Hanfa Council: CSRD transposed into Croatian legislation
At the meeting held today, the Hanfa Council discussed, among other things, new regulatory changes, current trends in the financial services market and initiatives that will be useful for further changes and the development of a sustainable financial market.
Beginning of corporate sustainability reporting
At its meeting, the Council discussed the new regulations - the Accounting Act and the Act on Amendments to the Audit Act prepared by the Ministry of Finance to transpose the EU Corporate Sustainability Reporting Directive (CSRD). These acts were proposed at the session of the Government of the Republic of Croatia on 26 June 2024, adopted at the session of the Croatian Parliament on 12 July 2024, and are expected to be published soon in the Official Gazette.
As a result, sustainability reporting will commence in 2025 for the financial year 2024 and onwards for the undertakings identified as obliged entities in these legislative proposals. In order to prepare these legal proposals, the Minister of Finance issued the Decision on the establishment of the Working Group for the drafting of acts transposing CSRD into the legislation of the Republic of Croatia, which ultimately had about 30 members from a number of institutions and associations.
CSRD, EU taxonomy - Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 establishing a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088), and SFDR - Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector are three interdependent regulations aimed at creating the foundation for the transition to investment in sustainable economic activities consistent with the EU taxonomy, helping investors identify such activities.
The transition to sustainable development requires the preservation of natural resources and respect for human and social rights, with climate action being an important aspect, as the need to limit and mitigate the consequences of climate change is increasing.
After the EU taxonomy and SFDR, CSRD is a final step that will allow for more comprehensible and easier comparability of sustainability information. New sustainability reporting will expand the circle of reporting entities, the report will be more comprehensive and compiled using the European Sustainability Reporting standards (ESRS), will be an integral part of the management report and will have to be published in a unique electronic format (eXtensible Business Reporting Language).
Tax credits for employers on contributions paid into voluntary pension savings
Pension companies presented a proposal to increase tax credits for employers on payments to employees for voluntary pension savings.
Due to the increase in average salaries in the Republic of Croatia, the value of tax credit decreased from 6.5% of gross salary in 2010 to 3.9% in February 2024. In order to achieve the level of the previous period, it is proposed to increase the tax credits for employers on contributions paid into voluntary pension savings.
It was pointed out that increasing tax credits is crucial to encourage employers to invest more in employee pension savings, which will result in higher pensions and better financial security in old age. Especially considering that the pension replacement rate (ratio of average pension to average salary at retirement) in Croatia stands at 29%, which is significantly below the EU average of 45%, and it is expected to decline further to 26.4% by 2045 and 23.7% by 2070.
A constructive dialogue with employers about this issue is crucial, since by investing in voluntary pension savings employers increase the security of workers, stimulate them further and reduce the tax burden on income. Payments of bonuses and other rewards through a pension fund reduce the total costs for the employer, while increasing the motivation and loyalty of employees.
Resolution college for SKDD-CCP SMART CLEAR
In accordance with Regulation (EU) 2021/23 of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties, Hanfa has successfully established the resolution college for SKDD-CCP SMART CLEAR.
The CCP RRR Regulation requires the resolution authorities of CCPs to set up resolution colleges to provide an effective recovery and resolution framework. As the resolution authority of SKDD-CCP SMART CLEAR, Hanfa is responsible for establishing, managing and chairing the resolution college, allowing for coordinated action in case of need for resolution of this financial institution.
The resolution college of SKDD-CCP includes seven institutional members, including various domestic and foreign supervisory and resolution authorities. This college provides a platform for cooperation and coordination, enabling the pooling of various perspectives and experiences to assess as accurately as possible the consequences of the CCP failure and to implement appropriate resolution strategies.
The establishment of the resolution college is an important step in ensuring the stability and resilience of the financial system of the Republic of Croatia, further strengthening confidence in market infrastructures and financial institutions.
Trends in the investment fund market
The Council was also presented with an overview of current trends and market situation of UCITS in Croatia, comparing it with trends at the EU level. The total assets of UCITS currently amount to EUR 2.67 billion and have been continuously growing since mid-2023. During 2024, asset growth has been mostly driven by money market funds as a result of the fact that investors in Croatia prefer safer types of investing.
In the European Union, however, the 2024 growth was most significantly contributed by bond funds, and EU investors are better at anticipating future financial market developments. In the domestic fund type structure, the so-called target-date funds are the most represented ones (21.36%), followed by short-term bond funds (21.02%) and equity funds (18.31%).
Preparations for reporting adverse impacts under the SFDR Regulation
The Council also discussed the results of the analysis carried out to report to the European Supervisory Authorities (ESMA, EIOPA and EBA) on disclosures on considering adverse impacts of investment decisions on sustainability factors, so that the ESAs can, based on this information, report to the European Commission on best practices and recommendations on voluntary reporting standards under Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR).
The Regulation requires financial market participants to publish on their websites whether they consider principal adverse impacts of investment decisions on sustainability factors.
The ESAs submitted their first reports in September 2022, which included best practices and recommendations for voluntary reporting, and this year data is being collected for the third such report. Hanfa analysed the publications of 41 entities, including investment firms, credit institutions, investment fund management companies, insurance companies, pension insurance companies and pension companies.
The analysis indicates the need to improve the visibility and availability of disclosures, a clearer link to PAI indicators and more detailed descriptions of the methodology and actions taken to mitigate adverse impacts.
The Ministry of Finance and Hanfa will continue to work on improving the transparency and compliance of entities with the provisions of the SFDR Regulation, in order to ensure responsible business operations and sustainable investments in the financial services market.
Capital market development
Trade on the Zagreb Stock Exchange in the first half of the year was marked by positive trends both in terms of increased turnover and of increased index value. The ZSE’s activities are currently focused on the implementation of DORA Regulation, which aims to strengthen the resilience of financial institutions to the challenges posed by the transition of an increasing part of their operations into the digital sphere.
Members of the Council welcome the initiative that Hanfa and the Ministry of Finance jointly hold regular quarterly round tables with the non-bank financial industry, which will host discussions about potential problems in the regulatory framework, which may hinder the development of the capital market (including insurance) in Croatia. As part of the strategic framework for capital market development, the Ministry of Finance and Hanfa will review the regulatory framework with a view to eliminating over-regulation, particularly when it comes to “gold plating” (practice of prescribing additional or stricter national rules in addition to what is required by EU legislation).
In addition to the ex post revision of the existing legislative framework, this will lead to an active ex ante dialogue with the industry when adopting new regulations, including those issued by Hanfa. Roundtables will be preceded by a period of gathering information from the industry on potential topics of market interest, from practical problems encountered by stakeholders in their business operations, to strategic issues requiring a holistic approach. Roundtables are planned to be organised by the Croatian Chamber of Economy, with the presence of representatives of all associations of Hanfa’s supervised entities (associations at the Croatian Chamber of Economy, the Croatian Insurance Bureau and the Association of Pension Companies and Pension Insurance Companies), while ensuring the participation of issuers on the stock exchange. This is a way to establish a structured regular dialogue with all market stakeholders, through which the existing and potential problems in the regulatory framework and the functioning of capital market can be identified in a timely manner.
Hanfa Council is Hanfa’s advisory body that meets regularly and provides opinions and expert and scientific advice to develop and improve supervisory practice. It consists of nine members: President of Hanfa Board (ex officio), five members elected by the representatives of supervised entities’ associations at the Croatian Chamber of Economy and three members appointed by the Government of the Republic of Croatia.
