French Financial Institutions Litigation & Regulation Update, Issue 11
LEGISLATION AND REGULATION
DIRECTIVES BANK RECOVERY AND RESOLUTION AND DEPOSIT GUARANTEE SCHEMES IMPLEMENTED INTO FRENCH LAW
Ordinance no. 2015-1024 dated August 20, 2015 implemented into French law both the Bank Recovery Resolution Directive and the Deposit Guarantee Scheme Directive.
LEGISLATION LIFTS SOME OF THE RESTRICTIONS TO LOANS BETWEEN CORPORATES
Under current rules, banking monopoly prohibits any entity other than a licensed or passported credit institution from extending loans on a regular basis, subject to a number of exceptions. Additional exceptions had been recently added to allow crowdlending. Recent legislation promoted by Minister of the Economy Emmanuel Macron creates further exceptions to this rule.
French companies incorporated as sociétés par actions (joint stock company) or sociétés à responsabilité limitée (private limited liability) with audited accounts may grant loans for a maximum period of two years to micro-firms, small and medium-sized enterprises and intermediate-sized enterprises, on an ancillary basis to their main business. Loans will be permitted only where the economic ties between the borrower and the lender justify the extension of a loan. Granting a loan should not result in the borrower requiring the lender to grant payment terms that exceed legally prescribed payment terms (broadly, 30 days following the date of receipt of the goods or performance of the service, unless the contract provides otherwise). Further restrictions on the limits of the loans are to be determined by secondary legislation.
Receivables arising from such loans may not be securitized or be subject to financial forward contracts.
DRAFT LAW PROPOSES TO PUT AN END TO DUAL ENFORCEMENT OF MARKET ABUSES AND MORE GENERALLY OVERHAUL ENFORCEMENT OF MARKET ABUSES
As previously reported, case law from both the European Court of Human Rights and the French Constitutional council requires amending current rules that provide for the dual enforcement of market abuses (i.e., insider trading, market manipulation, misinformation), both by the enforcement body of the securities regulator and by criminal courts. The Constitutional Council had given the government until September 1, 2016 to do away with the double-enforcement system for market abuses. In the interim, where two proceedings (either before the AMF or criminal courts) have been initiated and are still pending, the enforcement that has been initiated first will be the only one allowed to be pursued.
In order to conform legislation to case law, the French Senate issued a legislative proposal on October 7, 2015. The proposal suggests revising the allocation of enforcement authority between the AMF enforcement committee and the national financial prosecutor as follows:
- A market abuse may no longer be prosecuted and sanctioned by both the AMF enforcement committee and the national financial prosecutor.
- Exclusive jurisdiction is allocated to the national financial prosecutor over the most serious offenses and those committed intentionally. The seriousness of the offense is to be assessed on the basis of the benefit derived from the abuse and the entity that committed it.
- Each of the AMF or the national financial prosecutor, prior to taking action, should first inform the other authority of its intent. The party informed (AMF or the national financial prosecutor) is then given a fifteen-day period of time to decide whether it intends to take action. On the basis of such information, the party that first notified its intent to take action is given a ten-day period of time to reconsider its position. If it turns out that the two authorities intend to take action, the determination of the competent authority will be referred to a new body (Securities Offenses Council) composed of higher magistrates from the administrative and civil supreme courts.
The proposal not only seeks to address the dual enforcement of market abuses but also substantially strengthens criminal sanctions (individuals could be sentenced up to EUR 15 million in fines and five times this amount or 15 percent of turnover of the company for legal persons) to close the gaps between the criminal and administrative sanctions.
Noteworthy is also the proposed enlargement settlement procedure, which is an alternative to sanctions proceedings by the AMF Enforcement Committee. While the settlement process currently does not apply to market abuses, it is now proposed to include them within the scope of settlement procedures.
POSITIONS AND GUIDANCE FROM AUTHORITIES
SECURITIES REGULATOR PROPOSES CHANGES TO EMIR REGULATION
In response to the European Commission's consultation on EMIR, the AMF issued on October 15, 2015 a response highlighting CCP authorization process, reporting requirements to trade repositories, as well as difficulties faced by management firms with regard to access to clearing and interactions between the provisions of EMIR and the UCITS Directive.
The AMF also put forward concrete proposals aimed at improving EMIR. Removal of the frontloading obligation is proposed. It is also proposed that nonfinancial counterparties below the mandatory clearing thresholds should be exempt from the reporting requirements to trade repositories with respect to intra-group transactions. In addition, the AMF proposes that CCP supervision colleges should be permitted to periodically reassess the risks and authorizations of the CCPs and also have the power to introduce new requirements for clearing members with regard to their relationship with their customers in order to enhance customer protection.
Furthermore, the French markets authority believes that a revision of certain definitions is in order, namely the definition of OTC derivatives that objectively reduce the risk of nonfinancial counterparties.
The consultation will be give rise to a report submitted to the Council and the European Parliament in October 2015.
FRENCH SECURITIES REGULATOR CONSULTS ON REVISED TRANSPARENCY DIRECTIVE
The AMF launched on October 20, 2015 a consultation on proposed amendments to the AMF General Regulations to be conformed to the revised Transparency Directive 2013/50/EU.
Among several issues pertaining to corporate matters, the proposed amendments would result in further adjusting disclosure requirements applicable to physically-settled derivatives. In anticipation of the revised Transparency Directive, legislation had already foreseen in 2012 that cash-settled derivatives that have a similar economic effect to holding shares have to be aggregated to shares actually held for the purposes of calculating thresholds to be disclosed. The revised Transparency Directive 2013/50/EU requires the same aggregation to be provided for physically settled derivatives that have a similar economic effect to holding shares.
The consultation is due to close on October 30, 2015 and French implementation must be completed by the same date.
SECURITIES REGULATOR CONSULTS ON LOAN ORIGINATION BY EUROPEAN LONG-TERM INVESTMENT FUNDS
On October 22, 2015, the AMF launched a public consultation as to how French investment funds may be permitted to register as European long-term investment funds and hence originate loans to companies, under certain conditions.
To limit systemic risk, loan origination would be permitted for professional funds that would not be able to borrow or to grant loans with a maturity exceeding the funds' life. In particular, the AMF would adopt the provisions applicable to insurance companies in order to ensure that lenders are treated in the same way.
The proposals put out for consultation relate to the resources with management companies, types of funds authorized to grant loans, and loan maturity, to name but a few.
The consultation is due to close on December 4, 2015.
ENFORCEMENT
SANCTION ISSUED BY BANKING REGULATOR ENFORCEMENT COMMITTEE OVERTURNED BY STATE COUNCIL FOR ATTEMPTING TO SHIFT THE BURDEN OF PROOF
In a decision of October 14, 2015, the French Supreme Court overturned a EUR 2 million sanction issued by the Enforcement Committee of the French banking regulator ("ACPR") against a major bank for allegedly failing to comply with the right to open accounts, whereby an individual who had been denied the right to have an account opened may petition the Banque de France, which then instructs a commercial bank to open an account.
The Enforcement Committee considered that the gap between the number of requests made by the Banque de France to open accounts and the number of accounts opened by the bank in connection with this regulatory obligation is sufficient to characterize noncompliance with such obligations. The Enforcement Committee further considered that this gap revealed the likelihood of the violation and that there was no need to invite the bank to provide evidence as to steps taken in response to the requests from the Banque de France.
The French Supreme Court rules that the Enforcement Committee could not rely exclusively on the "likely" test of the alleged violation to evidence breach of a regulatory obligation. In so doing, the Court shifted the burden of proof from the prosecuting authority to the defendant.
The decision from the Enforcement Committee is therefore overturned, and the Enforcement Committee will need to decide anew.
BANKING REGULATOR ENFORCEMENT COMMITTEE SANCTIONS LIFE INSURANCE FIRM FOR IMPROPER INFORMATION GATHERING
In a decision from the ACPR Enforcement Committee dated July 20, 2015, the Committee imposed a fine on a firm specializing in life insurance products mainly distributed by representatives, following the Committee's conclusion that its marketing mechanism was deficient with regard to the information gathering, analysis, and advice provided to the clients.
More specifically, the ACPR Enforcement Committee found that there were gaps in the firm's knowledge of its clients in that: (i) the firm's questionnaire contained a single auto evaluation question regarding the client's financial knowledge; (ii) the clients did not receive the benefit of the warnings provided for in the law; and (iii) the data collection as to their needs and expectations was deficient. Furthermore, the Committee determined that the advice was provided in terms that were too broad to enable clients to make an informed choice. The failures were deemed aggravated by the fact that the clients subscribed to multiple contracts.
SECURITIES REGULATOR ENFORCEMENT COMMITTEE SANCTIONS INVESTMENT FIRM FOR FAILING TO CHECK AUTHORIZATIONS OF BUSINESS PROVIDERS
A European investment firm passported (on a cross-border basis and through a local branch) to act in France, active in the field of FX trading, provides a number of investment services to French investors. This firm relied on various business providers to increase its client base. The services rendered by these business providers qualified as discretionary portfolio management.
As part of a routine inspection of the French branch of the investment firm, the AMF found that the business providers did not have the proper authorizations to conduct discretionary portfolio management.
On October 26, 2015, the Enforcement Committee issued a EUR 200,000 sanction against the investment firm for failing to ensure that the business providers had the proper authorizations enabling them to provide third-party portfolio management services. The decision underlines that the investment firm substantially increased its revenues thanks to the business providers.
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