French Financial Institutions Litigation & Regulation Update, Issue 7
LEGISLATION AND REGULATION
ENABLING LEGISLATION AUTHORIZES A NUMBER OF BANKING, INSURANCE, AND MARKETS RELATED DIRECTIVES TO BE IMPLEMENTED INTO DOMESTIC LAW IN THE COMING MONTHS
Enabling legislation (Loi d'habilitation) no. 2014-1662 was adopted on December 30, 2014, allowing the government to enact a number of Ordinances (government acts having the force of legislative actions) aimed at implementing into domestic law several directives in the fields of banking, insurance, and markets. A deadline is supplied for each upcoming Ordinance, thereby providing a useful calendar for the implementation of the recent European legislations:
- The implementation of Banking Recovery and Resolution Directive no. 59/2014/EU was partially anticipated under French law by Law no. 2013-672 dated July 26, 2013, relating to the separation and regulation of banking activities; however, the French legislation, passed at a time when the directive was still under discussion, will be aligned with the Directive by the end of August 2015. Such provisions will also need to be extended to financing companies (sociétés de financement), i.e., a domestic status designed for undertakings licensed to extend credit and bar taking deposits within the same calendar.
- The Deposit Guarantee Schemes Directive no. 2014/49/EU will need to be implemented by the end of August 2015.
- Regulation no. 806/2014/EU on the resolution of credit institutions and investment firms will need to be implemented by the end of August 2015.
- Prudential requirements applicable to branches of credit institutions located outside the European Economic Area will be made compatible with Regulation no. 575/2013/EU on capital requirements by the end of May 2015.
- Directive no. 2014/17/EU on Mortgage Credits will need to be implemented by the end of May 2016.
- The Solvency II framework Directive (Directive 2009/138/EC) will need to be implemented by the end of December 2015.
- Directive 2013/50/EU amending the Transparency Directive will need to be implemented by the end of December 2015.
- The Central Securities Depositories Regulation no. 909/2014/EU will need to be implemented by the end of December 2015.
- The Markets in Financial Instruments Directive (2014/65/EU) will need to be implemented by July 3, 2016.
- The UCITS V Directive no. 2014/91/EU will need to be implemented by the end of May 2016.
SECONDARY LEGISLATION AMENDS INVESTMENT RULES OF INSURANCE COMPANIES
Decree no. 2013-717 of August 2, 2013, had expanded the list of eligible assets that insurance undertakings could use to cover their regulated commitments. This decree allowed insurance undertakings to indirectly invest in debt securities representing claims on private and public sector entities in European Union Member States with a maturity of two years and above through a new type of securitization vehicle.
Some considered that the reform did not go far enough in extending the range of eligible assets, however. Assets eligible for investment by insurance undertakings through such securitization vehicle are therefore further extended with Decree no. 2014-1530 and now include loans extended to European Union Member States, unlisted companies, or infrastructure projects. Entry into derivatives is also permitted by such securitization funds for the purposes of hedging interest rate of currency fluctuations or liquidity.
Finally, the form of securitization vehicle mentioned above may be invested in not only by insurance undertakings, as was the case under the initial decree, but also by mutuelles (complementary institutions) and institutions de prévoyance (savings institutions).
The new Decree has taken immediate effect.
POSITIONS AND GUIDANCE FROM AUTHORITIES
BANKING REGULATOR SETS OUT ITS RATIONALE FOR TREATING CASHING IN FUNDS ON BEHALF OF THIRD PARTIES AS REGULATED PAYMENT SERVICE
In the latest issue of its newsletter, the French banking regulator (the "ACPR") provided its rationale for classifying the cashing in of funds on behalf of third parties as a payment service, thus requiring the entity conducting such activity to get authorized as a payment services provider.
The ACPR recognizes that such classification has been criticized by the industry.
Treating the cashing in of funds on behalf of third parties, even on an ancillary basis, as a payment service implies that some marketplaces, crowding platforms, or Bitcoin exchanges need to become licensed as payment services providers.
The cashing in of funds on behalf of third parties would not trigger licensing requirements only in situations in which (i) the activity is conducted by the party providing the service in the course of its professional activity, and such activity is already regulated (such as lawyers, notaries, or real estate agents) or (ii) the payment instruments can only be used to acquire a limited range of goods and services or may only be used within a limited network.
The ACPR stresses that Payment services Directive foresees no exemption on the ground that the regulated activity is ancillary to the main nonregulated activity, but it states that it will apply these regulations in a proportionate fashion and will give stakeholders a reasonable timeframe to get licensed where required.
MADOFF CASE: FRENCH SUPREME COURT CONFIRMS JURISDICTION OF THE COURTS OF LUXEMBOURG OVER THE CLAIMS ISSUED BY A FRENCH INVESTOR AGAINST LUXEMBOURG BANK
On January, 7, 2015, the French Supreme Court confirmed the Court of Appeal's decision recognizing that the courts of Luxembourg had jurisdiction over the claims issued by a French investor against a Luxembourg bank acting as depositary of Luxalpha, a fund which had entrusted the management of its assets to Bernard L. Madoff Investments Securities LLC.
Under European Regulation n° 44/2001(CE) dated December, 22, 2000, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, a person domiciled in a Member State may, in another Member State, be sued in matters relating to tort, delict, or quasi-delict in the courts for the place where the harmful event occurred or may occur.
The claimant, an indirect victim of the Madoff Ponzi scheme, sued in France, the Luxembourg bank and a French bank having acted as intermediary for the purpose of transmitting the claimant's orders to invest in Luxalpha. Before the Court of Appeal, the Luxembourg bank had successfully raised the lack of jurisdiction of the French courts in that matter. The French Supreme Court confirmed that decision.
Indeed, it considered that the activities of the Luxembourg bank were necessarily held in Luxembourg. Moreover, it stated that the damage that may only be considered as the loss in value of Luxalpha's assets had also taken place in Luxembourg. Finally, the court stated that the place where the harmful event occurred could not be confused with the place where the claimant's assets were located.
FRENCH SUPREME COURT CLARIFIES THE LEGAL REGIME OF AN ACCOUNT OFFSETTING ARRANGEMENT
A bank's client was under a safeguarding proceeding subject to bankruptcy law. The bank filed a claim resulting from the net debit balance of the client's current account and sought to offset it with the counter-value of the client's financial instruments account. To support its claim, the bank claimed the connection (French legal concept of "connexité") existing between the two accounts resulting from an account offsetting arrangement ("convention d'unité de compte") entered into by the client.
Under French law, the order commencing a safeguarding proceeding automatically prohibits payment of claims arising prior to the issue of the commencement order, except offsetting payments of connected claims.
Every account opening agreement entered into by the client stipulated that all accounts, whatever their denomination, characteristics, or currency, formed branches of a sole and unique general account from which the bank could, at any time and without any formalities, claim the net balance resulting from their fusion.
The bank argued that the account offsetting arrangement created a connection between all accounts opened in the name of the client, which permitted offsetting between them to occur.
This argument was rejected by the Supreme Court, which considered on December 16, 2014, that the absence of fungibility between the accounts' items (cash in the current account and financial instruments in the securities account) excluded any offset between the accounts.
FRENCH ADMINISTRATIVE SUPREME COURT CONFIRMS SANCTIONS FOR UNLAWFUL CANVASSING
On November 28, 2014, the French Administrative Supreme Court (Conseil d'Etat) confirmed a sanction levied by the AMF Enforcement Committee against a French investment firm for unlawful canvassing with respect to unlisted tax exemption products and offer of securities to the public while failing to issue a prospectus.
On the first ground, investors were canvassed to invest in tax exemption products listed on Alternext Paris or the Free Market (Marché libre), which are not regulated markets. Because these products were not listed on the regulated market and did not give rise to a prospectus, canvassing was prohibited, unless targeted investors qualify as qualified investors within the meaning of the Prospectus Directive.
On the second ground, the investment firm had organized an advertising campaign that the AMF Enforcement Committee found characterized a public offering of securities, which would have required a prospectus to be filed with, and approved by, the AMF.
The €100,000 sanction levied by the AMF Enforcement Committee against the investment firm was therefore confirmed by the French Administrative Supreme Court.
POWER OF MANDATORY TRANSFER OF PORTFOLIO IN THE HANDS OF REGULATOR STRUCK DOWN AS UNCONSTITUTIONAL
Where the solvency or liquidity of an entity subject to the supervision of the ACPR is, or is likely to be, compromised or where the interests of its clients, insured parties, members, or beneficiaries are compromised, the ACPR may take precautionary action. It may, in particular, order the mandatory transfer of all or part of an insurance contracts portfolio from one entity to another without any due compensation.
This provision has been struck down by the French Constitutional Court, which considered that it caused a deprivation of private property without proper legal safeguard (allowing, for example, the insurance company to transfer the portfolio) or adequate and fair compensation.
As a consequence, the Court on February 6, 2015, struck down the relevant provisions as unconstitutional. Whether the French Constitutional Court could reach a similar decision and strike down provisions relating to bail in remains to be seen.
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