United States: French Financial Institutions Litigation & Regulation Update

Last Updated: March 26 2014
Article by Philippe Goutay

Welcome to the first edition of the French Financial Institutions Litigation & Regulation Update of the Paris Office of Jones Day.

This will bring to your attention the latest news in the financial services field in France in a short format (promised, not more than three pages!) and will be published every month or every two months as required by regulatory developments.

It will break down into three headings: Legislation and Regulation, Positions and Guidance from Authorities, and Enforcement. Specific issues that require elaboration exceeding the format of this Update will be discussed in a separate Jones Day Commentary.

We welcome any feedback you may have on this publication and would be delighted to add names of any of your colleagues to our distribution list.

LEGISLATION AND REGULATION

IMPLEMENTATION OF EUROPEAN LEGISLATION AND REGULATION

Legislative Implementation of CRD IV Package Under French Law

The French government released on February 20, 2014 Ordinance (government decree but having the force of a legislative action) no. 2014-158. The purpose of such ordinance is to finalize the legislative implementation of the CRD IV Package into French law. The Ordinance is presented in a separate Jones Day Commentary.

EU Commission's Proposed Approach to Banking Reform

After several EU jurisdictions (in particular Germany, the United Kingdom, and France) have taken legislative steps toward structural reforms affecting banks, the EU Commission has released a proposal for a Regulation on structural measures improving the resilience of EU credit institutions. This Proposal is discussed in a separate Jones Day Commentary.

FRENCH LEGISLATION AND REGULATION

Legislative Proposal on Unclaimed Banking Account and Life Insurance Contracts Left Dormant

A legislative proposal was released on November 13, 2013 and is currently under discussion before parliament. This would result in substantial change to the regime applicable to unclaimed banking account and life insurance contracts left dormant for a lengthy period of time. Under current rules, cash, securities, or life insurances that have been unclaimed for 30 years are transferred to the government. Under the new rules, banks and investment firms would be required to survey dormant accounts, to provide adequate information to accountholders, and to cap fees that may be charged to the account. Broadly, accounts and life insurance contracts will have to be transferred to a governmental body (Caisse des Dépôts et Consignations) after a 10-year period of dormancy, the title of which will then pass to the government after a 20-year period of time. The legislative history of the proposal reveals that some undertakings are currently facing severe sanctions by the banking regulator for failing to comply with applicable rules relating to dormant life insurance contracts (in particular in respect of actions to be taken to search for beneficiaries). If enacted, the legislative proposal is expected to come into force on January 1, 2016.

Capital Requirements Regime and Refinancing Options for Financing Companies Are Clarified

Financing companies (sociétés de financement) are regulated entities licensed to grant credit transactions but not to receive funds from the public. As such, they do not qualify as credit institutions (which implies, by way of example, that they are not eligible for ECB refinancing) but as financial institutions for the purposes of the Capital Requirements Regulation (no. 575/2013). Secondary legislation setting out the capital requirements regime applicable to financing companies was released on December 23, 2013. Broadly, the secondary legislation extends the application of the capital requirements regime set out for credit institutions to financing companies except where they are expressly disapplied, i.e., liquidity and coverage requirements for the most part.

Further, secondary legislation was taken on December 12, 2013 to the effect of limiting the circumstances in which financing companies may refinance themselves through the issue of debt securities without being deemed to be collecting funds from the public (which latter activity is barred to financing companies). This mostly covers 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.

POSITIONS AND GUIDANCE FROM AUTHORITIES

ESMA Letter to the Commission on the Classification of Financial Instruments as Derivatives

On February 14, 2014, ESMA published a letter sent to the Commission, in which ESMA invites the Commission to clarify the definitions of FX derivatives and commodity forwards that can be physically settled, in order to bring consistency to the application of EMIR across Member States. ESMA has observed that characterization of these contracts differs, in particular as to the settlement period beyond which a contract is a financial contract and no longer a commercial contract. Hence, France considers this settlement period to be of three days, where other jurisdictions see it of seven days, in particular for FX contracts. Interestingly, and unless the EU Commission provides for clarification (by which means is not mentioned), ESMA considers by anticipation that the settlement period will be of seven days for FX contracts, meaning that for contracts settling within seven days, EMIR will not apply. However, this would not prevent Member States from considering contracts not meeting this criterion as financial instruments for purposes other than EMIR, such as MiFID/MiFIR or MAD/MAR. A wider consistency relating to all EU legislation referring to financial instruments would be welcomed, however.

AMF Consults on Best Execution

On December 18, 2013, AMF, the French securities regulator, issued a consultation paper on best execution. The consultation paper relies for the most part on the document entitled "Best Execution under MiFID—Questions & Answers" released in 2007 by the then CESR. It focuses on a number of issues covered by the CESR Q&A such as seeking clients' prior approval to execute orders outside a regulated market or MTF, review and monitoring of the execution policy. In addition, particular focus is placed on best selection requirements applicable to investment firms that transmit or place orders with other entities for execution and factors that may be taken into account in determining the execution policy. Emphasis is finally placed on payment by trading platforms for order flow undisclosed arrangements and CFDs trading. The consultation closed at the end of January 2014, and the AMF should provide its feedback in the near future.

French Advertising Authority Makes Specific Recommendation on Leveraged and Atypical Investments

On January 28, 2014, ARPP, the French advertising authority, issued a recommendation on advertising financial and investment products and related services. In addition to reminders as to past performance or experience arising under MiFID, the ARPP places specific focus on two kinds of investments, namely leveraged investments and atypical investments (covering such diverse underlyings as gold, precious metals, or fine wines). The advertising of such products must clearly identify the promoter of the investment and be balanced between the presentation of performance and the risk inherent to the investment.

ACPR Clarifies Status of Bitcoin

On January 29, 2014, the ACPR, the French banking regulator, issued a warning against the risks of fraud and money laundering arising from buying, holding, or trading virtual currencies such as Bitcoins, just as the EBA did a few weeks earlier. However, the ACPR also stated that the exchange in France of Bitcoins against a currency that is legal tender entails a transfer of funds from the payer to the payee, hence requiring a license as payment services provider. The ACPR would like to lobby so that this position is written into the Payment Services Directive that is currently being revised.

ENFORCEMENT

Paris Court of Appeal Characterizes Conversion of Bitcoins into Legal Tender Currency as Payment Services

In this case, a bank closed a bank account of one of its clients when it found out that the accountholder used the account to receive funds securing transaction entered into on a Bitcoin currency exchange market. One of the arguments put forward by the bank for closing the account used by the accountholder is that the account actually qualified as a payment account within the meaning of the Payment Services Directive, which may therefore be operated only by a true payment services institution. This argument was upheld by the Paris Court of Appeal.

AMF Issues Warning Against Scammers Who Pose as AMF Officials

On March 3, 2014, the AMF issued a warning on scammers who pose as AMF officials to extort funds from corporates by way of fees that would be due as part of financial transactions but that would require not to be disclosed as a result of inside information regulations. More than a dozen corporates have reported this kind of fraud to the AMF. The AMF therefore recommends that each of the suspicious letters that uses AMF letterhead be checked with the management of the recipient to confirm if the alleged financial transaction did occur. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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