The amendments of Act CXII of 1996 on Credit Institutions and Financial Enterprises (the "Banking Act") in relation to Hungary's accession to the European Union ("EU")

Hungary's accession to the EU will result in a number of changes to the banking sector. The modifications to the legal rules relevant to the operation of the credit institutions and financial enterprises will facilitate Hungary's EU accession and harmonise the rules and regulations applicable to financial institutions. Some of the rules have already been implemented in order to ensure the concerned parties have enough time to prepare for the completion of the applicable EU rules. However, a number of amendments will only enter into force after Hungary's accession to the EU.

One of the most significant changes of the Banking Act which enters into force with Hungary's accession is the possibility of providing cross-border services in accordance with the rules relevant for such services. If a credit institution/bank having its registered seat in one of the Member States of the EU intends to provide financial or additional financial services in Hungary, it is obliged to notify the competent supervisory authority in its home country ("Local Supervisory Authority") about such intention in advance. The Local Supervisory Authority will notify the European Commission and the supervisory authority of the relevant country about the establishment of such branch office within one (1) month (the relevant authority in Hungary is the Hungarian Financial Supervisory Authority (the "PSZÁF")). Cross-border services can be provided after the notification by the supervisory authority of the relevant country.

Another important modification entering into force with Hungary's accession to the EU is that credit institutions and certain financial enterprises having their seats in the territory of EU will be entitled to establish a branch office in another EU Member State (i.e in Hungary as well). If a credit institution or financial enterprise intends to establish such a branch office, it must notify this fact to the Local Supervisory Authority. If the financial enterprise is managed in a proper manner and its financial situation is in compliance with the legal requirements, the Local Supervisory Authority shall notify the PSZÁF within three (3) months about such intention of the foreign bank. The PSZÁF will notify the Local Supervisory Authority of the terms of operation of the branch office. The Local Supervisory Authority is also obliged to notify the European Commission about the establishment of a branch office. Both the branch office and its parent company will be supervised by the Local Supervisory Authority ("Home Country Control"). Further, as is the case prior to EU accession, there will be no requirement to provide two billion Hungarian Forints (HUF 2,000,000,000) as capital. However, the procedure for establishing a branch office may take several months and the licensing procedure can be avoided only with respect to certain financial enterprises. Further, the parent company has joint and several liabilities for its branch office.

Nowadays, as there are already several foreign investors in Hungary, we assume that only a few branch offices will be established by foreign banks. However, some of the affiliates of foreign banks and financial enterprises will be liquidated and new branch offices will be established. The transformation of the affiliates to branch offices could raise some technical and legal issues as neither Act CXLIV of 1997 on Business Associations, nor Act XXXII of 1997 on Branch Offices of Foreign Enterprises regulates the process for such transformation. The affiliate should be liquidated and at the same time the foreign parent company has to resolve on the establishment of a new branch office in Hungary. It has to be taken into account that at the time when the affiliate will be under voluntary dissolution it cannot have customers, therefore the client files should be "transferred" to the new branch office prior to that date. This means that the establishment of the new branch office has to have happened by the commencement date of the voluntary dissolution of the affiliate of the foreign bank. However, the foreign owner cannot withdraw the invested amount of capital while the voluntary dissolution procedure is uncompleted. The newly established branch office will not be considered to be the legal successor of the affiliate of the foreign credit institution terminated by voluntary dissolution. This could cause some difficulties in the contractual relationships of the bank (for example: agreements with the suppliers, etc.).

Hungary's accession to the EU will also cause some changes with respect to the relationship with third country credit institutions. The new rules of the Banking Act also concerns credit institutions and financial enterprises registered in one of the OECD member states (USA, Canada) and on financial institutions having their registered seat in countries that are not member states of the EU ("Third Country Credit Institutions"). Third Country Credit Institutions can also establish branch offices in Hungary, however, such credit institutions have to meet certain stricter rules, such as providing two billion Hungarian Forints (HUF 2,000,000,000) as capital. Such branch offices must become a member of the National Deposit Protection Fund ("Országos Betétvédelmi Alap") (the "Fund") unless the PSZÁF confirms that the existing deposit insurance of the Third Country Credit Institution is equivalent to the insurance provided by the Fund. Further, the branch office of a Third Country Credit Institution is obliged to maintain an asset retention index of one hundred percent (100%) at all times. Third Country Credit Institutions are not allowed to advertise, as this is only allowed by financial enterprises registered in Hungary and in the EU.

Some amendments have been approved with respect to the consolidated supervision by PSZÁF and the Local Supervisory Authorities of other countries. If a credit institution has its registered seat in one of the EU member states, the Local Supervisory Authority, the PSZÁF and the National Bank of Hungary should co-operate in accordance with EU law. The primary supervisory authority is the Local Supervisory Authority and the authority competent pursuant to the seat of the branch office shall proceed upon its request. In the case of Third Country Credit Institutions, co-operation between the local authority and the PSZÁF is based on bilateral agreements.