Rules on the activities of trustees – the trust legislation of Hungary

Fiduciary trusts as a legal institution are one of the latest steps in the development of Hungarian civil law. Since their introduction in 2014, they have become more widely used and more widely known. We would now like to present the legal background of this legal instrument, focusing more on the person of the trustee.

The legislation contains a relatively small set of rules, and many of these rules are left and rely a lot to the agreement between the contracting parties, so that the legislation sets up a flexible regime for asset planning and asset management.

The substantive rules are based on two pillars, one is Chapter XLIII of the Civil Code (§ 6:310 – § 6:330), which sets the framework, and the other is Act XV of 2014 on Fiduciaries and the Rules of their Activities (Trsutee Act – Bvktv.), which describes the details and the rules on the performance of fiduciary activities.

The Hungarian legislation defines two directions for fiduciaries, according to whether they wish to perform their duties as professional (business) or as so-called ad hoc (non-professional) fiduciaries. The essential difference between the two types of fiduciary is the number of legal relationships a trustee can be subject to, i.e. the number of assets the trustee can manage. Any natural or legal person may undertake ad hoc management, but may only manage one asset. A business trustee may manage any number of assets, but his activities are authorised and supervised by the The Central Bank Of Hungary (Magyar Nemzeti Bank – MNB), and the law therefore imposes much stricter conditions on business trustees.

About the legal instrument itself, in brief.

As the purpose of this paper is rather to give a brief introduction to the legal regime applicable to fiduciaries, I will only give a few sentences on the essence of fiduciary trusts as a legal institution.

During the trust period, the trustee acquires, on the basis of a contract concluded with the settlor, the ownership of the rights and claims conferred on him by the settlor in respect of the property (real estate, movable property, bank accounts, business property, etc.). In the course of the trust, the trustee manages the property, rights and claims assigned to him in his own name but for the benefit of the beneficiary designated in the contract, free of charge or for a fee. The trust deed shall be in writing. The trustee may hold, use and dispose of the property entrusted to him in trust. The trust property is not a legal entity but is a separate taxable entity.

The activities of trusts and non-business trusts are regulated by Act XV of 2014. (Trustee Act – Bvktv.)

As already explained, the detailed rules for the activities of trustees are regulated by the so-called Trustee Act (Bvktv.)

The professional trustee

A business trust enterprise must comply with stricter requirements in terms of organisational, personal, material and guarantee (liability) conditions. In organisational terms, only companies listed in the law with a good business reputation (e.g. limited liability company, limited liability company, law firm) may carry out such activities. A trust company must have a minimum equity capital of HUF 70M.

The conditions for the person in a leading position, member, beneficial owner of the business include no criminal record, good business reputation, compliance with conflict of interest rules (e.g. independence from other trust businesses and assets under management, including relatives). In terms of staffing, the firm must employ at least one economist with a Master’s degree in economics, one lawyer with a law degree, on a full-time basis, and one independent auditor on a contract basis.

In addition, as financial security, the professional trustee shall be obliged to enter into a contract for the creation of financial security in an amount proportional to the total value of the assets under management, but not less than HUF seventy million, and to maintain it for the duration of its fiduciary activity.

Material conditions include: the maintenance of an adequate IT and administrative system for keeping and managing records relating to the assets under management, the drawing up of appropriate rules and regulations, the maintenance of a website with relevant information.

The Central Bank of Hungary does not keep records of the assets managed by professional trusts and cannot intervene in the activities of these kind of trusts, beyond verifying their compliance with the registration conditions. It shall, however, conduct an annual review of compliance with the conditions of registration, which must be initiated voluntarily by the professional trust companies.

The professional trustee shall itself hold the assets it manages, keep them separate and, in the context of its obligation to use them, make them available for the benefit of the beneficiaries in accordance with the provisions of the trust contract and the law. The trustee must preserve the value of the assets and pursue a prudent investment policy on the basis of the beneficial ownership obligation.

The non-professional / ad-hoc trustees

A non-professional trustee may only act as trustee in one trust relationship. Such an ad hoc trustee may be any legal or natural person who meets the requirements of the Trustee Act. In the case of a natural person trustee, a criminal record for the commission of certain offences defined in the Penal Code is a disqualifying ground. In the case of legal persons, more stringent conflict of interest rules apply to the person holding a managerial position, member and/or beneficial owner.

The contract establishing the ad hoc legal fiduciary relationship must be bonded in a private deed countersigned by an attorney or a legal adviser or in a notarial deed. The ad hoc legal fiduciary relationship must be registered with the Central Bank of Hungary within 30 days of its settlement. The notification must be accompanied by a declaration of the trustee’s compliance with the legal requirements and conflict of interest rules and a document certifying the payment of the HUF 50,000.00 procedural fee.

The Central Bank of Hungary shall register the legal relationship within 60 days of the notification.

Publicity and confidentiality of trust relationships

The Civil Code imposes a strict duty of confidentiality on the trustee. The trustee is obliged to keep confidential all facts, information and other data of which the trustee has become aware in the course of or in connection with his mandate as trustee. This obligation is independent of the establishment of the trust and shall survive the termination of the trust. However, the Trustee Act also provides for exceptions for fiduciaries by stating that the fiduciary is not under an obligation of confidentiality towards bodies acting in the performance of their duties as defined by law or by legislation enacted pursuant to a law. Under these provisions, certain bodies may request information without restriction, while others may request it only in connection with proceedings already pending before them.