3. 1. The creation of the positive list debtor record
In the regulation of loan and loan-type financial services, the central registration of credit and personal information that can be used to assess the credit application has substantial importance.
The aim of the credit assessment is to enable the lending institutions to understand the solvency and liquidity of their future debtors as much as possible, and to procure the data reflecting them (extent and structure of debt) from a reliable source, possibly independent from the credit applicant. One of its most important tools is the central credit information system (hereinafter referred to as: CCS).
In accordance with the regulation that was in effect before 2011, the comprehensive registry regarding the credit history of debtors was only realized for companies. Concerning retail credit information, the amendment of the Credit Act in 1998 created the opportunity to have a so-called negative list central data registry. Retail credit and personal information could enter the central credit information system (CCS) in case of severe contract violating behaviour, also stipulated in law. These data can be freely used for credit assessment in the framework of a precise procedure reinforced by warranty items.
The necessity to create a comprehensive registry of natural persons, i.e. a comprehensive retail loan registry (hereinafter referred to as: CCR) was primarily justified by the interest related to a grounded credit assessment. The public interest grounding the governmental intervention was the increasing indebtedness of the population: the number of credit borrowing substantially increased already in the early 2000s, in which cases the credit borrower tried to satisfy their daily needs by committing to impractical credit conditions. It also happened that the debtor entering the debt spiral tried to fulfil his obligation derived from a previous credit agreement by creating a new one.
MNB raised awareness to this dangerous tendency in its 2008 Stability Report: “In 2007, the indebtedness of households kept growing, partly due to the catch-up process and partly to consumption levelling. The debt service-to-income ratio debt service grew further, especially in the poorest households far below the average level of indebtedness. The risks hidden in the previous processes are elevated by the fact that retail credit borrowing is not shaped according to the economic processes, but it is fuelled by strong supply and the risk-based competition of financial institutions with more risks than before.” 6
The forecasts regarding the acceleration of ungrounded retail indebtedness however were ignored.
6 See: MNB report on financial stability April 2008. Available on the Internet: https://www.mnb.hu/letoltes/
stab-jel-20080415-hu.pdf
The domestic banking system initiated the establishment of Comprehensive Retail Loan Registry in time. The positive list debtor registration proposal by the Hungarian Banking Association prepared in 2002 to 2003 fell through, because according to the Commissioner for Citizens' Rights it would have violated the right of citizens for informational autonomy guaranteed in the Constitution. According to his view, “the limitation of the fundamental right is only constitutional, if it is due to an imperious reason, and the importance of the achievable target is aligned with the weight of fundamental right violation caused due to this”.
The Banking Association has been taking continuous steps since 2003 to create such a registry. In collaboration with banking experts, a previously drafted solution would have made it compulsory for all debtor contracts to be recorded. This would have facilitated more reliable credit assessment, differentially lower instalments for debtors paying in a reliable and contractual manner, and on the other hand the prevention of the over-engagement of future debtors. Based on the comprehensive positive debtors’ list, the credit institutions would have received more precise and more reliable information about their future debtors, who therefore would have been relieved from the procurement and attachment of countless other documentation (e.g. confirmation of outstanding debt without lenders). This procedure could also have significantly accelerated administration. The more precise risk assessment enables the differentiated application of the debtor risk surcharge, and the reduction of burdens for reliable, good debtors. You can see that the positive list debtors’
registry creates a classic win-win situation: it is certainly good for the banks, and good for the reliable, good debtors, and it might also provide protection against excessive indebtedness. The above-mentioned benefits can be ensured by a comprehensive information system.7
In 2006, first the Commissioner for Citizens' Rights, then the Hungarian Financial Supervisory Authority also categorically upheld the necessity of the positive list debtors’
registry, elaborating in detail on its advantages for both clients and credit institutions. In practice, the report of the so-called Várhegyi Committee8 also confirmed the same. The preparatory working material prepared at the Ministry of Justice of the time (called the Ministry of Justice and Law Enforcement)9 stipulated: “In order to reach the regulatory target such legal solution should be created, which on one hand ensures the fullest possible decision-making freedom for the client, and on the other hand enables the creation of an infrastructure, which is able to reduce the (different kind, but equally existing) risk of lending, consequently the risk of the client, the bank, the depositors and ultimately the government and the tax payers.
The law satisfies its constitutional requirement regarding proportionality, if the informational autonomy right of the client-debtor is only limited up to the level, which is required for the reliable operation of the “system”. So if we accept the justification and constitutionality of
7 Regarding the standpoint of the Hungarian Banking Association prepared by banking experts, see the presentation of Dr. Katalin Auer on certain questions of the Retail financial services held at the conference of 22-23 May 2007, under the title ”The role of the full list credit information system in credit assessment, and its connection to the central credit information system”. Available on the Internet: https://www.mnb.hu/
letoltes/20070522-23-auer-katalin-1.pdf
8 Governmental decree 1097/2006 (5. X.) set up the Expert Committee on Retail Financial Services. The president was Dr. Éva Várhegyi. The Committee prepared and publicized its proposals in December 2006 regarding the management of retail banking service-related problems.
9 Work material on certain questions related to retail financial services, July 2008
the regulatory target, i.e. that the informational autonomy right can be limited with such reason as a fundamental constitutional right, we must find the tool, by which the fundamental constitutional right can be limited in an absolutely necessary degree to reach the target.”
On 13 October 2008, the Ministry made an unexpected proposal to the Secretary of State, drafted and amended by the MJL. The key features of the proposal were the following:
• the consent of the client is required both for the registration and for the disclosure of data in the registry,
• the financial enterprise managing the CCS shall manage the data for 5 years following the termination of the contractual relationship,
• the client may consent to the submission of data to the CCS subsequently as well, or at any time may also revoke consent,
• within 45 days of the law coming into effect, the bank shall inform the clients in writing about the content of contracts managed by it, the data transfer obligation, the rules regarding CCS, the purpose of the registry, and also rights of the clients. The client has another 45 days to prohibit data transfer (initial upload),
• there are complicated and strict client information rules and administrative obligations related to the management of the entire system.
The draft would basically have created a client consent-based and continuously fluctuating voluntary registry, which would have questioned the scope, comprehensive nature and reliability of the available information. At the same time, the responsibility and cost of the construction of the system as well as supplying it with data would have been borne by the banks.
The draft, in this form, however would not have been able to efficiently fulfil its original purpose of simplifying and accelerating customer service by reducing the risk of lending. Moreover, based on the completed modelling it would have had an exactly opposite effect to these targets, with a much higher cost than both during the initial upload (uploading the database with older data, e.g. from archive databases) and the daily operations. Considering all the above, the Banking Association reported, after submission, that it does not agree with the draft and therefore asked for its revocation by the Government.
The Commissioner on Data Security also expressed his concerns regarding the Government draft in the autumn of 2008. He declared: “if necessary, I will turn to the Constitutional Court. According to the Ombudsman the Government wishes to implement the provision without a constitutional purpose, allowing for business interests. The law would provide an almost unlimited opportunity for the credit institutions to learn about the financial situation of citizens. The data security ombudsman recalled: since 1998, credit institutions have been trying to have a report prepared on people who punctually pay their debts. He believes: officials from the Ministry of Justice and Law Enforcement had a chance to learn about the dismissive view of the commissioner on Data Security at a personal consultation last week, since the strategical department leader of the Ombudsman’s office stated that the legal provision drafted by the Government is unacceptable. He added: the codifiers are using the financial crisis as a pretence to limit the rights of citizens, including good debtors, contained in the basic law without a constitutional purpose, from a business interest, unnecessarily and disproportionately. The commissioner on Data Security added: with careful and responsible work in
daily practice the banks can always clarify whether the person who contacts them for credit has proper collateral, or not. Therefore, the central database on good debtors is unnecessary.10
Even at the first signs of the crisis, the Commissioner on Data Security and his office apparently did not assess the importance of creating a positive list debtors’ registry as early as possible. I am convinced that quite a few debtors could have been saved from excessive indebtedness, as they were likely the first victims of the Great Recession.
In its letter dated May 2010 by the Banking Association, as a reply to the Parliamentary Commissioner on Citizen’s Rights clearly elaborated, that the single and obvious objective of the positive list debtors’ registry is to protect clients and to prevent their excessive indebtedness: ‘We must declare, that the national legal system – considering personal rights and the priority of data security – does not substantively limit the unlimited indebtedness of private persons. As long as a comprehensive credit registration system does not exist, it cannot be prevented by a well-intentioned regulation, similar to the above. As long as the client is not listed in the currently operating CCS due to non-payment, the registry on default debtors, he is able to borrow unsecured credits with all banks and cooperative banks, as only the client’s declaration is available stating that he has no debt elsewhere. The fact that it is living practice is justified by the fact, that the highest amount of live debt a client currently has in the CCS is 18, and the average number of loans per client is over1.5. We certainly do not state that all clients, or even the majority of clients get credit by misleading the bank, but we do state, that the clients are tending to overestimate their own performance. If there was a full-list credit registration system, which shows the debt burden of clients, it would be possible to set the affordable credit amount more precisely during credit assessment, or even reject the obviously not feasible applications. No such opportunity exists today, unless the lender employs visionaries. ”11
3. 2. Self-regulation for the simplification of credit replacement and for the fair practice of unilateral contract amendment
The Expert Committee on Retail Financial Services (so-called Várhegyi Committee) published its report in December 2006 under the title Proposals for the management of retail banking service-related problems. The Várhegyi Committee saw the resolution for the problems exposed in their report primarily to be the self-regulation of the banking community, and in case of failure to do so, in legislation. The Banking Association therefore founded eight working groups for creating self-regulation frameworks in the following topics:
• Working group on account channelling and collection;
• Working group on credit replacement and unilateral contract amendment;
• Customer relations;
• Basic account;
• E-contract, E-account, E-account balance;
• Financial culture and knowledge transfer;
• Inter-bank Code of Conduct;
10 Magyar Nemzet, Thursday, 30 October 2008, page 4.
11 The letter of the Hungarian Banking Association to the Parliamentary Commissioner on Citizens Rights, 27 May 2010.
• Positive debtor list (work has been ongoing in this area for a long time under the coordination of the Ministry of Justice and Law Enforcement).
The working groups aimed at preparing proposals for the recommendations of the Várhegyi report in the widest possible scope. Wherever it was not sufficient, they made proposals for legislative amendment. The Board of the Hungarian Banking Association negotiated the summary proposals prepared by the working groups in the summer of 2007.
The participants judged the summary to be a forward-looking and an appropriate mix of initiatives regarding self-regulation and legislation.
The competent Prime Ministerial Commissioner submitted his draft to the Government including the recommendations of the Banking Association in the middle of July 2007. In this, he made a proposal for solving the problems belonging to the scope of self-regulation and legislation. The draft stated:
“During the work there was always unison regarding the necessary norm changes that should possibly be executed through the self-regulation of the banking system, and legislation should ensure this supplementary, supportive framework and background. For this, the active collaboration of the banks (the Banking Association) was necessary, which it fully provided up until the current state of work: No such legislative pressure exists today that would have to be realized by governmental power despite the banks. Further, there was also unison − and this is a grandiose virtue of the initiative −, that the completed work and the formulated proposals were rated by all concerned organisations – although not of the same immediate and short-term interest – as important and significant. (e.g.: “The Office of Economic Competition welcomes proposals regarding the improvement of retail banking services, which clearly serve the reinforcement of the banking market competition.”, or the opinion of IRM, according to which the summary of the Banking Association “is an extremely meaningful and high quality piece of work, …, many elements of which have such importance that might provide a strong impetus for retail banking market development”.)” 12 Majority of the initiatives regarding legislation were not realized, or only by considerable delay and with substantially modified content. At the same time, the Banking Association working groups continued their activity and in the first half of 2008 the President of the Banking Association approved and announced on his website:
• his proposal 1/2008 for the standard management and interpretation of §.8 section (4) of the THM decree.
• his proposal 2/2008 on the Credit Replacement Code,
• his proposal 3/2008 on the Bank Changing Guide.
Under my direction, the working group engaged in the simplification of credit replacement and the establishment of the fair framework of unilateral contract amendment for consumers prepared
12 Gyula Gaál, Prime Ministerial Commissioner: Summary and proposal for the Government on measures to be taken in order to increase the standard of retail financial services - Budapest, 16 July 2007.
with the Credit Replacement Code by the end of 2007. It intended to shorten the time required for a possible bank change and simplify its administration by introducing a form with unified content, as well as its standard inter-bank management. Based on widespread professional negotiations, by the end of 2008 the working group also prepared the draft of a Code on the fair practice of the unilateral amendment right regarding retail loan contracts. The consumer protection organisations (National Consumer Protection Union, and the Union of Bank Loan Victims) also collaborated on the wording, however, the Office of Economic Competition did not respond to our multiple requests. Considering the developments of the financial crisis, the Board of the Banking Association considered it necessary to supplement the text of the Code with beneficiary conditions for the consumers.
From the very beginning, the Office of Economic Competition has sought for regulation on the legislative level. During 2008, they presented their proposal regarding the amendment of the Credit Act three times (in March, August and December) on different forums, practically with the same content. However, the proposals of the Office of Economic Competition were steadily and resolutely rejected each time by the experts present (IRM, Ministry of Finance PM, Hungarian Financial Supervisory Authority, consumer protection organisations and the Banking Association), by pointing out its professional insufficiencies in detail and also its expected, quite unfavourable impacts on the Hungarian economy. The view of the Office of Economic Competition in contrast to the professional arguments was fairly simple: the office of competition did not believe in the efficiency of the banks’ self-regulation. Their standpoint was surprising also because despite several invitations they did not participate in the meetings of the Banking Association working group, hence they did not have the opportunity to contradict the professional work either.
Following such antecedents and one week after the professional dispute in December 2008, on 23 December 2008 the Government (without the mandatory professional reconciliation specified by the law on legislation) submitted Bill T/8183 to the Parliament on the amendment of certain acts concerning the supervision of the financial intermediary system. The submitted government bill contains the proposal from the Office of Economic Competition almost verbatim, which has been rejected several times professionally. On 9 February 2009, the Office of Economic Competition publicised (according to my view illegally, by violating the procedural rules of the Competition Act)13 its sectoral investigation report, which also included a professionally quite disputable amendment proposal.14 Afterwards, the President of
13 According to Act LVII Section 43/E § (2) of 1996 on the prohibition of unfair market behaviour and the limitation of competition: “Before the report is adopted, the undertakings operating in the sector shall be given an opportunity to submit comments about the contents of the report in writing. To facilitate this process, a draft version of the report with restricted access data removed shall be sent to the undertakings operating in the sector for comments in due time to allow at least thirty days for the submission of their comments. The Hungarian Competition Authority shall publish on its website the report on the findings of the sectoral inquiry, the summary or minutes of the written comments or of the hearing, and ‒ if requested ‒ the documents containing the substantive comments made by the undertakings operating in the sector regarding the contents of the report, with restricted access data removed.”
14 http://www.gvh.hu//data/cms998828/banki_ágazati_vizgy_2009_02_09_pdf.pdf
14 http://www.gvh.hu//data/cms998828/banki_ágazati_vizgy_2009_02_09_pdf.pdf