French Financial Institutions Litigation & Regulation Update, Issue 2
The French Financial Institutions Litigation & Regulation Update is a periodic newsletter featuring the latest news in the financial services field in France.
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LEGISLATION AND REGULATION
French Consumer Legislation Introduces Class Actions
A new legislation dated February 17, 2014 (Loi n° 2014-344 relative à la consommation) introduces a number of changes to French law with the stated aim of restoring the balance of power between consumers and professionals. Among the most noteworthy changes is the introduction of class actions. While not specific to financial services law, these opt-in style class actions will permit authorized consumer protection associations to seek compensation for damages caused by any failure of a business to comply with its legal or contractual obligations in the case of a sale of goods or supply of services. Court will first rule on whether the action is admissible and will then rule on the liability of the professional, define the group of consumers seeking liability, and order publicity measures to announce the period during which they may join the action.
Same French Consumer Legislation Overhauls Regime for Miscellaneous Investments
Noteworthy (yet less publicized) is the overhaul of the regime of "miscellaneous investments." This regime captures the public offering or solicitation actions with respect to alternative investments, i.e., goods that are not managed by the investors themselves, or that offer liquidity through a buyback option and are supposed to gain value over time (such as, but not limited to, precious metals, jewels, race horses, or photovoltaic installations). Requirements arising from this regime have been strengthened and are incumbent on a larger category of intermediaries than under previous rules.
POSITIONS AND GUIDANCE FROM AUTHORITIES
EUROPEAN Commission Responds to ESMA on the Classification of Financial Instruments as Derivatives
As mentioned in the previous issue of the Update, ESMA had written to the European Commission on February 14, 2014 to seek clarification on the definitions of FX derivatives and commodity forwards. The Commission sent ESMA a preliminary answer on February 26, 2014 (but published several weeks afterward). Of particular interest are some of the preliminary views from the Commission on the matters set out in the letter:
- In order to assess the delineation between FX forward contracts and currency spot contracts, ESMA is mandated by the Commission to provide guidance as to which delivery periods are appropriate in the FX forwards market and to provide further details concerning the commonly accepted delivery period for currencies: in France, derivatives with settlement cycle beyond T+3 (pending EU harmonization) are to be considered forward contracts.
- The criterion of whether instruments satisfy a "commercial purpose" (derivatives entered into for commercial purposes are not caught) is to be used only in relation to physically settled commodity derivatives as opposed to derivatives relating notably to financial instruments, currency, or interest rates.
- The definition of commodity forwards that can be physically settled was discussed during the MiFID II, and a delegated act will clarify the matter.
Banking Regulator Issues Guidelines on Private Banking AML
In March 2014, the French banking regulator issued some guidance on AML/CFT in the field of private banking. The guidance also incorporates conclusions drawn from on-site inspections conducted by the ACPR. The ACPR notes that private banking is especially prone to money laundering due to products or services offered (with complex legal arrangements, bespoke management, or sophisticated products), unusual terms of transactions (high amount, enhanced confidentiality request, assets held overseas), features of business relationships (politically exposed foreign person), or distribution arrangements (recourse to brokers). The ACPR then stresses risk profiling of business relationships, vigilance diligences (including the origin of funds and what they will be used for as well as the economic justification of whether the transactions should be investigated in depth, provision by clients of supporting documents requested by financial institutions, and intermediation by a brokers or otherwise), permanent and periodic internal control (internal controls should address risks arising from new products and external growth transactions), and governance of AML/CFT arrangements within a group (risks arising from presence in non-cooperative territories or complex organization of business lines should be taken into account in the design of AML procedures).
French Constitutional Council Rules Out National Register of Consumer Credit
Among the major changes envisaged to be introduced by the legislation under the "Legislation and Regulation" section was the setting up of a national register of consumer credit. Under the register, lenders would have been required to record information relating to consumer credit agreements (identity of borrower and lender, repayment defaults, over-indebtedness, or insolvency) and to consult the register prior to granting a consumer credit. Solvency of borrowers would have also had to be reassessed every three years through mandatory consultation of the register. As part of its mandate of constitutionality judicial review, on March 13, 2014, the French Constitutional Council invalidated the draft provisions setting up the register on the ground that they would have posed a disproportionate threat on privacy rights. As a result, the regime for granting consumer credit into France remains unchanged in terms of reporting and consulting: only negative information has to be reported (and may be checked) by lenders, i.e., information relating to borrowers who experienced repayment incidents. It is also worth noting in this respect that French authorities have taken enforcement action against lenders that failed to update information contained in the register despite borrowers' repayment of their debt.
French Supreme Court Partly Overrules Decision on French Bank Ex-Trader
On March 19, 2014, the French Supreme Court partly upheld and partly challenged a decision held by the Paris Court of Appeal against a former employee trader. By way of quick reminder, the trader had been charged by the Paris Correctional Court with breach of trust, unauthorized access to automated data processing systems, and falsification of documents and had been sentenced to a five-year imprisonment term, but also ordered to compensate the French bank EUR 4.9 billion. This case was upheld by the Paris Court of Appeal. In the meantime, the French banking regulator had fined the trader's employer EUR 4 million on the ground of internal controls deficiencies. The French Supreme Court upheld the criminal aspects of the Court of Appeal's ruling (i.e., confirmed the criminal charges and the imprisonment sentence) but overruled the award of civil damages to the bank on the ground that the Court of Appeal had not taken account of the bank's failures in enforcing proper internal controls, which failures the Supreme Court ruled were instrumental in the unfolding of the fraud and the ensuing damage incurred by the bank. Determination of damage will therefore have to be examined anew by another Court of Appeal. In so doing, the French Supreme Court departed from its traditional case law regarding the compensation of victims of property-related criminal offenses whereby any negligence by the victim does not affect the award of civil damages.
Banking Regulator Enforcement Committee Fines Insurance Company for Failing to Conform to Rules Applicable to Dormant Life Insurance Contracts
As mentioned in the previous issue of this Update, French legislation relating to life insurance contracts left dormant for a lengthy period of time is currently being revised, and the ACPR issued a guidance on fees that may be charged by insurance companies in respect of actions to be taken to search for beneficiaries. As anticipated in the legislative history of the proposal under discussion before Parliament, an insurance company was fined EUR 10 million on April 7, 2014 for failing to comply with rules applicable to dormant life insurance contracts (in particular). The Enforcement Committee of the ACPR determined that the insurance company had failed to comply with the following provisions: late review of the national register of natural persons, required by law to search for the beneficiary when the insurer is informed of the insured person's death; and requirements relating to revaluations of policies after the policyholder's death.
Banking Regulator Enforcement Committee Fines Bank for Failing to Conform to Access Requirements to Basic Payment Accounts
On April 11, 2014, the Enforcement Committee of the French banking regulator issued a warning and a EUR 2 million fine against a bank on the ground of failure with regulations on the right to a bank account. Pursuant to such regulations, if a credit institution has denied access to a current account, a consumer can request the Banque de France to designate a credit institution responsible for providing such 'basic banking service.' The Enforcement Committee found that the bank did not open bank accounts for all persons who were eligible to have an account opened and that such accounts did not always offer basic payment services such as payment cards.
The issue of access to a basic payment account is gaining some traction in the EU as the European Parliament adopts the Directive on payment accounts on April 15, 2014.
Head of Banking Regulator Enforcement Committee Suggests that Larger Sanctions May Loom Ahead
On April 29, 2014, the Head of the French Banking Regulator Enforcement Committee stated in an interview that more cases relating to customer relationships, such as those referred to above, are to be expected and that larger fines cannot be ruled out. Targets of new sanctions may include payment services providers.
Securities Regulator Enforcement Committee Fines 20 Individuals in Connection with Entity Holding Itself Out as Art Broker
On April 7, 2014, the AMF Enforcement Committee levied total fines of EUR 4.22 million against 20 individuals involved in art-connected investments. A company holding itself out as an art broker promised to select, buy, hold, value, and resell pieces of art for the account of investors. The AMF Enforcement Committee considered that the activity proposed by the company falls under the then-applicable definition of "miscellaneous investment," i.e., investment by way of public offering that is not managed by the investors themselves or offering a buyback option or persons collecting cash to solicit such investments. The AMF Enforcement Committee then pointed out that the regime applicable to miscellaneous investment intermediaries, requiring, inter alia, a prospectus to be filed with the AMF, had been ignored.
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