1. P.R.I.M.E. Finance Panel of Recognized International Market Experts in Finance FX Loans in Hungary Presentation by Zoltán Lengyel, Allen & Overy, Budapest 2016 P.R.I.M.E. Finance Annual Conference 25 & 26 January, Peace Palace, The Hague

2. Law Unifying DecisionsFX Loan ActOutcomesRemediesThe „Experience” Background

3. Since 2008 HUF substantially depreciated against foreign currencies (CHF + EUR) Government interferes and passes legislation Customers suffered losses and stopped debt service + start litigations

4. Law Unifying decisions of the Curia (Supreme Court) Decision No. 6/2013 – so far so good –FX risk must be born by the borrowers –No mis-selling, the concept of ’FX loans’ is in line with freedom of contract –Defined FX Based Loans where the loan amounts are linked to FX but disbursement and repayment must be made in HUF > –Note that majority of Hungarian banks did arrange for FX hedge (either bought FX or entered into hedging transactions) –as part of their defence strategy most banks presented their funding mechanism and structure –But … Decision No. 2/2014 – the first strike –Provisions authorising the bank to increase costs to be borne by the customer are unfair, unless they satisfy the test developed by the Curia (PK Opinion No. 2/2012) –Application of bid and offer FX rates (i.e. FX margin) is unfair –The rate published by the Central Bank must apply instead

5. FX Loan Act Scope –Consumer Loan Contracts (01/05/2004 – 26/07/2014) –Definition of FX based loans („loans recorded in FX”) + also HUF loans –GTCs FX margin –Invalid –The Central Bank rate shall apply –Reporting to the Central Bank Unfairness Presumption Statutory presumption: Unilateral increase of costs provisions are unfair, unless they are in line with certain principles

6. FX Loan Act (cont’d) Unambiguous and comprehensible wording Itemised reference (no open ended, MAC type grounds are acceptable; e.g. base rate of the Central Bank as benchmark is OK) Objectivity (e.g. not dependent on the bank’s discretion) Factual accuracy and proportionality (the burden must actually hit the bank and only pro-rata can be passed on the clients) Transparency (but impossible to give a formula) Right to terminate Symmetry (i.e. banks must decrease interests where justified)

7. FX Loan Act (cont’d) - Challenge Procedure 3rd instance procedure 2nd instance procedure 1st instance procedure Metropolitan Tribunal had exclusive jurisdiction Minister of National Development as defendant Submissions within limited time periods 30 days for FX Based Loans (by 25 August 2014) Accelerated procedure First (and last) hearing within 8 days (adjournment once for 7 days) Evidence admissible only if available at the hearing Court to decide within 30 days No class action, separate litigations 8 days for appeal Hearing within 15 days Final and binding decision within 30 days 8 days to challenge No hearing 30 days to deliver the last instance decision

8. Outcome: banks lost all litigations Unilateral increase provisions were found invalid Banks must settle with customers under a separate Settlement Act Effect: –Partial invalidity only (collateral does not fall away) –Bank to repay (or set-off) the surplus realised from invalid Unilateral Increase Provisions and FX margin

9. Remedies International ForumsLocal Forums –(Challenge Procedure) –Preliminary ruling procedure before the CJEU – no effective remedy so far –Constitutional Court (violation of rule of law, right to fair procedure and lawful remedy) - rejected –International arbitration before ICSID – not yet tested in these cases –Litigation in Strassbourg before the ECtHR – not yet tested in these cases

10. Remedies - Relevant international forums 1. Court of Justice of the European Union (CJEU) in Luxembourg / Commission (Brussels ) 3. International arbitration before ICSID in Washington A.) Preliminary ruling During the course of the Challenge Procedure (Art. 267 of the TFEU) Horizontal effect of Directive 93/13 (Art. 288 of the TFEU) Charter (Articles 17 and 47: right to property, to fair trial and to an effective remedy) Judgement of the CJEU binding on national courts Compensation, if any, can only be claimed subsequently, in a separate litigation. B.) Complaint to the European Commission The European Commission may initiate an infringement procedure against the state Banks are not party to the process Result of the infringement procedure will not directly bring direct compensation to banks 2. European Court of Human Rights (ECtHR) in Strasbourg Any person may apply to the ECtHR claiming to be a victim of a violation by a Contracting State of the ECHR of the rights set forth in the ECHR ECHR: entitlement to the peaceful enjoyment of one’ s possession (Art. 1 of Protocol. 1) „Possessions” cover future assets in respect of which a bank has a legitimate expectation that they will be realised Compensation is aimed at wiping out the consequences of breach of treaty / restoring investor to previous position Violation of the principle of rule of law and Art. 6 and 13 of the ECHR (right to fair trial and effective remedy) Compensation is aimed at wiping out the consequences of violating the ECHR – „just satisfaction” Each Treaty protects "investments" by investors of one contracting party in the territory of the other contracting party Relevant Investment Treaty to be analysed Foreign shareholders of banks are likely to be considered „investors” Interests in domestic entities likely to be protected "investments” (loans specifically may also fall under this protection) Protections against unlawful interference with protected investments: expropriation, fair and equitable treatment

11. In summary the Hungarian ”experience” In short BAD – Hungarian courts rejected all motions based on EU grounds – Some questions sent to the Constitutional Court – Constitutional Court rejected several complaints – No preliminary ruling requested from the CJEU – In essence the courts held that FX legislation had no retroactive effect because it only codified existing case law as enshrined in the law unifying decisions

12. Questions?

13. P.R.I.M.E. Finance Panel of Recognized International Market Experts in Finance 2015 P.R.I.M.E. Finance Annual Conference 26 & 27 January, Peace Palace, The Hague