Answer ... (a) Crowdfunding, peer-to-peer lending
In its fintech strategy, the National Bank of Hungary (NBH) suggests that crowdfunding, initial coin offerings and security token offerings should be regulated in order to assist small and medium-sized enterprises and start-ups with capital raising. However, since its publication, no further steps have been taken in this regard.
Without specific regulation, the general rules also apply to crowdfunding activities. As two opinions issued by the NBH bear out, determining which specific rules apply is not always easy. From the perspective of online platforms, offering investment opportunities to registered users may qualify as an investment service (eg, placement of financial instruments, investment advice or investment research and financial analysis), which is subject to licence. From the perspective of fundraising companies, activities may qualify as the offer of securities, which is generally subject to publication of a prospectus approved by the NBH. The recruitment of members through a public offer may present other constraints, as this is forbidden for limited liability companies, and small and medium-sized enterprises and start-ups are generally established in this legal form. However, if the fundraising company does not provide membership or security in return for the contribution paid by platform users, the fundraising may be regarded as the collection of a deposit. This activity again requires a licence from the regulator. From the perspective of platform users, providing money to companies may qualify as the provision of loans, which may also be subject to licence and may be conducted by credit institutions and financial enterprises only.
A regulatory framework for crowdfunding is under development: the European Commission has submitted a proposal to the European Council on European crowdfunding platform providers. Once adopted, EU rules concerning crowdfunding platforms will also apply in Hungary. Although the legislation is lagging behind, Hungarian start-ups are nonetheless establishing crowdfunding platforms. A successful example is Inlock (https://inlock.io/about-us/), which provides a crypto-backed peer-to-peer lending platform from Estonia.
(b) Online lending and other forms of alternative finance
The provision of loans is subject to licence and may be conducted by credit institutions and financial enterprises only. These financial institutions can also contract with clients via electronic devices. However, loan contracts must be concluded in writing, which presents constraints even though the Hungarian Civil Code adopts a neutral approach, stipulating that ‘writing’ includes all forms that allow the content of the contract to be recalled and the contractual parties and the time at which the contract was executed to be identified. In case of disputes, an electronic document with an electronic signature has full probative value only if the electronic signature is a qualified or advanced electronic signature based on a qualified certificate.
Currently, several banks offer the possibility for clients to enter into loan contracts online; however, these contracts relate to unsecured loans or loans provided in relation to bank accounts only.
(c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb)
Payment services is an important field of innovative solutions whose development has been strongly encouraged by the NBH. Within the framework of open banking, banking data is made available to third-party service providers (ie, payment initiation service providers (PISPs) and account information service providers (AISPs)) through web-based interfaces of banks. With the authorisation of clients, AISPs may access information on their payment accounts, enabling them to share such data with other service providers. Via PISPs, clients can initiate payments from their bank accounts without direct contact with their banks. PISPs are subject to a licence issued by the NBH; if a payment service provider provides account information services only, the prior notification of the NBH is sufficient. Although the regulation sets out conditions in relation to PISPs (eg, an initial minimum capital of HUF 15 million), thus far no service providers have obtained the necessary licence, although several AISPs have been registered.
From 2 March 2020, PISPs and AISPs will have access to the instant payment system operated by GIRO Zrt (a subsidiary of the NBH) and the central database of secondary account identifiers also maintained by GIRO Zrt, which enables clients to initiate payments using mobile numbers or email addresses. If the instant payment system commences operations as planned, payments under HUF 10 million will be received by the beneficiary within five seconds.
Under the Act on Investment Service Providers and Commodity Dealers, options, futures, swaps, forward rate agreements and other derivative contracts relating to currencies, as well contracts for difference, are qualified as financial instruments. Investment services in respect of financial instruments (including forex trading) may be provided by investment firms and credit institutions that hold the necessary regulatory licence from the NBH.
According to an opinion of the NBH, there is a risk that the development and distribution of software for forex trading may fall under the scope of the Act on Investment Service Providers and Commodity Dealers. This risk may arise if such activities are not limited to software development and distribution, but also facilitate the initiation and execution of orders relating to forex trading. If the software can collect orders initiated through it and transfer such orders to a trading platform, or if the reference to the software’s past performance relating to trading may influence clients’ investment decisions, the provision of the software may qualify as an investment service or as an intermediation of investment services.
Where trading concerns financial instruments listed in the Act on Investment Service Providers and Commodity Dealers, such activities fall under the scope of the act and may be conducted only by an investment firm or a credit institution that holds the necessary licence.
Financial instruments include transferable securities, money market instruments, options, futures, swaps, other derivative contracts relating to securities and currencies and similar.
(f) Investment and asset management
The regulation of investment services in Hungary is based on MiFID 2. Only investment firms and credit institutions may provide investment services in respect of financial instruments as a regular business activity. The Act on Investment Service Providers and Commodity Dealers sets out a list of activities that constitute an investment service (eg, receipt and transmission of client orders; execution of client orders; portfolio management; investment services; placement of financial instruments; investment research and financial analysis). The act also sets out a list of financial instruments (eg, transferable securities, money market instruments, options, futures, swaps and other derivative contract relating to securities or currencies). Investment services may be provided only by investment firms or credit institutions that hold the necessary licence from the NBH.
An investment service provider must meet all regulatory requirements, including rules on:
- initial capital (ie, a minimum of €50,000 for the most limited scope of activity);
- legal form;
- necessary personnel and equipment;
- IT systems;
- risk management; and
- record keeping.
(g) Risk management
Where a financial or investment service constitutes a regulated activity, the rules on risk management set out under the relevant act shall apply accordingly. As the fintech space is not regulated in Hungary, specific risk management rules do not exist.
However, certain rules applicable in the field of payment services may have an impact on fintech solutions. Client identification required under the anti-money laundering rules may be conducted digitally through an audited electronic device if the financial service provider has such a system in place. On this basis, bank accounts may be opened online. However, until real-time client identification is performed, the client cannot initiate cash transactions above HUF 300,000 per month or any transactions with a value of HUF 10 million or more.
There are no specific regulations on roboadvice. Services provided by a roboadviser may easily qualify as investment research and financial analysis, investment advice, portfolio management or algorithmic trading. These services fall under the scope of the Act on Investment Service Providers and Commodity Dealers; as such, they are subject to licence from the NBH and may be provided for profit by investment companies and credit institutions only.
‘Investment research and financial analysis’ is defined as making investment recommendations under the Capital Markets Act. Investment recommendations include analyses, proposals and other information relating to financial instruments and/or exchange-traded instruments and their issuers, which are published or otherwise made available to the public and which may thus influence a client’s decision to invest. As this definition is particularly broad, it may even apply to roboadvisers that merely collect and arrange publicly available market data. However, if the roboadviser provides personal recommendations to a client in relation to transactions relating to financial instruments, this activity may qualify as the provision of investment advice. If the roboadviser manages clients’ assets, this activity may qualify as portfolio management. If orders in respect of financial assets are initiated via the roboadviser based on a computer algorithm, this activity may qualify as algorithmic trading.
Those wishing to provide a service that falls under the scope of the Act on Investment Service Providers and Commodity Dealers must comply with the requirements relating to initial capital and necessary personnel and equipment. Different thresholds as regards the minimum initial capital are set out under the act based on the scope of activities, although the initial capital must be at least €50,000.
Although, from the fintech perspective, insurance is not as well developed as payment services, innovative solutions are nonetheless available in the market, including online contracting, comparison sites, blockchain-based insurance products and specific motor insurance products.
However, insurance activities, including the provision of insurance products through tied or non-tied agents, fall under the Act on Insurance Activities and are subject to licence from or notification of the NBH. In the absence of a special regime, innovative solutions in the insurance sector may be provided by regulated market players. As fintech companies offer insurance products through their apps, they must be registered as agents of insurance companies. The companies that provide insurtech solutions discussed in question 2.2 are all registered insurance agents.