Prudential regulationi Relationship with the prudential regulator
Since 4 November 2014, the prudential supervision of a credit institution is handled by the ECB or the ACPR, depending on whether the institution is qualified as a significant entity or a less significant entity. In addition, the AMF has investigative and jurisdictional powers with regard to financial activities.Supervision by the ACPR
The ACPR carries out supervision of banks mainly in two ways: off-site monitoring and on-site inspections.
Off-site monitoring is based on an in-depth examination by the ACPR of accounting and prudential filings, which are usually submitted quarterly, along with internal audit reports filed once a year, and on regular contact with the senior managers of credit institutions. The ACPR adopts a different approach when dealing with large credit institution groups, based on a structured programme of enhanced supervision meetings, in addition to dealing with specific issues, overseeing the implementation of recommendations made following on-site inspections and periodic meetings with financial departments and the departments in charge of measuring and monitoring risks, particularly when quarterly earnings figures are published. Moreover, the ACPR may request at any time that a credit institution provide it with any supplemental information. Banks are also required by law to advise the ACPR promptly of any fact or decision that may constitute a breach of existing regulations, and which is likely to have a significant effect on the financial situation, profits or assets of the bank.
ACPR on-site inspections are designed to ensure that the information disclosed by banks accurately reflects their situation. The ACPR usually carries out a general inspection every one or two years. In addition to these routine inspections, if deemed necessary on the basis of a review, the ACPR also carries out more specific inspections on targeted risks or business segments. For more transparency, the ACPR has compiled in a charter rules governing the inspection process and the rights and obligations of the persons checked as well as of the controllers.
Following its off-site monitoring and on-site inspections, the ACPR sends a follow-up letter to the relevant institution. If the ACPR finds that the credit institution's liquidity or solvency is at risk or that the interests of clients are threatened, it may:
- send a cautionary notice to the management of the credit institution concerned, allowing it to provide the ACPR with explanations;
- issue a recommendation to the credit institution describing the measures designed to improve the credit institution's financial condition or management methods;
- issue an injunction to the credit institution requiring it to take certain specific measures within a set period; or
- order the following interim protective measures in the most serious cases:
- special surveillance;
- appointment of one or more ACPR officers;
- suspension, temporary restriction or prohibition of the free disposal of all or part of the assets of the credit institution;
- cessation of the credit institution's activities;
- limitation on the number of branches or agencies of the credit institution;
- the transfer of some or all of the credit institution's credit or deposit portfolios;
- limitation of or prohibition on the distribution of dividends;
- cessation of interest distribution for certain holders of additional Tier 1 funds;
- suspension of one or more senior managers of the credit institution;
- appointment of a temporary director;
- transfer of one or several activities;
- transfer of all or part of the credit institution's assets, rights and obligations to a bridge credit institution with a view to continuing or selling its business;
- implementation of bail-out measures (including capital reductions, cancellation of shares or liabilities);
- issuance of new equity instruments; or
- a prohibition on paying prior debts.
Since 20 February 2014, the ACPR may also require credit institutions to submit a recovery programme.
Through its enforcement powers, the ACPR may impose a wide range of sanctions, either in respect of a breach of regulations or for failure to comply with obligations resulting from a cautionary notice, a recommendation or an injunction issued by the ACPR. These sanctions include (in ascending order of severity):
- a warning;
- a reprimand;
- a prohibition on engaging in certain operations or limits on the conduct of certain credit institution activities;
- a temporary suspension of one or more senior managers of the credit institution (with or without the appointment of a provisional administrator);
- requiring the resignation of one or more managers or directors, or both (with or without the appointment of a provisional administrator);
- a partial withdrawal of the credit institution's licence (with respect to specific banking activities); and
- striking the bank off the list of credit institutions authorised to conduct banking activities in France (with or without the appointment of a liquidator).
In addition to these measures, the ACPR may also:
- impose a fine of up to €100 million or 10 per cent of the annual turnover;
- prohibit or limit the payment of dividends to shareholders;
- order any of the above-mentioned sanctions to be made public at the expense of the bank; or
- order a penalty payment to compel execution of its sanctions.
Banks authorised to offer investment services are also supervised by the AMF, to the extent that they provide those services.
The AMF may impose a warning, reprimand, or temporary or permanent ban on providing some or all of the investment services provided by an authorised bank. In lieu of, or in addition to, these sanctions, the AMF may impose fines of up to €100 million or 10 times any profit earned in violation of applicable rules. For certain offences, the sanction may amount to 15 per cent of the annual turnover.
Individuals acting under the authority of or on behalf of credit institutions may be liable to receive a warning, reprimand, a temporary suspension or withdrawal of their professional licence, and a temporary or permanent ban on conducting some or all business activities. In lieu of, or in addition to, these sanctions, the AMF may impose a fine of up to €15 million or 10 times any profit earned, or €300,000 or five times any profit earned, for violations of the applicable rules, depending on the seriousness of the violation.ii Management of banks
For significant credit institutions under the supervision of the ECB, the French regulations referred to below are to be read in conjunction with the governance requirements set out in EU Regulation No. 1024/2013.
On 26 September 2017, the EBA and the European Securities and Markets Authority (ESMA) published joint guidelines on the assessment of the suitability of members of management bodies and key function holders, which entered into force on 30 June 2018; on the same day, the EBA published revised Guidelines on Internal Governance. The ACPR published on 5 June 2018 a notice declaring its compliance with the second guidelines and its partial compliance with the first guidelines. As regards the guidelines on the assessment of the suitability of members of the management body and key function holders, the ACPR declared its intention to comply with the document with the exception of those paragraphs relating to the supervisory authority's assessment of the suitability of key functions holders, and in relation to the paragraphs relating to the presence and the definition of independent members, subject to two reserves of interpretation.Management
French banks are managed by at least two senior managers. In practice, before the implementation of the CRD IV Package, banks usually took the form of a public limited company with a board of directors, an executive chair and a deputy chief executive officer (CEO). However, since the implementation of the CRD IV Package by way of a 20 February 2014 ordinance, and guidance dated 29 January 2014 from the ACPR, the latter expressly requires the separation of the functions of the chair and the CEO, which has led to a reorganisation of the management of major banks in France. That requirement has recently been confirmed by the General Court, which has declared, regarding regional branches of a major French mutual banking group, that the same person may not occupy at the same time the post of chair of the board of directors and that of the effective director of a credit institution subject to prudential supervision.
Senior managers are appointed by the board of directors, subject to the approval of the ACPR, which ensures that they are fit and proper. Managers are collectively responsible for the effective implementation and the general direction of the bank's business, internal control, accounting and financial information, and capital requirements.
The 20 February 2014 ordinance also modified the rules on the number of corporate offices held by senior managers of a credit institution, which is now restricted to no more than one executive mandate and two non-executive mandates for the same person at the same time; and no more than four mandates as a member of the board of directors, supervisory board or any other body performing equivalent functions at the same time.
The ACPR also pays particular attention to the availability of managers, and makes sure in particular that, notwithstanding the aforementioned restriction, managers of a credit institution devote sufficient time to fulfilling their duties.Decision-making body
Banks are usually incorporated as public limited companies in which the decision-making body is the board of directors. Managers report to the board of directors, which must comprise at least three members. Banks and investment companies are required, as with respect to the senior managers, to notify the ACPR of the appointment or renewal of their directors. The ACPR is entitled, based on similar criteria as those applicable to senior managers, to oppose any appointment or renewal. Similarly, the ACPR may demand the resignation of a director as a sanction for breach of an applicable regulation or failure to comply with any of the ACPR's recommendations or injunctions.
The board is in particular responsible for supervising the management and the global situation of the bank as well as the implementation of its strategy. At least once a year, the board must review the activities and results of the internal control.
An audit committee is required to assist the board of directors in the exercise of its functions.Control functions
Banks must appoint two control officers who are responsible for ensuring permanent and periodic control respectively, and who report to the managers and, as the case may be, the board of directors or the audit committee.
Banks are also required to appoint a compliance officer to ensure compliance with all relevant applicable rules. Depending on the bank's size, the functions of the compliance officer may be exercised by the permanent officer.
It is also compulsory to appoint a risk management officer, who is responsible for a bank's risk analysis and risk measurement systems. The risk manager does not have any operational role unless he or she is a senior manager.
Smaller banks may elect to entrust these functions to a manager, who is usually a member of the board.Risk, nomination and compensation committees
Banks are required to create a separate risk committee to supervise the implementation of risk management procedures and policies (except for non-significant banks, which may merge their risk committee with their audit committee). This committee acts under the exclusive and collective liability of the members of the board of directors or supervisory board, as the case may be.
The CRD IV Package provides for the creation of a risk committee within a bank's board of directors or supervisory board, as the case may be, composed exclusively of members not exercising any management powers, and a risk division in each bank. These rules have been transposed into French law.
Following the transposition of the CRD IV Package into the Monetary and Financial Code, institutions with a balance sheet exceeding €5 billion must now create a nomination committee and a compensation committee.
In the case of credit institution groups that are subject to supervision on a consolidated basis, these specific committees may, in principle, be implemented at the level of parent companies of the consolidated group only.Compensation
Rules governing compensation are contained in Article L511-71 et seq. of the Monetary and Financial Code. In particular, these rules provide that:
- the board of directors, or supervisory board, adopts and regularly reviews the compensation policy with the support and advice of the compensation committee;
- the compensation policy must be adequate for the economic strategy, aims, values and long-term interests of the bank; must incorporate measures that aim to avoid conflicts of interest; and must not encourage risk taking above the threshold fixed by the bank;
- the shareholders must be consulted every year about the global amount of remuneration given to directors and employees exercising activities that have a significant influence on the bank or group's risk profile (i.e., a say-on-pay procedure for risk takers);
- at least once a year, implementation of the compensation policy must be subject to an internal and independent evaluation to ensure its compliance with the compensation policy and the process governing compensation adopted by the board of directors or supervisory board of the bank. The compensation committee must assess the compensation policy and the remuneration granted to the bank's directors every year;
- the variable remuneration of employees exercising control functions must not be based on the controlled activities;
- the compensation policy must clearly distinguish between fixed remuneration (experience-based) and variable remuneration (performance-based);
- the variable remuneration must take into account the overall performance of the employee and of its unit, must be based on long-term objectives and cannot be guaranteed; and
- credit institutions must ensure that the variable remuneration of senior employees, management or risk takers cannot exceed their fixed remuneration, except if otherwise decided by the shareholders by a two-thirds majority.
In addition, the EBA published on 21 December 2015 guidelines on sound remuneration policies, and the ACPR declared it would require compliance with the major part of these guidelines.
The ACPR can impose a revision of a bank's compensation policy if it considers that such a policy is not compatible with sound risk management and the long-term objective of growth. Institutions must also be able to justify the amount and terms of payment of variable remuneration.
In addition, the ECB supervises the remuneration of the management bodies of significant entities, and at the start of 2019 published recommendations for a dividend policy.iii Regulatory capital and liquidity
The current French requirements regarding capital and prudential ratios are those resulting from the implementation of the CRD IV Package.
If a French credit institution is categorised as a significant entity, compliance with the prudential requirements described below is supervised by the ECB.Minimum capital requirements
Banks with headquarters in France are required to have a minimum share capital of €5 million.
The ACPR carries out a periodic assessment of banks' compliance with the capital adequacy guidelines, and may adopt a variety of measures to ensure that a shortfall in capitalisation is remedied: it may order a bank to increase its share capital; it may appoint a provisional administrator vested with the full powers of administration, management and representation of the credit institution; or, when appropriate, the governor of the Central Bank is entitled to invite (not require) the shareholders of the bank to provide the necessary support.Prudential ratio requirements and composition of regulatory capitalSolvency ratio
The Capital Requirements Regulation imposes harmonised rules relating to prudential ratio requirements in the EU, which are directly applicable to French banking institutions, whereas the CRD provides for additional requirements that have not yet been fully implemented in France (i.e., additional own funds buffers).
The solvency ratio, according to the CRD IV Package, now includes the following categories: Common Equity Tier 1 (CET1), Tier 1 and Tier 2. Tier 3, provided for under CRD III, was abolished by the CRD IV Package.
In addition to the 8 per cent ratio, the CRD IV Package introduces three additional capital buffers (a capital conservation buffer equal to 2.5 per cent of CET1, a countercyclical capital buffer, currently equal to zero per cent (being increased to 0.25 per cent as of 1 July 2019), and the systemic buffer). These have been applied since 1 January 2016. In addition, local banking regulators can apply an additional buffer for other systemically important institutions, as well as institutions important to the EU.
Finally, each Member State may introduce a systemic risk buffer for the financial sector. Since 2015, this buffer has been capped at 5 per cent, but in France it is currently at zero per cent due to the lack of a decision by the French stability board (HCSF).Liquidity ratio
The CRD IV Package introduced two mandatory liquidity ratios: the liquidity coverage ratio (LCR) and the net stable funding ratio. Until a mandatory level is required for this second ratio, banks with headquarters in France will be required to comply only with the LCR, which since 2018 has required them to maintain, at all times, an LCR of at least 100 per cent.Exposure requirements
Banks with headquarters in France are required to maintain their overall exposure resulting from operations per beneficiary below the higher of €150 million or 25 per cent of their own funds.Supervision of banking groups
French banking groups that do not fall within the scope of the general EU-wide ECB supervision are subject to supervision on a consolidated and individual basis. All institutions that belong to a French banking group are subject to an assessment, the scope of which depends on their position within their group.
For the parent institution, the evaluation process is primarily implemented on a consolidated basis.
For an institution that is a parent of a sub-consolidation, the ACPR primarily conducts its evaluation on a sub-consolidated basis, based on a scope of application similar to that for group parents. The position of the sub-consolidation parent institution within its group, and the influence of its shareholding, is also taken into account.
For a bank that belongs to a group but that does not have any subsidiaries that are supervised by the ACPR, the supervision is conducted on a stand-alone basis, while taking into account the influence of the group to which it belongs and the businesses and risks of any non-banking subsidiaries. Financial holding companies and mixed financial holding companies are also subject to consolidated supervision.
In parallel with this consolidated basis approach, a stand-alone analysis is also conducted whenever the assessment of the specific risk profile and the risk assessment and management systems are of particular interest.iv Recovery and resolution
As a general principle, banks are subject to the same insolvency procedures that are applicable to all companies in financial difficulties in France, with certain specificities (Article L613-24 et seq. of the Monetary and Financial Code).
The ACPR plays a central role both before and after a crisis. As soon as the information available indicates that the financial balance of a credit institution is at risk or that its management methods are not satisfactory, the ACPR may require the credit institution to comply with higher capital requirements or require the adoption of specific methods of booking of provisions for certain assets. The ACPR may also employ administrative measures when certain practices of a given credit institution may harm its clients' interests: it may issue a warning against those practices or require that the bank concerned submit a recovery plan or upgrade its management methods. When the ACPR deems that the solvency or liquidity of a credit institution or the interests of its clients are at risk, it may take certain measures (see above).
When necessary, the governor of the Central Bank may invite the bank's shareholders to provide financial support. There is, however, no obligation on the part of the shareholders to accept such an invitation.
When a credit institution is in a crisis situation, the ACPR may nominate a temporary administrator, who will have all the powers to manage and represent the bank, or a liquidator, in particular in the event that the entity's banking licence is withdrawn (Article L613-24). In both cases, the ACPR may petition the local court for the forced sale of the shares owned by the management (Article L613-25). Moreover, the ACPR may request the involvement of the Deposit Guarantee Fund, for instance when a credit institution is unable to repay deposits received from the public.
This recovery and resolution framework changed in 2015 through the passing of EU Regulation No. 806/2014, dated 30 July 2014, which implemented an SRM, and the transposition by an ordinance dated 20 August 2015 of EU Directive No. 2014/59/EU, dated 15 May 2014, on bank recovery and resolution (BRRD). The recovery and resolution framework was amended in August 2015, January 2016 and December 2017. These amendments introduced in particular the requirements relating to total loss-absorbing capacity (TLAC), which relate to global systemically important banks. Further, in 2017, in accordance with Article 45 of the BRRD, the Single Resolution Board (SRB) introduced binding requirements and started to address both the quantity and quality of the minimum requirement for own funds and eligible liabilities (MREL). The law on banking resolutions is now lex specialis to general insolvency procedures to prevent systemic effects on the banking sector.
For significant banks and other cross-border groups within the Banking Union, the resolution authority is the SRB, and national resolution authorities are responsible for all other banks, except when resolution requires the use of the Single Resolution Fund or if the SRB decides to exercise directly all its powers.Preventive recovery plans
The following entities are obliged to draw up preventive recovery plans:
- significant credit institutions that fall under the sole supervision of the ECB;
- credit institutions within a group that are not supervised on a consolidated basis;
- the parent company of credit institutions within a group that are supervised on a consolidated basis within the EU; and
- credit institutions where required by virtue of a decision of the resolution college (Article L613-35 et seq. of the Monetary and Financial Code).
The plans have to be adjusted regularly, and are subsequently examined by the supervisory college within the ACPR (Article L613-36 of the Monetary and Financial Code). Preventive group recovery plans are communicated to other authorities, in addition to the resolution college (Article L613-37 et seq. of the Monetary and Financial Code). Significant banks' recovery plans are reviewed by the ECB.Preventive resolution plans
For entities that are obliged to produce recovery plans, the resolution college has the competence to also establish preventive resolution plans on an individual or consolidated basis (Article L613-38 et seq. of the Monetary and Financial Code). The resolution college designs potential resolution measures and cooperates with other authorities, particularly the respective supervisory authorities. At the initial elaboration of each plan, and at the point of any subsequent revision, the resolution college evaluates whether and to what extent an entity is resolvable without putting at risk its critical functions or the financial system as a whole (Article L613-41 et seq. of the Monetary and Financial Code). To guarantee the resolvability of an entity, the resolution college can take certain preventive measures (Article L.613-42 of the Monetary and Financial Code).
The resolution college also ensures that credit institutions and investment firms fulfil the minimal capital requirements determined by the law or by the residual discretion of the resolution college (Article L613-44 et seq. of the Monetary and Financial Code).
Intragroup guarantees, by which one group entity guarantees the obligations of another group entity to a third party, can be granted to stabilise the financial situation of the whole group. Such a contract is only effective when approved in advance by the resolution college and the supervisory college, as well as any other concerned supervisory institution within the ACPR (Article L613-46 et seq. of the Monetary and Financial Code).
Note that, as the competent resolution authority for significant banks and cross-border groups within the Banking Union, the SRB is responsible for drawing up the resolution plans and adopting all decisions relating to banking resolution in relation to these entities.Minimum requirement for own funds and eligible liabilities
The MREL corresponds to the minimum amount of loss-absorbing capacity that is also covered by the international standard TLAC developed by the Financial Stability Board. The SRB is committed to implementing and enforcing the applicable legal framework, including by setting MREL targets for the banking groups under its remit. For other entities, the national resolution authorities (in France, the ACPR) are responsible for setting MREL targets. Since 2017, several banking groups have been notified about their MREL level, and have started to issue eligible debts (such as non-preferred senior debt) to reach these targets.Resolution proceedings
Before taking concrete resolution measures in respect of a bank, including the write-down and conversion of capital instruments, an entity's value must be estimated by an independent expert (Article L613-47 of the Monetary and Financial Code). The resolution college can only write down and convert capital instruments if the entity's insolvency is otherwise unavoidable (Article L613-48 et seq. of the Monetary and Financial Code). The resolution procedure is initiated by the Governor of the French Central Bank, the Head of the French Treasury or the ECB (Article L613-49 of the Monetary and Financial Code).
The resolution college has the power to assume the effective management of an entity, designate a special administrator and replace members of the board (Article L.613-51 et seq. of the Monetary and Financial Code). All or part of a bank's activities can be transferred to a voluntary purchaser (Article L.613-52 et seq. of the Monetary and Financial Code). The bank's assets can also be transferred to a bridge bank (Article L.613-53 et seq. of the Monetary and Financial Code) or to an asset manager (Article L613-54 et seq. of the Monetary and Financial Code) with a view to a subsequent sale. A bail-in of eligible liabilities may be implemented in accordance with Article 27 of Regulation No.806/2014 (Article L613-55 et seq. of the Monetary and Financial Code). Additionally, the resolution authority is allowed to order the issue of new shares or Tier 1 capital instruments (Article L613-56 et seq. of the Monetary and Financial Code).
For entities subject to the direct supervision of the ECB, it determines, after consulting the SRB, whether a bank is failing or likely to fail. If so, the SRB places the bank under resolution and adopts a resolution scheme determining which resolution measures will be applied.