Economy 17 November 2015, 4:53pm

Hungary constitutional court throws out parts of brokerage compensation law

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Hungary's Constitutional Court on Tuesday annulled parts of a law that required commercial banks to pay billions of forints to bail out clients of failed brokerage Quaestor, state news agency MTI reported.

Hungarian brokerage Quaestor collapsed early this year after it was found to have issued more than HUF 150 billion in fictitious bonds. In April, a central bank official estimated the collapse of Quaestor and other small brokerages will cost the financial sector around HUF 30 billion per year over a 10-year period.

The court declared unconstitutional sections in the law that defined which clients could get compensation and the financial conditions of a compensation fund.

The decision means that the holders of Quaestor bonds will certainly not get their compensation ranging between HUF 6 m and HUF 30 m. According to vs.hu, the government will create new legislation to compensate the victims, taking into consideration the objections of the Constitutional Court.

The fact that the Constitutional Court has the mandate to throw out a law (or its sections) is basically good news for members of the Investor Protection Fund (BEVA) i.e. mostly banks, brokerages and fund managers and bad news for the victims of failed brokerages. At the same time, we have no way of knowing what the next law will contain therefore this creates uncertainty for all parties involved.

The court’s decision can give the government a sound foundation to fully respect a Memorandum of Understanding signed with Erste and the EBRD in February, as it has already clarified its intention to observe the agreement (and lower the bank tax). The decision of the court may also prove important ahead of a rating review by Fitch scheduled for Friday, as the rating agency may perceive this change positive because an extra burden on local banks will be eliminated.

MTI quoted the court's president, Barnabás Lenkovics as saying that the law could be amended as its objective to compensate Quaestor clients was not unconstitutional.

Government spokesman Zoltán Kovács told reporters that the government would propose modifications but did not elaborate further.

"We are going to fulfil the decision of the Constitutional Court and the government has to deal with the issue on Wednesday when we have a cabinet meeting and very obviously a new legislation will be coming," he said.