Bulgaria: More Stringent Regulation Of Financial Institutions In Bulgaria

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

New rules on financial institutions entered into force in May 2009. Existing financial institutions had to apply for registration under the new rules by 30 September 2009.


Under Bulgarian law, financial institutions include nonbanking institutions that carry out certain non-exclusive banking activities, including:

  1. factoring;
  2. financial leasing;
  3. trading in money market instruments, foreign currency or derivatives;
  4. brokering money;
  5. providing advice to companies about their capital structure, strategy, transformation or M&A transactions;
  6. collateral transactions; and
  7. extending credit by using funds that have not been raised in a public manner1.

The requirements to carry out such activities were, until recently, fairly loose. Such entities had only to notify the Bulgarian National Bank (BNB) within two weeks following the commencement of their activities.

Registration requirements for financial institutions

Under the new, more stringent rules, companies wishing to pursue the above businesses must register with the BNB. The BNB may refuse registration if the applicant does not comply with the statutory requirements or fails to provide the necessary documents.

A major new requirement is a minimum share capital of (i) BGN 250,000 (ca. EUR 128,200) for factoring, financial leasing, collateral transactions and extending credit by using funds that have not been raised in a public manner, and (ii) BGN 50,000 (ca. EUR 25,600) for all remaining activities.

Another new set of requirements concerns the qualification, professional experience and reputation of the persons who manage or represent financial institutions. Such persons must:

  1. have a university degree;
  2. have at least three years of professional experience in the area of economics, law, finance or informatics;
  3. not have been sentenced for a general criminal offence committed with intent;
  4. not have been, during the last two years, members of a management body of an insolvent company, if any unsatisfied creditors' claims have remained after the termination of such a company;
  5. not have been banned from being appointed to a position associated with financial responsibility; and
  6. not have been included in the list of persons with respect to whom the restrictions and prohibitions under the regulations against financing of terrorism apply.

The requirements under items (iii), (iv), (v) and (vi) apply also to natural persons (as well as to the managers of legal persons) holding directly or indirectly more than 10% of the shares in a financial institution.

There is a long list of documents that must be presented to the BNB in order to demonstrate compliance with these requirements.

Carrying out any of the above activities without first registering with the BNB might lead to large financial penalties.

Requirements related to the activities of financial institutions

Financial institutions must ensure that at least 50% of their overall activities relate to at least one of the activities listed in the Introduction above (Main Activity)2. If a financial institution falls beneath the 50% ratio for more than six months, the BNB may strike it out of the financial institutions registry.

Each financial institution must adopt and apply internal rules for managing its activities, including a clear organisational structure and assignment of responsibilities, effective procedures for detecting and managing risks, mechanisms for internal control and accounting procedures.

Financial institutions performing the activities of financial leasing and extending credit by using funds that have not been raised in a public manner must adopt and apply internal rules and general terms and conditions to their dealings with consumers. These must be presented to the BNB within 30 days following registration of the financial institution. Such financial institutions are granted access to the Central Credit Registry maintained by the BNB, but are also burdened with the obligation to report certain information about their debtors to the registry.

The new regulations provide for special financial reports, having a form and contents as determined by the BNB, which financial institutions must prepare and submit to the BNB on a quarterly basis.

Lastly, bank supervision experts from the BNB are entitled to carry out inspections of any financial institution to ensure compliance with the statutory requirements.

Impact on EU financial institutions that operate in Bulgaria

The requirements related to the activities of financial institutions specified above are equally applicable to recognised EU financial institutions. Historically, upon Bulgaria's accession to the EU, financial institutions from another EU member state that were subsidiaries of duly licensed banks from another EU member state were allowed to perform the activities of a financial institution (see Introduction above) after registration with the BNB3. Now, the BNB is entitled to strike such institutions off the register if they violate any of the above newly adopted requirements.

Financial institutions performing the activities of financial leasing and extending credit by using funds that have not been raised in a public manner must adopt and apply internal rules and general terms and conditions to their dealings with consumers.

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


1 This activity, in contrast to the preceding ones, is not a banking activity since banks use publicly raised funds to extend credit.

2 The ratio must be calculated on the basis of the net proceeds from the overall activities and the Main Activities, or on the basis of the balance sheet value of the company's assets relating only to the Main Activity and the total value of the company's assets.

3 The BNB must register such financial institutions upon receipt of a compliance certificate issued by the competent authority of the home member state stating that the requirements under Article 24 of Directive 2006/48/EC (transposed verbatim into the relevant Bulgarian statute) have been met.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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