Csaba Kandrács, the new Vice President of Financial Supervision and Consumer Protection at the National Bank of Hungary talked with Növekedés.hu. He explained how the bank has facilitated the development of consumer-friendly home insurance, as well as a introduced product quality monitoring services that will rate non-compulsory car insurance (casco) products. Further, a group of so called “commandos” has been created who will quickly intervene to investigate and prevent regulatory violations and uphold consumer protections.
You've started a major organizational transformation. Why was it necessary? Has the supervision not worked well thus far?
Sure, it has. We have achieved many results that were well received by consumers. For example, we have assisted inthe settlement of former foreign currency loans, their conversion into forints, or dealing with unfair terms and conditions of financial companies. As a result of our supervisory work, consumers have been reimbursed billions of forints. All markets in the financial system today are in a much better condition than they were in six years ago. Thesenew transformations will lay the foundation for our work for the next six years.
When the President of the Republic appointed me to this position on October 4, I did not go to celebrate with my family. Instead, I rushed to join my colleagues and start to work. I have much experience and I know how the organization works, so I know what needs to be changed.
First of all, we want to focus even more on consumer protection. This requires a much more agile organization that requires less complex coordination and facilitates quicker actions. To achieve this, we will integrate separate consumer protection units. In the past, these units have functioned as "islands" in each of their respective areas of supervision. Integrating these units will allow us to more effectively monitor these markets and take immediate action when we become aware of a consumer protection violation. Second, digitalisation and sustainability will be truepriorities that will help shape a strong, determined, consistent, and proactive supervision of these markets.
You are planning a green financial strategy. What exactly does it mean?
The world is moving towards sustainability. The MNB is already working to bring these issues into the minds of financial institutions. We have launched a green program with awards. After the end of October, a new, independent organizational unit will be responsible for promoting sustainable finance.
We will announce a green financial package soon, and we will hold a financial sustainability conference at the end of November with renowned participants. Soon, we will be the first member from Central and Eastern Europe to join the International Climate Change Alliance.
The Banking Association has complained of being subject to strict regulatory rules while fintech companies with hundreds of thousands of customers in Hungary can operate under much lighter restrictions. How will the MNB oversee these fintech companies?
Digitization is a reality. New fintech companies will continue to appear from scratch. The proper supervision should give clear direction to this.
The first step is that we must use and understand these technologies well. We already have colleagues who are familiar with digital technologies, and we are currently developing a blockchain technology with the help of the Banking Association and the Hungarian Insurance Association. This will integrate the system of lenders and the related loan protection insurance companies onto a single platform. We hope to have it ready next year.
The second important thing is adhering to a fundamental principle: the adoption of digitalisation must not split the market, with the older institutions being subject to stricter regulations than the new institutions. A healthy balance needs to be found so that innovations that help customers can still emerge without placing those already in the market at a competitive disadvantage.
What about foreign applications?
We are paying attention to cross-border financial services. We are cooperating with our EU counterparts so that we can intervene immediately at an international level in certain cases. In addition, MNB is entitled to suspend the sale of certain products in certain markets, if necessary.
Can you give an example?
We recently banned insurance policies that were sold through domestic intermediaries from Slovakia. These products were not in compliance with Hungarian law, and the interests of customers were being neglected during the sale process.
What will Qualified Consumer-Friendly Home Insurance look like and when will it start?
It's ready and we'll be introducing it soon, with sales starting in March. The former MNB's Qualified Consumer-Friendly Home Loan (MFL) product system has been a success. By last August, nearly 52,000 home loan agreements of this kind had been finalized, worth a total of about 640 billion forints. In addition, 98 percent of new loans are already fixed, along with two-thirds of the qualifying products already in existence. This means most banks are meeting the requirements set by the National Bank for the safety of its customers.
Consumer-friendly home insurance is based on the same logic. We are helping to make such insurance policies much more comprehensible for the general public than previous products.
We provide the basic conditions required to obtain certification, with some new requirements for the base product. We also introduce a common definition of terms that may have been different at the insurers, such as pipe bursts, burglary, water leaks or lightning damage.
Are you planning to cover other types of products in your rating?
It is obvious that casco should also be included among consumer-friendly products. The goal is for more people to beable to buy affordable, non-compulsory car insurance by intensifying market competition.
What investigations are expected next year?
We will build on the hundreds of investigations that provide an overview of all market players over three to four years. In addition, we will be conducting special investigations of payment service providers and reviewing the general terms and conditions of credit card contracts. We will also focus on monitoring compliance with debt brake rules.
In addition to these general investigations, there will be an increasing number of targeted procedures. In the era of big data, analysing detailed information from institutions allows us to start on-the-spot investigative processes at any time,based on the risks reported by algorithms. Separate operational investigation teams called "commandos" have been set up for this purpose.
Based on our monitoring data or customer reports, these special units can appear on-site quickly and unexpectedly. Once on-site, we can verify the information by copying the servers, or seizing the computers of the supervised institution. The purpose of the unexpected appearance is to prevent the suspected organization from deleting or damaging information. We process data in a rigorous, secure, and professional environment. This policy, which is already operational today, has been further developed to allow us to investigate as many markets as needed.
The fines of financial institutions have increased significantly. Last year there were some over 100 million forints. Why?
Serious penalties will continue to be imposed if we see systemic risk at any of the institutions. They will not succeed by trying to circumvent legislation or 'flexibly interpreting' it. As the Hungarian economy grows and people have more money, the financial sector is expanding. Tangible measures and, if necessary, fines are needed so the financial institutions can correct the identified risks. If we did not do so, the market could calculate our fines and continue the infringement. Most supervised institutions understand this logic. As a result, there are fewer serious breaches than there were six years ago, when the MNB took over financial supervision.
There are many complains about exchange offices. The exchange rates are totally unpredictable. For example, at the airport there is a 100-forint gap between the buying and selling price of the euro. In what extent are they being investigated?
Exchange offices are basically agents of banks, so they also investigate them. Both last year and this year, we investigated some of them. In some cases, we required showing that the exchange rates were clearly visible for customers, and that they were complying with anti-money laundering measures. We closed some exchange offices that were working without permission. At the same time, we must admit that at some places, a currency exchange office can experience higher costs, such as office rents, which can be reflected in their exchange rates. However, with careful preparation before traveling and reviewing more offers, customers can find the best rates.
What measures are being planned against money laundering?
We have now strengthened our operational unit to prevent money laundering and the financing of terrorism. Dozens of investigations in these areas have recently been carried out and we are planning many more.
Customers who have floating rate mortgages are already receiving bank letters asking them to consider changing to fixed rate ones. What results would you be satisfied with?
I would be satisfied by making everyone aware of the risk of floating interest rates. Knowing the risks will help themmake a responsible decision. I hope many will choose to turn to fixed loans. A slowdown in the economy could bring an end to the recent unprecedented economic growth. Although the Hungarian economy is in much better shape today than it was in 2010, it is impossible to predict what will happen in the next few years. Due to international developments, interest rates that are at record low levels today might rise sharply in the future. Consumer home loans are long-term contracts. Therefore, we recommend switching to a fixed interest rate loan with a secure, fixed instalment. Some may have a slightly higher repayment rate today, but when the interest rates eventually start to climb, these fixed payments will not rise like variable rate loan payments.
You will become a member of the Monetary Council following your appointment. Are you worried about the exchange rate of the forint?
The MNB has no exchange rate target, but it has an inflation target. The exchange rate can, of course, influence the inflation rate, but it is not the only influence. Therefore, our primary focus is not the exchange rate.
According to your new competitiveness program, voluntary pension and health funds would be merged into welfare funds. Everyone would become a member, but would be free to leave. Why change the present system?
The National Bank has recently come up with a 330-point Competitiveness Program, and strengthening self-care is an integral part of it. There is a missing generation of voluntary pension funds. Fifteen years ago, people in their twenties or thirties were entering the workforce at a much larger proportion than they are today.
So, while the current generation of people in their forties are consciously saving for their retirement years, the retirement funds have not yet caught on with younger people. Also, the health insurance sector has been losing money for the past three years. If everything remained the same, it would likely become insolvent within 15 years.
It is our vision that consumers can make better use of their savings in welfare funds owned by fund members. As a new element of the program, people could withdraw from their contributions either for the purchase of a first home, or the birth of a first child. This would give dynamism to the sector. In addition, pension funds and health funds could be connected with welfare funds, and young people could save in both "pockets" of funds at the same time.
Should investors buy cryptocurrencies? What is the supervisory opinion on this?
Anyone who wants to invest in them should be aware that cryptocurrency values are extremely volatile. They are unregulated in the EU market and are not backed by a compensation guarantee fund or any financial supervision. I do not think that a conscientious financial consumer should take these risks.
We can say that cryptocurrency is not a financial instrument, but a gamble. It is not advisable to play with your savings. However, the evolution of these instruments is worth monitoring at a supervisory level.
What is your overall view of the Hungarian banking and insurance sector?
Just like the economy, the credit and insurance markets have had good years. The banking sector has a very high capital adequacy ratio that is close to the EU average, and its profitability is excellent. Some years ago, non-performing loans made up twenty percent of the typical bank loan portfolio. Today, that figure is below five percent, for both retail and corporate loans. There are many security and supervisory regulatory tools in place that guarantee no new systemic risks will build up. The insurance sector has grown eight percent per year over the past two to three years. We projected that this market could double in size within a decade. This is a realistic goal.