended regulation of buying option: buying option is a specific legal institution regulated by the Civil Code and therefore, it cannot be changed by the Credit 6 Institutions Act. Apart from legal technicalities, a number of reasonable counter-arguments were submitted against the sale of the real estate by the customers. A bank would exercise its buying option if the customer has defaulted on his contractual obligation despite several attempts to restore its ability or willingness to pay. In such cases, the relationship between the parties is spoiled and the customer may cause further losses during the 90-day period proposed. We rejected the proposal to include claim enforcement rules in the banks' business conditions. Currently, all additional obligations are stipulated in the contract and it would be difficult for the customer to trace these important points in the bank's business conditions. Banks' already complex business conditions would be stuffed with descriptions of various additional obligations related to the various contracts and the various methods of enforcement (as these are not uniform, either). Such a volume of business conditions would be confusing rather than helping the average customer. We proposed that these obligations continue to be specified in the loan contract. Most of our proposals were accepted. The 90-day deferral for sale by the customer was dropped and so was the idea for additional obligations to be stated in the banks' business conditions. However, the obligation for banks to provide risk statements was retained in the draft law. 3. Credit information system The Administrative State Secretary of the Ministry of Justice approached the Ministry of Finance and the Association with a proposal regarding a central credit information system. The Ministry of Justice initiated a review of the provisions of the Credit Institutions Act because, in their opinion, the rules for a central credit information system should be more specific and complemented with further guarantee elements. In the Justice Ministry's opinion the central credit information system is not fair in that it does not distinguish between major and minor defaults and provides limited possibilities for a more detailed information exchange (allowing a better assessment) between banks. The regulations on a central credit information system in the Credit Institutions Act were changed in two points, effective from October 7, 2004: the credit information provider is obliged to notify the customer in writing on the fact and contents of the information upon entry of information in the BAR system. The second change is that customer information registered in the BAR system may be retained for a maximum period of five years from repayment of the debt; thus, the legislation makes it clear that in case of long-term contracts the start of the retention period is the date when the debt is repaid, not the expiry date of the contract. (Basically, the system had followed this principle even before this change). The Justice Ministry is of the view that a more comprehensive review of the rules governing the central credit information system would be required, with special regard to: a/ improving customer information, b/ allowing customer to take appropriate actions to prevent any misunderstanding or illegal measures, c/ commensurate registration time, differentiated according to the seriousness of the default. 7 After consultations with banks the Association expressed its support of the Justice Ministry's proposal. At the same time we submitted a number of constructive counter-proposals and proposals for adjustments in certain points. Based on banks' opinions and comments, the following proposals were presented to the Ministry: The starting point and governing principle for the amendment should be that all organisations affected by the regulation are supportive of the central credit information system, as a good and useful instrument. The amendment should not weaken the regulation and should not make the system inoperable; it should be aimed at improving the usability and transparency of the system and customer security through better information. Rules for the central credit information system should be grouped and provided in a separate sub-chapter in the Credit Institutions Act. The amendment should provide clearer, and more specific, criteria for registration; the current conditions have given rise to repeated interpretation disputes. Debtor data should be registered in case a debt in excess of the minimum wage is unpaid for more than 90 days. The new legislation should clearly provide that, apart from direct debtors, the definition of debtor includes all persons who have assumed suretyship, guarantee or collateral in respect of the debt, should such persons become debtors upon default. The information maintained in the credit information system and the criteria for registration should be extended to include the details of loan applications rejected for reasons attributable to the customer, if the loan application has been rejected for fraudulent conduct by the customer. Similar data for rejected private bank card applications are even now registered in the central credit information system in respect of rejected applications and rejected use of a bank card. The new provisions for notification on registration should ensure that Over and above the general terms and conditions of the contract and notes contained in the bank's business conditions, the customer should be provided with proper information when concluding the contract (for example, within the framework of risk statements); Imminently before registration, the customer should be notified that according to the bank's records the criteria for registration are present. In this respect (and this is the practice followed by most banks), the notification should be given at such a point in time, where the customer can still take appropriate action, for instance by repaying the debt or by proving that the claim is unfounded. The notification should be made in writing and in a provable manner and should include information as to how the customer can avoid registration; The customer should be notified on actual registration. During preliminary discussions it was raised that the customer should be given the chance to contest prior to being entered in the credit information system. In this respect, the banking community and the Hungarian Financial Supervisory Authority expressed the view that the registration should not be pending until the contestation or a subsequent litigation process is 8 concluded. Even now, customers do have the possibility to obtain information through customer inquiries and if registration was based on a mistake, the customer may request the bank that has entered it to cancel it. If such request is rejected, the customer may go to court, in accordance with the relevant provision of the Data Protection Act. Here, it should be noted that no such litigation has taken place during the five years since the retail system has been in operation. Litigations launched by customers to buy time to avoid registration while the case is in process would weaken the usability of the system and generate legal disputes. A cornerstone of the mandatory credit information system is that, upon presence of the relevant legal criteria, the credit institution is obliged to report the debtor without discretion. The Justice Ministry accepted this argument, with the proviso that it should be looked into whether, under the current rules for the cancellation of data, a quick pre-emptive process could be developed to prevent litigation so that any legal disputes after registration could be settled within the shortest possible time. Within this context, it was raised that the Hungarian Financial Supervisory Authority should perform an extraordinary inspection in cases where the customer's complaint is rejected by the credit institutions It was also mooted that legal disputes could be handled through the reconciliatory bodies functioning under the Consumer Protection Act; for this, the rules for these reconciliatory bodies should be reviewed. A major requirement concerning the new regulation is that the period of registration should be determined in a differentiated way and the system should be such to allow commensurately differentiated consequences. The provisions of the Credit Institutions Act allow even in their present form a differentiated assessment of the customer based on details sent to and retrieved from the BAR system. The main differentiation criteria should be included in the Credit Institutions Act. Based on these, the banking community will develop a proposal for a rating scale or an index system, to be agreed upon by all players in the market and the relevant document approved by the Hungarian Financial Supervisory Authority. Credit institutions pointed out that a more differentiated information base would be a useful tool in credit appraisal and would allow the practice of considering BAR listing as a prohibitive factor to be dispensed with. Access to information stored in the BAR system and inquiries. The regulation should stipulate how natural persons can access their data in the system. At the discussion with the Justice Ministry, the issue of banks charging a transaction fee for inquiries was raised. Representatives from the Data Protection Ombudsman's Office explained that the customer has the right to know the information kept on him at no charge. The Association maintains that the current positions on a positive debtor database should be reconsidered. This would be important for several other reasons, too, such as preventing a mass indebtedness of households and developing a viable retail debt workout system. Representatives from the Data Protection Ombudsman's Office maintained their objections and constitutional queries regarding the proposed system. 9 4. Amendments to the Accounting Act (Act C of 2000) The Ministry of Finance submitted a proposal for amendments to Act C of 2000 on Accounting in the third quarter. One change sensitively affecting the financial sector was a basically positive, proposal, concerning fair value accounting. According to this, those businesses, which, effective from January 1, 2005, are required by law to draw up consolidated annual financial statements by applying the rules of fair value accounting should also compile their individual annual financial statements based on the rules of fair value accounting. After consultations with experts we indicated the Ministry our concerns over making fair value accounting mandatory: The fair value option has been present in Hungarian legislation since January 1, 2004. However, it does not apply to all assets to be reported at fair value under international accounting standards and, in certain points (such as reclassifications between different financial instrument categories), deviates from IAS 39. The proposed amendment may significantly bear on the corporate tax base and the local trade tax base. Tax consequences cannot be neglected: the stock of trading assets subject to fair value accounting may be quite large in volume and may, from period to period, vary in structure and volume, sometimes with a high price volatility, depending on the market. Due to these effects, bank's tax liabilities (and likewise, fiscal revenues of the budget) would be difficult to plan. The time since the introduction of fair value accounting in Hungarian legislation has been very short; there is little practical experience regarding its application and the method is not widely used yet by credit institutions. The IT costs involved if FVA was imposed on a mandatory basis would be rather significant. The intended principle of standardisation prejudices the principle of level playing field: the method of reporting and computation of the tax base would differ in the case of those required to use FVA on a mandatory basis and those not using FVA. It is unclear whether or not, under a standard principle, other entities involved in consolidation would also be required to use FVA. Tax implications should also be looked into for these entities. Directive 2003/51/EC, referred to in the proposal, mentions the use of FVA in individual annual financial statements as an option, not as a compulsory method. Considering our above arguments, the Ministry of Finance relinquished the proposal to introduce fair value accounting on a mandatory basis and removed it from the draft law presented to Parliament. 5. Insolvency Act The Codification Committee, led by László Keller, Political State Secretary in charge of controlling public finance affairs, worked almost continuously in the third quarter with some short interruptions in the summer. The expert summary group, comprising specialists from the Association and member banks, was complemented on the lending side with risk management and workout specialists from member banks, who represented banks' interests with full commitment and at high professional standards at the weekly meetings of the working committee. At the Codification Committee's fourth meeting, addressing the codification working document, the Association was represented by its Secretary General. In his comments, the Secretary General 10 emphasised the importance of the Act for the banking industry: injuries to lenders' interest may adversely affect lending and economic turnover as a whole. The new legislation should put the most important decisions in the hands of the lenders. Banks have no counter-interest in allowing reorganisation processes to be launched at companies which can be rescued; however, in most cases its is banks who ensure the conditions for further operations during the reorganisation process and therefore, it is reasonable to give lenders the right to selecting or dismiss the receivers. Courts should only be given some automatic decision powers. Prior to the Codification Committee meeting, the working document was sent to specialists from member banks for review and issues related to lender interests and the enforcement of mortgage and other collaterals were also reviewed in depth by the summary working group. In many points, the proposal showed that lender interests were pushed in the background. We submitted our comments and objections in writing. The concept of the new legislation was finalised at the end of the summer. It was reviewed by the summary working group on September 3 and by the Codification Committee on September 16, 2004 and was scheduled to be submitted to administrative review in mid-September and then presented to Government. The concept of the new legislation contained a number of elements focused on debtor and receiver interests, with lender interests even less respected than in the current legislation (the elements in question mainly related to the satisfaction of secured claims under bankruptcy procedures and the handling of collaterals). The proposed regulation on the satisfaction of secured claims meant a step back. The 50% rules was proposed to be abolished, lender claims would have been met from proceeds from the pledged asset provided there are still funds available after paying the liquidation expenses specified in point a) of subsection 2 of Section 57 of the Act; however, the scope of expenses listed in this point a) in the current legislation is so wide that there would hardly be any funds remaining after all those expenses are paid. The Association's position was that assets encumbered by mortgage or pledge should not be included in the liquidation assets: they should be separated and promptly put at the disposal of the mortgagee or pledgee. A lengthy liquidation process would entail a significant loss of value and the lender would be worse off even if he was entitled to all the proceeds collected from sales. We also drew attention to the fact that the measure contradicted the EU regulatory trends and would cause banks a competitive disadvantage under Basel II; corporate lending would be set back and become more costly. Decision rights of secured lenders. Under the concept, secured lenders would have veto rights in bankruptcy procedures. Eligible for voting are lenders whose claims are fully covered by the pledged asset. This fact is to be verified by the receiver and the relevant decision may be challenged in Court. For example: a mortgagee has a HUF 30 million claim, which has been secured by an asset with a value of HUF 40 million. The receiver may establish that the asset is only worth HUF 20 million. Consequently, the lender will only have voting rights in proportion to this value and, if there are several lenders, then some of them may even be excluded from the vote. If, the pledged asset is subsequently sold at a higher price, the secured lender may not receiver the surplus over HUF 20 million, because such surplus is to be divided proportionately between claims falling under point c) of subsection 2 of Section 57. In our opinion this is completely unacceptable and raises constitutional queries; it upsets the order of satisfaction of claims and would break up the entire lending system. 11 The chapters on rules of procedure can only be partially assessed, as they are marked as not yet finalised. According to the proposal, bankruptcy proceedings to be launched upon debtor's request under a simple process by filling in a form and submitting it to the Court. In this case, the debtor is entitled to moratorium promptly upon filing the request. This provision serves debtor protection purposes and may give rise to abusing lenders. As for moratorium, no mortgage rights, assignment or transfer rights, buying options or rescission rights could be enforced during the period of moratorium. We believe this is unacceptable. Once it is the debtor who receives the proceeds from the sale of assigned collaterals and not the beneficiary, this legal institution will loose its intended function and such proceeds will be untraceably consumed during continued operations of the company. The prohibition of exercising the buying option is against the regulations on buying option and current provisions of the Bankruptcy Act. The proposal fails to offer any security in the event the buying option expires during the moratorium. The same is our position regarding sale with reservation of title and the right of rescission. The concept contains other professionally questionable measures, as well. The Association's Board reviewed the concept and submitted its comments in a letter to State Secretary László Keller, as Chairman of the Codification Committee; the Justice and Finance Ministers were also informed on the Association's position. A breakthrough was achieved in a number of issues at the Codification Committee's meeting of September 16: after a debate, the Committee decided to retain the 50% rule for mortgagees and we were reassured that there was no intention to impair the current regulation of mortgage rights in any respect. As to international regulations on mortgage rights, the Committee will solicit for the opinion of the Justice Ministry. The debate over the legal status of the receiver remained open. Following the government change, the task of preparing the new Insolvency Act was assigned to the Ministry of Justice; the draft law has not been presented to Government yet and is expected to be revised. 6. Payments regulations The authorities responsible for payments regulations (The Ministry of Finance and the National Bank of Hungary) requested the Association's opinion on the proposed Government and Central Bank Decrees. A general review of payments regulations has been on the agenda for quite some time; however, no final decision has been made in respect of either of the proposals reviewed. A recent amendment to the Central Bank Act reshaped the regulatory framework and split certain regulatory functions between the Ministry of Finance (acting on behalf of the Government) and the central bank (previously, the central bank was the sole owner of the regulation). Although the division of tasks under the current proposals is now more conceptual, reviews have proved that the division of regulatory tasks in respect of an integrated payment system cannot be done without facing a number of serious problems. In its comments, the Association tried to address the two regulations as parts of one and the same framework and demonstrated that a divided regulation will lead to several misunderstandings. 12 The unilateral and inadequate regulation of electronic payment instruments was the part criticised the most by banks: Despite our repeated requests, the regulations on bank cards were not separated from the regulations on other electronic payment instruments. In practice, there are substantial differences between bank cards (used in large volumes) and individual remote banking via computers from the workplace or telephone banking orders from private customers, in terms of exposure, customer responsibility, transaction amounts and banks' liability in function of all these. We proposed that the new regulation provide separate liability rules for bank cards versus other electronic instruments. In respect of problem cases and disputes, inevitable in banking, the draft regulation contains unilateral and adverse provisions, utterly encouraging fraud and leaving banks defenceless against such acts. In case of disputes, the burden of proof would be with the bank even in such cases where there is no chance to find out the truth. It would be particularly adverse to banks if all customer claims related to electronic trade were to be considered as proven and recognised damages to be remedied by the banks. We expressed our objections to the fact that mobile banking was not addressed in the proposed regulation, whereas, an amendment to the Telecommunications Act enacted last year, mobile phone providers are now allowed to provide payment services. No doubt, paying parking fees, shopping or utility bills via mobile phone is an added service to the customer. (This is different, though, to the cases where the customer gives a transaction order to the bank via mobile phone. Here, the transactions are managed, financed and recorded and combined with other own services by the mobile phone company). Of course, the appearance of new players in the market does affect banks sensitively; the main problem, however, is that the questions such as which payment areas will mobile phone providers have access to, their relationship with other payment services providers and their scope of responsibility are unsettled. This latter is particularly injurious to banks, given that mobile service providers are free of the costly consumer protection measures banks are obliged to have in place by law. The regulation has not kept pace with foreign exchange liberalisation measures, prompt collections are still difficult. A main problem is that the interbank giro system is not able to handle foreign currency transactions. Another problem is that in case of collection under execution procedures there are no specific provisions as to which other accounts (HUF/FX) of the client may be debited, in what order and at what exchange rates, once there are not enough funds on the foreign currency account affected by the collection, and the issue of bank charges to be debited is also unclear. An issue related to international payments is how the 5-day deadline can be met in cases where the initiating bank is not aware of the exact dates of banking holidays in the intermediary and receiving countries, and thus, timely payment is compromised. In addition to the above, further comments, question and proposals were included in our detailed opinion submitted to the competent authorities. 7. International Accounting Standards In the process of the work of the EU Accounting Regulatory Committee, aimed at adopting international accounting standards, a lengthy debate evolved over IAS 39, the standard that 13 essentially affects the accounting rules for banking products. Numerous proposals were presented by the European Central Bank and the banking industry, of which, at the end, three options remained: Adopting IAS 39, without the provisions on full fair value and hedge accounting; Adopting IAS 39 with the proviso that it is not applied to the financial sector; Postponing adoption. The Ministry of Finance, which is involved in the work of the competent committees, asked for the Association's input in developing the Hungarian position for the closing vote on IAS 39. In our comments we noted that the banking community had not received any information concerning the work of the Accounting Regulatory Committee, we had no formal information on the status of the various chapters under revision; this would be badly needed, given the approaching implementation dates, and further professional assistance would also be appreciated. We maintained our support of the previous Hungarian opinion, according to which Hungary maintains its position and urges for the full adoption of IAS and IFRS in the EU and their promulgation in national languages to allow for their application by the affected entities from January 1, 2005. Basically, this would have meant a temporary postponement of the adoption of IAS 39. Notwithstanding, we found the adoption of IAS 39 without the provisions on full fair value and hedge accounting also acceptable, with further investigations proposed by the international professional community in this respect. According to unofficial information, members of the Accounting Regulatory Committee were in favour of Options 1 and 3; finally, by a close vote, Option 1, i.e., adoption of IAS 39 without the provisions on full fair value and hedge accounting was endorsed. 8. Concept for a uniform legislation on co-operatives A 2003 amendment to the Act on New Co-Operatives provided for the need to adopt a uniform legislation for co-operatives. The new legislative concept is aimed at EU harmonisation and seeks to regulate co-operatives as organisations which combine business functions with cultural, social and community functions. In our comments on the concept we proposed that co-operatives should have a minimum capital of HUF 3 million, a downward deviation from this should only be allowed for housing co-operatives and, maybe, school co-operatives. We provided comments concerning the transformation of co- operatives and the regulation of shares in co-operatives and proposed for the institution of member's shares to be developed so that member's shares are qualified as a negotiable asset that can be offered as collateral for business transactions and may be subject to execution. To ensure negotiability, co-operative shares should appear in the form of securities falling under the Capital Market Act. We emphasised the need for the new legislation to stipulate operational rules for the various forms of co-operatives and pointed out that the operations of savings co-operatives and insurance co-operatives should be given proper attention. Also, we initiated that the National Federation of Savings Co-Operatives (OTSZ) and the National Interest-Representation Association of Savings Co-Operatives (TÉSZ) should be involved in future reviews. 14 9. Reporting requirements The National Bank of Hungary submitted for review its Guide for the planned 2005 monetary statistical reporting requirements at the end of the summer. The Guide is planned to be issued as a legal regulation, that is, as a Central Bank "Decree on the Scope, Method and Deadlines for Reporting to the Central Bank Information System". The decree would contain all reporting requirements for the financial sector in an integrated form. In addition to changes to current reporting requirements, the central bank needs some new data to be reported by banks, mainly due to the European Central Bank's reporting requirements. There will be more reports required in relation to securities transactions (repo-type transactions, ownership structure of securities aggregates, securities introduced to the Budapest Stock Exchange). Reports on announced loan and deposit interest rates, for the purpose on interest statistics. In relation to payments, GIRO will be required to report the codes for failed international settlements (Balance of Payments) on a monthly basis. Under its overseeing role, the central bank will require KELER to provide monthly reports and ad hoc written reports on operational breakdowns and repairs. E-money reporting (e-money is not functional yet, the relevant regulation is already in force and therefore, the reporting requirements have been issued). Changes to current reporting requirement: Supervisory Balance Sheet and Profit and Loss Account: new lines added, some old lines (such as for example, some lines related to repo transactions) omitted. A new method is proposed for the maturity classification of time deposits, based on whether or not interest loss is incurred on redemption before expiry. Corporate and retail interest rate reports extended to include EUR and CHF denominated products. Bank card issues and acquirer reporting will be broadened due to the changed contents of the ECB'S Blue Book. The forex transactions table in the Operative Foreign Exchange Report on open forex positions will be more detailed. Banks provided a number of modification requests and proposals for adjustments to certain definitions in the proposed regulation. The Association asked for avoiding any redundant data reporting and that details that are available in existing statistics should be retrieved centrally by the central bank; unnecessary adjustments that do not carry any information content, such as column or line rearrangements should be avoided as they would entail substantial extra work and costs for the banks. Costs would either reduce profit or increase the stock of intangible assets, whereby prudential and risk-taking limits would be reduced. The central bank was receptive to our proposals: the modification concerning the classification of time deposits in the supervisory balance sheet was dropped; a small experts group was set up to review the requirements concerning interest statistics, the redundant requirements mentioned were omitted and those changes that were not carrying any information content were revoked. 15 10. Public Private Partnership in educational infrastructure development The Ministry of Education solicited the Association's comments on the proposed Government Decree on Public Private Partnership. During previous consultations the Ministry had promised to give maximum consideration to the banking industry's position in the proposed regulation. Given the special nature of the regulation (Government Resolution, not Government Decree), the Ministry only sent us the short draft resolution and an extract of the detailed proposal. In our position taken based on member banks' comments we welcomed the objective of the proposal to resolve the issues of state guarantee and the payment of rental fees by universities (the public sphere), a key element of the scheme. However, in our letter we pointed out that the contract between the winning bidder and the university should be signed by the competent ministry and countersigned by the Ministry of Finance. Also, we drew attention to the fact that long-term state commitments are not transparent to us in the budget records and maintenance costs for existing institutions implemented under PPP projects are missing from the elements of rental fee. We objected to the fact that the proposal did not include our previous proposal for internationally experienced financial/legal consultants to be involved to assist the tender inviter in the preparatory stage. We agreed with the proposal that default in services should be sanctioned by the university by fee reductions; at the same time, we drew attention to the danger that the reductions may reach the extent where not only the operator's profits but the payment of loan instalments is also compromised (namely, this would lead to termination of the loan and cessation of the project). The complexity of the problems concerning PPP development projects is indicated by the fact that the State Audit Office in its 2004 report on the budget expressed criticism over the lack of transparency of PPP projects. 16 II. LOAN SCHEMES 1. Agricultural loans The Association initiated with the Ministry of Agriculture an amendment to the Government Decree on agricultural supports for 2004, given that the provisions on the interest rate to be applied is incorrect in the Decree. (The Decree provides that the interest should be calculated at the 3- month BUBOR effective on the date on which the interest is debited [not the interest due date]). Despite several promises, the Decree has never been amended. In some cases the issue was resolved by providing the correct text in the decrees on the specific loans schemes. However, for example in the case of grain storage loans, the relevant decree did not contain any provisions on the computation of interest and therefore, the incorrect provision in the Government Decree had to be applied. Unfortunately, the Government Decree has not been and is not expected to be amended this year. Special attention shall be given to the correct wording in drafting the Decree for 2005. In view of the large and high quality wine production in 2004, the Ministry of Agriculture initiated the introduction of a loan scheme with interest subsidy to promote quality wine storage. Specialists from interested banks had several consultations with the Ministry of Agriculture and agreement was reached that the banks' requests will be taken into account in the decree to be issued. The review of applications under the loan scheme for agricultural producers in adverse areas was concluded in the third quarter. Most of the 1,200 applications were approved by the jury set up within the Ministry of Agriculture (also by taking into account the assessments provided by the banks). The first self-assessments will be due in 2005. The evolution loans scheme, launched 3 years ago, was concluded, self assessments for the third year were reviewed and approved in the third quarter. Final data on this 3-year scheme are hoped to be available in the near future. 2. SME lending Upon proposals by member banks, the HBA initiated with the Ministry of Economy and Transport an amendment to the provision of the Decree on SME loans, which provides that subsidised assets cannot be mortgaged. This provision causes confusions in administration and often makes the granting of loan impossible. Given that no progress had been made in the issue, the Association once again raised the matter with the Ministry. The Ministry initiated modifications to the Government Decree on SME loan reporting requirements. Banks supported the initiative and we developed a common proposal to improve and simplify the reporting requirements. The proposal was also reviewed with the Hungarian Financial Supervisory Authority, given that under an authorisation from the Government, the reporting obligation is to be ordered by the President of the Supervisory Authority. (The final government Decree containing the amended reporting requirements has not been furnished to us to date). 17 III. INTERNATIONAL COOPERATION 1. FBE Banking Supervision Committee - Capital Adequacy Working Group July Document of the European Commission Following the adoption of the Basel Accord in June, the European Commission published the proposal for the new Capital Adequacy Directive, to be enacted in the form of amendments to the Banking Consolidation Directive (Directive 2000/12/EC) and the Directive on the Capital Adequacy of Credit Institutions and Investment Firms (Directive 93/6/EC). (www.europa.eu.int/comm/internal_market/regcapital/index_en.htm) In connection with the Directive, the Internal Market Commissioner, Fritz Bolkenstein, pointed out that "this proposal will put the EU at the forefront of modern financial regulation. It will enable European financial institutions to do business efficiently, safely and competitively to the benefit of consumers, businesses and Europe’s economy. It is an excellent example of international and European processes working in parallel to produce positive results for all." Similarly to the Basel Accord, the Directive dispenses with the "one-size-fits-all" approach and allows financial institutions to determine their capital requirements by choosing the approach best suited to them (simple, intermediate or advanced approach). The proposed amendments to the Directives follow the June Basel Accord in other respects, as well; a specific objective of the Commission was to reduce the differences between the European regulation and international agreements to the minimum. However, there is already a difference in the scopes of application: while the Basel Accord applies to internationally active banks (groups, financial conglomerates), the Directive will have to be applied by all EU-based banks and investment firms on individual and group levels (national supervisors may give an exemption from an individual application under certain conditions). Another difference is that the European regulation allows the use of the standardised approach for sovereign and institutional portfolios (banks, investment firms, municipalities) even in case other portfolios are measured by using the IRB approach. The new regulation does not affect the differences in definition of capital, which will continue to remain: in contrast to the Basel regulation, the European Directive does not set a capital adequacy ratio: it only provides that the regulatory capital shall at all times exceed the sum of the minimum capital requirement for credit, market and operational risks. The Directive does not specify the ratio of tier 1 and tier 2 capital to be allocated for expected losses that exceed available provisions. (Pursuant to the Basel regulations, this ratio is 50% each.) The European regulation will allow a 0% risk weighting for domestic intra-group exposures at national discretion, once certain conditions are met. In the proposed EU regulation, it will suffice to calculate the capital requirement for operational risk on group level, if the AMA is used and so decided by the national regulator. Contrary to expectations, the Commission did not reduce the range of national discretions significantly, compared to the Basel Accord. In accordance with the June agreement, European banks and investment firms will be required to apply the standardised and foundation IRB approaches from end-2006 and the advanced IRB approach from end 2007. (Institutions may request to be allowed to use the old method for determining the minimum capital requirement until the end of 2007). 18 FBE proposals for modifications to the proposed Capital Requirements Directive The FBE's competent working group developed its position on the proposed Capital Requirements Directive. The FBE's proposals are aimed at ensuring a consistent single market; accordingly, the FBE repeatedly urges for a reduction of national discretions. It proposes that waiver of solo (individual entity) level application is not decided by national supervisors: instead, compliance at group level should suffice once certain conditions are met (waiver of solo level application within a member state should not be an exception but a mandatory rule, once there is adequate capital allocation within the group). The FBE also proposes that the 0% risk weight applicable to intra- group exposures within the same country should be a regulation and not a possibility (national discretion). The 0% risk weight for intra-group exposures should be applied within the EU as a whole. The FBE is objected to having two options for the risk weighting of institutions in the standardised approach and to the national discretion option concerning effective maturity requirements in the foundation IRB approach. The FBE urges for close cooperation between supervisors and supports the notion of Lead Supervisor. The FBE believes that the supervisory review should only be applied at group level and not at individual entity level and the same applies to the measurement of operational risk under the advanced measurement approach. The FBE fully supports the introduction of mandatory supervisory disclosure requirements. The draft position paper stresses, that changes in the treatment of trading book items should be incorporated in the proposed Directive. The positive effects of diversification should not be ignored in determining the capital requirement. The FBE supports the Commission's intention to monitor the procylicality effects of the new regulation. To safeguard the competitiveness of European banks the FBE urges for an early enactment of a flexible directive, able to reflect market changes. Developments in adoption of the new Capital Requirements Directive The new Capital Requirements Directive will be adopted by the European Parliament and the European Council under a co-decision process. To prepare the Council decision, expert-level consultations are being conducted by member states, Hungary is represented by a representative from the Ministry of Finance. In the working groups set up for this purpose, member states can raise and clarify the issues they feel problematic and make proposals for modifications to the Directive. In Hungary, the Ministry of Finance invited a review with the participation of the National Bank of Hungary, the Hungarian Financial Supervisory Authority and professional associations to develop a Hungarian position on the proposed Directive. At the consultation, the Hungarian Banking Association submitted a number of proposals for modifications and adjustments to the Directive. Most of our proposals were incorporated in the Hungarian position sent to Brussels. Eager to have the Directive adopted by the Council with the minimum possible changes and within the shortest possible time under the Dutch presidency, the European Commission in the competent working group tried to avert proposals made by member states to modify or clarify the text. The Commission would like to have the text adopted by the Council by the end of December. Issues were ranged according to political and professional importance into four categories (Lists A, B, C and D). List A comprises three issues of political nature that are to be decided on by ECOFIN and over which member states are rather divided at present. Elements ranged in List A are related to implementation dates, consolidated supervision and the treatment of 730k investment firms. Perhaps the most important one from the Hungarian point of view is the issue related to 19 consolidated supervision. The present text provides that in case the home and host country supervisors fail to agree on approving the IRB approach for six months, then home country supervision will make the decision. Hungary's position is that the approval of more advanced approaches should by all means be subject to agreement between the competent supervisors. List B contains some forty issues of political nature, to be agreed on within the Council's working group based on the draft text provided by the Dutch presidency.1 The list includes a number of FBE proposals, such as those related to the levels of application in the various pillars and the weighting of intra-group claims. The list also includes a proposal to be incorporated in the Recitals to state that the collection and management of personal data is necessary for applying the IRB approach and does not violate any data protection laws. Items contained in Lists C and D relate to technical issues and corrections. The issue of reducing national discretions was assigned to the Committee of European Banking Supervisors (CEBS). It is hard to tell when the European Parliament will start the debate of the proposed Directive. As a reaction to the hurry shown by the Dutch presidency, the European Parliament now wishes to review the proposal in details. MEP's are concerned of the impacts of the Directive on the SME sector, small banks and consumers. In relation to changes to the treatment of trading book items MEP's are objected to discussing an unfinalised proposal. A parliamentary hearing of specialists (bankers, regulators, PriceWaterhouseCoopers and the FED) is scheduled for November 22. The Rapporteur in charge of the Directive is expected to submit his report in February and the European Commission hopes the Directive to be passed in first reading in March 2005. FBE response to the CEBS consultation paper on Pillar 2 In its letter the FBE congratulates the CEBS on the consultation paper and expresses its belief that the consultation paper is an important step towards a common approach to EU supervision. At the same time, the FBE emphasises that the supervisory review process will only work if applied at consolidated group level; if it is not, financial institutions will be subject to inconsistent supervisory treatment across subsidiaries and the objective of enhancing the understanding of firms’ overall risk profiles will be jeopardised. In this regard the FBE is disappointed that the CEBS paper leaves the possibility open for member states to apply Pillar 2 at individual entity level and does not tackle the issues of coordination between home and host country supervisors and their responsibilities. FBE response to the CEBS High Level Principles on Outsourcing In its letter, the FBE cautioned against setting overly-prescriptive procedures which could result in interference in the contractual relationships. Banks should assume responsibility for the final quality of the services they outsource; however, the high level principles should not become an obstacle to the development of new and innovative models in the banking industry. Outsourcing is 1 Hungary raised the following main issues: The Directive should provide for favourable weightings for claims on central government and the central bank also for non-euro-zone countries. The Directive should provide for favourable weightings for mandatory reserves placed through intermediary institutions. The Ministry of Finance supports Poland's proposal that certain provisions of the Directive be applied to small institutions in a "simplified" manner (aimed to ease administrative, IT and data processing work). 20 and should remain a bank’s decision, based on economic grounds, after a careful risk and cost/benefit analysis. In August 2004 the Basel Committee Joint Forum2 published its position on Outsourcing in Financial Services. Apparently, outsourcing is treated by supervisors as an important issue. Therefore, then FBE's Banking Supervision Committee decided to extend the mandate of the competent working group and to make it permanent. Basel Committee and IOSCO joint working group survey on trading book risks A joint working group of the Basel Committee and IOSCO conducted a questionnaire survey in July, to better understand the treatment of trading book risks in practice. (In providing their answers, the participating institutions worked together with the competent supervisors and the answers were summarised by the supervisors. The deadline for responses was October 15). The objective of the survey was to map institutions' internal classification criteria in the trading book and the processes of rating and internal risk measurement of trading positions. A third group of questions addressed counterparty risks related to OTC derivatives, repo and securities transactions, unrealised transactions, credit derivatives and contractual netting. Presentation by the Chairman of the Accord Implementation Group In his closing address at an IIF conference in July, Nicholas Le Pan, Vice Chairman of the Basel Committee and Chairman of the Accord Implementation Group (AIG) spoke about current issues related to the implementation of Basel II. He emphasised that cooperation between supervisors and banks and regular feedback were keys to a successful implementation. Contrary to those suggesting that there ought to be a uniform implementation, he said in his opinion a uniform application of Pillar 2 across different countries (jurisdictions) was unrealistic. He also challenged those suggestions that banks should exclusively deal with their home supervisors in issues related to implementation. Communication with host supervisors is necessary and cannot be neglected: it is natural for a host supervisor to require the information needed for supervising subsidiaries in the host country. He said the home/host issue, i.e., the division of responsibilities between home and host supervisors, was one of the most important to effective implementation of Basel II and one of the highest priority of issues for AIG. (AIG launched 15 real case studies and plans to broaden the scope to include non-G10 countries). Cooperation between home and host supervisors should range from simple sharing of information through to joint examinations and a joint assessment of internal rating based approaches. At the end of the presentation Mr Le Pan touched upon some other areas that the AIG is focusing on. A working group was set up to look at validation issues, to determine the elements of the validation process and to put together a validation manual for supervisors. A joint working group was created to consider the issue of downturn LGDs and the related issues of stress testing under Pillar 2 of the Accord. The AIG will address in more depth the AMA approaches and the related implementation challenges. The AIG will also focus on the more specific elements of Pillar 2, such as how to assess concentration risk and plans to update and publish the survey it has completed on preliminary intentions on national discretions. 2 The Joint Forum is a cooperation forum of international organisations of banking supervisors, investment service supervisors (IOSCO) and insurance supervisors (IAIS). 21 Meeting of the Basle Committee Chairman with representatives of the International Banking Federation At the meeting, held at the end of July, Jaime Caruana, Chairman of the Basel Committee stressed the importance of dialogue between prudential and accounting standard-setters and the industry. He said he appreciates banks' reservations concerning the treatment of core deposits, hedging, provisions and the fair value option in the IAS. The Basel Committee is conducting negotiations with the IASB on the treatment of sight deposits, provisioning and the fair value option. Mr Caruana is of the opinion that an overly extensive use of fair value will make comparison of institutions more difficult and may impact on pricing. The IASB must appreciate this and should take into account banks' best risk management practices. FBE Banking Supervision Committee - Capital Adequacy Working Group 2. FBE Fiscal Committee At its meeting, the FBE Fiscal Committee addressed technical issues related to Savings Taxation reporting (implementation deferred from January 1 to July 1, 2005). Most member states have completed their national identification code lists and the preparation of required legal laws and IT systems is now in progress. Lichtenstein, Monaco and San Marino (ranged in Country Group 3) will also join; conclusion of the relevant agreements is now underway. At the meeting, representatives from member countries raised a number of practical issues yet to be resolved; for example: each country knows its own identification system but it is still unclear how foreign entities will be identified if the codes are frequently changed; the treatment of accrued interest is a concern; issues related to information flow. The FBE proposed setting up a working group on savings taxation and urged for the supply of missing data. The FBE Fiscal Committee approached members with a questionnaire on the proposed withholding tax on savings, with special regard to the taxation of interest on bonds. Participants were informed that the OECD Fiscal Committee has introduced some new provisions that also affect bank information. Under the new measures, information held by banks may be used for tax purposes under information exchange between national authorities. The main changes relate to Article 26 of the OECD Model Tax Convention: According to the new provisions, the contacted party may not decline to supply information on the grounds that such information is not needed for its own tax purposes. This change makes it clear that a contracted state must supply information even if such information is not needed by that state for its own tax purposes. A new paragraph (Paragraph 5) was enacted to ensure that the supply of information relating to ownership interests or information held by a bank, other financial institution, agent or fiduciary, cannot be declined on the grounds that such information constitutes a bank secret. The secrecy provisions in Article 26 have also changed: information supply to supervisory authorities is permitted. A supervisory authority is an authority that oversees tax administration and compliance and is part of the administrative organisations of government in the contracted countries. At the meeting it was raised that VAT on deals between a parent company and a subsidiary or between subsidiaries, which is non-deductible and therefore, reduces profit, is a very substantial item in banking. The VAT working group turned to the European Commission, urging for a solution and a change to the regulation at European-level. Germany approached member state with 22 a questionnaire on VAT on outsourced services. The Nordea group with members active in Nordic states competed a study on the VAT implications of cross-border intra-group transactions. The issue of VAT on financial services will be a subject of the Dublin tax conference to be held in December with the participation of national tax authorities, government representatives and business professionals. The FBE will also be represented at the conference. 3. FBE Accounts Committee The FBE Accounts Committee reviewed three options regarding the adoption of IAS 39 in the EU: a) Adopting IAS 39 without the provisions on full fair value and hedge accounting; b) Adopting IAS 39 with the proviso that it is not applied to the financial sector; c) Postponing adoption. There was no common position within the Committee: some member countries were in favour of postponing the adoption of the standard, some were for adopting the standard 39 without the provisions on full fair value and hedge accounting, some supported the adoption of IAS 39 in its current form. There was consensus, though, that in view of the difference in opinions over the fair value option, an early solution was required and the FBE's position could be a starting point for the discussions. Since the IASB rejected the interest margin hedge proposal presented by the FBE, it was proposed that at the next meeting, the benefits of the proposed interest margin hedge product should be pointed out and its should be emphasised that these benefits cannot be used under the current IAS 39. An account was given on the FBE delegation's discussions with the CEBS technical group on the regulatory capital impacts of IAS 39. The FBE stressed that for the purpose of next year's capital planning, banks should know the regulatory changes affecting accountancy before the beginning of next year. A working group on financial reporting was set up within the CEBS to develop a standard Balance Sheet and Profit and Loss Account format to ensure harmonious and uniform reporting. This format would be used for supervisory reporting purposes within the EU. The process of adoption of the proposed reporting format is now in progress, the FBE's specialists are involved in developing the final version. (The Hungarian Banking Association forwarded the proposed format to the National Bank of Hungary, the Hungarian Financial Supervisory Authority and the accountancy unit of the Ministry of Finance). The FBE welcomed the Exposure Draft on the disclosure of financial instruments; however, some issues to be resolved were raised: the requirement for the disclosure of capital ratios may be injurious to the institution's reputation; the requirement for the disclosure of risk data for financial products would entail auditing. These factors were reviewed in detail in the process of developing a common FBE position on the Exposure Draft. 23 In the FBE's opinion the implementation of the XBRL reporting system is indispensable and the European banking industry should urge its adoption by supervisors. The representatives from banks and banking associations would like to be briefed on the next XLRB conference to be held in November. The banking industry does not have adequate information on the XLRB system. The FBE would support the setting up of a bank specialists group within EFRAG. It is understood that EFRAG's Supervisory Board is also considering setting up a special working group for financial products. 4. FBE Financial Markets Committee Representatives of banking associations from new EU member states were introduced on the first day of the Committee's October meeting, held in Amsterdam. (Only five out of the ten new member countries were present). The official plenary meeting was held on the second day. Reports were presented on activities of the Committee in the first half of the year and on tasks for the next period. Within this, developments in the Lámfalussy process were reviewed in relation to: investment service providers, prospectus used in public offerings, regulations on market abuse, reporting requirements aimed at ensuring market transparency, securities accounting regulations, new rules for financial statements of companies. It was raised again that the overregulation of European financial markets imposes serious burdens on banks and decision-makers must be made aware of this. A delegate from the Dutch Finance Ministry, in his presentation on principles of the proposed EU corporate governance directive said that according to a survey made by Ernst&Young the costs of public limited companies in Holland are expected to increase by EUR 200 million to 300 million due to the proposed regulation (sectors other than banking will also be affected). Wim Mijs, Chairman of the Committee, asked new members to: take up contact with those MEPs who are in charge of financial markets issues, or have the background or interest, and update them on a regular basis on the positions of the domestic banking community on regulatory and legislative issues. Mr Zoltán Spéder, Deputy CEO of OTP Bank was elected as Hungary's delegate to the Market Participants Consultative Panel of CESR (CESR is in charge of preparing implementation rules for financial market regulations). The Hungarian Banking Association was asked to take up contact with Mr Spéder and to keep him informed on the Association's positions so that he can properly represent them in the consultative panel. The Association was requested to take up contact with the competent officials at the Hungarian Financial Supervisory Authority, the National Bank of Hungary and the Ministry of Finance (who have regular cooperation with CESR) and to keep them informed on the Association's positions. (These communications are in fact in place, the Association's opinions on regulatory issues are regularly solicited by these institutions). 24 The deadlines provided for the transposition and domestic application of implementation directives for the EU regulations on investment service providers and market abuse are unrealistically short and unmanageable by the banking industry; the FBE is going turn in writing to the competent EU authorities. National associations were requested to draw the attention of their national authorities to the issue, based on the FBE's letter. A mechanical application of EU legislation would impose excessive extra costs on the industry. IT should be achieved that industry interests are taken account of by the authorities at both the EU and national levels. (The draft letter of the FBE has not been received as of this date). 5. FBE Communications Committee At its October meeting, the FBE Communications Committee addressed issues related to improving banks' image. Customer satisfaction is regularly monitored in the EU member states. The FBE launched a special project to review results of the surveys and to draw some general conclusions. For example, the Belgian Banking Association conducted a survey based on phone interviews. The survey was aimed at drawing conclusions based on experience of a four-year period and to provide guidance for the future. A four-year comparison showed that changes in the banking sector were perceived by the public as neutral, while changes in the supermarket industry over the same period were perceived as positive. The survey also tried to find out what banks are associated with in people's minds. First ranked was that banks make high profits and contribute to economic growth; however, the respondents felt banks are not fully aware of their customers' expectations and do not really help make their lives better. Most respondents qualified banks' services as satisfactory but said banks did not treat all customers equally. Direct contacts with the bank's personnel are important and increase customer confidence. As the role of the Belgian Banking Association, provision of information, the protection of banks' interests, mediation between banks and regulators and participation in the preparation of banking regulations were mentioned in the first place. The process of mergers in the banking industry reduces customer confidence. Answers to the question what would be the most important measures that banks should take to improve their image were varied by age. In general, communications ranked highest in importance among the answers provided. The FBE encourages similar surveys to be conducted in other countries (in Switzerland, for example, similar surveys are conducted on a quarterly basis). 6. European Payment Council (EPC) The EPC elected a nominee from Hungarian Foreign Trade Bank to represent the Hungarian banking industry in the European Payment Council. Hungarian Foreign Trade bank was nominated by the Payment System Council, the supreme body of the Payment System Forum, to represent the interests of Hungarian banking in the EPC and provide regular information on activities affecting payments in Hungary. Although the FBE, as a founder of the EPC, provides regular information on issues addressed by the EPC, we can now receive first-hand information through the Hungarian representative and can influence activities within the EPC through our vote. Channelling activities of the Payment System Forum, as the EPC's "mirror organisation" in Hungary, into European activities through the Hungarian representative in the EPC will be a task for the near-future. The Hungarian banking community nominated three specialists to the working groups of the EPC. According to 25 preliminary information, the head of the Payment System Forum's Mobile Payments Working Group was elected into the EPC's Mobile Payments Working Group and EPC officials said there were good chances for the other two nominees to be elected (nominees to the Bank Cards Working Group and the Cash Working Groups). 7. European Committee for Banking Standards (ECBS) Proposals presented by the Secretaries General of the EPC and ECBS for their respective organisational structures and operations were an important item of the September 16 TSC meeting; however, no concrete decisions were made on the tasks of the two organisations and the relationship between the technical committees of the two organisations. At the request of the ECBS, the Hungarian Banking Association's Standardisation Working Group, in cooperation with the John von Neumann Computer Society's Hungarian Smart Card Forum, completed the Hungarian Section for the Citizen Card Survey (ECBS document No. TC4N830 Rev1 ACT). The Hungarian Banking Association's IT Security Working Group completed and submitted the document requested for developing a position on the Security Evaluation section of the proposed New Legal Framework (based on the information to be provided by each country, a position paper will be compiled by ECBS TC4). The Mobile Working Group of the Payment System Forum's Cashless Payments Technical Committee received for review the ECBS DIG V4.2 August 2004 Implementation Guidelines. Although the Working Group did not submit comments this time, it will make use of this document as well as the ECBS TR603 VERSION 1 (February 2004) Business and Functional Requirements for Mobile Payments in its further work. 26 IV. ASSOCIATION EVENTS 1. FBE seminar for new and associate members on operations of the Banking Supervision Committee At the recommendation of the FBE Secretariat, the FBE Banking Supervision Committee held its 51st Meeting in October in Budapest. By choosing Budapest as a venue for the meeting, the FBE wished to recognise the active participation of the Hungarian Banking Federation, initially as an observer and, since this year, as a full-fledged member, in activities of the various committees and working groups of the FBE. In the afternoon of the day before the meeting a seminar was held for association representatives from the new EU member states and candidate countries. The seminar was attended by the banking associations of Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Slovakia, Slovenia and Turkey. At the seminar, colleagues from the FBE’s secreteriat gave presentations on the activities and services of the Banking Supervision Committee, on EU institutions, the Lamfalussy Process and the work performed within the Banking Supervision Committee, with special regard to the Committee's role in developing a European Capital Requirements Directive based on Basel II. In a roundtable, the new and candidate members presented their banking sectors and banking associations and their key issues concerning the proposed new Capital Requirements Directive and their views of cooperation and division of responsibilities between home and host supervisors. The FBE requested new members to take up contact with their MEPs (or their assistants) and financial attachés in Brussels and familiarise them with professional issues and industry interests related to the Capital Requirements Directive. 2. Ombudsman report on banks' mortgage lending practices In June, Association leaders met with the Citizen Rights Ombudsman, Dr. Barna Lenkovics, to review his report No. OBH 4999/2003 on banks' mortgage lending practices. It was agreed that a working committee would be set up to review the findings of the report and the industry's position. The working committee review of the report took place on September 7, 2004 with the participation of the competent associate of the Ombudsman's Office, specialists from mortgage banks and commercial banks engaged in mortgage lending, the competent associate of the Ministry of Finance and the Head of Consumer Protection Department of the Hungarian Financial Supervisory Authority. At the discussion, the legal framework and market environment that determines banks' behaviours were explained in detail; as a result of the discussion, the Ombudsman's associate and, in his letter closing the investigation, the Ombudsman himself acknowledged that the general practices applied by banks cannot be considered as wrong and a few cases are no grounds for general conclusions on the banking industry as a whole. We requested the Ombudsman's Office to involve us or some independent experts in complaint investigations before closing such investigations and going public with the results. The representative of the Ombudsman's Office did not refuse the proposal. Colleagues from member banks presented their practices in applying buying options in contracts and pointed out that the buying option was necessary due to the inadequate enforceability of collaterals and other securities provided under the contract; however, in such cases, provisions 27 protecting the customer's rights are also included in the contract. The representative from the Ministry of Finance presented a proposed amendment to the Credit Institutions Act, regarding a mandatory risk statement to be issued in case of buying options and foreign currency loans. The purpose of this amendment is to implement the Ombudsman's recommendations. The representative of the Hungarian Supervisory Authority informed the participants that the Supervisory Authority had reviewed banks' mortgage lending practices and had not found any negative phenomena. According to the Supervisory Authority, more consumer protection measures are needed in other various areas of retail lending; the Authority and will prepare an initial working paper to start the work. 3. Group4 Falck merger with Securicor plc Danish-based Group4 Falck announced its merger with the U.K-based Securicor plc in February 2004 and the merger was approved by the European Commission on March 28, 2004. The merger of the Hungarian subsidiaries of the two companies was approved by the Hungarian Competition Office. The merger basically affects cash transport in Hungary and has aroused wide attention in the banking community. In August, the Association organised a consultation with Mr Sándor Kecskeméti, the CEO of Group4 Falck, to review the new situation after the merger. The meeting was attended by bank security and legal officers from member banks. Mr Kecskeméti briefed the participants on Group4 Falck's development plans in the areas of cash processing, coin processing and cash transport. The Trade Union of Security Employees was established and the drafting of a sector-level collective bargaining agreement in line with the European expectations is now in process. Contracted customers will be approached on changes after the merger by Group4 Falck individually. 4. Payment System Forum Activities of the Payment System Forum, the "mirror organisation" of the European Payment Council (EPC) were less intense during the summer. In the period between July and September meetings were held by three working groups of the Cards and Cashless Payments Technical Committees: the Cardholder Information Working Group, the Mobile Payments Woking Group and the Legal Working Group. The Mobile Payments Working Group and the Cardholder Information Working Group were once more faced with the problem of finance for the documents to be compiled by them. The two groups seek to involve external experts in preparing studies and in organising a campaign aimed at popularising the use of bank cards. This will require substantial financial resources. The Cardholder Information Working Group proposes to launch an advertising campaign, with the involvement of an external company. The costs (approx. HUF 400 million) are envisaged to be shared by the two international bank card companies involved and Hungarian bank card issuer banks in the proportion of their votes in the Hungarian Bank Card Forum. The costs of the document to be prepared by the Mobile Payments Working Group is expected to be in excess of HUF 10 million. The funds are to be contributed by banks participating in the Working Group, whereas the information to be compiled will be used by other banks, as well. GIRO Rt. has undertaken the task of issuing the tender invitation, contracting and managing the payments; however, it was raised again that these tasks should be performed by the Association. 28 Up until now, the Association has not undertaken such tasks, given, inter alia, that it does not have financial or professional resources available for such tasks. Financing requirements of the Working Groups will be addressed by the next meeting of the Payment System Forum. 5. Hungarian Bank Card Forum The Bank Card Forum meeting held on September 14 adopted a resolution to allow modification proposals to be submitted to the Internal Operational Rules (in addition to those presented at the meeting) until September 28. The Internal Operational Rules will be finalised and adopted thereafter. The meeting addressed a specific problem, indicated by the Association in writing and previously addressed also at a discussion with the National bank of Hungary with the participation of some member banks: in the case of bank card transactions that are executed in Hungary and settled by the acquirer through a foreign collecting agent, it may happen that due to conversions, the amount debited to the card issuer bank is not the amount shown on the receipt but the amount obtained after conversion, which is normally higher than the receipt amount. To resolve the problem, it was agreed that the issuer bank should credit the difference between the debited amount and the receipt amount to the customer. 6. Information Society Inter-Ministerial Coordination Committee, IT Security Sub- Committee At the July 6 meeting of the IT Security Sub-Committee of the Information Society Inter- Ministerial Coordination Committee, Dr Peter Bakonyi briefed the participants on Elisa, an e- Europe organisation formed to address information security issues. A presentation on the Inter- Ministerial Coordination Committee's Draft Recommendation on Information, IT Security and ISO 17799/BS 7799 was given by Lajos Muha. In his presentation on training, István Szabó emphasised product security as equal in importance to organisational security (which was covered at the previous meeting). Dr Zsolt Haig from the Miklós Zrínyi University of Defence gave a presentation on information security education, followed by a presentation by Imre Szeberényi from the Budapest University of Technology and Economics on the training of IT security trainers.
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