Legal Reform in Hungary

The EBRD Legal Transition Team’s assessments of commercial and financial laws in the region have revealed that in spite of favourable scores in such areas as public procurement, corporate governance and securities market, where the respective assessment results showed that the legislative frameworks are in high compliance with international standards, there is a room for improvement in a number of other areas.

Access to Finance

Since 1996, Hungary had equipped itself with a comprehensive, flexible and modern system for charging all kinds of assets. Registered charges over movable (tangible) assets have been registered in the centralised electronic Charges Registry, which has been operating since May 1997 by the Hungarian National Chamber of Public Notaries.
From the EBRD’s perspective, one of the most significant challenges in the secured transactions system concerns charges over immovable property (mortgages). Although they are, by and large, governed by a set of market-oriented provisions working efficiently, there are serious bottlenecks to the system, in particular:
- the time required to register a mortgage, which is unduly long
- the costs associated with the creation of a mortgage, again comparatively high for the region
- the inefficiency of the enforcement process, due to the enforcement costs (again, very high) and the fact that the property is rarely sold at market value.
 
(Assessment of Secured Transactions 2013 – country report)
 
EBRD Legal Reform Projects
 
In 2005 the EBRD assisted the Ministry of Justice with the preparation of new decrees on registration and non-judicial enforcement following amendments to the Civil Code provisions on pledges. The Bank also reviewed and made recommendations on the pledge registry’s operation, and is participated in an education campaign for banks, lawyers, courts, and the general public.
 
Assistance in Implementing Registration under New Law for Charges over
Moveable Assets I
 
The EBRD provided technical assistance for the establishment of the first nation-wide computerised registration system for charges over movable property in the Bank's countries of operations, in accordance with Civil Code charge provision requirements.
 
Assistance in Implementing Registration under New Law for Charges over
Moveable Assets II
 
The EBRD provided follow-up assistance after the successful launch of the computerised registration system that the Bank helped to establish, monitored its functioning and helped to resolve implementation issues. The EBRD also discussed amendments to certain Civil Code provisions with the Ministry of Justice; revision
took place in December 2000.
 
In 2014 the EBRD conducted an assessment on secured transactions which examined the availability of collateralising different types of assets regardless of the underlying legal instruments used to achieve the establishment of secured creditor’s rights. In addition to the classic security interests (pledges and mortgages the assessment also covered usual types of quasi security, such as sale and lease back transactions. The assessment also covered related issues such as enforcement and syndicated lending. The links below take you to the assessment results for Hungary.
 
 
 

Capital Markets

Hungary enjoys a relatively high technical level of capital markets infrastructure, and its laws are largely aligned on EU rules. The EBRD 2011 Local Capital Markets Development Legal and Regulatory Work Report (the “2011 Report”) found that the laws on prohibiting insider dealing and market manipulation are working well, and the capital markets in Hungary benefit from strong corporate governance rules, as well as favourable passporting rules and accounting rules for repo transactions.
 
EBRD Legal Reform Projects
 
Close-out Netting Legislation
At the request of the Ministry of Finance, the EBRD undertook a project to assist Hungary in developing its bankruptcy-related legislation to strengthen the enforceability of close-out netting for over-the-counter derivatives contracts. The EBRD worked with the International Swaps and Derivatives Association, Inc. on this project, which was funded by the UK government and completed in December 2001.
 
Legal Advisory Services for New Securities Act
The EBRD provided assistance to the Ministry of Finance in drafting a new comprehensive securities law. As a result, a new comprehensive Act on Capital Market, in line with EU directives and international best practices, was adopted by the Hungarian Parliament on 18 December 2001 and entered into force on 1 January 2002. This project was funded by the UK government and was completed in December 2001.
 
 

Contract Enforcement and Judicial Capacity

Hungarian courts are generally regarded as being impartial and independent, and posing no obstacle to business. However, the speed of judicial proceedings remains a concern. This is reflected in the most recent EBRD – World Bank Business Environment and Enterprise Performance Survey (BEEPS), where only 5% of surveyed respondents expressed the view that the court system was fast. This is typical of survey results for Central Europe; where court-users increasingly have higher expectations of what their court systems should be able to deliver.
 
 

Corporate Governance

The 2007 EBRD assessment on corporate governance showed Hungary being in “High Compliance” with the OECD Principles of Corporate Governance, the highest ranking of all EBRD countries of operations (see Chart 4 below). The assessment evidenced no major shortcomings in the relevant framework (see Chart 5 below). According to the information available from the EC Commission (8 April 2011), Hungary appears to have duly transposed all Acquis Communautaire in the field of company law.
Corporate governance legislation in Hungary is therefore in line with EU standards. The 2008 Corporate Governance Recommendations require companies listed on the Budapest Stock Exchange to comply with the code or explain the reasons for non-compliance. As evidenced by a study ordered by the EC Commission in 2009, the Hungarian regulator (HFSA) has not been very active in the field of corporate governance yet. In this respect, it is expected that the HFSA develop a practice on enforcing corporate governance issues.
 
 
 

Debt restructuring and bankruptcy

The EBRD’s 2009 Insolvency Law Assessment rated Hungary’s general insolvency law as being in “Medium Compliance”, with a score of 72% . Despite this sound overall rating, there are material gaps in the law. There remains scope for improvement in dealing with the assets of the estate and in particular the requirements for the debtor and third parties to maintain and deliver up assets of the insolvent estate. Furthermore, it has been identified that the legislation dealing with the provision of information to creditors and the independent analysis of a reorganisation plan is weak and requires improvement. The largest single issue is with respect to reorganisation proceedings.
Most recently (in 2014) the Legal Transition Team conducted an assessment of Insolvency Office Holders in the region. Based on the results of the assessment, a developed legal framework exists for the IOH profession in Hungary, which prima facie, displays a number of key strengths. Nevertheless, the framework would benefit from minor further improvements to address certain key areas of weaknesses and thus further improve IOH capacity and performance.
 
 
EBRD Legal Reform Projects
 
In 2001 at the request of the Ministry of Finance, the EBRD undertook a project to assist Hungary in developing its bankruptcy-related legislation to strengthen the enforceability of close-out netting for over-the-counter derivatives contracts. The EBRD worked with the International Swaps and Derivatives Association, Inc. on this
project.
 
 

Electronic Communications

The main legal basis for electronic communications regulation is the Law on Electronic Communications. Amendments to transpose the EU 2009 regulatory framework were adopted in July 2011. The European Commission initiated infringement proceedings for non-communication of transposition measures on 18
July 2011 and closed the proceedings on 22 March 2012. In May, 2012 the European Commission referred Hungary to the Court of Justice, asking to impose a penalty for non-transposition of the EU 2009 framework.
 
 
 

Energy and resource efficiency

In 2008, the government approved a Renewable Energy Strategy and Energy
Efficiency Strategy for 2007-2020. The policy targets a 13% share of renewable
energy in total primary energy supply by 2020. The strategy favours decentralised
energy production, the co-generation of heat and power and the establishment of
small power stations utilising renewable sources locally. A previously set target of 5% for renewable energy production was achieved, primarily through use of biomass. The main supporting policies for renewable energy are preferred feed-in obligations and tariffs (i.e., regulated prices to encourage the development of renewable energy production), investment subsidies from domestic and EU sources, and tax allowances for bio-fuels. A green certificate scheme was introduced with the 2001 Electricity Act, as amended in 2005.
 
 

Energy legal and regulatory reform

The Ministry of Transportation, Telecommunication and Energy (Ministry) is
charged with primary responsibility for the energy sector; regulatory implementation
is the responsibility of the Hungarian Energy Office (HEO). The HEO is a legally
autonomous body regulating electricity, gas and district heating, under the supervision of the Ministry.
 
 
 

PPP/Concessions

The Hungarian government has a policy framework for improving the legal environment and promoting the concept of the Public Private Partnership (“PPP”) pursuant to which a PPP Task Force was set up by the Ministry of Economy and Transport in 2003 to include representatives of major public agencies and infrastructure line ministries as well as experts from private sectors.
The main legislative act is the Law XVI of 1991 on Concessions (the “Concessions Law”). Moreover, Act CXXIX of 2003 on public procurements (replacing Act XL of 1995) may be applicable to PPP projects other than concession. The EBRD PPP/ Concessions Sector Assessment revealed that the Hungarian concession legislation is in ‘medium’ compliance with international standards and practices; this is the same result as the earlier assessment conducted in 2007/8.
 
 
 
EBRD Legal reform projects
 
In 2009, at the request of the Ministry of Economy and Transport of Hungary (MoET) the EBRD provided assistance with the review of the Concessions Law and the Procurement Law, advice on the PPP policy issues and on related secondary legislation including tender rules and procedure regulations.
 
 

Public Procurement

In the EBRD’s 2010 assessment of public procurement law and practice, Romania scored “Medium Compliance” with international procurement standards (71 per cent) (see Chart 8 below). The PPL in Romania is based on sound principles of EU public procurement directives and has not been found to have any major weaknesses. The PPL promotes competition and efficiency in public procurement but safeguards concerning accountability, transparency, integrity and stability are not as strong as in other EU Member States in the EBRD region.