Hungary is gearing up for an election in the spring, and the government is facing a serious challenge from the main opposition party, both on current policy and in the opinion polls. Nevertheless, it is showing determination in pressing ahead with EU accession legislation, including significant reforms of the capital market.
Since Viktor Orban became prime minister in 1998 observers have seen a gradual loosening of the strict fiscal regime of the previous socialist government that came to power in 1994. But there have been charges that the government is embarking on an “anti-investor” path, expanding its role within the economy with a number of grand spending plans. Two massive public investment drives covering two years from 2000 carry a price tag of s3bn. Critics say this is excessive intervention, and inconsistent with the EU programme. Rather than being anti-investor, the government claims, the public spending plans will stimulate private investment; s3bn of seed money then.
Istvan Farkas is a managing partner at FI-AD Financial Advisory in Budapest, and he is concerned about the direction the government is moving in. “In the past the government has tried hard to strengthen the Budapest stock exchange, but its policies have not really worked. The government should step back from overt involvement in the capital market”. Realising it may only have a few months left in power – opinion polls show the two main parties neck-and-neck on 44% - the government has decided to ignore such advice. As part of the EU accession legislation that it was trying to get through parliament by the end of December, it has included a far-reaching Capital Markets Act. Janos Tot at the Hungarian Financial Services Authority (HFSA) said the act had all-party support and was confident that it would be in place and effective from this month. “The criticism of the government that suggests we are anti-investor is totally without foundation,” he says. “It has always been the stated aim of the prime minister and the finance minister to encourage domestic investors, and also to attract as much foreign investment as possible. We could hardly do that if we were passing legislation which impeded the flow of those funds.”
Farkas is not convinced that the new legislation does enough to meet the needs of the industry. “With the Capital Markets Act all the government has done is introduce a piece of consolidating legislation, pulling regulation of various aspects of the market under one roof, and introducing small amendments. Originally the market participants had insisted on a new law to regulate the fund and asset management industry. A close examination of this legislation confirms that we have not got what we wanted.”
He is concerned about the lack of genuine third party asset management regulation. “The insurance companies will still be allowed to manage their funds in-house, with no requirement to out-source, or even offer for tender. By not making specific provision for in-house and out-sourced management to be treated the same, the government is not providing a level playing field. There is an element of anti-competition here, and for that reason I do not believe we are looking at the final draft of this bill.” If he were right it would certainly seem inconsistent with EU standards, but would not be the first time that a powerful insurance company lobby had held sway over the legislator.
Less critical is Krisztina Kozma of Credit Suisse Asset Management in Budapest. She believes that it is a very significant piece of legislation, which will be beneficial to the asset management industry. “Currently the industry operates on a dual-company basis. For example, we are allowed to manage the assets of pension funds and other investment funds. Meanwhile, brokerage firms must manage other assets such as corporate or municipal. The new law would allow for the setting up of a new generation of asset management companies, capable of controlling assets across the board.” She believes one advantage of this will be increased transparency.
The legislation also liberalises the fund sector, allowing for the first time the creation of fund of funds, and other types of investment vehicles. “Importantly there will also be new regulations designed to protect the consumer and fund member, these will cover marketing and presentation of products,” says Kozma. “These are positive changes which we should applaud, are part of the EU harmonisation programme, and have support across all parties. Even so the government has prepared a very short timetable, with the act due to be effective from the start of the year.”
Kozma is also enthusiastic about other areas of the act. “The new asset management companies will be required to provide increased capital requirements, and individuals working in the industry will have to have appropriate qualifications and membership.” She also believes that a merged regulator for all financial services is a plus.
Farkas remains sceptical about the progress the government is making on financial service regulation, and more importantly its commitment to collective investment. “The capital market as a whole needs to be prioritised by the government, whichever political hue takes over in the spring. We need to bolster collective investment either through pension funds or other investment funds.
“It is clear to anyone working in the industry that the government is not doing enough to support pension funds in particular. When we reformed pensions in Hungary it was strongly suggested that contributions would grow, and that there would be incentives to ensure this happened. In reality adjusted contributions are now lower than they were in 1998.”
He is also concerned about the erosion of the second pillar that has been witnessed over the past year. “The recent tinkering with the second pillar, which means that those joining the workforce for the first time will not have mandatory supplementary pensions is a retrograde step. The same rules allow for a move back to the pay-as-you-go first pillar, although probably few will elect for that option. This means an inevitable shrinking of second pillar provision, but with little incentive to suggest that the third pillar funds will take up the slack. It is another example of the government’s lack of commitment to this part of the financial services sector.”

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