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Non-banking financial institutions

An amendment to the Credit Institutions Act (CIA) that entered into force on March 31 2009 followed by the new Regulation 26 dated April 23 2009 on Financial Institutions issued by the Bulgarian National Bank (BNB) introduced stricter regulation of non-banking financial institutions.

Unlike the previous requirements stipulating mere notification to the Bulgarian National Bank, now financial institutions operating in Bulgaria have to comply with capital and organisational requirements and register in a register maintained by the Bulgarian National Bank.

According to Bulgarian law, a financial institution is a non-banking institution performing one or more of the activities specified in the law. Such activities include: providing financial leasing services or money transfer services; trading with capital markets instruments, currency, precious metals, futures and options; consulting services on capital structure, sector strategy and the reorganisation of companies; providing factoring services; and providing loans using funds not accumulated by deposits from the public or other funds attracted from the public.

Rebeka Kleytman
Jasmina Uzova, Wolf Theiss

Companies whose activity falls under one of those described in the above legislation include those offering financial leasing services and consumers loans.

Financial institutions registered in Bulgaria are registered upon filing an application with the Bulgarian National Bank. They have to comply with simple capital, management and organisational requirements fixed in Regulation 26. Existing financial institutions had to submit their applications, accompanied with evidence of their compliance with the new regulation, no later than September 30 2009.

Financial institutions established in an EU member state are registered upon notification being sent to the Bulgarian National Bank by the authority regulating the foreign financial institution in its home member state and a confirmation from such authority that, among other things, the financial institution is a subsidiary of one or more banks or financial institutions licenced and supervised in the home member state.

The new regulation limits the organisational forms that may be used by Bulgarian finance institutions to joint stock companies, limited liability companies and associations limited by shares.

The minimum amount of the registered share capital of a Bulgarian financial institution is now defined by law and, depending on the activity performed, varies between Lev50,000 (€25,000) and Lev250,000. Financial institutions should maintain a minimum amount of positive equity at the same levels defined as minimum registered capital requirements. Pursuant to the interpretations of the Bulgarian National Bank, the items included in the equity of a financial institution shall be determined pursuant to the IFRS. The general rules of the Bulgarian Act on Commerce shall also apply, for example a limited liability or joint-stock company whose total liabilities exceed its total amount of assets has a statutory obligation to file for insolvency and, having its corporate existence threatened, will not be eligible for registration as a financial institution until such state of over-indebtedness has been remedied.

Introducing a minimum capital requirement at least procured a certain degree of financial stability for non-banking providers of banking services just a few months before the introduction of the latest amendments to the Bulgarian Act on Commerce, thus reducing the required minimum capital for the registration of a non-specialized limited liability company to Lev2 only.

The new regulation also introduces requirements for a good reputation and the qualification of the members of the managing bodies of the financial institution, as well as the qualifying shareholders holding (directly or indirectly) more than 10% of the shares in such financial institution.

The requirements for qualifying shareholders apply equally to shareholders owning their qualifying percentage either directly or through a number of subsidiaries.

Another procedural requirement which causes delays in the application process is that the Bulgarian National Bank requires a considerable part of the information (including information from the qualified shareholders) to be submitted also in an electronic form signed with the electronic signature of each signatory in their relevant capacity.

The financial institutions are subject to extensive reporting requirements, including the quarterly submission of financial information, submission of their general terms and conditions. Each financial institution should have a clear organisational structure and effective procedures concerning risk management and internal control.

Unlike previous periods when the Bulgarian Central Credit Registry (BCCR) collected information submitted only from banks, now the registry of obligor debts includes data that financial institutions must also submit. In contrast to the former regulation, financial institutions are also entitled to retrieve information from the BCCR, which is probably in response to the financial crisis and the attempts by the government to contribute to a more stable and transparent financial situation in the country.

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