Since the country joined the EU in May, the Hungarian Financial Services Authority and government have been making broad changes to investment in foreign fund portfolios as the Ucits III directive comes into force
Investing in collective investment schemes became an option for Hungarian investors after the transition to a market economy in the early 1990s.
Over the past 15 years the role of investment funds has increased and their development reached its peak around the middle of 2003. At this time, an amount of approximately HUF1,170bn (e4.7bn) was invested in funds in Hungary. After that time, the previously steady increase of amounts invested in funds came to an end, mainly due to the National Bank of Hungary raising the base rate which, in turn, resulted in investors channelling their earnings to bank accounts offering higher interest rates rather than investing them in funds with lower yields.
The downturn in the investment fund markets ended around the first quarter of 2004, since which time Hungary has experienced a slow increase in the amounts invested in various types of funds.
The volatility of the Hungarian investment funds markets resulted in the funds becoming much more diversified, as evidenced by the numerous types of new funds in the market compared with before the 2003 downturn. This diversification can clearly be seen in the trend that the market share of funds investing in securities has decreased and real estate funds have become increasingly important in the Hungarian market, although, according to recent publications, an important growth was seen in funds investing in bonds in 2004.
Investment fund management activity in Hungary has some special characteristics. Most Hungarian banks are owned by foreign banks, resulting in fund management typically being directed from abroad. In the case of these foreign-owned Hungarian banks, the headquarters of the parent companies often determine Hungarian fund portfolios and selling strategies and only the administrative activities are carried out in the country itself. These banks generally only sell units in their domestic markets, which means that, for example, units representing Hungarian shares will generally not be sold outside of Hungary.
On the other hand, those Hungarian banks that do not have a foreign parent company are following an expansive strategy and, in the framework of that, for several years have been willing to sell abroad to the public investment units issued by local funds representing Hungarian securities.
While these banks have demonstrated a desire to expand their services to foreign countries and offer their investment units in foreign markets as well, the majority of the banks have stuck to the guidelines of sell ing their units only for domestic investors.
The question of the inflow of foreign investment funds has been even more emphasised with the country's accession to the EU. Generally speaking, foreign investment units are not considered as attractive by Hungarian investors at present, so they therefore comprise a negligible percentage of the market.
The reason for this is that most of the foreign investment units have a relatively low yield as compared with domestic investment units. Moreover, the foreign products are mostly only offered through private banking services for the purpose of broadening the portfolio of certain individuals.
Notwithstanding the fact that Hungary has enacted laws regulating investment funds and investment fund management in the early 1990s, even with a partial implementation of the Council Directive 85/611/EEC (the Ucits directive), these laws were not suitable to satisfy European trends and requirements in respect of the cross-border selling of investment units. The challenge Hungary faced was to amend its law to better satisfy market demands and to implement a legal framework that is satisfactory and suitable not only in respect of present conditions but also anticipated future conditions driven by market developments.
The regulatory framework for investment funds went through a considerable change before the EU accession. The most important steps were the establishment of rules regarding the possibility of offering foreign investment units in Hungary and the gradual liberalisation of the ability to engage in fund management through local branch offices.
The Ucits directive is now fully implemented in the Hungarian legal regime through the provisions of Act CXX of 2001 on the Capital Markets (known as the Hungarian Capital Markets Act). Investment funds qualifying as Ucits funds in their member state of registration will now be able to sell their investment funds in Hungary without a specific licensing requirement.
Although no licensing requirement is set forth under Hungarian law for the public sale of foreign products issued by Ucits funds, the Hungarian Financial Services Authority does require some additional information to be filed with it prior to commencing the public sale of such investment units. In addition, the current provisions of the Hungarian Capital Markets Act concerning the domestic sale of such foreign investment units issued by Ucits funds are rather broad, and certainly not precise enough to give steady guidance as to the exact procedure to be followed in such a domestic public sale.
The Hungarian Ministry of Finance and the Hungarian Financial Services Authority have recently undertaken some efforts to identify the current problems arising from the broad regulations and to try to resolve the above question with further amendments of these rules.
In principle, under national law a Ucits fund registered in an EU member state other than Hungary and intending to sell its investment units locally will, while also providing information to their own financial services authority about their intended sale in Hungary, have to file a notice with the Hungarian Financial Services Authority explaining that it wants to sell its units in Hungary.
Although the wording of the Capital Markets Act suggests that, after the filing of such notice, the public sale of the investment units may be started without any further delay, the authority requires a time period of two months to elapse before the actual sale of the units may begin. Moreover, the regulator, pursuant to its current practice, will want to issue a consent stating that it agrees to the public sale of the units in Hungary.
With the expected decrease of the base rate and the trend towards the diversification in individual and institutional portfolios, there is a clear expectancy that Ucits funds registered in other EU member state will take a growing stake in the Hungarian investment unit markets.
The notification process shall eventually become a day-to-day practice for the Financial Services Authority, and it is clear that the regulator is making an effort to try to simplify the notification procedures and make Hungary a fund-friendly environment.
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