The banking sector in France is characterised by its highly integrated nature – the six leading French banking groups in terms of net banking income for 2015 were BNP Paribas, BPCE, Groupe Crédit Agricole, Société Générale, La Banque Postale and Groupe Crédit Mutuel.
Pursuant to Regulation 1024/2013, thirteen French banking groups are significant, representing more than 92 per cent of the overall banking assets in France, and 30 per cent of the total banking assets held by significant credit institutions supervised by the ECB.
Another key feature of the French banking sector is the presence of cooperative and mutual benefit banking groups. Three of the five largest banking groups in France are mutual benefit banking groups. The main characteristic of these banking groups is their ‘inverted pyramid’ structure. Such groups are held by cooperative banks, which are in turn owned by their cooperative member-shareholders. The banking industry is one of the main private employers in France (employing over 370,000 people in 2014).
Since 2014, the most significant event with respect to the French banking system has been the implementation of a harmonised European regulatory framework. This includes:
- a a single European supervisory mechanism;
- b a single resolution mechanism (SRM);
- c the Bank Recovery and Resolution Directive (BRRD); and
- d the adaptation of the national regulation framework thereto.
ii THE REGULATORY REGIME APPLICABLE TO BANKS
Five significant steps towards European harmonisation have been taken since 2011:
- a on 1 January 2011, the EBA was created;
- b on 26 June 2013, the EU adopted a legislative package to implement the Basel III Accords into the EU prudential framework, and to strengthen the regulation and supervision of the banking sector in Europe by introducing harmonised rules (CRD IV Package);
- c on 29 October 2013, the EU adopted the creation of a single supervisory mechanism (SSM) to confer specific supervision tasks on the ECB;
- d on 30 July 2014, the EU enacted the creation of a bank SRM, elements of which already entered into force on 19 August 2014; and
- e on 15 May 2014, the EU enacted the BRRD.
In France, other than EU regulations of direct application, the statutory framework applicable to the regulation of banking activities is provided by the French Monetary and Financial Code. The power to regulate the banking and financial sector is now shared between the European legislature and the Minister of Economy and Finance, assisted by a consultative authority, the Advisory Committee on Financial Legislation and Regulation.
In accordance with Regulation (EU) No. 1024/2013,2 since 4 November 2014 the authority to supervise and control banks is shared between ACPR, the national regulator, and the ECB. The ECB supervises all credit institutions with respect to certain domains such as granting or withdrawing banking licences, or assessing acquisitions of qualifying holdings in such institutions. In addition, the ECB is the sole competent prudential regulator for credit institutions that are categorised as ‘important entities’. The ACPR remains directly in charge of credit institutions that are deemed to be less important. These authorities cooperate, and the terms of such cooperation have been defined, inter alia, in Regulation (EU) No. 468/2014 of 16 April 2014.
The ACPR is an independent authority without legal personality. The French Central Bank plays a key role in the functioning of the ACPR. The ACPR is chaired by the Governor of the French Central Bank, and the administrative staff of the ACPR are seconded from the French Central Bank.
In accordance with EU Regulation No. 806/2014,3 since 1 January 2016, the authority to implement a bank resolution in France is shared between the national resolution authority, which is the resolution college within the ACPR, and the ECB.
Banks and investment service providers also fall within the remit of the French Market Authority (AMF), which supervises compliance with professional rules relating to the provision of investment services and asset management activities.
The provision of banking services in France requires a licence that is, since 4 November 2014, granted by the ECB, while the provision of investment services in France requires a licence obtained from the ACPR. Portfolio management companies (i.e., investment companies providing portfolio management services on behalf of third parties or collective portfolio management as their main activities) must be authorised by the AMF.
Banks and investment firms licensed in a Member State of the European Economic Area (EEA) benefit from a mutual recognition procedure, and are authorised to provide banking or investment services in France through a branch or by virtue of the free provision of services subject to the procedures required in their home state and to the competent authority being informed of the provision of such services. A non-EEA bank may either apply for a licence or establish a representative office in France, but only to provide information, liaison or representation services to French customers (i.e., such an office is not permitted to carry out any banking operation in France). The competent authority must be notified of the opening of a representative office.
iii PRUDENTIAL REGULATION
i Relationship with the prudential regulator
Since 4 November 2014, the prudential supervision of a credit institution is handled by the ECB or the ACPR, depending on whether such institution is qualified as a ‘significant entity’ or a ‘less significant entity’. In addition, the AMF has investigative and jurisdictional powers with regard to financial activities.
Supervision by the ACPR
The ACPR’s supervision of banks is mainly carried out in two ways: off-site monitoring and on-site inspections.
Off-site monitoring is based on an in-depth examination by the ACPR of accounting and prudential filings, which are usually submitted quarterly, along with internal audit reports filed once a year, and on regular contact with the senior managers of credit institutions. The ACPR adopts a different approach when dealing with large credit institution groups, based on a structured programme of ‘enhanced supervision’ meetings, in addition to dealing with specific issues, overseeing the implementation of recommendations made following on-site inspections and periodic meetings with financial departments and the departments in charge of measuring and monitoring risks, particularly when quarterly earnings figures are published. Moreover, the ACPR may request at any time that a credit institution provide it with any supplemental information. Banks are also required by law to advise the ACPR promptly of any fact or decision that may constitute a breach of existing regulations, and which is likely to have a significant effect on the financial situation, profits or assets of the bank.
ACPR on-site inspections are designed to ensure that the information disclosed by the banks accurately reflects their situation. The ACPR usually carries out a general inspection every year or every two years. In addition to these routine inspections, if deemed necessary on the basis of the review, the ACPR also carries out more specific inspections on targeted risks or business segments.
Following its off-site monitoring and on-site inspections, the ACPR sends a follow-up letter to the relevant institution. If the ACPR finds that the credit institution’s liquidity or solvency is at risk or that the interests of clients are threatened, it may:
- a send a cautionary notice to the management of the credit institution concerned, allowing it to provide the ACPR with explanations;
- b issue a recommendation to the credit institution describing the measures designed to improve the credit institution’s financial condition or management methods;
- c issue an injunction to the credit institution requiring it to take certain specific measures within a set period; or
- d order the following interim protective measures in the most serious cases:
• special surveillance;
• appointment of one or more ACPR officers;
• suspension, temporary restriction or prohibition of the free disposal of all or part of the assets of the credit institution;
• the cessation of the credit institution’s activities;
• a limitation on the number of branches or agencies of the credit institution;
• the transfer of some or all of its credit or deposit portfolios;
• a limitation of or prohibition on distribution of dividends;
• the cessation of interest distribution for certain holders of additional Tier 1 funds;
• suspension of one or more senior managers of the credit institution;
• appointment of a temporary director;
• transfer of one or several activities;
• transfer of all or part of the credit institution’s assets, rights and obligations to a ‘bridge’ credit institution with a view to continuing or selling its business;
• implementation of bail-out measures (including capital reductions, cancellation of shares or liabilities);
• issuance of new equity instruments; or
• prohibition on paying prior debts.
Since 20 February 2014, the ACPR may also require credit institutions to submit a recovery programme.
Through its enforcement powers, the ACPR may impose a wide range of sanctions, either in respect of a breach of regulations or for failure to comply with obligations resulting from a cautionary notice, a recommendation or an injunction issued by the ACPR. These sanctions include (ascending in severity):
- a warning;
- b reprimand;
- c prohibition from engaging in certain operations or limits on the conduct of certain credit institution activities;
- d temporary suspension of one or more senior managers of the credit institution (with or without the appointment of a provisional administrator);
- e requiring the resignation of one or more managers or directors, or both (with or without the appointment of a provisional administrator);
- f partial withdrawal of the credit institution licence (with respect to specific banking activities); and
- g striking the bank off the list of credit institutions authorised to conduct banking activities in France (with or without the appointment of a liquidator).
In addition to these measures, the ACPR may also:
- a impose a fine of up to €100 million or 10 per cent of the annual turnover;
- b prohibit or limit the payment of dividends to shareholders;
- c order any of the above-mentioned sanctions to be made public at the expense of the bank; or
- d order a penalty payment to compel execution of its sanctions.
Supervision by the AMF
Banks authorised to offer investment services are also supervised by the AMF, to the extent they provide such services.
The AMF may impose a warning, reprimand, or temporary or permanent ban on providing some or all of the investment services provided by an authorised bank. In lieu of, or in addition to, these sanctions, the AMF may impose fines of up to €100 million or 10 times any profit earned in violation of applicable rules. For certain offences, the sanction may amount to 15 per cent of the annual turnover.
Individuals acting under the authority of or on behalf of credit institutions may be liable to receive a warning, reprimand, temporary suspension or withdrawal of their professional licence, and a temporary or permanent ban on conducting some or all business activities. In lieu of, or in addition to, these sanctions, the AMF may impose a fine of up to €15 million or 10 times any profit earned, or €300,000 or five times any profit earned, for violations of the applicable rules, depending on the seriousness of the violation.
ii Management of banks
For important credit institutions, under the supervision of the ECB, the French regulations referred to below are to be read in conjunction with the governance requirements set out in EU Regulation No. 1024/2013.
French banks are managed by at least two senior managers. In practice, before the implementation of the CRD IV Package, banks usually took the form of a public limited company with a board of directors, an executive chair and a deputy chief executive officer (CEO). However, since the implementation of the CRD IV Package by way of a 20 February 2014 ordinance, and guidance dated 29 January 2014 from the ACPR, the latter expressly requires the separation of the functions of the chair and the CEO, which has led to a reorganisation of the management of major banks in France.
Senior managers are appointed by the board of directors, subject to the approval of the ACPR, which ensures that they are ‘fit and proper’. Managers are collectively responsible for the effective implementation and the general direction of the bank’s business, internal control, accounting and financial information and capital requirements.
The 20 February 2014 ordinance also modified the rules on the number of corporate offices held by senior managers of a credit institution, which is now restricted to no more than one executive mandate and two non-executive mandates for the same person at the same time; and no more than four mandates as a member of the board of directors, supervisory board or any other body performing equivalent functions at the same time.
The ACPR also pays particular attention to the availability of managers, and makes sure in particular that, notwithstanding the aforementioned restriction, managers of a credit institution devote time enough to fulfilling their duties.
Banks are usually incorporated as public limited companies, in which the decision-making body is the board of directors. Managers report to the board of directors, which must comprise at least three members. Banks and investment companies are required, as with respect to the senior managers, to notify the ACPR of the appointment or renewal of their directors. The ACPR is entitled, based on similar criteria as that applicable to senior managers, to oppose such appointment or renewal. Similarly, the ACPR may demand the resignation of a director as a sanction for breach of an applicable regulation or failure to comply with any of the ACPR’s recommendations or injunctions.
The board is responsible for supervising the management and the global situation of the bank as well as the implementation of its strategy. At least once a year, the board must review the activities and results of the internal control.
An audit committee is required to assist the board of directors in the exercise of its functions.
Banks must appoint two control officers who are responsible for ensuring permanent and periodic control respectively, and who report to the managers and, as the case may be, the board of directors or the audit committee.
Banks are also required to appoint a compliance officer to ensure compliance with all relevant applicable rules. Depending on the bank’s size, the functions of the compliance officer may be exercised by the permanent officer.
It is also compulsory to appoint a risk management officer, who is responsible for a bank’s risk analysis and risk-measurement systems. The risk manager does not have any operational role unless he or she is a senior manager.
Smaller banks may elect to entrust these functions to a manager, who is usually a member of the board. These duties may also be assumed by the executive body, particularly in smaller banks.
Such control functions may also be outsourced, provided that the ‘essential services’ central to banking activity and services substantively contributing to a decision committing the bank with regard to its clients can only be outsourced to authorised French or foreign banks. The ACPR does not, however, consider internal control to be an ‘essential service’ that can only be outsourced to authorised or approved persons. Thus, in small banks, internal control is usually outsourced to audit firms (but not to the firm that audits the bank’s accounts).
Risk, nomination and compensation committees
Banks are required to create a separate risk committee to supervise the implementation of risk-management procedure and policies (except for non-significant banks, which may merge their risk committee with their audit committee). This committee acts under the exclusive and collective liability of the members of the board of directors or supervisory board, as the case may be.
The CRD IV Package provides for the creation of a risk committee within the banks’ board of directors or supervisory board, as the case may be, composed exclusively of members not exercising any management powers, and a risk division in each bank. These rules have been transposed into French law.
Following the transposition of the CRD IV Package into the French Monetary and Financial Code, institutions with a balance sheet size exceeding €5 billion must now create a nomination committee and a compensation committee.
In the case of credit institution groups that are subject to supervision on a consolidated basis, these specific committees may, in principle, be implemented at the level of parent companies of the consolidated group only.
Rules governing compensation are contained in Article L511-71 et seq. of the French Monetary and Financial Code.
In particular, these rules provide that:
- a the board of directors, or supervisory board, adopts and regularly reviews the compensation policy with the support and advice of the compensation committee;
- b the compensation policy must be adequate for the economic strategy, the aims, the values and the long-term interests of the bank; must incorporate measures that aim to avoid conflicts of interest; and must not encourage risk taking above the threshold fixed by the bank;
- c the shareholders must be consulted every year about the global amount of remuneration given to directors and employees exercising activities that have a significant influence on the bank or the group’s risk profile (i.e., ‘say-on-pay’ procedure for risk takers);
- d at least once a year, implementation of the compensation policy must be subject to an internal and independent evaluation to ensure its compliance with the compensation policy and the process governing compensation adopted by the board of directors or supervisory board of the bank. The compensation committee must assess the compensation policy and the remuneration granted to the bank’s directors every year;
- e the variable remuneration of employees exercising control functions must not be based on the controlled activities;
- f the compensation policy must clearly distinguish between fixed remuneration (experience-based) and variable remuneration (performance-based);
- g the variable remuneration must take into account the overall performance of the employee and of its unit, must be based on long-term objectives and cannot be guaranteed; and
- h credit institutions must ensure that the variable remunerations of senior employees, management or risk takers cannot exceed their fixed remuneration, except if otherwise decided by the shareholders by a two-thirds majority.
The ACPR can impose a revision of a bank’s compensation policy if it considers that such policy is not compatible with sound risk management and a long-term objective of growth. Institutions must also be able to justify the amount and terms of payment of variable remuneration.
In addition, the ECB supervises the remuneration of the management bodies of important entities. On 29 January 2015, the ECB issued recommendations on a prudent dividend policy, and announced an upcoming review of variable remuneration.
iii Regulatory capital and liquidity
The currently applicable French requirements regarding capital and prudential ratios are those resulting from the implementation of the CRD IV Package. On 5 November 2014, France informed the European Commission that it had transposed the CRD IV Package.
If a French credit institution is categorised as an important entity, compliance with the prudential requirements described below is supervised by the ECB.
Minimum capital requirements
Banks with headquarters in France are required to have a minimum share capital of between €1.1 million and €5 million, depending on the nature of the credit institution (e.g., bank, cooperative bank).4
The ACPR carries out a periodic assessment of banks’ compliance with the capital adequacy guidelines, and may adopt a variety of measures to ensure that a shortfall in capitalisation is remedied: it may order the bank to increase its share capital; it may appoint a provisional administrator vested with the full powers of administration, management and representation of the credit institution; or, when appropriate, the Governor of the French Central Bank is entitled to ‘invite’ (not ‘require’) the shareholders of the bank to provide the necessary support.
Prudential ratio requirements and composition of regulatory capital
The Capital Requirements Regulation imposes harmonised rules relating to prudential ratio requirements in the EU, which are directly applicable to French banking institutions, whereas the CRD provides for additional requirements that have not yet been fully implemented in France (i.e., additional own funds buffers).
The solvency ratio, according to the CRD IV Package, now includes the following categories: common equity Tier 1 (CET 1), Tier 1 and Tier 2. Tier 3, provided for under CRD III, has been abolished by the CRD IV Package.
In addition to the 8 per cent ratio, the CRD IV Package introduces three additional capital buffers (a capital conservation buffer equal to 2.5 per cent of CET 1, a countercyclical capital buffer and the systemic buffers). These have been applied from 1 January 2016 onwards. In addition, local banking regulators can apply an additional buffer for ‘other’ systematically important institutions, as well as institutions important to the EU.
Finally, each Member State may introduce a systemic risk buffer for the financial sector. Since 2015, this limit has been set at 5 per cent.
The CRD IV Package has introduced two mandatory liquidity ratios: the liquidity coverage ratio and the net stable funding ratio. Nevertheless, until this second ratio is implemented in France, banks with headquarters in France will still be required to comply with French law, which requires them to maintain, at all times, a liquidity ratio of at least 100 per cent.5
Banks with headquarters in France are required to maintain their overall exposure resulting from operations per beneficiary below the higher of €150 million or 25 per cent of their own funds.6
Supervision of banking groups
French banking groups that do not fall within the scope of the general EU-wide ECB supervision are subject to supervision on a consolidated and individual basis. All institutions that belong to a French banking group are subject to an assessment, the scope of which depends on their position within their group.
For the parent institution, the evaluation process is primarily implemented on a consolidated basis.
For an institution that is a ‘parent of a sub-consolidation’, the ACPR primarily conducts its evaluation on a sub-consolidated basis, based on a scope of application similar to that for group parents. The position of the sub-consolidation parent institution within its group, and the influence of its shareholding, is also taken into account.
For a bank that belongs to a group but that does not have any subsidiaries that are supervised by the ACPR, the supervision is conducted on a stand-alone basis, while taking into account the influence of the group to which it belongs and the businesses and risks of any non-banking subsidiaries.
In parallel with this consolidated basis approach, an analysis is also conducted on a stand-alone basis whenever the assessment of their specific risk profile and their risk assessment and management systems are of particular interest.
iv Recovery and resolution
As a general principle, banks are subject to the same insolvency procedures that are applicable to all companies in financial difficulties in France, with certain specificities (Article L613-24 et seq. of the French Monetary and Financial Code).
The ACPR plays a central role both before and after the occurrence of a crisis. As soon as the information available indicates that the financial balance of a credit institution is at risk or that its management methods are not satisfactory, the ACPR may require such credit institution to comply with higher capital requirements or require the adoption of specific methods of booking of provisions for certain assets. The ACPR may also employ administrative measures when certain practices of a given credit institution may harm its clients’ interests: it may issue a warning against such practices or require that the bank concerned submit a recovery plan or upgrade its management methods. When the ACPR deems that the solvency or liquidity of a credit institution or the interests of its clients are at risk, it may take certain measures (see above).
When necessary, the Governor of the French Central Bank may invite the bank’s shareholders to provide financial support. There is, however, no obligation on the part of the shareholders to accept such invitation.
When the credit institution is in a crisis situation, the ACPR may nominate a temporary administrator, who will have all the powers to manage and represent the bank, or a liquidator, in particular in the event that the entity’s banking licence is withdrawn (Article L613-24). In both cases, the ACPR may petition the local court for the forced sale of the shares owned by the management (Article L613-25). Moreover, the ACPR may request the involvement of the Deposit Guarantee Fund, for instance when the credit institution is unable to repay deposits received from the public.
This recovery and resolution framework changed in 2015 through the passing of EU Regulation No. 806/2014 dated 30 July 2014, which implemented a single resolution mechanism, and the transposition by an ordinance dated 20 August 2015 of EU Directive No. 2014/59/EU dated 15 May 2014 on bank recovery and resolution (BRRD). The recovery and resolution framework was subject to change in August 2015 and January 2016. The law on banking resolutions is now lex specialis to general insolvency procedures to prevent systemic effects on the banking sector.
Preventive recovery plans
The following entities are obliged to draw up preventive recovery plans:
- a significant credit institutions that fall under the sole supervision of the ECB;
- b credit institutions within a group that are not supervised on a consolidated basis;
- c the parent company of credit institutions within a group that are supervised on a consolidated basis within the EU; and
- d credit institutions where required by virtue of a decision of the resolution college (Article L613-35 et seq. of the French Monetary and Financial Code).
The plans have to be adjusted regularly, and are subsequently examined by the supervisory college within the ACPR (Article L613-36 of the French Monetary and Financial Code). Preventive group recovery plans are communicated to other authorities, in addition to the resolution college (Article L613-37 et seq. of the French Monetary and Financial Code).
Preventive resolution plans
For entities that are obliged to produce recovery plans, the resolution college has the competence to also establish preventive resolution plans on an individual or consolidated basis (Article L613-38 et seq. of the French Monetary and Financial Code). The resolution college designs potential resolution measures and cooperates with other authorities, particularly the respective supervisory authorities. At the initial elaboration of each plan, as well as at the point of any subsequent revision, the resolution college evaluates whether and to what extent an entity is resolvable without putting at risk its critical functions or the financial system as a whole (Article L613-41 et seq. of the French Monetary and Financial Code). To guarantee the resolvability of an entity, the resolution college can take certain preventive measures (Article L613-42 of the French Monetary and Financial Code).
The resolution college also ensures that credit institutions and investment firms fulfil the minimal capital requirements determined by the law or by the residual discretion of the resolution college (Article L613-44 et seq. of the French Monetary and Financial Code).
Intragroup guarantees, by which one group entity guarantees the obligations of another group entity to a third party, can be granted to stabilise the financial situation of the whole group. Such contracts are only effective where approved in advance by the resolution college and the supervisory college, as well as any other concerned supervisory institution within the ACPR (Article L613-46 et seq. of the French Monetary and Financial Code).
Before taking concrete resolution measures in respect of a bank, including the write-down and conversion of capital instruments, the entity’s value must be estimated by an independent expert (Article L613-47 of the French Monetary and Financial Code). The resolution college can only write-down and convert capital instruments if the entity’s insolvency is otherwise unavoidable (Article L613-48 et seq. of the French Monetary and Financial Code). The resolution procedure is initiated by the governor of the French Central Bank, the head of the French Treasury or the ECB (Article L613-49 of the French Monetary and Financial Code).
The resolution college has the ability to assume the effective management of the entity, to designate a special administrator and to replace members of the board (Article L613-51 et seq. of the French Monetary and Financial Code). All or part of the bank’s activities can be transferred to a voluntary purchaser (Article L613-52 et seq. of the French Monetary and Financial Code). The bank’s assets can also be transferred to a bridge bank (Article L613-53 et seq. of the French Monetary and Financial Code) or to an asset manager (Article L613-54 et seq. of the French Monetary and Financial Code) with a view to a subsequent sale. A bail-in of eligible liabilities may be implemented in accordance with Article 27 of the EU Regulation No. 806/2014 (Article L613-55 et seq. of the French Monetary and Financial Code). Additionally, the resolution authority is allowed to order the issue of new shares or Tier 1 capital instruments (Article L613-56 et seq. of the French Monetary and Financial Code).
iv CONDUCT OF BUSINESS
i Rules governing the business conduct of banks
The primary laws and regulations governing the business conduct of banks are:
- a the French Monetary and Financial Code (in particular Article L533-1 et seq.);
- b the French Civil Code (general contractual rules and rules relating to loans) and the French Commercial Code (rules relating to commercial paper);
- c regulations issued by regulatory authorities, such as orders of the Minister of Economy and by the AMF and, in particular, the rules of ‘good conduct’ set out in Articles 314-1 to 314-105 of the General Rules of the AMF;
- d European banking and market abuse rules, in particular Directive No. 2004/39 (Markets in Financial Instruments Directive) and Directive No. 2003/6 (on market abuse);7 and
- e all international banking rules, such as rules issued by the Office of Foreign Assets Control or resulting from the Financial Action Task Force (anti-money laundering) and the Basel Committee on Banking Supervision.
ii Potential sources of civil, criminal and regulatory liability
Banks have many potential sources of civil, criminal and regulatory liability.
The main sources of civil and regulatory liability include non-compliance with one or several of the following obligations:
- a Obligations relating to investment services:
• general principle of good conduct (honesty, loyalty, professionalism and compliance with the principle of prioritising clients’ interests and the integrity of the market);
• obligation to classify clients as professional clients, eligible counterparties and retail clients;
• obligation relating to provision of information (accurate, clear and sufficient information must be provided to clients);
• obligation to evaluate clients (evaluation of clients and potential clients to determine the services and financial instruments best suited to their needs);
• obligation of best execution (in the execution of orders, reasonable measures to be taken to provide the client with the best possible result);
• obligation to call margins for orders with deferred settlement;
• written and up-to-date policies for preventing and managing potential conflicts of interests; and
• internal compliance obligations (internal administrative procedures, compliance rules, efficient techniques to evaluate risks and backing up of electronic data).
- b Obligations and liabilities relating to credit services:
• obligation to inform and advise clients and potential clients in connection with all services provided;
• obligation to confirm in advance that a loan is adapted to the financial resources of the client (liability resulting from excessive, inappropriate or abusive loans);
• no liability resulting from unreasonable financial support except in the case of fraud, clear interference with the debtor’s management or if the guarantees taken in consideration of the credit granted are disproportionate to the latter;8
• liability for claims of insufficient assets (liability for mismanagement if there is an insolvency proceeding brought with respect to a company, the assets are insufficient to cover the company’s liabilities, the bank can be considered as a de facto or de lego manager of the company, and the bank has mismanaged the insolvent company.9 Banks are very rarely considered liable as de facto managers);
• liability resulting from abusive termination of credit, in the event that reasonable notice has not been provided when terminating credit facilities (unless they have a stated maturity);
• liability for non-compliance with the rules relating to the structure of and access to the banking profession (violations of the rules governing the approval of credit institutions); and
• liability for mismanagement of portfolios (banks may be held liable if they do not comply with the limits of the mandate given by their clients).
- c Main sources of criminal and regulatory liability:
• money laundering:10 punishable by a maximum of five years’ imprisonment, a €375,000 fine for individuals and €1.875 million for legal entities such as banks; these fines may be raised to half the value of the property or funds in respect of which the laundering operations were carried out;
• market abuse: regulatory and criminal liability for insider trading, disclosing false and misleading information and share price manipulation. Criminal offences are punishable by a maximum of two years’ imprisonment, and a €1.5 million fine for individuals and €7.5 million for legal entities such as banks, or 10 times the profit made through insider trading. Regulatory violations are punishable by a fine of a maximum of €100 million, or 10 times the profit made through insider trading. Please note that the French Constitutional Council ruled on 18 March 2015 that no one can be prosecuted twice for market abuses (once before a criminal court and once before the regulator);
• usurious loans: punishable by a maximum of two years’ imprisonment, a €45,000 fine for individuals and €225,000 for legal entities such as banks;
• illicit solicitation: banks that do not have a European passport, or that have not been authorised by the ACPR to conduct business in France, may be held criminally liable for any unsolicited contact made with an individual or legal entity to obtain an agreement for a banking, investment or financial transaction or service;11 and
• complicity in tax fraud: punishable by seven years’ imprisonment, a €20,000 fine for individuals and a fine of up to €10 million for legal entities.
iii Banking confidentiality
All managers, officers and employees of banks are bound by the principle of banking confidentiality.12 Any person who does not comply with this obligation can face tortious or criminal liability.13 The disclosure of information subject to banking confidentiality is punishable by up to one year’s imprisonment, a fine of €15,000 for an individual and €55,000 for a bank.
Banking confidentiality protects the interest of the client, and can only be waived by the client.
There are several exceptions to this prohibition relating to information provided in connection with disclosure obligations made to, or investigations conducted by, the following authorities:
- a tax and customs authorities;
- b the French Central Bank;
- c the AMF and ACPR; and
- d reports of suspected money laundering or terrorism activity made to TRACFIN, the French anti-money laundering authority.
Moreover, several banks may benefit from ‘shared banking confidentiality’ for the implementation of specific transactions such as syndicated loans, banking pools or hedging transactions.
Recent case law also suggests that banks are not bound by banking confidentiality with respect to guarantors.
French banks fund their activities from a capital base comprising equity and deeply subordinated debt, accounted for as equity, subordinated debt, medium and long-term senior debt, customer deposits and shorter-term debt. This section focuses on the non-equity sources of financing available to French banks to fund their activities.
The following table shows the principal non-equity funding sources of some of the largest banking groups in France as indicated in their latest available reports:
Amount due to credit institutions
La Banque Postale
i Amounts due to credit institutions
Interbank debt will usually comprise unsecured loans, short-term deposits and repurchase agreements.
Repurchase agreements, known as pensions, are governed by Article L211-27 et seq. of the French Monetary and Financial Code and are defined as transactions pursuant to which an entity transfers the ownership of financial instruments to another entity, in consideration for an agreed price, and under which the transferee agrees to transfer the ownership of such financial instruments (which the transferor must accept) back to the transferor, for a price and at a date agreed upon by the parties. The financial instruments subject to the repurchase agreement remain at all times on the balance sheet of the transferor despite the initial transfer of ownership.
ii Customer deposits
As illustrated by the table above, customer deposits generally represent the largest source of funding for the main French banks, as has been the case over the past few years. According to the French Central Bank (responsible for compiling regional statistics on the bank deposits of the non-financial sector), between 30 November 2015 and 31 December 2016, customer deposits increased in France from €1,741 billion to €1,861 billion.
In addition, in its recent report ‘Performance of French banks in 2015’ dated May 2016, the ACPR stressed that ‘loan-to-deposit ratios continued to decline as deposits grew faster than lending in a low interest rate environment (up 6% between December 2014 and December 2015, compared with year-on-year growth of 2% in lending)’.
However, in its recent publication ‘Report on Financial Structures’ dated October 2016, the ECB stressed that, within the EU, ‘on the liabilities side, the trend towards greater reliance on deposit funding gained traction in 2015, as the median share of customer deposits increased by 3 percentage points to 45%’, which indicates that the above-mentioned upward trend regarding customer deposits in France is in line with the trend mentioned in the ECB’s report.
iii Debt securities
Debt securities issued by banks (other than subordinated debt) include short to medium-term instruments issued in the money markets and longer-term securities issued in the capital markets.
Short to medium-term instruments issued in the money market
The French money market is divided into three components: the interbank market, the interest rate swap market and the market in negotiable debt securities (TCNs).
The TCN market is the component of the money market open to all participants (financial and non-financial, resident and non-resident – subject to certain conditions), in which the TCN category of instruments governed by Articles L213-1 to 213-4-1 and D213-1 et seq. of the French Monetary and Financial Code (as well as treasury bonds) are traded. The minimum value of a TCN is €150,000.
The rules governing the TCN market in France have been reformed in 2016 through Decree 2016-707 of 30 May 2016 and Ministerial Order of 30 May 2016 (TCN Reform), which entered into effect on 1 June 2016 with a view to opening the market to foreign investors by, in particular, simplifying the applicable rules and existing TCNs categories. Until the TCN Reform, TCNs were divided into three categories: certificates of deposit with a maturity not exceeding one year, which could only be issued by credit institutions, sociétés de financement, investment companies and the Caisse des Dépôts et Consignations; commercial paper with a maturity not exceeding one year, which could only be issued by entities other than credit institutions; and medium-term notes, with a maturity that had to exceed one year, and that could be issued by any entity. TCNs available to banks were therefore certificates of deposit and medium-term notes. The main features of the TCN Reform are as follows:
- a a merger of the certificates of deposit and commercial paper into a new category called Negotiable European Commercial Paper (NEU CP). As a consequence, no distinction is made anymore regarding the nature of the issuer. It should be noted that the regime of medium-term notes remains unchanged (NEU MTN, together with NEU CP, New TCN);
- b deletion of the requirement to provide a summary of the financial documentation in French when such documentation is drafted in a customarily accepted language in the financial sphere, subject to the obligation to include in the financial documentation a warning in French inviting investors to use a French translation of such documentation;
- c the minimum value of a New TCN has been increased up to €200,000 (or the equivalent amount in another currency) when the financial documentation is drafted in a customary accepted language in the financial sphere; and
- d extension of the list of rating agencies allowed to rate the issuer to any rating agency registered with the European Securities and Markets Authority (to the extent such rating agency has the technical capacity to proceed with the rating of such instrument14).
The TCN Reform also improves the New TCN market from an accounting perspective.
As of the end of February 2017, the outstanding amount of short-term notes was €216.4 billion and the outstanding amount of medium-term notes was €40.7 billion.
The advantage of such instruments is the flexibility offered with respect to their maturity, allowing the issuer to adjust the instrument’s characteristics to meet its specific funding needs.
Longer-term debt securities issued on the capital markets
French banks issue a variety of bond instruments, including covered bonds.
As in other European countries, covered bonds issued in France are dual-recourse bonds, with a claim against the issuer and a priority claim on a pool of collateral (referred to as the cover assets). These are issued in most instances pursuant to a specific legal framework. As such, covered bonds constitute one of the safest instruments available, and have proven relatively more resilient than other funding instruments in the face of recent financial turmoil. French covered bonds are issued pursuant to four different legal regimes, which are described below.
Bonds issued by the Caisse de Refinancement de l’Habitat (CRH)
The CRH is a credit institution owned by French banks, which was created by the government in 1985 to fund or refinance residential home loans granted by certain French banks. The CRH issues bonds and lends the bond proceeds to the borrowing banks, which then issue promissory notes (of a nominal value equal to or higher than €100,000) in favour of the CRH evidencing the loan from the CRH. The CRH’s operations are governed by a specific legal regime set out in Article 13 of Law 85-695 of 11 July 1985, and Articles L313-42 to L313-49-1 and R313-20 to R313-25-1 of the French Monetary and Financial Code. Since 4 November 2014, the CRH has operated under the supervision of the ECB due to the size of its balance sheet.
As of June 2016, the breakdown of the CRH’s equity is as follows:15
- a Crédit Mutuel: 36.7 per cent;
- b Crédit Agricole SA – Crédit Lyonnais: 34.7 per cent;
- c Société Générale: 16 per cent;
- d BNPP: 6.3 per cent; and
- e BPCE: 6.3 per cent.
The refinanced loans remain on the borrowing banks’ balance sheet, but are pledged as collateral in guarantee of the banks’ obligations under the promissory notes. In turn, the bondholders have a legal privilege over the promissory notes in guarantee of the CRH’s obligations under the bonds, so that the amounts generated by the promissory notes are allocated in priority to the payment of interest and principal on the CRH bonds.
The only eligible loans (i.e., the cover assets) are residential loans with a first-ranking mortgage, or a guarantee issued by a credit institution or an insurance company (such guaranteed loans not to exceed 35 per cent of the cover assets).
Real estate bonds
Such bonds may only be issued by special purpose companies called sociétés de crédit foncier (SCFs), usually set up by a credit institution and governed by a stringent legal framework set out in Article L513-2 et seq. and Article R513-1 et seq. of the French Monetary and Financial Code. SCFs are supervised by the ACPR.
The cover assets are narrowly defined by law, and include loans secured by a first-ranking mortgage, and loans granted to finance real estate and guaranteed by a credit institution or an insurance company (such guaranteed loans not to exceed 35 per cent of the assets of the SCF).
As an exception to the general rules of French bankruptcy law, holders of such bonds and other privileged debts benefit from a legal privilege allowing them to be paid prior to all other creditors.
Structured covered bonds
In view of the restrictions imposed by the existing legal framework with respect to the collateral that can be used as cover assets for covered bonds, and in particular the 35 per cent cap on guaranteed housing loans with respect to the real estate bonds described above, certain banks have structured instruments as covered bonds outside of a specific legal regime. These structures rely on Article L211-36 et seq. of the French Monetary and Financial Code, which implement EU Collateral Directive 2002/47/EC (as amended by Directive 2009/44/EC) and allow the enforcement of collateral with respect to certain financial obligations even when the collateral provider is the subject of an insolvency proceeding.
To remedy the disadvantages inherent in real estate bonds, in particular the 35 per cent cap on guaranteed housing loans and the uncertainty as to the structure of the structured covered bonds, the government created a new category of covered bonds called ‘residential bonds’.
Residential bonds may only be issued by special purpose companies called sociétés de financement à l’habitat (SFHs), which are usually set up by a credit institution and governed by a stringent legal framework set out in Article L513-28 et seq. and Article R513-19 et seq. of the French Monetary and Financial Code. SFHs are supervised by the ACPR.
The major difference between the two legal frameworks is that, in the SFH framework, no cap has been set with regard to guaranteed loans, which is clearly an advantage given that more than 75 per cent of real estate loans are guaranteed loans.
iv Subordinated debt
The subordinated debt issued by banks usually takes the form of subordinated redeemable bonds, perpetual subordinated bonds or deeply subordinated bonds.
The subordinated nature of these instruments is based on Article L228-97 of the French Commercial Code, which provides that debt securities may be structured so as to be subordinated to all other indebtedness of the issuer or to all other indebtedness other than participating loans (which is another category of subordinated debt provided by law).
vi CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
Ownership restrictions and control
Since 4 November 2014, the ECB is in charge of the control of banking licence approvals and acquisitions of qualified holdings in credit institutions.
Requests for a banking licence are filed at the ACPR, which first assesses whether all conditions for the granting of a banking licence are fulfilled, then submits a proposed decision to the ECB.
The conditions for granting a banking licence under French law include a review of the credit institution’s shareholders.
A shareholder may be invited by the ACPR to provide support to a bank. In practice, however, a shareholder is invited to do so only when it owns at least 10 and less than 50 per cent of the voting rights of the bank. The ACPR would normally consider that majority shareholders or shareholders exercising an effective control over a bank should provide all or substantially all of the necessary financial support.
The ACPR is expected to continue ruling in accordance with the following principles:
- a one or several shareholders may only own a controlling interest in a bank if they have sufficient financial means and prior experience in the activities to be authorised. Otherwise, the ACPR would require an EU-authorised bank (usually with a blocking minority vote) to act as sponsor;
- b if the effective control of a bank will not be held by a single shareholder, the ACPR would seek to ensure that the allocation of the share capital is sufficiently stable, and that certain undertakings from the main shareholders are provided, and would usually recommend entering into a shareholders’ agreement;
- c the ACPR would not grant its authorisation to banks that are owned by a single individual; and
- d the ACPR would prefer interests to be held directly in the bank rather than through holding companies.
With regard to (a), the ACPR would generally consider that when a controlling ownership is owned by entities that are not subject to the supervision of banking authorities, the authorisation should be granted (and maintained) only if the entities’ investment in the bank is reasonable given their assets and available capital. In addition, the non-banking activities of such entities must generate annual financial results sufficient to satisfy any future requirement to reinforce the capital of the bank. The ACPR would require non-banking controlling shareholders to be sponsored by an EU-authorised bank. It is likely that a comfort letter from the entities would also be required (providing for long-term ownership of the bank, permanent supervision of the bank’s business and a commitment to provide financial support to the bank if necessary).
If the majority shareholders of a bank are foreign banks that do not belong to the EEA and are small or average-sized participants in the world banking market, an EU-authorised bank should act as a sponsor for such foreign shareholders. This sponsor is usually required to own a blocking minority vote and to be represented on the bank’s board of directors.
Although in theory there is no obligation for a shareholder to provide additional capital to the bank in the event that it becomes undercapitalised, it appears that shareholders of a bank may be required to give support to a bank upon the ACPR’s request, in particular given the fact that committing such support was often considered by the regulatory authority to be an underlying condition for the granting of the authorisation for the operation of banking activities in the first place.
In the context of an acquisition of control, regulators also need to evaluate the impact of the proposed transaction on the prudential ratios of the acquiring entity, the target and the combined group. Similarly, the ability to implement risk-monitoring systems (i.e., both permanent and periodic controls) is a key factor for securing ACPR approval. The ACPR also considers the proposed post-transaction management team to be a critical element. In addition, the ACPR will ensure that the change of control does not adversely affect the funding of the bank, the risks incurred by the bank, the internal control procedures or the IT infrastructure.
In practice, when projects for establishment in France are submitted by banks with confirmed international experience and a first-rate financial situation, and a country of incorporation that guarantees French credit institutions sufficiently free access to its market, the French authorities generally allow the applicants considerable latitude with regard to their form of establishment: they may choose to either open a branch or create a subsidiary.
In contrast, when foreign banks from countries that are not members of the EEA or the G10 wish to open an establishment for the first time, the French regulator is likely to impose a requirement that they create subsidiaries to involve, as a shareholder, a local partner bank that could facilitate their initial contact with French customers and act as their sponsor.
Changes in the qualifying holding
Since 4 November 2014, assessing changes in the qualifying holding of any European credit institution falls within the scope of the ECB’s competence. Such changes are, however, first examined by the competent national authorities.
A qualifying holding is defined as ‘a direct or indirect holding in an undertaking which represents 10 per cent or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking’.
Changes in the qualifying holding are filed at the ACPR, which first assesses whether the filing is compliant with the French provisions transposing the CRD IV Package. The ACPR then submits a proposed decision to the ECB, which renders a final decision following its assessment.
ii Transfers of banking business
French law does not provide for any specific regime allowing banks to transfer all or part of their business to another entity without requiring the relevant third-party consents, including the customers’ consent with respect to loans and deposits (with the exception of the above-mentioned power of the ACPR to permit such transfer).
If the transaction is structured as a sale of a going concern, then relevant third-party consent would need to be obtained. However, in practice, approval is generally sought only for material contracts. For contracts that are not considered material, the bank will usually simply notify their transfer to the counterparty.
Third-party consent should, however, not be required if the sale of the business is structured as a sale of the shares of the entity that is party to the deposit and loan agreements, or as the contribution of an autonomous business activity to another entity in exchange for shares in such entity (since deposit and loan agreements would not typically contain change of control provisions).
vii THE YEAR IN REVIEW
i Modifications to the French banking monopoly rules
The French banking monopoly rules have been amended to incorporate the new definition of credit institutions and the creation of the société de financement status, provided that such modifications do not modify the substance of the French banking monopoly rules. Rules applicable to financing companies were outlined in a Decree published on 13 November 2014. New exceptions from the banking monopoly have been included:
- a by Ordinance No. 2014-559 dated 30 May 2014 to allow crowdfunding companies to carry out their business in France;
- b by Law No. 2015-990 published 6 August 2015 (known as the Macron Law), allowing certain companies to grant credit for a maximum term of two years to small and medium-sized businesses with whom they maintain a business relationship;
- c by Law No. 2015-992 published 17 August 2015, allowing third-party financing companies to grant credit to builder-owners in the field of energy efficient construction; and
- d by Law No. 2016-1691 published on 9 December 2016 regarding transparency, anti-corruption and economic modernisation, certain funds are entitled to carry out credit transactions.
ii Extension of the scope of crowdfunding
By decree No. 2016-1453 of 28 October 2016, the scope of crowdfunding platforms has been extended by an increase in the applicable ceilings for loans and investments in financial securities and the conditions on issuing ‘mini securities’.
By Ordinance No. 2016-520 of 28 April 2016, a legal framework has been set for blockchain. According to this text, blockchain technology is defined as a ‘shared electronic recording system allowing for authentication’.
Moreover, the issuance of mini-bonds can now be recorded on a blockchain. In this case, the bonds can be sold under appropriate modalities: the recording of the sale operation in an electronic shared recording system proceeds to the transfer of the ownership title.
Further to the decision of the UK to leave the EU, the ACPR and the AMF are getting ready to welcome British-based institutions that wish to relocate their business to France. For existing activities that are already supervised by the competent authority in their home country, the licensing procedure may be simplified and speeded up. This will be done by using documents already available in English such as forms that have been submitted to the supervisory authorities in home countries and papers concerning a branch whose business will be taken over by a subsidiary firm. An English-speaking contact point will be appointed to guide applicant firms through the procedure starting with the pre-authorisation period, and will provide all necessary information to ensure the smooth processing of the application.
The ACPR has set up a page on its website for the standardised licence application forms, and has created a special Brexit mailbox to answer any questions such institutions may have about these issues. The ACPR will reply as soon as possible in the most suitable form.
The AMF is also setting up a dedicated welcome programme for management firms and FinTech companies based in the United Kingdom that wish to apply for an authorisation from the AMF. This one-stop shop offer entails a range of services, including the 2WeekTicket pre-authorisation procedure, which allows firms to begin the process of opening offices in France in just two weeks. The AMF has also set up a page on its website about the programme and an e-mail address to answer queries.
viii OUTLOOK and CONCLUSIONS
While the French banking sector had been steadily recovering from the 2008 financial crisis, the eurozone crisis, combined with the heavy exposure of French banks to such sovereign risks, has resulted in the need for French banks to continue to strive to meet the regulatory capital requirements and remain profitable.
It now appears that these efforts are starting to pay off. French banks have reduced their balance sheets by selling certain non-core activities and loan portfolios, reinforced their regulatory capital and accumulated significant liquidity reserves. The French Banking Law and the new European regulatory framework did not significantly alter the French universal banking model, which has shown resilience during the crisis.
French banks are therefore looking to the future with greater confidence and optimism, and are again focusing on their growth plans. However, challenges still lie ahead, as profitability remains very much below pre-crisis levels, and major strategic decisions will need to be made to address this concern.
The four biggest French banking groups (BNP, Société Générale, Crédit Agricole and BPCE) shall also have to comply with the TLAC rules in the near future. The French Commercial Code has been amended to allow these banks to issue new financial instruments that fulfil the TLAC criteria.
1 Olivier Saba and Samuel Pariente are partners and Mathieu Françon, Jessica Chartier and Béna Mara are associates at Bredin Prat.
2 EU Regulation No. 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.
3 EU Regulation No. 806/2014 of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund.
4 CRBF Regulation No. 92-14.
5 Decree dated 5 May 2009, amended by a Decree dated 3 November 2014 relating to the identification, measurement, management and liquidity risk control, replacing Regulation No. 88-01.
6 CRBF Regulation No. 93-05.
7 On 20 October 2011, the European Commission published a proposal for a regulation to replace the Market Abuse Directive (see below).
8 Article L650-1 of the French Commercial Code.
9 Article L651-2 of the French Commercial Code.
10 Banks may be found criminally liable for facilitating, by any means, the concealment of the true origins of goods or resources of a person who commits a crime or a misdemeanour that provides that person with a direct or indirect profit. Banks may also be considered guilty of money laundering if they knowingly facilitate a transaction involving the investment, concealment or conversion of the direct or indirect product of a crime or a misdemeanour (Article 324-1 of the French Penal Code).
11 Article L341-1 et seq. of the French Monetary and Financial Code.
12 Article L511-33 of the French Monetary and Financial Code.
13 Article 226-16 of the French Penal Code.
14 Further details in Article 11 of Ministerial Order of 30 May 2016.
15 Total: 100 per cent.