French Financial Institutions Litigation & Regulation Update, Issue 3
The French Financial Institutions Litigation & Regulation Update is a periodic newsletter featuring the latest news in the financial services field in France.
LEGISLATION AND REGULATION
FRENCH GOVERNMENT INTRODUCES CROWDFUNDING REGULATORY FRAMEWORK INTO FRENCH LAW
On May 30, 2014, the French government issued Ordinance (a government act having the force of a legislative action) no. 2014-559 dated May 30, 2014 relating to crowdfunding, with the stated aim of lifting some of the regulatory constraints hindering the development of crowdfunding in France, while maintaining sufficient investor protection. To this end, the ordinance addresses each of the three forms that crowdfunding typically takes, i.e., securities investments, loans and donations depending on the form of the requested funding.
First, in terms of securities investments, operators of websites matching the supply and demand of securities will need to seek registration as investment firms (as is already the case when an investment service occurs) or as crowdfunding advisers (conseiller en investissements participatifs). Qualifying entities seeking registration as crowdfunding advisers will need to be based in France, i.e., no passporting rights will be available to them. They will have to comply with a number of rules of good conduct, including: the presentation of risks, the performance of adequacy tests, transparency on inducements, rules on solicitation and anti-money laundering regulations. Further, a new exemption to public-offering rules is created where a number of criteria are met, notably that the value of the placement does not exceed a threshold to be set by way of secondary legislation during any 12-month period.
Second, in terms of crowdfunding by way of loans, the scope of bank monopoly rules whereby lending may be performed only by licensed institutions had to be revised. Pursuant to a new exemption to such rules, individuals (as opposed to legal entities) may, on a nonprofessional or otherwise commercial basis, extend no more than one loan per project. Interest rate charged is capped to the statutory interest rate further increased by five percentage points. Operators of websites matching the supply and demand of loans will have to seek registration as crowdfunding intermediaries (intermédiaires en financement participatif).
A significant number of issues are still to be set by way of secondary legislation, including amendment to the Securities Regulator (AMF) Rulebook, for the regime to become fully operative. We will monitor such clarifications.
The new regulatory framework is due to come into force on October 1, 2014 for the most part.
LAW ON UNCLAIMED BANKING ACCOUNTS AND LIFE INSURANCE CONTRACTS LEFT DORMANT HAS BEEN ADOPTED
The legislative proposal referred to in the first issue of the Update was adopted in final form on June 3, 2014. The new law clarifies the regime applicable to unclaimed banking account and life insurance contracts left dormant for a lengthy period of time. This legal initiative comes amid a number of enforcement actions being taken against insurance undertaking for alleged failure to conform to preexisting rules, which are substantially strengthened by the law. Lastly, an insurance undertaking has been fined EUR 10 million by the Enforcement Committee of the ACPR for failing to check the national register of natural persons ("RNIPP"), to search for beneficiaries and for the requirements relating to revaluations of policies after the policyholder's death. Further enforcement decisions are to be expected in this area.
Under the new rules, consultation of the RNIPP will have to be made annually. Institutions will be required to publish the list of dormant bank accounts and unclaimed life insurance policies. Credits to these accounts and unclaimed life insurance contracts will have to be transferred to a specific body (Caisse des Dépôts et Consignations) after a 10-year dormancy period (in most circumstances), the title of which will then pass on to the government after a 20-year period of time. The new law is due to come into force on January 1, 2016.
FRENCH GOVERNMENT EXTENDS RANGE OF FOREIGN INVESTMENTS SUBJECT TO GOVERNMENT PRIOR AUTHORIZATION
In response to the bid by General Electric to acquire the energy division of Alstom, the French Government issued Decree no. 2014-479 on May 14, 2014. The decree extends the range of foreign investments (whether by way of bid for the company, bid for part of the company or purchase of more than one-third of the stake in the company) requiring prior governmental authorization. In addition to sectors for which prior governmental authorization must already be sought—including military, cryptology, technology, defense and betting—activities relating to the supply of electricity, gas, oil or other energy resources, water, transportation networks and services, electronic communications networks and services, facilities, certain installations or works of paramount importance and protection of public health are captured.
REFINANCING OPTIONS AVAILABLE TO FINANCING COMPANIES ARE CLARIFIED
As mentioned in the first issue of the Update, financing companies (sociétés de financement) are regulated entities licensed to grant credit transactions but not to receive repayable funds from the public. The inability to receive repayable funds from the public makes refinancing more challenging. Pursuant to a Decree dated December 12, 2013, financing companies may refinance themselves through the issue of debt securities issued by way of private placement to qualified investors or with a denomination per security in excess of EUR 100,000. Decree no. 2014-511 dated May 22, 2014 went on to clarify that these debt securities include commercial paper (billets de trésorerie) and French medium term notes (BMTN).
CROSS-BORDER MARKETING OF ALTERNATIVE INVESTMENT FUND IS CLARIFIED
Pursuant to Decree no. 2014-485 dated May 14, 2014, conditions for cross-border marketing of Alternative Investment Funds ("AIFs") is clarified, whether on the basis of the passport or not (in the latter case pursuant to Article 42 of the Alternative Investment Fund Managers Directive).
In a number of instances, the marketing of AIFs was subject to the AIFM complying with rules applicable to French asset managers, whether arising from the AIFMD or French law. This criterion was extremely broad and has been narrowed to compliance with the provisions set out in the AIFMD only.
POSITIONS AND GUIDANCE FROM AUTHORITIES
SECURITIES REGULATOR HAS BEEN CONSULTING ON CHANGES TO TENDER OFFER RULES SET OUT IN ITS RULEBOOK
Further to legislation no. 2014-384 dated March 29, 2014, which overhauled a number of tender offer rules, the French Securities Regulator (the "AMF") has been consulting on proposed changes to its rulebook to adjust it to the revised legislative action.
First, the law introduced a mandatory acceptance condition set at 50 percent of the share capital or voting rights, with the result that if a bid fails to fulfill this condition, it will lapse and the tendered shares will be returned to their holders. As a result of this change, it is proposed that the AMF Rulebook set out exemptions from the mandatory acceptance condition, rules regarding suspension of voting rights if a mandatory bid lapses and restrictions on dealings rules during the offer period for a bid subject to the mandatory acceptance condition.
Another mandatory bid triggering event—where a shareholder holding between 30 percent and 50 percent of a company's capital or voting rights raises that stake by more than 2 percent over 12 consecutive months—was lowered to 1 percent, which required coordination in the AMF Rulebook.
The greater role allocated to the works council in the takeover bid process implied adjusting the timeframe of tender offers and disclosure of market-sensitive information.
Finally, the legislative action put an end to the statutory board passivity rule set out in the Takeover Directive during the offer period, which has been implemented into the proposed AMF Rulebook.
Comments for this consultation are now closed, and the AMF should issue its amended Rulebook shortly.
ENFORCEMENT
DATABASE CONSULTATION PRIOR TO EXTENDING CONSUMER LENDING IS INCREASINGLY SENSITIVE
As mentioned in the second issue of the Update, the issue of recording loans in a register is highly sensitive in France. A tentative draft provision aiming at creating a consumer credit register recording all consumer credits was ruled contrary to the Constitution on the basis that it would disproportionately encroach on privacy rights. As a result, the existing National Register of Household Credit records only debt repayment incidents meeting a number of criteria. Consulting such register for the purposes of assessing borrowers' creditworthiness is mandatory for credit institutions engaging in consumer lending in France. Failure to comply with this requirement results in forfeiture of the creditor's entitlement to contractual interest and automatic entitlement to interest at the statutory rate increased by five percentage points in the vast majority of cases. This five-point margin may paradoxically result in the amounts that the creditor is likely to receive following application of the penalty being actually higher than those that it could have received if it had complied with its contractual obligations. The Court of Justice of the European Union ruled on March 27, 2014 in Case C-565/12 that in such instances, the penalty is not genuinely dissuasive.
In addition, on April 28, 2014, the French Data Protection Authority issued a notice to comply with applicable regulations against a bank for recording in the National Register of Household Credit repayment incidents that do not meet the requirements set out in French law and for maintaining record of repayment incidents beyond the legally prescribed period of time despite repayment of their debt.
FRENCH GOVERNMENT CLARIFIES ENFORCEMENT MANDATE OF SECURITIES REGULATOR
The French Securities regulator may conduct inspections if it has grounds to suspect that entities committed market abuse or investigations to ensure that regulated intermediaries comply with the regulations applicable to them. The regulatory framework relating to inspections was less detailed than that relating to investigations. Such imbalance is now rectified with Decree no. 2014-498 dated May 16, 2014.
SECRETARY GENERAL OF SECURITIES REGULATOR PROMOTES EXPANSION OF SETTLEMENT PROCEEDINGS
As an alternative to enforcement proceedings, the AMF is empowered to initiate a settlement procedure. Under current rules, the right to settle may be offered only in the case of a failure to meet professional obligations by market intermediaries, including investment firms or asset managers. In an interview dated May 22, 2014, AMF Secretary General Benoît de Juvigny promoted an expansion of the scope of the right to settle cases to include minor defaults in financial information or misselling of financial products.
Under the settlement procedure, the Board of the AMF sends a proposal to enter into negotiations.
If the settlement negotiations succeed, the settlement agreement is approved by the Board of the AMF and then ratified by the Enforcement Committee.
Philippe Goutay
Paris
+33.1.56.59.46.58
pgoutay@jonesday.com
Anselme Mialon
Paris
+33.1.56.59.39.39
amialon@jonesday.com
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. The electronic mailing/distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the author and do not necessarily reflect those of the Firm.
