The Banking Regulation Review: France
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 2019 were BNP Paribas (BNPP), BPCE, Groupe Crédit Agricole, Société Générale, La Banque Postale and Groupe Crédit Mutuel (BFCM).
Pursuant to Regulation (EU) No. 1024/2013 of 15 October 2013, 12 French banking groups are significant, representing 33 per cent of the total banking assets held by significant credit institutions supervised by the European Central Bank (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 groups is their inverted pyramid structure. The 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 more than 409,000 people in 2018).
The French banking system is mainly governed by a harmonised European regulatory framework, which includes the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the adaptation of the national regulation framework thereto.
The regulatory regime applicable to banks
The European regulatory framework is mainly based on the following legislation:
- Regulation (EU) No. 1022/2013 establishing the SSM;
- Regulation (EU) No. 806/2014 setting up the SRM;
- Regulation (EU) No. 575/2013 establishing prudential requirements for credit institutions and investment firms (the Capital Requirements Regulation (CRR));
- Directive 2013/36/EU regulating access to the activity of credit institutions and the prudential supervision and investment firms (the Capital Requirements Directive (CRD IV)); and
- Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions (the Banking Recovery and Resolution Directive (BRRD)).
On 20 May 2019, the EU adopted a series of four pieces of legislation amending the European regulatory framework: Regulation (EU) 2019/876 (CRR II), Regulation (EU) 2019/877 (SRM II), Directive (EU) 2019/878 (CRD V) and Directive (EU) 2019/879 (BRRD II).
In addition, the statutory framework applicable to the regulation of banking activities is provided by the French Monetary and Financial Code, and by specific decrees and orders. The power to regulate the banking and financial sector is now shared between European legislature and the French Minister of Economy and Finance, assisted by a consultative authority, the Advisory Committee on Financial Legislation and Regulation.
In addition, the European Banking Authority (EBA) issues regulatory guidelines and recommendations. In principle, the French Prudential Control and Resolution Authority (ACPR) must inform the EBA of whether it complies or intends to comply with these guidelines and recommendations within two months of their issuance.
In accordance with Regulation (EU) No. 1024/2013, the authority to supervise and control banks is shared between the ACPR 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 significant entities.
The ACPR remains directly in charge, subject to the oversight of the ECB, of credit institutions that are classified as less significant. These authorities cooperate, and the terms of such cooperation are defined, inter alia, in Regulation (EU) No. 468/2014 of 16 April 2014.
The ACPR is a public authority without legal personality. The French Central Bank (the Central Bank) plays a key role in the functioning of the ACPR, which is chaired by the governor of the Central Bank, and the administrative staff are seconded from the Central Bank.
In accordance with Regulation (EU) No. 806/2014, 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 Single Resolution Board.
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 granted by the ECB, while the provision of investment services requires a licence obtained from the ACPR. Portfolio management companies 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 those 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., not to carry out any banking operations in France). The competent authority must be notified of the opening of a representative office.
Under French law, only authorised credit institutions or financing companies may, on a regular basis, enter into credit transactions and only credit institutions may, on a regular basis, receive repayable funds from the public (the French banking monopoly). Recently added exceptions from the banking monopoly include:
- by Ordinance No. 2017-1432, published on 4 October 2017, on the modernisation of the legal framework of asset management and debt financing;
- by Law No. 2018-1021 of 23 November 2018, which introduces an exception for social housing organisations, for certain transactions they carry out among themselves; and
- by Law No. 2019-486 of 22 May 2019 on the growth and transformation of business, which (1) allows more forms of companies to grant credit to small and medium-sized businesses with whom they maintain a business relationship and increases the maximum term from two years to three years; and (2) broadens the possibility for companies to receive repayable funds from their shareholders and officers by, inter alia, abolishing the requirement for the shareholders to hold at least 5 per cent of the companies' capital.
i Relationship with the prudential regulator
Prudential supervision of a credit institution is handled by the ECB or the ACPR (see Section II). In addition, the AMF has investigative and jurisdictional powers with regard to financial activities.
Supervision by the ACPR
The ACPR carries out supervision of banks mainly 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 along with internal audit reports, 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 that 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 banks accurately reflects their situation. In addition to these routine inspections, if deemed necessary on the basis of a review, the ACPR also carries out more specific inspections on targeted risks or business segments. For more transparency, the ACPR has compiled in a charter rules governing the inspection process and the rights and obligations of the persons checked as well as of the controllers.
Following its off-site monitoring and on-site inspections, the ACPR usually 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:
- send a cautionary notice to the management of the credit institution concerned, allowing it to provide the ACPR with explanations;
- issue a recommendation to the credit institution describing the measures designed to improve the credit institution's financial condition or management methods;
- issue an injunction to the credit institution requiring it to take certain specific measures within a set period; or
- 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;
- cessation of the credit institution's activities;
- limitation on the number of branches or agencies of the credit institution;
- the transfer of some or all of the credit institution's credit or deposit portfolios;
- limitation of or prohibition on the distribution of dividends;
- 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 or cancellation of shares or liabilities);
- issuance of new equity instruments; or
- a prohibition on paying prior debts.
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:
- a warning;
- a reprimand;
- a prohibition on engaging in certain operations or limits on the conduct of certain credit institution activities;
- a temporary suspension of one or more senior managers of the credit institution (with or without the appointment of a provisional administrator);
- requiring the resignation of one or more managers or directors, or both (with or without the appointment of a provisional administrator);
- a partial withdrawal of the credit institution's licence (with respect to specific banking activities); and
- 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:
- impose a fine of up to €100 million or 10 per cent of the annual turnover;
- prohibit or limit the payment of dividends to shareholders;
- order any of the above-mentioned sanctions to be made public at the expense of the bank; or
- 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 that they provide those 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 significant 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.
These French regulations are also to be read in conjunction with the 26 September 2017 joint guidelines on the assessment of the suitability of members of management bodies and key function holders published by the EBA and the European Securities and Markets Authority (ESMA), which entered into force on 30 June 2018; on the same day, the EBA published revised Guidelines on Internal Governance, and the 29 May 2018 ECB guide to fit and proper assessments. On 5 June 2018, the ACPR published a notice declaring its compliance with the second guidelines and its partial compliance with the first guidelines.
French banks shall be managed by at least two senior managers and the separation of the functions of the chair and the CEO is required in principle.
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 rules on the number of corporate offices held by senior managers of a credit institution is 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 sufficient time 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, with respect to senior managers, to notify the ACPR of the appointment or renewal of their directors. The ACPR is entitled, based on similar criteria as those applicable to senior managers, to oppose any 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, in particular, 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.
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 (which may be exercised by the permanent officer depending on the bank's size) and a risk management officer.
Smaller banks may elect to entrust these functions to a manager, who is usually a member of the board.
Risk, nomination and compensation committees
Banks are, in principle, required to create a separate risk committee to supervise the implementation of risk management procedures 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 Monetary and Financial Code provides for the creation of a risk committee within a bank's 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.
Moreover, institutions with a balance sheet 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 Monetary and Financial Code. Some of these rules are likely to be amended upon transposition of CRD V (see Section VII.vi). To date, these rules provide that:
- the board of directors, or supervisory board, adopts and regularly reviews the compensation policy with the support and advice of the compensation committee;
- the compensation policy must: be adequate for the economic strategy, aims, values and long-term interests of the bank; incorporate measures that aim to avoid conflicts of interest; and not encourage risk-taking above the threshold fixed by the bank;
- the shareholders must be consulted annually about the global amount of remuneration given to directors and employees exercising activities that have a significant influence on the bank's or group's risk profile (i.e., a say-on-pay procedure for risk takers);
- 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;
- the variable remuneration of employees exercising control functions must not be based on the controlled activities;
- the compensation policy must clearly distinguish between fixed remuneration (experience-based) and variable remuneration (performance-based);
- 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
- credit institutions must ensure that the variable remuneration of senior employees, management or risk takers cannot exceed their fixed remuneration, except if otherwise decided by the shareholders by a two-thirds majority.
In addition, on 21 December 2015, the EBA published guidelines on sound remuneration policies (the ACPR declaring it would require compliance with the major part of these guidelines) and the ECB published recommendations for dividend and variable remuneration policies.
The ACPR can impose a revision of a bank's compensation policy if it considers that such a policy is not compatible with sound risk management and the long-term objective of growth. Institutions must also be able to justify the amount and terms of payment of variable remuneration.
Key function holders
In accordance with the joint guidelines of ESMA and the EBA on the assessment of the suitability of members of management bodies and key function holders, as the managers, key function holders must also meet certain good standing conditions.
iii Regulatory capital and liquidity
Minimum capital requirements
Banks with headquarters in France are required to have a minimum share capital of €5 million.
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 a 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 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 CRR 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 includes the following categories: Common Equity Tier 1 (CET1), Tier 1 and Tier 2.
In addition to an 8 per cent ratio, the banks must comply with three additional capital buffers (a capital conservation buffer equal to 2.5 per cent of CET1, a countercyclical capital buffer, which is equal to 0.5 per cent as of 2 April 2020, and the systemic buffer). In addition, local banking regulators can apply an additional buffer for other systemically 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 buffer has been capped at 5 per cent, but in France it is currently at zero per cent due to the lack of a decision by the French stability board, the HCSF.
CRR II introduced a Tier 1 capital leverage ratio requirement equal to 3 per cent and an additional leverage ratio buffer requirement for global systemically important banks (G-SIBs). These requirements shall apply from 28 June 2021.
The CRD IV package introduced two mandatory liquidity ratios: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). Currently, banks with headquarters in France will be required to comply only with the LCR, which, since 2018, has required them to maintain, at all times, an LCR of at least 100 per cent. By 28 June 2021, they must reach an NSFR of at least 100 per cent.
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.
iv Recovery and resolution
As a general principle, banks are subject to the same insolvency procedures that are applicable to all companies in financial difficulty in France, with certain specificities.
The ACPR (or, as the case may be, the ECB) plays a central role both before and after 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 the 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 those 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 Section III.i).
When necessary, the governor of the Central Bank may invite the bank's shareholders to provide financial support. Jurisprudence has, however, considered that there is, in principle, no obligation on the part of the shareholders to accept such an invitation.
When a 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. In both cases, the ACPR may petition the local court for the forced sale of the shares owned by the management. Moreover, the ACPR may request the involvement of the Deposit Guarantee Fund; for instance, when a credit institution is unable to repay deposits received from the public.
This recovery and resolution framework was amended in May 2019 by the adoption of BRRD II (which was not transposed at this stage). The amendments introduced, in particular, requirements in relation to a total loss-absorbing capacity (TLAC), applicable to G-SIBs. Further, in 2017, in accordance with Article 45 of the BRRD, the Single Resolution Board (SRB) introduced binding requirements, and started to address both the quantity and quality of the minimum requirement for own funds and eligible liabilities (MREL).
The banking resolution framework is now lex specialis to general insolvency procedures to prevent systemic effects on the banking sector.
For significant banks and other cross-border groups within the Banking Union, the resolution authority is the SRB, and national resolution authorities are responsible for all other banks, except when resolution requires the use of the Single Resolution Fund or if the SRB decides to exercise all its powers directly.
Preventive recovery plans
The following entities are obliged to draw up preventive recovery plans:
- significant credit institutions that fall under the sole supervision of the ECB;
- credit institutions within a group that are not supervised on a consolidated basis;
- the parent company of credit institutions within a group that are supervised on a consolidated basis within the EU; and
- credit institutions where required by virtue of a decision of the resolution college.
The plans have to be adjusted regularly, and are subsequently examined by the supervisory college within the ACPR. Preventive group recovery plans are communicated to other authorities, in addition to the resolution college. Significant banks' recovery plans are reviewed by the ECB.
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. The resolution college designs potential resolution measures and cooperates with other authorities, particularly the respective supervisory authorities. At the initial elaboration of each plan, and 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. To guarantee the resolvability of an entity, the resolution college can take certain preventive measures.
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.
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 if approved by competent regulators.
As the competent resolution authority for significant banks and cross-border groups within the Banking Union, the SRB is responsible for drawing up the resolution plans and adopting all decisions relating to banking resolution in relation to these entities.
Minimum requirement for own funds and eligible liabilities
The MREL corresponds to the minimum amount of loss-absorbing capacity that is also covered by the international standard TLAC developed by the Financial Stability Board. The SRB is committed to implementing and enforcing the applicable legal framework, including by setting MREL targets for the banking groups under its remit. For other entities, the national resolution authorities (in France, the ACPR) are responsible for setting MREL targets. Since 2017, several banking groups have been notified about their MREL level, and have started to issue eligible debts (such as non-preferred senior debt) to reach these targets. In addition, in accordance with the second part of its 2018 MREL Policy, the SRB has started to introduce binding MREL targets at individual levels.
To comply with the TLAC Standard established by the Basel Committee, CRR II has introduced (in addition to the BRRD II provisions relating to MREL, which apply to all banks) several specific provisions requiring G-SIBs to comply with a risk-based ratio of 16 per cent and a non-risk-based ratio of 6 per cent of own funds and eligible liabilities (these requirements being applicable since 27 June 2019). Moreover, CRR II, in conjunction with BRRD II, introduced certain requirements for eligible liabilities that are similar to those applicable to various categories of own funds, including by providing qualification rules or rules in the event of a breach or reduction of eligible liabilities.
When entities meet the applicable conditions for resolution, resolution authorities may apply, in addition to many resolution powers, four resolution tools:
- the sale of business tool;
- the bridge institution tool;
- the asset separation tool; and
- the bail-in tool.
Before taking concrete resolution measures in respect of a bank, including the write-down and conversion of capital instruments, an entity's value must be estimated by an independent expert. The resolution college can only write down and convert capital instruments if the entity's insolvency is otherwise unavoidable. The resolution procedure is initiated by the Governor of the Central Bank, the Head of the French Treasury or the ECB.
The resolution college has the power to assume the effective management of an entity, designate a special administrator and replace members of the board. All or part of a bank's activities can be transferred to a voluntary purchaser. The bank's assets can also be transferred to a bridge bank or to an asset manager with a view to a subsequent sale. A bail-in of eligible liabilities may be implemented in accordance with Article 27 of Regulation No. 806/2014. Additionally, the resolution authority is allowed to order the issue of new shares or Tier 1 capital instruments.
For entities subject to the direct supervision of the ECB, it determines, after consulting the SRB, whether a bank is failing or likely to fail. If so, the SRB places the bank under resolution and adopts a resolution scheme determining which resolution measures will be applied.
Conduct of business
i Rules governing the business conduct of banks
The primary laws and regulations governing the business conduct of banks are:
- the Monetary and Financial Code (in particular Article L533-1 et seq.);
- the French Civil Code (general contractual rules and rules relating to loans) and the French Commercial Code (rules relating to commercial paper);
- 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;
- European banking and market abuse rules, in particular the Market Abuse Directive2 and the Market Abuse Regulation;3
- regulatory guidelines and recommendations issued by the EBA; in particular, the guidelines on internal governance under CRD IV; and
- all international banking rules, such as those 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:
- obligations relating to investment services:
- the 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 the 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 interest; and
- internal compliance obligations (internal administrative procedures, compliance rules, efficient techniques to evaluate risks and the back-up of electronic data);
- 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;4
- 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.5 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 there is 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); and
- main sources of criminal and regulatory liability:
- money laundering:6 punishable by a maximum of five years' imprisonment and a fine of €375,000 for individuals or €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. The ACPR may also impose important sanctions on banks for failing to comply with their anti-money laundering and counter-terrorist financing obligations (a credit institution was recently subject to a €50 million fine on that basis);
- 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 five years' imprisonment and a fine of €100 million for individuals or €500 million for legal entities such as banks, or 10 times the amount of the profits gained or losses avoided, or 15 per cent of the total annual turnover. Regulatory violations are punishable by a fine of a maximum of €100 million or 10 times the profit made through insider trading. The French Constitutional Council ruled on 18 March 2015 that no one can be prosecuted twice for a market abuse (once before a criminal court and once before the regulator);
- usurious loans: punishable by a maximum of two years' imprisonment and a fine of €45,000 for individuals or €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;7 and
- complicity in tax fraud: punishable by seven years' imprisonment and a fine of €20,000 for individuals or up to €10 million for legal entities such as banks.
iii Banking confidentiality
All managers, officers and employees of banks are bound by the principle of banking confidentiality.8 Any person who does not comply with this obligation can face tortious or criminal liability.9 The disclosure of information subject to banking confidentiality is punishable by up to one year's imprisonment and a fine of €15,000 for an individual or €55,000 for a bank.
Banking confidentiality protects the interests 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:
- tax and customs authorities;
- the Central Bank;
- the AMF and the ACPR; and
- the French anti-money laundering authority, TRACFIN (in terms of reports of suspected money laundering or terrorism activity made to TRACFIN).
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.
|Bank||Amounts due to credit institutions (€ billion)||Customer deposits (€ billion)||Debt securities (€ billion)||Subordinated debt (€ billion)|
|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 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 the financial instruments (which the transferor must accept) back to the transferor, for a price and on a date agreed 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 for the past few years.
In its report on the performance of French banking groups in 2018, dated June 2019, the ACPR stressed that 'the French banks' average loan-to-deposit ratio increased slightly by 2.4 pt' from 114.2 per cent at the end of 2017 to 116.6 per cent at the end of 2018, 'consistent with the median of European banks'. This upward trend is not entirely in line with the trend at the European level, which has been descending compared with previous years.
The supervisory statistics for the third quarter of 2019 published by the ECB on 16 December 2019 show that the loan-to-deposit ratio at the European level decreased from 118.42 per cent in the third quarter of 2018 to 116.84 per cent in the third quarter of 2019.
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 (TN).
The TN 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 TN category of instruments governed by Articles L213-1 to 213-4-1 and D213-1 et seq. of the Monetary and Financial Code (as well as treasury bonds) are traded. The minimum value of a TN is €150,000.
Since the TN reform that occurred in 2016 through Decree 2016-707 of 30 May 2016 and the Ministerial Order of 30 May 2016, the main features of TNs have been as follows:
- no requirement to provide a summary of the financial documentation in French when the 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 the documentation;
- the minimum value of a new TN is increased to €200,000 (or the equivalent amount in another currency) when the financial documentation is drafted in a customarily accepted language in the financial sphere; and
- extension of the list of rating agencies allowed to rate the issuer to any rating agency registered with the ESMA (to the extent that the rating agency has the technical capacity to proceed with the rating of the instrument).10
As at the end of December 2019, the outstanding amount of negotiable European commercial paper was €249.5 billion and the outstanding amount of medium-term notes was €51.7 billion.
The advantage of these 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, described below.
Bonds issued by the Caisse de Refinancement de l'Habitat
The Caisse de Refinancement de L'Habitat (CRH) is a credit institution owned by French banks, 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 No. 85-695 of 11 July 1985, and Articles L313-42 to L313-49-1 and R313-20 to R313-25-1 of the Monetary and Financial Code. Since 4 November 2014, the CRH has operated under the supervision of the ECB owing to the size of its balance sheet.
As at 30 December 2018, CRH shareholders' equity was exclusively constituted of CET1 in a total amount of €557.2 billion, and was allocated as follows:
- BFCM: 31.2 per cent;
- Crédit Agricole SA – Crédit Lyonnais: 34.2 per cent;
- Société Générale: 20.4 per cent;
- BNPP: 8.8 per cent; and
- BPCE: 5.4 per cent.11
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 allocation of amounts generated by the promissory notes are given priority over 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 exceeding 35 per cent of the cover assets).
Real estate bonds
Real estate bonds may only be issued by special-purpose mortgage credit companies (SCFs), which are 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 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 (guaranteed loans of this type shall not exceed 35 per cent of the assets of the SCF).
As an exception to the general rules of French bankruptcy law, holders of real estate 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 Monetary and Financial Code, which implements the Collateral Directive12 (as amended by Directive 2009/44/EC) and allows 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 housing finance companies (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 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 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).
Control of banks and transfers of banking business
i Control regime
Ownership restrictions and control
The ECB is in charge of the control of banking licence approvals and acquisitions of qualified holdings in credit institutions. To support applicants and all entities involved in the process of authorisation, on 9 January 2019 the ECB published a non-binding consolidated guide to assessments of licence applications, which applies to all licence applications to become a credit institution (including applications for credit institutions, fintech companies and qualifying holding approvals).
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.
The latter may be invited by the ACPR to provide financial support or a comfort letter (providing, for example, 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).
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 at 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 a proposed transaction on the prudential ratios of the acquiring entity, the target and the combined group. Similarly, the ability to implement risk-monitoring systems is a key factor for securing ECB non-opposition. The ACPR also considers the proposed post-transaction management team to be a critical element. In addition, the ACPR will ensure that a 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.
Changes in the qualifying holding
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 that represents 10 per cent or more of the capital or of the voting rights or that 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 rules governing changes in the qualifying holding of credit institutions are, inter alia, laid down in a ministerial order dated 4 December 2017. 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 consent, including the customers' consent with respect to loans and deposits (with the exception of the above-mentioned power of the ACPR to permit a transfer).
If a 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 a 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 an entity (since deposit and loan agreements would not typically contain change of control provisions).
The year in review
Law No. 2019-486 of 22 May 2019 established a framework for initial coin offerings and provided a legal framework for certain services (including custody, portfolio management, trading (for legal tender or not), underwriting, reception and transmission of orders, and investment or advisory services) linked to digital assets and for entities that provide them. The latter have to register with the AMF for the provision of certain services and may more generally apply for an optional approval from the AMF. On 19 December 2019, the European Commission launched a public consultation into legislation establishing a European framework for markets in crypto-assets.
Further to the United Kingdom's decision to leave the European Union, which became effective on 31 January 2020, the ACPR and AMF set up measures to welcome UK-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 aim is to simplify and speed up the licensing procedure 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 has been appointed to guide applicant firms through the procedure.
iii Payment services
The Payment Services Directive 2 (PSD2)13 entered into force on 12 January 2016, and has been applicable since 13 January 2018. In France, Ordinance No. 2017-1252, dated 9 August 2017, and several decrees and orders, have transposed PSD2, the main measures of which include the regulation and supervision of new actors in the payment services sector (payment initiation service providers and account information service providers), changes to the scope of the entities that are excluded from the Directive, reinforced consumer protection rights, rules relating to the security of payment services with a view to preventing fraud, and the extension of the scope of the rules to include non-EEA currency payments between EEA-domiciled payment service providers, as well as payment transactions where one of the payment service providers is located outside the EEA in all currencies.
One of the key measures introduced by PSD2, the strong customer authentication, was to apply from 14 September 2019. However, the EBA allowed national authorities to organise a transition period on the basis of which the French authorities have adopted a migration plan setting a 31 December 2020 deadline.
iv Endorsement of the final changes to the Basel III framework
The Basel Committee on Banking Supervision announced on 7 December 2017 that the outstanding Basel III post-crisis regulatory reforms had been endorsed, including:
- a revised standardised approach for credit risk;
- revisions to the internal ratings-based approach for credit risk;
- revisions to the credit valuation adjustment framework;
- a revised standardised approach for operational risk;
- revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks; and
- an aggregate output floor.
The revised standards will take effect from 1 January 2022, and are to be phased in over five years.
v Prevention of money laundering and terrorist financing
A new directive amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the fifth Anti-Money Laundering Directive (AMLD)) was published on 30 May 2018.
The fifth AMLD, inter alia, extends the existing scope of the fourth AMLD to new technologies such as virtual currencies and electronic wallets, makes national beneficial ownership registers accessible to the public under certain conditions and obliges Member States to create a list of offices and functions that qualify as being politically exposed. In France, the Directive was transposed by an ordinance and several decrees published on 12 February 2020.
vi New banking package
A comprehensive package of legislative measures to strengthen the Banking Union and reduce risks in the financial system was adopted at EU level on 14 May 2019.
CRD V amends CRD IV by, inter alia, enlarging the scope of exempted entities and adding provisions relating to intermediate parent companies, revisiting the Pillar 2 framework and clarifying the criteria of application on Supplementary Capital Requirements and amending applicable remuneration rules. National transposition and application of CRD V by Member States is due by 28 December 2020.
CRR II amends the CRR of 2013 as regards, inter alia, the following key measures:
- a new market risk framework for reporting purposes, including measures reducing reporting and disclosure requirements and simplifying market risk and liquidity rules for small non-complex banks;
- the introduction of a binding leverage ratio and an NSFR;
- a new TLAC requirement for G-SIBs; and
- implementation of the new Basel standardised approach to counterparty credit risk, the SA-CCR.
BRRD II aims to address the issues of the current system concerning, inter alia, the MREL policies and the resolution for groups. As a consequence, the new Directive introduced important changes relating to MREL rules by harmonising it with the TLAC Standard, creating internal MREL for subsidiaries, clarifying the criteria for eligible liabilities and giving the power to resolution authorities to impose additional subordination requirements (Pillar 2) in addition to the MREL Pillar 1. To clarify and facilitate the resolution for banking groups, BRRD II introduces the concepts of 'resolution entity' and 'resolution groups'. National transposition and application of BRRD 2 by Member States is due by 28 December 2020.
SRM II incorporates the modifications made to the BRRD, to the SRM.
vii Prudential supervision of investment firms
Directive (EU) 2019/2034 and Regulation (EU) 2019/2033, both of 27 November 2019, have established new prudential requirements and supervisory measures for investment firms. Currently, investment firms are subject to CRR and CRD and have been assimilated to credit institutions for supervisory and supervision purposes. However, these regulations do not sufficiently take into account the specific characteristics of investment firms. The objective of the new rules is to adapt the requirements to the specific risk profiles and business models of investment firms while safeguarding financial stability. The Directive is to be transposed by 17 July 2021 and the Regulation will be applicable from 26 June 2021.
viii European system of financial supervision
On 19 December 2019, the EU adopted a set of rules to strengthen the European system of financial supervision. The legislation amends tasks, powers, governance and funding of the ESMA, the European Insurance and Occupational Pensions Authority, the EBA and the European Systemic Risk Board. The role and the powers of the EBA with regard to money laundering activities are also strengthened.
ix Green and sustainable finance
For implementing its objectives of connecting finance with sustainability, the European Commission has proposed a series of regulations that are likely to impact credit institutions in the future, including:
- a proposal for a regulation on the establishment of a framework to facilitate sustainable investment that will create a unified classification system (taxonomy), which is currently being debated;
- a regulation on disclosures relating to sustainable investments and sustainability risks that introduce disclosure obligations on institutional investors and asset managers to integrate environmental, social and governance (ESG) factors into their risk management processes, which was adopted on 27 November 2019;
- a delegated act that will further specify how investment firms should take clients' ESG preferences into account; and
- a regulation amending the Benchmarks Regulation,14 which creates a new benchmark comprising low-carbon and positive carbon impact benchmarks, adopted on 27 November 2019.
In light of the covid-19 crisis, the ACPR, in line with publications issued at an international, European Union and French level, has issued dedicated publications to adjust requirements applicable to the banking sector in this specific context (including by temporarily loosening certain requirements). Several other measures have also been taken by the French government and legislator to support the French economy, some of which have an impact on the banking sector.
Outlook and conclusions
In the context of low interest rates, French banks are continuing to work on their profitability, even though the sector is set at a good level in comparison with the eurozone, with a return on equity of 6.7 per cent in 2018, which was well above the eurozone average of 5.8 per cent. In addition to trying to improve their profitability, French banks must increase investment in the digitalisation of their operations, green finance and in research and development (including artificial intelligence) to adapt to new consumer trends, reduce their operating costs and face up to the gradual arrival of new players such as Google, Apple, Facebook, Amazon, Baidu, Alibaba, Tencent and Xiaomi.
Additional challenges are faced by the sector in the context of a changing regulatory environment – this involves, for the four biggest French banking groups (BNPP, Société Générale, Crédit Agricole and BPCE), a focus on their compliance with the TLAC rules, and, more generally, for banking groups to continue to work on their compliance with MREL requirements, resolution plans and the new banking package, as well as upcoming green finance requirements.
The banks are operating in a European environment that is tending to become increasingly harmonised.
1 Didier Martin and Samuel Pariente are partners and Jessica Chartier, Béna Mara and Gaël Rivière are associates at Bredin Prat.
2 Directive 2014/57/EU on criminal sanctions for market abuse.
3 Regulation (EU) No. 596/2014 of 16 April 2014 on market abuse.
4 Article L650-1 of the French Commercial Code.
5 Article L651-2 of the French Commercial Code.
6 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).
7 Article L341-1 et seq. of the Monetary and Financial Code.
8 Article L511-33 of the Monetary and Financial Code.
9 Article 226-16 of the French Penal Code.
10 Further details in Article 11 of Ministerial Order of 30 May 2016.
11 Total: 100 per cent.
12 Directive 2002/47/EC.
13 Directive (EU) 2015/2366 of 25 November 2015 on payment services.
14 Regulation (EU) 2016/1011.