The French Parliament recently voted to enact legislation that seeks to address many of the perceived causes of the financial crisis and its effects on the financial system. The Financial and Banking Regulation Law (Loi de Régulation Bancaire et Financière) of October 22, 2010 (the "Law") contains six main measures: (1) creation of the Council of Financial Regulation and Systemic Risk (Conseil de Régulation Financière et du Risque Systémique—the "Council");1 (2) enhancement of the powers of the Financial Markets Authority (Autorité des Marchés Financiers—the "AMF"—French regulator); (3) implementation of a new financial supervisor authority; (4) regulation of derivative instruments and short sales; (5) regulation of credit rating agencies; and (6) reinforcement of the regulation of providers of financial products and services.
Creation of the Council of Financial Regulation and Systemic Risk
The Council will be a public authority composed of eight members, including representatives of the Banque de France, the AMF and the Autorité des Normes Comptables (Standards Accountant Authority). The Council's role will be to: ensure cooperation and information exchange between the different financial authorities in France, monitor the financial markets, evaluate systemic risk, facilitate coordination between international and European standards, and express any opinion or position that it may consider relevant. The Council was created to address the causes and effects of the financial crisis and ensure that French measures are consistent with the European and U.S. responses to the financial crisis. The Council will have no power to make decisions, but may advise the French government on decisions.
Enhancing the Powers of the AMF
The Law contains several provisions that enhance the authority of the AMF. The French regulator aims to protect investors and ensure that market information is accurate and the market functions properly. In addition, the AMF is now required to take into account European standards and practices and cooperate with other European regulatory authorities. In the case of exceptional circumstances threatening the stability of the financial system, the president of the AMF will be authorized to restrict the terms of trading of financial instruments for a maximum of 15 days. As a consequence, in the case of a systemic risk, the AMF may impose restrictions on transactions in certain financial instruments. The new regulations also reinforce the AMF's authority to impose penalties. In particular the AMF's General Secretary Assistant (Secrétaire General Adjoint) can determine whether to initiate investigations; a member of the AMF's College (internal committee of the AMF, with several powers of decisions) has been authorized to attend the meetings of the Commission des Sanctions (AMF's Penalties Committee); penalties have been increased from €10 million to €100 million for corporations and from €1.5 million to €15 million for individuals; and the penalties will now be made public, except if the publicity of the decision may seriously affect financial markets or may cause disproportionate damage to the parties. One of the key provisions of the Law empowers the AMF to apply a settlement procedure in case of non-compliance with the regulations. The parties and the AMF's President also have the right to appeal the decisions of the AMF Commission des Sanctions (an independent committee within the AMF, separate from AMF's department in charge of inquiries and prosecutions).
Implementation of a Prudential Supervisor
The Law ratifies the creation in January 2010 of the French entity called Autorité de Controle Prudentiel (the "Authority") and makes some changes to its system. The Authority, which resulted from the merger of four regulatory entities in the banking and insurance field, was created in order to preserve the stability of the financial system; protect clients, investors and insured persons; and regulate professionals under its authority. Its main role is to supervise the activities of banking and insurance in France. The major changes effected by the Law relate to the composition of the Authority (an increase from 16 to 19 members), the penalty process (e.g., increase of the penalty amounts, establishment of a rapporteur in charge of the investigation procedure, and public disclosure of sanctions) and granting right to the Parliament to conduct inquiries.
Regulating Derivatives Instruments and Short Sales
French law has traditionally punished "market abuses" (e.g., insider transactions, market price manipulation and misinformation) relating to financial instruments traded on regulated markets The new regulation extends the AMF's authority to include financial instruments "related to one or several financial instruments traded on a regulated market." As a consequence, market abuse involving derivatives instruments will be punishable; this provision applies in particular to credit default swaps.
In response to criticisms of short selling practices during the recent financial crisis, a new provision in the French monetary and financial code will prevent a seller from short selling financial instruments traded on a regulated market if the seller does not have for its own account sufficient financial instruments to cover the seller's position or if the seller has not taken necessary measures with a third party to have "reasonable assurance" for the seller's ability to deliver the financial instruments. In addition, delivery times have been reduced.
Although this restriction does not apply to financial instruments that are not traded on a regulated market or to buyers, the government and the AMF may, in the future, provide for comparable restrictions to cover such instruments and cover buyers.
Monitoring Credit Rating Agencies
In light of the role played by credit rating agencies in the recent crisis, the Law is designed to increase regulation of such agencies. As a consequence, the AMF will be the competent authority for the registration and supervision of such agencies. In addition, new article L.544-5 of the French monetary and financial code establishes a mechanism of civil liability (responsabilité délictuelle et quasi-délictuelle) that applies to credit rating agencies in case of fault or negligent failure resulting in damages for their clients or third parties. Moreover, any clause excluding such liability is prohibited.
Reinforcing the Obligations of Professional Sellers of Financial Services and Products to their Clients
The Law has consolidated statutes regulating activities of various intermediaries involved in the provision of financial products and services. The Law covers, among others: intermediaries in banking transactions and payment services (intermédiaires en opération de banque et en services de paiement), financial investment advisors (conseillers en investissement; these are not professionals regulated as investment services providers – prestataires de services d'investissements, or "PSI"), and tied agents (agents lies), by listing them as professionals subject to a common requirement to be registered. This list of professionals will be managed by the Agency for the Register of Insurance Intermediaries (Agence pour le Registre des Intermédiaires en Assurance, or "ORIAS"). ORIAS is in charge of verifying that theses professionals comply with applicable regulations.
Regulation of direct marketing activities (démarchage) has been expanded to a cover larger number of financial participants, including intermediaries in banking transactions and payment services and tied agents. In particular, tied agents are now allowed to directly market financial services to the public through any means, including telephone, email and direct contact at the clients' residences. In addition, the Law states that persons can now carry out direct marketing activities on behalf of banking and financial services providers, within the limits of the services, transactions and products for which the principal has been approved. These regulations are designed to increase professionalism and the responsibility of participants in the field of marketing financial services and products.
The Law is just one part of the French government's response to the financial crisis and the systemic risks that contributed to it. It is a first step in regulatory reform of the financial sector that, among other processes, will involve France's implementation of the EU's UCITS IV and AIFM Directives. However, any efforts made by the French authorities to significantly increase the level of regulation should be tempered by the need to avoid excessive constraints for professionals. In addition, the reforms should seek to reach a balance between the drive for regulation and the need to ensure Paris' competitiveness as a financial center.
1 Articles L.631-2 et seq. of the French monetary and financial code.
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