Licensing intra-group financing activity

MNB

This article was written by Csaba Ember, Senior Associate at Gide Loyrette Nouel-dʼOrnano Iroda. 

A large group of companies often finance operational and capital expenditures of their Hungarian affiliates not only through intercompany loans but by way of purchasing debt. Recent regulatory changes in Hungary may force such large entities to reconsider their intra-group financing activity which affects their Hungarian affiliate since some of these activities may require the license of the Hungarian regulator.

Intra-group financing arrangements have long been used as means of centralizing a group’s cash and currency, as a preferred way of funding certain transactions within the group. Intra-group financing relates mainly to loans and guarantees, but also to foreign exchange swaps, and similar financial transactions such as purchasing debt. The methods of one group member providing funds to other members are very diverse and can be based on direct agreements or cash-pooling arrangements, to name but two.

It is slightly more than a year ago now that a new Banking Act entered into force, in 1 January 2014, replacing the previous one. The current Banking Act introduced some new regulations that may heavily influence the intra-group financing activity of large corporates. Under the previous banking act, intra-group financing activity could be carried out without asking for a licence of the National Bank of Hungary. The reason for this is that, under the old Banking Act, both the purchasing of debt and intra-group financing activity was included in the definition of loan granting activity, and it was expressly stated that intra- group financing can be pursued without a licence from the National Bank of Hungary.

The current Banking Act has changed the definition of granting loans, and debt purchasing no longer falls within this financial service. Currently, debt purchasing is regulated as a stand-alone financial service that may be performed if the National Bank of Hungary grants its respective licence. Although, intra-group financing activity is still not subject to a licence from the National Bank of Hungary, it covers only granting loans and excludes debt purchasing. 

This means that those groups who have a Hungarian member should reconsider the activity of their intra-group financing entities and how to satisfy the financing needs of such Hungarian group members, since under the current Banking Act the purchasing of debts in Hungary may require a license from the National Bank of Hungary. If this is the case, such activity can only be performed in Hungary by a regulated financial institution holding the required licence. Such a financial institution may be established in Hungary, but it requires a rather time consuming licensing procedure by the National Bank of Hungary. However, no licence from the National Bank of Hungary is required for the provision of financial services (such as debt purchasing) provided in Hungary by credit institutions or certain financial enterprises registered in another member state of the European Economic Area, carried out as a cross-border activity. In practice, this means that if there is a financing entity within the group that is registered in another EEA member state as a credit institution or financial enterprise (and in the latter case it also meets some other criteria set out in the Banking Act), then it may purchase debt within the group without requiring a licence in Hungary. However, questions may be raised as to whether purchasing the debt of a Hungarian member company by a foreign group financing entity would qualify as a transaction performed outside of Hungary. If this would be the case, the transaction would fall out of the scope of the Banking Act, and such licensing issues would not be applicable either. This question can always be answered by taking into consideration all the circumstances and conditions of a certain transaction, but on the basis of the respective guidelines of the National Bank of Hungary it is rather unlikely that the regulator would draw the same conclusion.

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