France: The reforms brought by the law on banking and financial regulation
19 November 2010
Law n°2010-1249 of 22 October 2010 on banking and financial regulation (the Law) has recently been published in the French Journal Officiel.
The Law contains numerous important provisions and it is difficult to provide a detailed description of these provisions in a single bulletin. Some aspects of the reforms introduced by the Law are therefore addressed in separate, specific bulletins. However we believe it is useful to provide an overview of the main provisions of the Law in order to understand the principal aspects of the reforms introduced by the Law.
The Law has been adopted against the backdrop of the financial crisis and reflects current international and European trends in banking and financial regulation. The Law has been announced as the French legislator's response to the causes of the financial crisis and has a double objective: firstly, to regulate and monitor the entities suspected to have been the troublemakers (such as market operators, rating agencies, derivatives markets, alternative funds, etc.) and secondly, to support the economy.
This double objective is clearly indicated in the title of the Law. Section I of the Law is entitled "To strengthen the supervise the principals and the financial markets", whilst Section II is dedicated to "supporting the financing of the economy in order to facilitate the economic recovery."
The strengthening of the financial sector regulation
The first part of the Law intends to strengthen the financial sector regulation and the Law therefore introduces several important measures, such as the control of short sales, the regulation of derivatives markets and rating agencies, the reinforcement and extension of the sanctioning powers of the regulatory entities on the markets and the control of the risks and remuneration within the financial sector, as well as extending the scope of the obligation to inform the competent authorities with the power to bind companies acting in the financial markets.
Creation of a board of financial regulation and systemic risk
The Law creates a board of financial regulation and systemic risk (conseil de régulation financière et du risque systémique) which amalgamates the controlling authorities of the financial sector.
This board is created to anticipate the risks facing the financial sector more efficiently and to coordinate more accurately the role of France in both international and European forums focused on reforming financial regulation.
Strengthening the powers granted to the French Autorité des marchés financiers and to the French Autorité de Contrôle Prudentiel
The Law ratifies ordinance n°2010-76 of 21 January 2010 which merged the authorities competent for licensing and controlling any relevant entity in the banking and insurance sectors.
Following the recent financial crisis, the French Authority of Prudential Control (Autorité de contrôle prudentiel) (ACP) is now entitled to alert its counterparts when the liquidity in a market or the stability of the financial system is threatened.
In order to consolidate financial stability, the Law has provided the chairman of the French Financial Market Authority (Autorité des marchés financiers) (AMF) with the authority to implement emergency measures to restrict the negotiations in the financial markets in the event of exceptional circumstances.
The Law grants these extraordinary powers to the chairman of the AMF to in order to prevent an occurrence of the situation suffered by the AMF in Autumn 2008 when it decided to suspend short sales of securities in the financial sector without being in a position to rely on specific legislative provisions to do so. The AMF now has a legal basis to rely on when implementing extraordinary measures, but these measures must remain temporary (15 days which can be extended to 3 months). A governmental order (arrêté ministériel) is necessary in order to extend these measures beyond this 3 month time limit.
This reinforcement of the powers granted to the AMF is supported by the consolidation of the sanctions that the AMF can pronounce. From that perspective, the Law has considerably raised the threshold of the penalties that the sanction commission of the AMF can impose, multiplying them by ten*. The threshold for sanctions applicable to the sanction commission of the ACP is multiplied by 2, raising it from EUR 50 to EUR 100 millions. The Law has therefore conformed the threshold applicable to the sanction commission of both authorities.
In addition, the Law now provides that any decision made by the sanction commission of the AMF or the ACP will be published, whereas this was only a possibility under the old regime.
Finally, the Law has introduced provisions authorising the AMF to compromise into the French Monetary and Financial Code (Code monétaire et financier) (the CMF): when the AMF college notifies grounds for complaint to any person (other than in a market abuse situation), it now has the capacity to propose a compromise to that person who will then undertake to pay a sum corresponding to the maximum amount of the incurred financial sanction. The compromise is proposed by the AMF college and confirmed by the sanction commission of the AMF.
* The ceiling goes from EUR 10 to 100 million for legal entities, and from EUR 1.5 to 15 millions for individuals (article L. 621-15 of the French Monetary and Financial Code (Code monétaire et financier) as amended).
Creation of a control of rating agencies
The Law takes into account the European regulation on regulation of rating agencies* by establishing for the first time in France a control of the rating agencies. The AMF will be in charge of this control.
The Law also introduces a tort liability principle for rating agencies which are now liable towards their customers as well as to third parties, for any damage resulting from any action performed by them in order to comply with their obligations under the European regulation referred to above. This has important consequences in the European legal framework: under Regulation (EC) n°864/2007 of 11 July 2007, the law applicable to a non-contractual obligation arising out of a tort is the law of the country where the tort occurred. Therefore, an investor claiming a damage suffered in France will be in a position to initiate proceedings against the rating agency in accordance with French law irrespective of the actual location of the agency.
In addition, any clause excluding or restricting such liability is prohibited and deemed inapplicable. Similarly, the Law provides that any agreement entered into by a rating agency to submit a dispute arising in relation to its activity to the jurisdiction of courts of a state which is not a member state of the European Union (in order to benefit from liability limitation or exoneration clauses) is null and void.
* Regulation (EC) n°1060/2009 from the Parliament and the Council of 16 September 2009, relating to rating credit agencies.
Creation of a college of supervisors
The Law intends to further monitor and control cross-border bank groups. This includes the creation of a college of supervisors gathering the relevant authorities of the member States of the European Union and of other States parties to the agreement on the European Economic Area.
Completion of the legal framework applicable to derivatives and short sales
The Law contains several provisions which intend to complete the legal framework applicable to derivatives and short sales, in addition to the measures which have been announced at the European level*.
The Law extends the competence of the AMF with respect to market abuse sanction and reporting of suspicious transactions to, in particular, certain derivative markets.
The Law intends to restrict "naked short sales" of financial instruments which are admitted to trading on a regulated market. Therefore, the Law prohibits the issuance of any sale order if the relevant financial instruments are not credited into the account of the seller or if the seller cannot provide reasonable assurances evidencing its ability to timely deliver these financial instruments. In addition, the Law intends to reduce the settlement cycle from three to two trading days, subject to an harmonisation at the European level.
Lastly, the Law extends the close-out netting and financial collateral regime to certain derivatives which are not forward financial instruments, provided that these derivatives are cleared by a recognised clearing house or are the subject of periodic margin calls.
* Commission Européenne, Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, COM(2010) 484/5 and Proposal for a Regulation of the European Parliament and of the Council on Short-Selling and certain aspects of Credit Default Swap COM(2010) 482 final.
Improvement of risk governance
The Law sets out a risk monitoring procedure to be complied with by credit institutions and insurance and reinsurance companies.
This risk monitoring function is given to the audit committee referred to in article L. 823-19 of the French Commercial Code (Code de commerce) (which already deals with any question relating to the formulation and control of financial and accounting information). The audit committee must therefore now also follow up on risk policy, procedure and governance.
It should be noted that the board of directors or supervisory board of the relevant company may decide to appoint a separate committee to perform this function.
Strengthening the duties owed by any professional providing financial services towards its customers
The Law contains several provisions intended to reinforce the duties owed by any professional providing financial services towards its customers. This includes:
- an extension of the entities or persons authorised to canvass, in particular to some managing companies of a French organisme de placement collectif en valeurs mobilières (OPCVM) or tied agents;
- a modification of the definition of and the professional requirements applicable to any banking transaction intermediary which must be honourable and is now subject to professional skills conditions and which must now comply with rules of good practice to be specified in a future decree issued by the French administrative Supreme Court (Conseil d'Etat);
- the adjustment of the rules of good practice applicable to any financial investment advisor and to those already applicable to an investment service provider (PSI), by way of duplication of the terms of the EU directive 2004/39/CE of 21 April 2004 on financial instruments markets;
- new obligations binding a PSI appointing a tied agent to verify the worthiness of such agent; and
- the specific registration (on the register referred to in article L. 512-1 of the French Insurance Code (Code des assurances)) is now applicable to banking transaction and payment services intermediaries, financial investment advisors and tied agents, under the same conditions as those applicable to insurance intermediaries.
Lastly, the Law has abrogated the licence exemption which previously benefited to canvassers acting as agents of a PSI in relation to investment services for and on behalf of their principal.
Supporting the economy - financing the economic recovery
The second part of the Law intends to reform the financing routes of the economy so that both small and medium size companies and households can benefit from these routes, in order to facilitate and accelerate the economic recovery within France.
Updating the law applicable to takeover bids
The Law modernises the legal provisions applicable to takeover bids in order to offer shareholders better protection and in order to prevent "dormant" takeovers.
In light of the above, the Law modifies article L. 233.10 of the French Commercial Code to extend the concept of action in concert, which now encompasses any agreement intending to either apply a common policy or obtain control of the target.
In addition, the Law increases transparency with respect to temporary loans of shares or securities. To that extent, the Law provides that any shareholder who temporarily owns (e.g. under any temporary assignment of shares or in accordance with any other transaction under which it can or must transfer back shares to the assignor), three days before a shareholders meeting, more than 0.5% of the company's voting rights must inform the issuing company and the AMF accordingly. The information which must be transmitted relates to, amongst others, the number of shares acquired following this temporary transfer, the identity of the transferor and the date and term of the underlying contract. Interesting point to note: this is the company which must publish this information (and not the AMF). Also note that PSI are exempted from this requirement with respect to the shares included in their negotiation portfolio.
Moreover, the threshold triggering the obligation to make a takeover bid is now included in the CMF (previously it was defined in the general regulations of the AMF). The Law decreases this threshold from a third to 30% of the share and/or the voting rights, aligning French regulation with that of many other European countries.
Finally, the Law intends to offer a better protection to shareholders on Alternext and therefore introduces procedures (in respect of takeover bids and squeeze-out) which only apply to small and medium-size companies.
Introduction of the accelerated financial preservation
The Law creates a new insolvency proceeding, the accelerated financial safeguard (sauvegarde financière accélerée) (SFA), thereby introducing the so-called "prepack" restructuring procedure into the French legal system.
The SFA will not apply to companies who are in a state of "cessation des paiements" (e.g. unable to meet their payment obligations as they fall due for payment with their available assets). Rather, the SFA will only apply to companies which are heavily indebted with their bank creditors (but not yet in a state of "cessation des paiements") and for which conciliation proceedings have failed. The SFA will last for a period of one month (with a possible extension up to a maximum of two months) instead of the 12 month duration of the standard safeguard procedure) and will facilitate the freeze of the financial liabilities of the company. Unlike the standard safeguard procedure, the SFA only requires the approval of the majority of the company's creditors as opposed to conciliation proceedings for which unanimity is required.
The SFA will apply to insolvency proceedings initiated on or after 1st March 2011.
Creation of the remuneration Committee
The Law creates a remuneration committee which will need to be introduced in any credit institution, broker or venture-capital company whose respective size exceeds a threshold to be determined in a future decree.
This committee will produce an annual examination of: (i) the principles of the remuneration policies of the relevant company, and (ii) the remunerations and indemnities granted to corporate officers and employees acting as professionals in the financial markets and the activities of whom may have a significant impact on the risk exposure of the relevant company.
It should be noted that the Law also grants authority to the ACP in this respect as the ACP is now authorised to review the policies and practices relating to the remuneration of employees acting as professionals in the financial markets and the activities of whom may have a significant impact on the risk exposure of the relevant company.
Incidental possession of equity securities by of French securitisation vehicles
In order to achieve their corporate purpose, French securitisation vehicles are now allowed to have in their balance sheet (but only on an incidental basis), equity securities resulting from a conversion, an exchange or a repayment of debt securities or securities giving access to the capital of the issuer.
This provision intends to facilitate the refinancing (by way of a debt for equity swap) of transactions which have been securitised.
Support of housing loan financing
Creation of a new type of covered bond: housing financing bonds, issued by housing financing companies
The Law, reflecting the regime already applicable to mortgage backed companies (SCFs), creates a new type of issuer, called housing financing companies (société de financement à l'habitat) (SFHs). SFHs will be allowed to issue a new type of covered bonds (called housing financing bonds (obligations de financement de l'habitat) (OHs)). The OHs are a different type of instrument to the existing OFs traditionally issued by SCFs (although the legal regime for OFs and OHs is very similar).
The new regime intends to provide investors with an instrument as efficient and as secured as the OFs without applying some of the more onerous regulatory constraints that currently apply to SCFs.
It also intends to allow banks to refinance real estate loans granted to individuals at a lower price and with lower risk.
Reform of mortgage bonds
In order to further increase the reputation of the SCFs, the French legislator intends to codify some of the current market standards that are usually satisfied by issuers. The main purpose of the Law in this respect is to offer investors the same level of legal protection already offered under German law to investors in pandbriefe products. These standards will also apply to French SFHs. As a result, the collateralisation ratio, the liquidity requirements and the information required to be delivered to investors have all been reinforced. Finally, the Law authorises, under certain conditions, SCFs and SFHs to subscribe for, acquire or hold their own securities.
Please note that a separate bulletin addressing this aspect of the reform has recently been published: France : French Covered Bonds, The New Legislative Framework
A consequence of the buy-back of its bonds by a French issuer was framed by provisions which were no longer relevant and not competitive within the European Union, namely the mandatory cancellation of the repurchased bonds. From now on, a buy-back of bonds which do not give access to capital and are admitted to trading on a regulated market or an organised multilateral trading system can be purchased without immediate cancellation up to 15% of one emission subject to firstly, disclosure to the market which conditions will be set by the General Rules of the AMF and secondly, a maximum period of self-possession to be determined by decree.