The Croatian Financial Services Supervisory Agency (HANFA) is the regulatory body responsible for overseeing Croatia’s financial markets, including banking, insurance, leasing, investment funds and the capital market. HANFA was established in 2005 through the merger of existing regulatory agencies and has become an important pillar of Croatia’s financial system.

Introduction

HANFA plays a critical role in promoting the stability, integrity and transparency of Croatia’s financial system. Its key functions include licensing and supervising financial institutions, regulating market conduct, approving prospectuses, enforcing regulations, and protecting consumers.

Since its formation, HANFA has worked to implement EU standards and best practices for financial market supervision. This has supported Croatia’s accession to the European Union in 2013. Moving forward, HANFA continues to enhance its regulatory framework and oversight capabilities.

This article provides an overview of HANFA’s organization, responsibilities and regulatory approach across the major segments of Croatia’s financial sector including banking, insurance, investment funds and capital markets. The key developments and initiatives undertaken by HANFA are also discussed.

HANFA’s Organization and Structure

HANFA is an autonomous regulatory agency with its head office located in Zagreb. It has a two-tier organizational structure consisting of the HANFA Council and the HANFA Office.

The HANFA Council is the main decision-making body responsible for enacting regulations, guidelines and decisions. It consists of five members appointed by the Croatian Parliament for five-year terms. The Council adopts all regulations, guidelines, warnings and other decisions within HANFA’s scope of authority.

The HANFA Office handles the operational supervision and oversight of financial institutions. It is led by the President who is also a member of the Council. The Office comprises various departments focused on specific industries like banking, insurance, leasing, investment funds and the capital market. The staff includes financial and legal experts engaged in licensing, supervisory analysis, investigations, enforcement and other activities.

HANFA is an independent body that operates autonomously. Its funding comes from fees levied on the entities under its supervision. This helps ensure impartiality and objectivity in conducting its regulatory responsibilities. HANFA submits annual reports on its operations and finances to the Croatian Parliament.

Key Responsibilities and Functions

As Croatia’s integrated financial regulator, HANFA is responsible for overseeing banks, insurance companies, leasing firms, investment funds, pension funds and capital market entities. Its core duties include:

  • Licensing – Reviewing applications and issuing licenses to entities that wish to provide financial services in Croatia. This helps ensure they meet the required prudential and governance standards.
  • Supervision – Conducting off-site monitoring and on-site inspections of licensed firms to assess their financial health, risk management, compliance and business conduct. This involves reviewing reports, financial statements, policies, procedures, internal controls, governance and risk exposures.
  • Regulations – Developing and implementing primary and secondary legislation, standards, guidelines and codes of conduct governing financial institutions and markets. This helps promote fair, orderly and transparent market conduct.
  • Enforcement – Investigating violations and taking enforcement actions such as fines, bans, compulsory administration or license withdrawals against entities that breach laws and regulations. This acts as a deterrent for misconduct.
  • Consumer Protection – Implementing measures to safeguard the rights of financial services consumers such as disclosure requirements, fair treatment and dispute resolution mechanisms.
  • Financial Stability – Monitoring risks to the overall financial system stability and coordinating with other authorities on macroprudential oversight and crisis management.
  • International Cooperation – Collaborating and exchanging information with EU regulatory bodies and international financial institutions to promote harmonized cross-border supervision.

In performing these responsibilities, HANFA aims to foster fair, efficient and transparent financial markets that inspire investor confidence while protecting consumers.

Regulation of the Banking Sector

Banks form the backbone of Croatia’s financial system, accounting for around 70% of assets in the overall financial sector. As of 2022, Croatia had 20 banks licensed by HANFA.

HANFA oversees bank licensing and supervision to maintain the safety and soundness of the banking industry in line with EU regulatory standards. Its key regulations for the banking sector include:

  • Credit Institutions Act – Governs the licensing and operational requirements for banks and credit unions. It covers aspects like minimum capital, governance, risk management, capital adequacy, liquidity, large exposures, reporting duties, supervision measures, sanctions, insolvency procedures and more.
  • Decision on the Classification of Placements and Off-Balance Sheet Liabilities of Credit Institutions – Provides rules for the classification of bank assets and off-balance sheet items into risk categories based on the likelihood of repayment. This risk classification determines the level of loan loss provisions to be maintained by banks.
  • Decision on the Governance System – Sets requirements concerning bank organizational structure, risk management framework, internal controls, remuneration policies and outsourcing arrangements.
  • Decision on the Management of Interest Rate Risk in the Banking Book – Requires banks to implement an internal interest rate risk management system including policies, procedures, limits, stress testing and oversight measures.
  • Decision on the Management of Liquidity Risk – Prescribes standards for bank liquidity risk measurement, limits, reporting and stress testing. Includes requirements for a robust liquidity coverage ratio framework.

HANFA employs a combination of off-site monitoring and on-site inspections to ensure banks comply with regulations. It analyzes bank reports, financial statements, policies and risk exposures. HANFA also directly examines governance frameworks, internal controls, procedures and risk management systems during on-site visits. Enforcement measures like fines, bans and license withdrawals can be imposed on banks for non-compliance.

During the global financial crisis, Croatian banks faced deteriorating asset quality and profitability. HANFA responded by enhancing its supervisory practices while providing flexibility on some regulatory requirements. This allowed banks to work through their credit issues while maintaining adequate capital and liquidity buffers. The banking industry has since rebounded and Croatia’s new Bank Recovery and Resolution Act also aims to minimize systemic risks.

Regulation of Insurance Companies

The insurance industry in Croatia comprises around 20 companies that provide life, non-life and reinsurance services. HANFA ensures insurance firms operate on a sound financial footing and treat customers fairly through its regulatory oversight.

Key regulations for the insurance sector include:

  • Insurance Act – Defines the licensing requirements and standards for governance, capital adequacy, technical provisions, investments, reporting, acquisitions, supervision and insolvency procedures for insurance companies.
  • Ordinance on the Manner of Calculating Technical Provisions – Lays down detailed rules for calculating adequate technical provisions to cover liabilities arising from insurance contracts.
  • Ordinance on Own Funds of Insurance and Reinsurance Companies – Specifies eligible components and capital quality standards for insurance firms’ available solvency margin.
  • Ordinance on Detailed Conditions for the Provision of Life Insurance – Sets various requirements related to life insurance policies like minimum guaranteed returns, surrender values, paid-up policies, consumer disclosures etc.

To ensure compliance, HANFA reviews periodic reports submitted by insurers concerning their business operations, solvency position, financial statements, investments, technical provisions and reinsurance protections. On-site inspections of insurance companies are also conducted.

A risk-based approach is applied with more intensive supervision of firms posing elevated solvency or governance risks. HANFA has punitive powers to enforce regulations through measures like fines, bans and ultimately license revocation. This promotes a prudent and sustainable insurance sector.

Oversight of Investment Funds

Investment funds have grown to become an important segment of Croatia’s financial marketplace. As of 2022, the sector comprised 104 funds and 24 fund management companies overseen by HANFA.

The key regulations governing investment funds include:

  • Act on Open-ended Investment Funds with a Public Offering – Regulates the establishment, management, governance, permitted activities, investments, valuations, fees, disclosures, cross-border distribution and supervision of UCITS funds.
  • Act on Alternative Investment Fund Managers – Implements the EU Alternative Investment Fund Managers Directive covering licensing, conduct of business and transparency rules for managers of alternative funds like private equity, venture capital and hedge funds.
  • Ordinance on Sworn Auditors’ Reports on UCITS Financial Statements and Sworn Auditors’ Annual Financial Reports – Defines the format and content of audit reports to be provided by investment funds.
  • Ordinance on the Risk Management and Calculation of the Total Exposure and Exposure of UCITS and AIF – Prescribes appropriate risk management policies and methodologies for calculating exposures.

HANFA scrutinizes fund documentation, investment policies, valuations, fees, disclosures and risk management frameworks. It utilizes reporting reviews, surveys and on-site inspections to ensure compliance. Enforcement options like issuance bans, fines or ultimately license withdrawals provide credible deterrence for violations. This oversight promotes investor protection and financial stability.

Capital Markets Regulation

Fostering an orderly capital market is another key part of HANFA’s mandate. Its oversight spans trading platforms, central depository, clearing house, brokers, listing, public offers and takeovers.

Major capital market regulations include:

  • Capital Market Act – Provides the framework for securities issuance, public offers, listings, takeovers, market abuse prohibition, investment services, reporting duties and enforcement measures.
  • Ordinance on Issuers’ Financial Reporting – Defines periodic reporting requirements for issuers of securities to provide transparent information to investors.
  • Takeover Act – Regulates the conduct of takeover procedures including mandatory bids, disclosures, defense measures and sellout rights for minority shareholders.
  • Market Abuse Regulation – Prohibits market manipulation, insider trading and unlawful disclosure of sensitive information.
  • Ordinance on Market Infrastructure – Sets authorization requirements and operating rules for trading venues, central depository and clearing house.

HANFA scrutinizes prospectuses of securities issuers and approves public offer documents. It monitors trading activities for any potential market abuse. HANFA also verifies compliance by investment firms, trading venues and market infrastructures with conduct of business rules and organizational requirements. Timely disclosures and transparency requirements allow investors to make informed decisions.

Targeted on-site inspections based on risk factors complement ongoing monitoring. Significant penalties like trading bans and monetary fines enforce adherence to capital market regulations. Croatia’s capital markets have steadily grown with HANFA’s oversight providing confidence to domestic and foreign investors.

Key Regulatory Initiatives and Developments

Since its formation in 2005, HANFA has spearheaded multiple regulatory initiatives to continually enhance Croatia’s financial system:

  • Implemented the regulatory framework for alternative investment funds allowing private equity, venture capital and hedge funds to be established.
  • Upgraded insurance regulations in line with the EU Solvency II directive enhancing capital requirements, risk management, governance and reporting standards.
  • Introduced enhanced rules for bank governance, internal controls, liquidity risk management and loan loss provisioning based on EU best practices.
  • Established a comprehensive framework aligned with the EU’s Markets in Financial Instruments Directive II to regulate investment services, trading venues and market conduct.
  • Enhanced investor protection standards through strengthened disclosure requirements, product oversight and fair treatment rules.
  • Upgraded regulations for takeover procedures, minority shareholder rights and mandatory bid thresholds.
  • Developed risk-based supervisory methodologies for more effective oversight across all financial sectors.
  • Expanded international supervisory cooperation through signing Memorandum of Understandings (MoUs) for information exchange and collaboration with EU regulators.
  • Implemented an integrated multi-sectoral crisis management framework emphasizing swift intervention powers and resolution tools.
  • Enhanced anti-money laundering regulations requiring financial institutions to have more stringent checks and reporting.
  • Strengthened market abuse enforcement through investigating and sanctioning various cases of insider trading and market manipulation.
  • Improved transparency through launch of new public registers and expanding scope of disclosures across all sectors.

HANFA continues to regularly refine Croatia’s financial regulations taking into account market developments, risks and international standards. Its forward-looking yet prudent approach aims to foster an inclusive, efficient and resilient financial system.

Conclusion

The Croatian Financial Services Supervisory Agency has made tremendous strides in enhancing the country’s financial regulatory framework since its inception. HANFA has successfully established itself as a credible and effective integrated regulator across the banking, insurance, funds and capital market sectors.

Its comprehensive oversight spanning licensing, conduct standards, prudential requirements, governance rules, consumer protection and enforcement measures has strengthened the soundness and integrity of Croatia’s financial system. Tight regulation combined with swift intervention powers provides safeguards against systemic risks.

At the same time, HANFA has liberalized market access allowing greater competition and diversity in financial services for consumers and investors. Ongoing upgrades to supervisory practices and risk-based approaches ensure regulations keep pace with market innovations and evolving risks.

By adopting EU and international standards, HANFA has supported the integration of Croatia’s financial markets into European and global structures. It has fostered deeper relationships with regional and global regulatory authorities.

The stability delivered by HANFA’s robust institutional framework and regulatory oversight provides an enabling environment for the sustainable development of Croatia’s financial markets. It helps inspire confidence among institutions, investors and consumers in the fairness and integrity of the country’s banking, insurance and capital market sectors.

Going forward, HANFA is well positioned to continue supporting the maturity of Croatia’s financial system in line with the country’s economic growth and European ambitions.