LEGISLATION AND REGULATION

Provisions Applying to French Branches of Non-EU Credit Institutions Are Revised 

Pursuant to Article 47(1) of CRD IV, Ordinance no. 2015-558 dated May, 21, 2015 amended with immediate effect the provisions applying to French branches of non-EU credit institutions. 

The Ordinance deals with the authorization, regulatory capital requirements, and governance of branches of non-EU credit institutions. For each of these issues, the authorization or the exoneration from otherwise applicable requirements is contingent on the demonstration that the regulation or the supervision of the home country of the credit institution is deemed to be equivalent to French regulations.

In addition, non-EU credit institutions wishing to set up a branch in France will need to demonstrate that the credit institution will carry out supervisory duties over the local branch that are equivalent to the supervisory duties that French law requires from the board of directors and the general assembly over a French credit institution. Local branches that have already been authorized under former rules have an 18-month period to certify that the credit institution carries out supervisory duties over the local branch that are equivalent to the supervisory duties that French law requires from the board of directors and the general assembly over a French credit institution.

The Ordinance will be further discussed in a Commentary to be published shortly.

Secondary Legislation Completes Implementation of Solvency II

As previously reported, the implementation of Solvency II into French law (applicable as from January 1, 2016) started with Ordinance no. 2015-378 of April 2, 2015. Decree no. 2015-513 of May 7, 2015 and an Order of May 7, 2015 continue the implementation exercise. Among the many issues addressed, the list of assets and investments eligible as a cover for insurers' regulated commitments currently set out in the French insurance code will, from January 1, 2016, apply only to insurers that do not meet the criteria of size, activity, or group affiliation provided under Solvency II. Investment restrictions provided by Solvency II will apply to other insurers.

Secondary Legislation Further Adjusts French Law to the Single Supervision Mechanism 

As previously reported, the Single Supervision Mechanism took effect in France in November 2014, meaning that since this date, the European central Bank ("ECB") has directly supervised significant credit institutions while less significant entities continue to be supervised directly by the localAutorité de Contrôle Prudentiel et de Résolution ("ACPR"), with the ECB having a number of direct supervisory powers. 

Decree no. 2015-564 of May 20, 2015 sets out cooperation mechanisms between the ECB and the ACPR in respect of authorizations to be granted or withdrawn or the applications made by those who wish to acquire a qualifying holding in a credit institution. 

POSITIONS AND GUIDANCE FROM AUTHORITIES

Position Limits and Reporting on Commodity Derivatives to Take Effect Next Month

Beyond providing for a French regime of banking separation, French Law no. 2013-672 of July 26, 2013 had sought to anticipate MiFID 2 on a number of issues. Among such issues, starting from July 1, 2015, the Autorité des Marchés Financiers ("AMF") will be empowered to impose position limits on commodity derivatives traded on a French regulated market and CCP cleared.

To such effect, the AMF Rulebook was amended through an order of May, 5, 2015. The AMF also issued an instruction (DOC-2015-04) dated May 22, 2015 setting out the positions limits regarding each type of agricultural commodity, the positions reporting, and the reporting publication.

The new regulation provides that a person cannot build a long or short position on agricultural commodity derivatives exceeding the limits imposed by the AMF subject to some exemption in certain circumstances. Please note that these requirements will likely need to be adjusted by 2017 when MiFID 2 enters into force.

ENFORCEMENT

Members of the Securities Regulator and the Enforcement Committee Issue Proposals on Dual Enforcement of Market Abuses

As previously reported, recent case law requires amending rules providing for the dual enforcement of market abuses both by the enforcement body of the securities regulator and criminal courts. 

To this effect, a number of representatives from both the securities regulator and the enforcement body of the securities regulator issued proposals on amendments of the law on May 19, 2015. The report notes that cases where a market abuse has been sanctioned both administratively and criminally are relatively unusual (only 17 have been recorded over the last 10 years). 

The report then considers the various options at hand to conform French law. The enforcement of market abuses is regulated by European legislation, including the recast Market Abuse Directive, which requires the market abuses to be criminally punished. Deletion of criminal punishment has therefore not been considered an option, and depriving the enforcement committee of its jurisdiction to punish market abuses was not considered appropriate. 

Instead, the report proposes that the authority contemplating initiating proceedings should be required to notify the other authority of its intent. This notification would then open a two-month period during which neither authority may take action, such period being designed to find an optimal allocation of matters between the criminal authority and the securities regulator. At the end of this two-month period, three options will be available: (i) where both authorities agree that the conditions applicable to the crime are met, the criminal authority will pursue proceedings and the securities regulator will abstain from proceedings; (ii) where both authorities agree that the conditions applicable to the crime are not met, the securities regulator will pursue proceedings; and (iii) where the two authorities have not been able to reach an agreement (i.e., think they are each authorized to pursue their own proceedings, which should be very rare), the report proposes that either only the faster authority should initiate proceedings or that a joint committee should discuss which of the two proceedings to pursue.

Court Finds Swap Agreement and Underlying Lease Agreement Are Not Severable 

In a decision dated January 20, 2015, the Paris Court of Appeal confirmed an earlier decision held by a lower court in a case involving a floating rate lease agreement and a swap contract. 

Both agreements were proposed by the same bank. The swap agreement was designed to cover the interest rate risk arising from the floating rate lease agreement. 

The borrower agreed to both agreements and proceeded with the performance of the swap agreement. The borrower had given its preliminary consent to the agreement but never gave the required notarized consent. 

The borrower then refused to make the payments due under the swap agreement on the ground that the swap agreement was null and void due to the absence of consideration (cause) as a result of the invalidity of the lease agreement. The bank required performance of the swap agreement on the ground that the swap agreement was severable from the lease agreement. 

On these two issues, the Paris Court of Appeal confirmed the decision held by the lower court. The Court of Appeal confirmed that the requirement for the swap agreement to have proper consideration (cause) is to be assessed at the time of entry into that the swap agreement. At the time of entry into the swap agreement, consideration did exist due to the existence of the lease agreement. The Paris Court of Appeal further confirmed that the swap agreement was not severable from the lease agreement; the lower court rightly noted that the borrower was offered the choice between a fixed rate lease and a floating rate lease, and in the latter case, a swap agreement was offered and agreed to and the notional amount of the swap agreement was the same as the amount due under the lease. As a result of the two agreements not being severable, the swap agreement became invalid like the lease agreement.

Securities and Banking Regulators Review Online Marketing of Financial Products  

The Joint Unit of the ACPR and the AMF has published its yearly report focusing on the distance marketing of financial products. The result of the controls conducted by the Joint Unit reveals heterogeneous practices. This has prompted the Joint Unit to set up a working group covering the assessment of the profile of the customer, the adequacy/appropriateness test, the obligations of advice, the conditions for opening an account, and the processes for marketing financial product and executing orders.