Full report (PDF, 106KB)
In the summer of 2007, at the onset of the gravest financial crisis since World War II, the first priority of the French government was to try to limit the consequences for the French economy and to encourage the international community to draw lessons from the crisis and adopt measures to prevent a repetition. Following the 2009 G20 meeting in Pittsburgh, which decided to reinforce the regulation of financial systems, Christine Lagarde, France’s Minister of Economy, Finance, and Industry presented a draft law on banking and financial regulation to the French Council of Ministers on October 16, 2009.
The first part of the draft law reinforced the regulation of the banking sector and strengthened the mechanisms in place to prevent and/or manage any future crisis. The second part of the draft law set forth measures designed to improve financing channels to benefit companies, notably small- and medium-size companies, and individual households, in order to accelerate France’s economic recovery. A final version of the draft law was adopted by Parliament on October 22, 2010, and published in the OFFICIAL GAZETTE of October 23, 2010 as Law 2010-1249 of 22 October 2010 on Banking and Financial Regulation.
Title I of the Law: Reinforcing Supervision of Financial Players and Markets
Creation of the Council in Charge of Regulating the Financial Sector and Monitoring Systemic Risk
Article one of the Law creates the Council in Charge of Regulating the Financial Sector and Monitoring Systemic Risk (Conseil de la Régulation Financière et du Risque Systèmique) (CRFRS). The new body comprises eight members: the Minister of Economy as Chairman; the Governor of the Banque de France, who is also the Chairman of the Prudential Control Authority (Autorité de Contrôle Prudentiel (ACP); the ACP’s Vice Chairman; the Chairman of the Financial Markets Authority (Autorité des Marchés Financiers (AMF), an independent public agency tasked with investor protection; the President of the Autorité des normes comptables (Accounting Standard Authority); and three additional persons selected for their knowledge of the monetary, financial, or economic fields.
The CRFRS has three missions: (1) to monitor the cooperation and exchange of information among the institutions its members represent; (2) to review analyses of the situation of the financial sector and markets and evaluate any systemic risk, taking into account the opinions and recommendations of the European Systemic Risk Council; and (3) to improve cooperation in setting international and European standards applicable to the financial sector and issue opinions on the subject if necessary. To further its missions, CRFRS has the authority to question professionals from the financial sector. It will prepare an annual report for Parliament.
Increased Powers of the AMF
Article 2 of the Law gives the Chairman of the AMF, which is responsible for regulating and overseeing financial markets in France, the authority to take emergency measures in the event of exceptional circumstances threatening the stability of the financial system. These measures would restrict the negotiability of certain financial instruments for short periods, not exceeding in principle two weeks. The emergency measures may be extended for up to three months by the AMF Governing Board. After this three-month period, the Minister of Economy must issue a regulation for any further extension. Article 2 could have been used, for example, to prohibit short selling during the 2007 crisis.
The penalties that the AMF may impose for violation of financial laws and regulations is also increased, from €10 million to €100 million (about US$13.7-137 million) with respect to persons regulated by the AMF and those who commit market abuse, and from €1.5 million to €15 million (about US$2.06-20.6 million) with respect to individuals placed under the authority or acting on behalf of persons regulated by the AMF.
The AMF, in cooperation with the French Energy Regulation Commission (Commission de Régulation de l'Energie), will supervise and monitor carbon markets. The definition of regulated markets in financial instruments is amended to include carbon markets.
Monitoring of Credit-Rating Agencies
The Law establishes the AMF as the agency responsible for registering and monitoring credit-rating agencies in furtherance of a European Community regulation on the subject. Regulation 1060/2009 applies to credit-rating agencies registered in the Community and its principal aim is to protect the stability of financial markets and investors.
In addition, the Law sets forth a specific liability regime enabling both clients and third parties to claim compensation from the abovementioned credit-rating agencies for losses or damages resulting from non-compliance with their obligations as defined under Regulation 1060/2009. The applicable law and the competent jurisdiction to determine damages will be that of the country where the damage occurs and not that of the credit-rating agency’s seat or registered office. Furthermore, any contractual agreement made in advance of a dispute relating to Regulation 1060/2009, giving exclusive competence to a jurisdiction situated outside the EU, in a situation where French courts would otherwise have been competent, will be null and void. Finally, clauses excluding the liability of the abovementioned credit-rating agencies are prohibited.
Implementation of the Prudential Control Authority
The Law ratifies Executive Ordinance 2010-76 of January 21, 2010, which established the Prudential Control Authority (Autorité de Controle Prudentiel) (ACP). This new administrative authority resulted from the merger of four approval and monitoring authorities of the banking and insurance sectors. The ACP is in charge of ensuring consumer protection, promoting financial stability at the national and EU levels, and facilitating French influence on international negotiations on the reform of financial regulation. The ACP will guarantee the implementation of the restrictions on bank bonuses decided on by the G20; banks and insurance companies are required to establish remuneration committees that will examine the remuneration of market operators. In addition, the ACP will check bank charges and will be able to monitor compliance – commitment by commitment – with the commitments undertaken by the banks within the framework of the Financial Sector Consultative Committee.
Transposition of EU Directives
The Law authorizes the government to transpose into national law within six months of its promulgation, by means of executive ordinances, the provisions of the following directives of the European Parliament and of the Council:
- Directive 2009/110/ECof September 16, 2009 on the taking up, pursuit and prudential supervision of the business of electronic money;
- Directive 2009/65/ECl of July 13, 2009, on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS); and
- Directive 2009/44/EC of May 6, 2009, amending Directive 98/26/EC on settlement finality in payment and the securities settlement system and Directive 2002/47/EC on financial collateral for linked systems and credit claims.
Regulation of Derivative Markets and Naked Short Sales
An investor selling financial instruments (securities and options, forwards, swaps, etc.) is prohibited from issuing a sale order unless he holds in his account the financial instruments he is selling or he has taken the necessary measures to ensure that he will be able to deliver such financial instruments on the settlement date. The settlement date, which, under the current rule is three trading days after the sale, will be reset at two trading days once an equivalent harmonization regime is implemented at the EU level.
Improvement of the Governance of Risk in Companies
The Law contains provisions aimed at improving the management of risk in regulated entities such as credit institutions and insurance and re-insurance companies by requiring that a specialized committee monitor the risk management policy, procedures, and systems of the entity.
Reinforcement of Financial Professional Obligations to Clients
The last chapter of Title I reinforces the obligations of financial intermediaries to their clients. The Law first clarifies the concept of banking and financial solicitation (démarchage bancaire et financier). Professionals in the financial field engaged in solicitation activities “may only act on behalf of their principal and within the limits of the services, operations, and products for which their principal is authorized”. The Law defines banking intermediaries (intermédiaires en operations de banque et en service de paiement) and sets forth their regulatory regime. Their services include “introducing, presenting, or assisting in the conclusion of banking operations or payment services or carrying out any work or advice preliminary to the completion of such banking or payment services”. Finally, all financial intermediaries will be required to register in one single register that consumers will be able to consult.
Title II: Promotion of Economic Recovery
Reform of the Procedure for Mandatory Tender Offers
The Law reforms the procedure for mandatory tender offers to increase the protection of shareholders and prevent “rampant” takeovers. To achieve this goal, the Law first amends the definition of “parties acting in concert” contained in article L. 233-10 of the Commerce Code. The Law provides that parties “are considered acting in concert …[if they] entered into an agreement with a view to acquire, transfer, or exercise voting rights, to implement a common policy in relation to the relevant company, or to obtain the control of the company”.
To increase transparency, voting rights acquired by way of temporary transfers of shares that represent more than 0.5% of the voting rights in a company having its registered seat in France and whose shares are admitted to trading in the EU or EEA must be disclosed three days before a shareholder meeting to the company and to the AMF. If this requirement is not met, the voting rights associated with the shares will not count, not only for that meeting but also for any other shareholder meeting until the re-sale of the shares.
The Law also decreases the threshold that triggers the obligation to launch a mandatory tender offer from one-third (i.e., 33%) to 30% of the shares or voting rights. It provides that “any person or legal entity, or shareholder in a company whose seat is located in France and whose shares are listed in France or in another EU or EEA Member State, acting alone or in concert within the meaning of article L. 233-10 of the Commerce Code, which happens to hold, directly or indirectly, more than 30% of the shares or voting rights, or to hold, directly or indirectly, between 30% and 50% of the shares or voting rights of a company, and who in less than 12 consecutive months, increases its share- or voting-rights holding by at least 2% must immediately notify the AMF and file a draft mandatory tender offer procedure”.
The Law defines the method of calculation of “fair price” in regard to mandatory tender offers. It also introduces new procedures regarding these offers that only apply to small- and medium-size companies. The Law authorizes the government to transpose into national law by way of an executive ordinance a European Parliament directive on the exercise of certain rights of shareholders in listed companies.
Improvement of Insolvency Law for Companies Facing Financial Difficulties
The new Law introduces an “accelerated financial safeguard” procedure that may be triggered under certain circumstances; the debtor must not be insolvent, must face insurmountable difficulties, and must meet certain thresholds (involving turnover or the number of employees). The procedure will be available to a debtor that has reached an out-of-court restructuring arrangement with a majority of its financial creditors and/or bondholders only. The arrangement does not include suppliers of services or goods. The debtor will be able to impose this arrangement on financial creditors who refused to take part in the restructuring through a summary court proceeding. The court must decide within one month from the opening of the accelerated financial safeguard procedure whether or not to approve the arrangement.
Credit insurers will have access to the Fichier Bancaire des Entreprises(Corporate Banking Database, FIBEN) under certain conditions. All companies recorded in the database receive a rating based on their ability to meet their financial commitments.
The Law creates a new type of covered bonds called obligations de financement de l’habitat (home finance bonds) that are designed to facilitate the refinancing of home loans. The bonds will be issued by a new category of credit institutions (societés de financement de l’habitat) whose “exclusive purpose will be to grant or finance home loans and to issue home finance bonds within the conditions defined by a decree”.
This article summarizes the most important features of the very complex Law on Banking and Financial Regulation. Christine Lagarde welcomed the Law’s publication, noting that it implements the G20 decisions at the national level and places France in “the vanguard of the radical reform of the financial system,” at a time when the French presidency of the G20 is close at hand.
Prepared by Nicole Atwill
Senior Foreign Law Specialist
 For more on the G-20 Pittsburgh Summit, see The Pittsburgh Summit: Key Accomplishments, THE PITTSBURGH SUMMIT 2009, http://www.pittsburghsummit.gov/resources/129665.htm (last visited Dec. 2, 2010).
 Id. art. 6.
 Id. art. 9.
 Id. art. 10.
 (Regulation (EC) 1060/2009 of the European Parliament and of the Council of 16 Sept 2009 on Credit Rating Agencies, 2009 OFFICIAL JOURNAL OF THE EUROPEAN UNION [O.J.] (L302) 1, available at EUROPA, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:302:0001:0031:EN:PDF (external link)
 Id. arts. 10 & 11.
 Id. arts. 12-23.
 Directive 2009/110/EC of September 16, 2009, 2009 O.J. (L267) 7, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:267:0007:0017:EN:PDF (external link)
 Directive 2009/65/EC of July 13, 2009, 2009 O.J. (L302) 32, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:302:0032:0096:en:PDF (external link)
 Directive 2009/44/EC of May 6, 2009, 2009 O.J. (L146) 37, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:146:0037:0043:EN:PDF (external link)
 Id. art. 27.
 Id. arts. 29-35.
 Id. art. 36.
 Id. arts. 53-55.
 Id.art. 56; Directive 2007/36/EC of the European Parliament and of the Council of July 11, 2007 on the exercise of certain rights of shareholders in listed company, 2007 O.J. (L184) 17, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:184:0017:0024:EN:PDF (external link)
 Id. arts. 57 & 58.
 Id. art. 59.
 Id. art. 73.
 (Press Release, Ministère de l'Économie, des Finances et de l'Industrie, 23 octobre 2010 - Christine LAGARDE: “Avec la publication de la loi de régulation bancaire et financière, la France tourne le dos a la finance deregulee” [23 October 2010 – Christine LAGARDE: “With the publication of the Law on Banking and Financial Regulation, France is turning its back on deregulated finance”], http://www.economie.gouv.fr/discours-presse/discours-communiques_finances.php?type=communique&id=4708&rub=1 (external link)
Last Updated: 01/22/2015