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French Financial Institutions Litigation & Regulation Update, Issue 5

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

Secondary Legislation Relating to Ring-Fencing Banking Law Is Nearing Completion

Implementation of French Law No. 2013-672 of July 26, 2013 on the separation and regulation of banking activities is progressing with the publication of an order ("arrêté") dated September 9, 2014.

The Order sets out requirements applicable to French institutions in which the book value of the assets corresponding to trading on financial instruments exceeds 7.5 percent of the balance sheet of the entity.

Such requirements relate to proprietary trading activities that are exempt from ring-fencing (provision of investment services to clients, clearing of financial instruments, hedging, intra-group investment transactions, sound and prudent management of the treasury, and market-making activities).

Among such requirements are the classification into mandates per desk of proprietary trading activities; such classification to be communicated to, and reviewed by, the French banking regulator (the “ACPR”); and enhancement of internal controls.

Special emphasis is placed on market-making, in relation to which institutions will need to notify (as from April 1, 2015) the ACPR of a number of qualitative and quantitative indicators.

Finally, when proprietary trading activities are segregated in a dedicated subsidiary, the group’s large exposure limit to this segregated entity shall be reduced to 15 percent of eligible capital until June 30, 2015 and to 10 percent of eligible capital as of July 1, 2015.

For institutions that are required to segregate their proprietary trading activities, such segregation will need to take effect by July 1, 2015.

Entry Into Force of Single Supervisory Mechanism Is Pending

Effective November 4, 2014, the European Central Bank (the “ECB”) will directly supervise the following institutions deemed significant: BNP Paribas, BPCE, Bpifrance (Banque Publique d’Investissement), Confédération Nationale du Crédit Mutuel, CRH—Caisse de Refinancement de l’Habitat, Crédit Agricole SA, HSBC France, La Banque Postale, Société Générale SA, and Société de Financement Local.

Less significant credit institutions will continue to be supervised directly by the ACPR. The ECB will, however, be entitled to oppose applications for authorization made by new entities and object to the acquisitions of qualifying holdings.

In a number of areas such as money laundering, consumer protection, and insurance, the ACPR will retain jurisdiction in respect of both significant and less significant institutions.

Crowdfunding Regulatory Framework Is in Force

As reported in a previous issue of this Update, an Ordinance dated May 30, 2014 had created a legislative framework for crowdfunding, while leaving a significant number of issues to be clarified by way of secondary legislation for the regime to become fully operative.

To this effect, Decree no. 2014-1053 dated September 16, 2014 regulates the regime applicable to crowdfunding investment advisors (conseillers en investissements participatifs), i.e., operators of websites matching the supply and demand of securities, as well as crowdfunding intermediaries (intermédiaires en financement participatif), i.e., operators of websites matching the supply and demand of loans.

Amounts and term of loans that may be offered via crowdfunding intermediaries and extended by individuals (not corporate entities) are capped at €1,000 per individual lender and per project if the loan bears interest or €4,000 per individual lender and per project if the loan does not bear interest. Maturity of loans may not exceed seven years, and borrowers may not borrow more than €1 million per project.

As for crowdfunding activity in the form of subscription of securities, which may cover unlisted securities the total amount of which calculated over a 12-month period is less than €1 million, the AMF Rulebook has been amended to include requirements applicable to crowdfunding investment advisors in terms of professional skills, business conduct and organization rules, and the process for seeking and obtaining an authorization.

The new regulatory framework has been in force since October 1, 2014.

POSITIONS AND GUIDANCE FROM AUTHORITIES

Financial Regulators Clarify Their Position With Respect to the MiFID Investment Service of Placing of Financial Instruments in the Context of Crowfunding

Further to the above, the AMF and the ACPR issued on September 30, 2014 a joint position clarifying the circumstances under which crowdfunding investment advisors (conseillers en investissements participatifs) would not be deemed to conduct the MiFID investment service of placing of financial instruments for the benefit of issuers. Provision of a MiFID investment service would require the operator to seek and obtain a full-fledged authorization as an investment firm, which authorization is much more burdensome than the authorization as a crowdfunding investment advisor.

Securities Regulator Talks Retail Investors Out of Forex Market Trading

The AMF has been alerted by a growing number of complaints from investors and many advertisements for investors to trade in the online foreign exchange (“forex” or “FX”) market. As a response, the AMF has begun an online publicity campaign to increase public awareness of the risks of trading in the forex market. According to the study, the percent of clients losing money for all providers combined is nearly 89 percent in four years, and the average loss per client was nearly €10,900 between 2009 and 2012.

In addition, the AMF found that numerous firms operate in France without the authorizations required to offer services to the public and is increasingly taking legal action to block access for internet users in France to certain sites offering services without proper authorization.

Banking Regulator Clarifies Its Resolution Strategy

The ACPR Board of Resolution has published guidance as to its resolution strategy. The document sets out the resolutions powers that were conferred on the ACPR Board of Resolution by Law No. 2013-672 of July 26, 2013 on the separation and regulation of banking activities (to be shortly strengthened further to ensure full consistency with the Bank Recovery and Resolution Directive).

The ACPR Board of Resolution discloses the approach that it will take to the resolution of banking groups, namely the Single Point of Entry, or SPE, approach (i.e., the exercise of power and application of resolution measures throughout the banking group with parent companies supervised in France, with host country authorities taking measures as needed to support the resolution actions of the resolution authority of the parent company) as opposed to the Multiple Point of Entry, or MPE, approach (i.e., the exercise by at least two different resolution authorities of resolution powers and instruments at the level of the different parts of the banking groups).

ENFORCEMENT

French supreme court Confirms that Compensation Payable for Damage as a Part of a Criminal Offense May Be Reduced as a Result of the Victim’s Own Negligence

A previous issue of this Update reported a decision dated March 19, 2014 from the French Cour de cassation whereby it had ruled that the award of civil damages in a criminal action had to be reduced in the case of failures from the claimant. The French Cour de cassation applied this case law in circumstances where an individual found guilty by the court of embezzlement, fraud, and forgery challenged his civil condemnation to fully compensate the victim bank on the ground that negligence in failing to detect the fraud should reduce the claimant's right to compensation. In the case at hand, no negligence was characterized from the bank, but the Cour de cassation reaffirmed that such negligence, where characterized, could have potentially reduced its right to compensation.

Securities Regulator Enforcement Committee Has Discussed the Applicability of the Ne Bis In Idem Principle to Market Abuses During Its Yearly Seminar

The AMF Enforcement Committee held its yearly seminar on October 7, 2014.

The seminar first organized a roundtable providing an overview of sanctions of enforcement decisions in Europe. This first roundtable provided an opportunity to discuss the compatibility of the French enforcement framework where the same conduct may be punished by both an administrative sanction and by criminal prosecution with recent case law held by the European Court of Human Rights (Grande Stevens and Others v. Italy). The applicability of the ne bis in idem rule (the right not to be tried or punished twice) to market abuses will be further discussed in our seminar held on November 6, 2014.

The AMF seminar then discussed the impact of new technology on enforcement decisions and the challenges posed by such technologies in detecting potential abusive conducts using automated trading as a case in point.

Securities Regulator Enforcement Committee Sanctions Individual for Market Manipulation

On October 1, 2014, the AMF Enforcement Committee levied a €75,000 sanction against an individual for market manipulation and a €250,000 sanction against an online broker for failing to detect such scheme.

The online broker is sanctioned for failure to comply with compliance arrangement requirements regarding in particular the necessity to have mechanisms for efficient detection and treatment of the manipulative behavior of the individual who engaged in a layering, i.e., submitted multiple manipulative orders and subsequently cancelled them.

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