2012 ANNUAL OVERVIEW OF BANKING AND FINANCE LAW

Transcription

1 2012 ANNUAL OVERVIEW OF BANKING AND FINANCE LAW December 2012

2 2012 ANNUAL OVERVIEW OF BANKING AND FINANCE LAW The Banking and Finance department of Lefèvre Pelletier & associés is pleased to provide you, for the eighth consecutive year, with this summary of legal and judicial developments in the banking and finance area in The purpose of this booklet, which is not intended to be exhaustive, is to provide an overview of legislative and regulatory developments as well as court decisions that we believe to be significant. Please contact the Banking and Finance department of Lefèvre Pelletier & associés if you have questions or would like further information. We hope you will find the booklet useful and wish you an enjoyable read. The Banking and Finance Department December 2012 Lefèvre Pelletier & associés is a leading law firm in France. The firm provides advisory and litigation services to its French and international clients by pooling the skills of its teams in all areas of business law. 2

3 CONTENTS 1 Bank transactions p Payment and credit instruments p Future of means of payment p Bank cards p Promissory note p The bank, a provider of loans p Loans in foreign currencies p Professional lender s obligation to warn uninformed borrowers when granting a disproportionate loan p Additional details on the rules for calculating the APR p Consumer credit and compound interest p Intermediation: the new IOBSP regime p Definition of an IOBSP p Regimes by IOBSP category p Securities p Surety bond p Mortgage p.09 2 Financial markets/ Investment services p Revision of MiFID p Protection of investors p Uncertainty surrounding the ban on commissions p Remuneration of the managers and employees of investment companies ---- p Third country p Next steps p EMIR Regulation p Clearing obligation for OTC derivatives p Reporting obligations p Territorial scope p Next steps p AMF Position no. 20I2-08 dated 16 July p Responsibility of the ISP p Cover obligation p Duty to inform, advise and warn p.13 3 Collective management p Update on UCITS p.15 3

4 CONTENTS Transposition of the UCITS IV Directive p UCITS V and VI p Update on AIFM p Literal transposition p Maintenance of a single management company regime p Simplify and modernise the range of French products subject to the AIFM Directive p Impact on depositaries p Third-country passport p.17 4 Prudential standards and conformity p Decree no dated 3 October p Implementation of Regulation (EU) No. 236/2012 of the European Parliament and of the Council dated 14 March p CRD IV proposal p European banking union p Decree no dated 8 November p.18 5 Insolvency proceedings p Unfair assistance p Necessary proof of the improper nature of loans granted p Bank guilty of no fault when assisting an insolvent company p Cœur Défense case: Epilogue p.19 6 Project financing p Partnership contracts and other complex contractual arrangements p Financial evaluation prior to the conclusion of public/private partnership contracts and certain other administrative contracts of the State and its public corporations having a public accountant p Conditions of use of the public/private partnership contract p Loans and contracts covering the interest rate risk of local and regional authorities p Request for registration of a structured loan p Swap contract and summary proceedings p.21 4

5 1 Bank transactions 1.1 Payment and credit instruments Future of means of payment In April 2012, Messrs Georges Pauget and Emmanuel Constans (former director of Crédit Agricole and chairman of the Financial Sector Advisory Committee respectively) submitted their report on The future of means of payment in France to the Minister of Economy, Finance and Industry. The full text of the report can be found at the following address: gouv.fr/file/ The report's authors put forward twenty proposals in response to the following priorities: facilitate secure online payments; develop modern face-to-face payment methods, in particular by card; speed up and assist with reducing the importance of the cheque as a means of payment; promote efficient, open and competitive economic models; mobilise the public sector; define and reach a national objective. The twenty proposals include the development of contactless payments and card payments for small amounts, particularly in local shops and businesses, aimed at reducing the number of cheques issued in France. The authors of the report also suggest speeding up efforts to equip local governments and public institutions with electronic payment terminals that accept bank cards and encourage online payments within government institutions Bank cards A transaction whereby a holder uses his credit card to take out a monthly subscription constitutes an agency agreement, as far as the future payments are concerned. The principal may therefore cancel at any time the payment mandate granted to his bank, which is then prohibited from making the future payments, on pain of liability with respect to the card holder (Court of Cassation, Commercial Chamber 27 March 2012 no ). The new article L , last paragraph, of the Monetary and Financial Code, resulting from order dated 15 July 2009, follows the same lines as this decision (returned under the aegis of the previous legislation) and provides that: Consent to the performance of a series of payment transactions may be withdrawn, such that all later transactions are deemed not to be authorised Promissory note In accordance with established case law, the irregular endorsement of a negotiable instrument may be deemed a guarantee granted by the endorser (for a letter of exchange, see, for example, Court of Cassation, Commercial Chamber, 24 April 1990 no ). In a judgement dated 5 June 2012, the Court of Cassation extends this solution to the endorsement of a promissory note, specifying, however, that to be valid as a guarantee, the irregular endorsement of a promissory note by a natural person to the benefit of a professional creditor must comply with articles L and L of the Consumer Code (relating to mandatory handwritten statements), failing which the guarantee is null and void (Court of Cassation, Commercial Chamber, 5 June 2012 no ). 1.2 The bank, a provider of loans Loans in foreign currencies (a) ACP recommendation dated 6 April 2012 On 6 April 2012, the Autorité de Contrôle Prudentiel (Prudential Supervisory Authority ACP) adopted a Recommendation concerning the marketing to private individuals of loans bearing an exchange risk. The development reflects the dissatisfaction expressed by several borrowers who contracted loans in foreign currencies and suffered the disastrous effects of the euro's depreciation against these currencies (Recommendation no R-01, available in full at the following address: acp/publications/registre-officiel/recommandation R-01-de-l-ACP.pdf) 5

6 In this recommendation, which does not challenge the legality in principle of foreign-currency loans, the ACP recommends that credit institutions implement the following measures in particular: raise the awareness of client advisers about the risks of taking out a foreign-currency loan; take greater care to ensure advertisements for foreign-currency loans are balanced, and mention both the advantages of these products and the associated risks; provide potential borrowers with accurate and detailed explanations, including simulations showing the impact of a 10% and 20% unfavourable change in exchange rates of compared to those in force at the time of the proposal; provide the borrower with information every year on the present and future characteristics of the loan. This recommendation entered into effect on October (b) Bank's obligation to inform and warn The granting of a loan to a private individual in a foreign currency does not create a special warning obligation on the lender other than that which exists when a disproportionate loan is granted. Consequently, if, at the time it was taken out, the foreign-currency loan was not clearly disproportionate to the borrower's financial capacities and assets, then the lender is under no particular obligation to issue a warning. The bank merely has an obligation to provide information, which is satisfied if it is established that the borrower received sufficient information about the exchange risks (Regional Court of Paris, 9 th Chamber, 1st Sect. 23 January 2012 Case 10/08831) Professional lender's obligation to warn uninformed borrowers when granting a disproportionate loan A professional lender is under no obligation to warn an uninformed borrower if the loan granted is appropriate in view of the borrower's financial capacity and the risk of indebtedness arising from the loan. To assess the financial capacities of the borrower, the lender may take into account the future income that the borrower intends to derive from the investment financed by the loan (Court of Cassation, Commercial Chamber, 6 December 2011 no ) Additional details on the rules for calculating the APR When calculating the APR, the costs of acquiring shares of the lender must be taken into account only when the acquisition of these shares is required by the lender and constitutes a prerequisite for the loan (Court of Cassation, 1 st Civil Chamber, 12 July 2012 no ) Consumer credit and compound interest Article L of the Consumer Code, in the version that existed prior to law no of 1 July 2010, stated The borrower cannot be made liable for any compensation or cost other than those mentioned in articles L to L in the event of premature repayment, or default provided for by these articles. Capitalisation of interests as provided for in article 1154 of the Civil Code is thus excluded in the case of consumer credit (Court of Cassation, 1st Civil Chamber, 9 February 2012 no ). This decision applies to the new article L of the Consumer Code (which replaced article L of the above mentioned code) resulting from law no dated 1 July 2010, even if this new text prefers the term expenses to costs. 1.3 Intermediation: the new IOBSP regime The reform of the rules applicable to intermediaries in banking transactions and payment services ( IOBSPs ) is reaching its end. Further to the Deletré report, which recommended that the existing mechanism for financial investment advisors be extended to all intermediaries, the legal texts implementing the banking and financial regulation 6

7 law dated 22 October 2010 have finally been adopted: a first decree dated 26 January 2012 relates to the IOBSP regime; a second decree dated 26 January 2012 relates to their single ORIAS registration; an order dated 1 March 2012 provides for the thresholds below which intermediaries are not considered IOBSPs; an order dated 1 March 2012 specifies the information that has to be provided to ORIAS when submitting the registration request; and an order dated 4 April 2012 deals with IOBSP training programmes. This mechanism clarifies the notion of IOBSP (1.3.1) and the regime applicable to each of the four newlycreated categories of intermediary (1.3.2) Definition of an IOBSP The old definition of an intermediary in banking transactions (IOB) merely defined the IOB's role as bringing the parties together, without giving details. As a result, parties were sometimes subjected to this regime of intermediaries even though their role was much closer to that of a simple supplier of information. However, with the new definition, the IOBSP is practically viewed as an advisor in relation to bank products and services or payments. The Monetary and Financial Code (CMF) now refers to: presenting, proposing or assisting the execution of banking transactions or payment services or (...) carrying out any work and consultancy prior to their execution ; the soliciting or receiving, by any person, of the client's consent to the banking transaction or payment service or describing verbally or in writing to a potential client the terms of a banking transaction or payment service, with a view to its execution or provision ; It expressly excludes simple suppliers of information whose only role consists in presenting an institution to a client. Thus the very definition of an IOBSP, although similar to that of an insurance intermediary, is not totally removed from the concept of personal recommendation in relation to investment advice Regimes by IOBSP category The IOBSP rules cover intermediation activities as diverse as consumer credit, real estate loans, debt consolidation and reverse annuity mortgages. Four new operating categories will thus allow for a variety of business models: financial transaction and payment service brokers, whose main characteristic is to operate under the terms of a client mandate and to seek the best possible offer for the client, by making credit institutions and payment institutions compete against each other; exclusive banking transaction and payment service agents, who hold a mandate which exclusively binds them to one or more credit or payment institutions; non-exclusive agents of credit or payment institutions, who only carry out a partial market analysis and whose objective is to distribute the offers of a limited number of credit or payment institutions; of banking transaction agents and payment service intermediaries; this category allows for co-brokering with the three above categories. The mechanism subjects these categories of IOBSP to various obligations: registration with ORIAS, professional capacity, professional insurance or financial guarantee and rules of good conduct (adapted in accordance with the category to which they belong) all subject to a certain number of exemptions. The most restrictive regime applies to brokers, taking into account, in particular: the obligation to take out an insurance, which is imposed directly on brokers whereas the three other categories can be covered by the insurance of their principal; rules of good conduct, which are more restrictive for brokers and their agents, and include, in particular (i) the obligation to analyse a sufficient number of offered contracts in order to be able to carry out an objective market analysis, (ii) requirements in terms of client information and the suitability of the proposed product or service for the client's needs, (iii) obligations of transparency related to the fee received by a credit institution and/or the investment in its share capital (prevention of conflicts of interest), and (iv) information obligations with respect to the institutions themselves. 7

8 The mechanism will come into effect on the date of creation of the single register of intermediaries by ORIAS, expected in January 2013, with IOBSPs further benefitting, from an additional compliance period of three months. 1.4 Securities Surety bond (a) Mandatory information as per articles L and L of the Consumer Code (i) Field The mandatory information provided in articles L and L of the Consumer Code must appear, under pain of nullity, in all private surety bonds signed by a natural person to the benefit of a professional creditor, regardless of whether the guarantor is an informed guarantor or whether the surety bond is a civil or commercial one. A professional creditor, within the meaning of these articles, means one whose claim originates in the practice of his profession or relates directly to one of his professional activities (Court of Cassation, Commercial Chamber, 10 January 2012 no ). The concept of professional creditor is therefore not limited to credit institutions and the like: in this decision, the creditor was a seller of building materials, whose claim arose from the financing that it had granted to the debtor for the purchase of such materials; the Court of Cassation found fault with the lower courts for having considered that the lender was not a professional creditor within the meaning of articles L and L of the Consumer Code. (ii) Penalty for the absence of information relating to the joint and several character of the surety bond Article L of the Consumer Code provides that, in the fields of consumer credit and real estate loans, when the creditor requests a joint and several surety bond, the surety deed must include a handwritten statement where the guarantor states the following: Waiving the benefit of discussion defined in article 2298 of the civil code and committing myself jointly and severally with X, I undertake to reimburse the creditor without being able to demand that he first sue X. The absence or incorrectness of this handwritten statement is not sanctioned by the invalidity of the surety bond, but rather by its requalification as a surety bond that is not joint and several (Court of Cassation, 1st Civil Chamber, 5 April 2012 no ). This decision, rendered in connection with article L of the Consumer Code, undoubtedly applies to article L of the same code, which relates to mandatory handwritten statements in private joint and several surety bonds concluded by individuals with professional creditors, whatever the nature of the obligation guaranteed. (b) The rules that protect the surety do not apply to an endorser The endorsement of a promissory note or a bill of exchange is traditionally defined as the exchange form of a surety bond. However, the rules that protect the surety do not apply to the endorser. The Court of Cassation has already ruled that the latter may not claim the application of the provisions of article L of the Monetary and Financial Code (Court of Cassation, Commercial Chamber, 16 June 2009 no ). In a ruling dated 30 October 2012, the Court of Cassation confirmed and clarified its jurisprudence by considering that the endorser is not entitled to sue the bank for breach of the duty to warn or for breach of article L of the Consumer Code (Court of Cassation, Commercial Chamber, 30 October 2012 no ). (c) Annual information for the surety (i) Scope Article L of the Monetary and Financial Code stipulates that Credit institutions which have granted a credit facility to a company subject to a guarantee from an individual or a legal entity shall be required, by 31 March of each year at the latest, to inform the guarantor of the amount of the principal, interest, commissions, fees and incidental expenses that were outstanding under the guaranteed obligation as of 31 December of the previous year, as well as the term of said commitment. A leasing transaction does not qualify as a credit facility within the meaning of this article. Consequently, the annual information that it requires is not owed to the guarantor of the lessee (Court of Cassation, Commercial Chamber, 8

9 8 November 2011 no ). In this judgement the Court of Cassation confirms a position that it had previously taken (see, for example, Court of Cassation, Commercial Chamber, 28 May 2002 no ). (d) Effects of the damages awarded to the guarantor on the guaranteed debt Damages awarded to the guarantor as a result of a fault of the creditor at the time of the execution of the guarantee are set off against the guarantor's debt towards the creditor. However such damages do not affect the guaranteed principal debt: the principal debtor cannot ask the creditor for the total or partial offsetting of the guarantor's debt towards him (Court of Cassation, Commercial Chamber, 13 March 2012 no ). (e) Guarantees and undertakings granted by an SCI (property investment company) and the purpose of the aforesaid SCI In a judgement dated 8 November 2007 (no ), the first civil chamber of the Court of Cassation specified the principles according to which a guarantee granted by an SCI is valid. The guarantee must: comply with the purpose of the company, or have been authorised by a unanimous decision of the shareholders, or be justified by the existence of common interests between the company and the principal debtor. The Court of Cassation revised its case law in the last months of 2011 and in In a ruling dated 8 November 2011 (no ) the commercial chamber considered that a guarantee the amount of which would jeopardise the company was null and void. It considered that the three above criteria, referred to by the ruling of 8 November 2007, were not sufficient for the guarantee to be valid. It was thus ruled that if the provision of a guarantee by a company is obviously contrary to its own interests, the unanimous agreement of its shareholders cannot remedy the defect that invalidates the guarantee. The commercial chamber, in a ruling dated 13 December 2011 (no ), subsequently considered that a guarantee that does not directly meet the company purpose and is granted without the express consent of the shareholders may be valid if there exist common interests between the guarantor and the principal debtor. By a ruling dated 28 June 2012 (no ), the commercial chamber confirmed an appeal court ruling which, after observing that the manager of an SCI had taken out a bridging loan secured by a mortgage on the SCI's property, the said loan having been used to finance a shareholder loan to a commercial company, had considered that the bridging loan, which the bank was calling in, did not comply either with the purpose of the SCI or with the latter's interests, and had cancelled attachment proceedings initiated by the bank on the basis of the loan deed. The 3 rd civil chamber of the Court of Cassation, in a judgement dated 12 September 2012 (no ), referred to the spirit of the abovementioned ruling of 8 November 2011 when it overturned a judgement delivered by a court of appeal which had considered that the mortgage loan taken out by an SCI to finance the purchase of two loans granted to a commercial company could not be annulled even if the loan was not within the company's purpose because it had been signed by all of the shareholders. The Court of Cassation states that: insofar as the guarantee, even if granted with the unanimous consent of the shareholders, is not valid if it is against the company s interest, the court of appeal breached the abovementioned text Mortgage (a) Conventional mortgage Immovable property encumbered by an inalienability clause may not be the subject of a conventional mortgage because this immovable property constitutes a nontradable property within the meaning of article 2397 of the Civil Code (Court of Cassation, 1 st Civil Chamber, 23 February 2012 no ). (b) Mortgage guarantee The registration of a mortgage is not a prerequisite for the validity of the mortgage in the relations between the parties: such registration is required only as a condition for enforceability with regard to third parties. 9

10 The mortgage guarantee contract can thus continue to produce its effects for the benefit of the secured creditor after the expiry of the mortgage registration provided that the date agreed upon between the parties as to the expiry of this registration is not also the term of the guarantor's commitment. Consequently, the secured creditor can validly renew the registration of his mortgage after the expiration date initially agreed with the guarantor, provided this expiration date relates only to the registration and not to the guarantor's commitment. The creditor may also sue the guarantor, even after this expiration date (Court of Cassation, 1st Civil Chamber, 12 January 2012 no ). 2 Financial markets/ Investment services 2.1 Revision of MiFID On 26 October 2012, after examining the proposed revision of the Markets in Financial Instruments Directive (MiFID) published by the European Commission on 20 October 2011, the European Parliament adopted a certain number of amendments to the initial proposal following the submission of a report by the Economic and Monetary Affairs Committee. Some of these amendments deserve special attention: Protection of investors Judging that better codes of conduct would not be enough to afford adequate protection to investors, the European Parliament reinforced the requirements of MiFID II. Investment firms will have to ensure that the structured deposits and investment products they design correspond to the requirements and characteristics of a target market that they have previously defined. They will also have to take reasonable measures in order to ensure that the investment product is marketed and distributed to the clients of the target category. Still with the aim of ensuring adequate protection for investors, investment companies will have to evaluate their products regularly in order to check their compliance with the defined objectives and their suitability to the target market Uncertainty surrounding the ban on commissions An amendment proposed by MEP Markus Ferber concerns the ban on receiving commissions in connection with individual management mandates and independent investment advice, which was included in the Commission's initial proposal. The amendment only provides for the introduction of an obligation to inform clients of the existence and the amount or the methods of calculation of the commissions and other incentives and monies paid by third parties. However, it is planned to allow Member States to prohibit or restrict the acceptance or receipt of fees, commissions or non-financial benefits in connection with the provision of investment advice or a portfolio management service on a discretionary basis Remuneration of the managers and employees of investment companies To ensure better protection for consumers, the Parliament adopted an amendment aimed at defining the remuneration and the performance evaluation of the managers and employees of investment companies. These should not conflict with the obligation of these companies to serve the best interests of their clients. More precisely, the remuneration of staff members who sell or advise on investment products should not depend on the sales objectives or profits that the company derives from a specific financial instrument Third country The Commission's initial draft provided that investment companies and market operators of third countries would be subject to a common regulatory framework. One of the amendments adopted by the European Parliament provides for the introduction of a passport, already contemplated in the Commission's proposal, which would allow them to offer investment services and carry on investment activities throughout the European Union. The Commission should check the actual equivalence of the regulatory and supervisory framework in third countries, giving priority to the business partners of the European Union and the fields specified in the G20 programme. 10

11 2.1.5 Next steps The amended text was referred by the Parliament to the Economic and Monetary Affairs Committee for review, the voting having been postponed to a later meeting. If the Council of the European Union validates the position of the Parliament, the adoption of a final text should take place during first-half In any event, the revised MiFID is unlikely to be transposed by Member States before EMIR Regulation On 27 September 2012, the European Securities and Markets Authority (ESMA) published its proposed technical standards consisting of proposals for detailed measures for the application of the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR), which came into effect on 16 August Clearing obligation for OTC derivatives Under the EMIR Regulation, all financial counterparties to an OTC derivative, as well as non-financial counterparties under certain conditions, are obliged to clear OTC derivatives considered eligible by ESMA in authorised clearing houses. In particular, this obligation will rest on non-financial counterparties once they exceed one of the thresholds defined by ESMA's proposed technical standards. These thresholds vary according to the class of underlying assets: for OTC credit and equity derivatives, the proposed threshold is a gross notional value of 1 billion; for OTC interest rate, foreign exchange or commodity derivatives or all other derivatives, the threshold is set at a gross notional value of 3 billion. When the clearing threshold for an asset class is reached by a counterparty, the latter becomes subject to the requirements resulting from the EMIR Regulation not only for the asset class for which the threshold was reached, but also for all derivatives, regardless of their asset class. It should be noted that thresholds are likely to change in the future. Indeed, they will be regularly reviewed in order to ensure they remain appropriate to the markets to which they correspond. Counterparties must therefore regularly monitor thresholds in order to check whether they come within the scope of the EMIR directive in the event of a thresholds reduction. It is also important to note that transactions which are objectively measurable as reducing risks related to the commercial activity of a non-financial counterparty, i.e. hedging transactions, will not be taken into account when calculating these thresholds Reporting obligations All counterparties, whether financial or not, will have to declare in detail their transactions to a trade repository registered with or recognised by ESMA. The question arose as to whether counterparties subject to the reporting obligations under the Markets in Financial Instruments Directive (MiFID) and/or the Regulation on wholesale energy market integrity and transparency (REMIT) would also be subject to a reporting obligation under the EMIR Regulation. In its proposed technical standards, ESMA specified that since the EMIR reporting obligations are broader, two reporting procedures would have to be followed. Nevertheless, ESMA indicated that it was working on the introduction of a single reporting mechanism for EMIR, MiFID and REMIT. The information required under the reporting obligation includes the identity of the parties to the contract, the beneficiary of the rights and obligations resulting from the contract, as well as the main covenants of the contract Territorial scope The question of the extraterritorial application of the EMIR Regulation is not addressed in the technical standards proposed by ESMA. Although no date has yet been set, recommendations on this subject are expected to be published in the coming months. These recommendations should specify the meaning of the expression contracts that are considered to have a direct, substantial and foreseeable effect within the EU. Indeed, only contracts which have a direct, substantial and foreseeable effect within the EU should come within the scope of the EMIR Regulation. ESMA has indicated, subject to confirmation, that the transactions of counterparties established in the European Union correspond to this definition, as well as transactions carried out in the European Union by foreign counterparties. 11

12 2.2.4 Next steps The European Commission has three months during which it can either adopt the technical standards proposed by ESMA or propose amendments. Consequently, the final text of the technical standards will not be published before the end of December 2012, following which the delegated acts will come into effect gradually in It should be noted that ESMA proposed these new technical standards without taking into account the ongoing review of the EMIR Regulation. In October 2012, within the framework of the MiFID revision, the European Commission published a proposal for a new regulation modifying the EMIR Regulation, which was discussed and amended in the European Parliament on 26 October After the vote, the question was referred for review to the Economic and Monetary Affairs Committee and the final text is not expected to be adopted before It is possible, therefore, that the technical standards will be modified in the future in order to comply with the requirements resulting from the future recasting of the EMIR Regulation. 2.3 AMF Position no dated 16 July 2012 The AMF and the ACP have adopted a common position, in the form of questions and answers, intended to clarify the respective perimeters of placement services and the sale of financial instruments. This clarification was eagerly awaited by traders in financial instruments, insofar as uncertainties remained for distributors mainly financial investment advisors and banking transaction intermediaries given the plethora of selling schemes. Indeed, if a distributor of financial instruments was considered to be providing a placement service without AMF authorisation, that would constitute a breach of investment service providers monopoly. The joint position of the ACP and the AMF first defines what a placement service is. The service must meet two conditions: the search, whether direct or indirect, for subscribers or buyers; the existence of a service supplied to an issuer or a seller of financial instruments. The joint position then indicates that the distribution of savings products such as financial securities issued by UCITS, OPCIs (real-estate collective investment schemes), SCPIs (real-estate investment companies), SEFs (forestry investment companies), SICAFs (closedended investment companies) or securitisation schemes or structured debt securities issued by credit institutions or investment companies which registered office is located in a Member State of the European Union or in another State that is a party to the Agreement on the European Economic Area (for example, negotiable debt securities or structured bonds) constitutes a service rendered to the client and not to the issuer. Thus, the distribution of savings products does not qualify as a placement service insofar as it does not meet the second condition mentioned above. Concerning the other types of financial instruments (for example, stocks and bonds), the joint position indicates that the investment service is rendered to the investment service provider and not directly to the issuer since, in this case, the distributor acts with the agreement of the investment service provider which is responsible for the distribution of the financial instruments and not in the name of the issuer of these financial instruments. However, the risk that the marketing of financial instruments by a distributor might be recharacterized as a placement service cannot be totally dismissed. Indeed, the joint position specifies the following limitations: qualification as an investment is possible if the distributor gives an undertaking, directly or indirectly, to the issuer or the seller, in respect of a minimal subscription or purchase amount; qualification as an investment is possible if a person who does not engage in a direct search for subscribers or purchasers is placed between the issuer and the distributor. 12

13 2.4 Responsibility of the ISP Cover obligation (a) Obligation to liquidate clients' uncovered positions In a judgement dated 26 June 2012, the commercial chamber of the Court of Cassation confirmed that an ISP is obliged to liquidate the positions of all clients that have not supplied, on the day after the last day of monthly liquidation, the securities required for the delivery of the financial instruments sold or the funds needed to pay for the financial instruments acquired. It thus censures an appeal court decision providing for a division of responsibilities between the client and the brokerage house, considering that the latter had deliberately chosen to defer the liquidation of its positions despite the repeated reminders of its bank as to its debt situation and requests for funds sent by registered letter. The reasoning followed by the Court of Cassation implies the responsibility of the ISP which failed to liquidate the positions in such a situation, even in the presence of a contrary order, deeming that the fault of the client in respect of the rollover of uncovered positions could not have occurred in the absence of a fault on the part of the brokerage house. (Court of Cassation, Commercial Chamber, 26 June 2012, no ) (b) Deposits allocated as cover for stock exchange transactions: proof of client consent Article L para. 1 of the Monetary and Financial Code states Regardless of the nature thereof, deposits made by clients with investment service providers [...] to cover or guarantee positions taken on a market in financial instruments, shall be transferred with full title to the service provider [...] as soon as they are made, for the purpose of settlement, on the one hand, of the debit balance established upon liquidation of the positions and, on the other hand, of any other sum owed to the service provider [...]. A judgement dated 26 June 2012 rendered by the commercial chamber of the Court of Cassation requires ISPs to supply proof of the allocation of these deposits by the client to cover forward transactions before being able to invoke the transfer of ownership. In this case, the securities of a client of a brokerage house had been seized by a creditor, preventing their sale. The brokerage house invoked the provisions of article L of the CMF, claiming that the sole existence of a debit balance of the client, on the day of the seizure, should imply the transfer of ownership to it, allowing it to sell the securities in order to pay off this balance. The Court dismissed this argument, requiring that the ISP furnish proof of the client's express consent to the allocation of its deposits as cover for its stock exchange transactions. (Court of Cassation, Commercial Chamber, 26 June 2012, no ). (c) Absence of a request for funds and determination of the extent of the reparable damage In the context of a forward transaction, an ISP that fails to fulfil its obligation to request funds from its client may be liable for the increase in the debit balance of the current account of its client caused by this failure. In a judgement dated 22 May 2012, the commercial chamber of the Court of Cassation extended the reparable damage of the client, where positions were taken that were not covered by the bank, to the entirety of the losses incurred. It thus overturned an appeal court s decision that had limited the reparable damage to the loss of an opportunity not to carry out forward transactions and to avoid the risk of loss inherent to the investment on the stock market. This position makes the ISP bear all of the losses suffered in connection with uncovered forward transactions. The professional, who was fully aware of its client's debt position and had let it operate on the futures markets without cover, must therefore be considered as the sole party liable for the entire damage of the client. (Court of Cassation, Commercial Chamber, 22 May 2012, no ) Duty to inform, advise and warn (a) Lack of consistency between a mutual fund advertisement and the proposed investment In one of the recent judgments relating to the Doubl'O products, the Court of Appeal of Lyon considered that a bank had failed to fulfil its duty to advise and inform 13

14 when the sole information it provided to its client was the advertising leaflet and did not provide an information notice. In addition, the Court considered that a contradiction, along with the lack of information on the unfavourable aspects of the investment, entitled the client to sue the bank for compensation for its damage consisting of the loss of the opportunity to invest the sums in a savings account. (Court of Appeal of Lyon, 6th ch., 28 March 2012, no. 11/01450) It thus confirms the position taken by the Court of Cassation in its decision dated 24 June 2008 finding the marketer of mutual funds liable with regard to its clients when the advertising provided is not coherent with the proposed investment or when the inherent risks of the options, the corollaries of the announced advantages, are not emphasised there. (b) Information Obligation satisfied by the remittance of the information notice to the client In its judgement dated 12 January 2012, the Court of Appeal of Rouen considered that the remittance of the information notice is enough to establish that the investor was informed of all the characteristics of the investment product. In this case, an investor had taken out with his bank a life insurance contract via a financial medium where the redemption of units at maturity corresponded to the capital initially invested. The investor sued the bank because the return on the investment was lower than expected. The same investor admitted having received the mutual fund information notice containing the main provisions of the contract and having signed a declaration stating that he was fully aware of the fluctuations inherent to financial markets. Consequently, this investor was deprived of any action on the basis of the bank's failure to meet its information obligation. The Court also dismissed any idea of a failure on the part of the bank to meet its advisory obligation, since it had proposed an investment likely to offer to the ordinary investor significant profits whilst guaranteeing, at the very least, the recovery of the amount invested at maturity, regardless of the performance of the financial markets. (Court of Appeal of Rouen, 12 January 2012, no. 11/01607). (c) Duty to advise and inform towards an uninformed company A company opened a management account with a bank and subscribed for units of UCITS whose management was entrusted to its bank pursuant to a dynamic management mandate. In 2009, the company sued its bank for breach of its obligations to advise and inform in connection with the execution and performance of the management mandate. The Court of Appeal of Paris considered, firstly, that the company was an uninformed investor since its purpose did not provide for any banking activity and its director had no experience of stock market transactions when the management mandate was signed. Secondly, the Court found the bank liable for a failure to advise. The Court deemed that the agent, during the mandate, should have encouraged its client to change the management strategy to a balanced or safe management approach, since the stock markets were becoming too risky. This position however did not result in compensation for the company, since the latter communicated no portfolio statement and thus had no proof of the real and serious nature of the loss of opportunity that it allegedly suffered. (Court of Appeal of Paris, Section 5, ch. 6, 24 May 2012, no. 10/16322) (d) Tax-optimised rental investments The investment service provider, who is bound by a non-interference obligation, cannot assess the commercial suitability of the financing requested by a client. However, the Court of Appeal of Bordeaux, in a judgement dated 20 February 2012, found the bank and the developer jointly and severally liable for failing to inform a couple of the obligation to rent within twelve months of the handover of the apartment and for failing to take into account in the personalized study neither the birth of a baby, foreseeable in the case of a young couple, a circumstance which would reduce the tax burden and thus the benefits of the investment, nor the state of the property market of the city concerned, which was saturated with rental properties. (Court of Appeal of Bordeaux, 20 February 2012, no. 10/05741). 14

15 3 Collective management 3.1 Update on UCITS Transposition of the UCITS IV Directive The transposition of the UCITS IV Directive, adopted in July 2009, required a revision of the AMF UCITS regulations, which took the form of a new version of the General Regulation and instructions concerning coordinated UCITS, non-ucits, venture capital, employee savings schemes and OPCIs. After a first series of implementation measures in 2011, a new reform was adopted on 15 October 2012, which made significant changes to books III and IV of the AMF General Regulation. The new measures concern investment service providers, UCITS and OPCIs. Their aim is to: reorganise the operations relating to the modification and operation of UCITS, in particular by modifying approval times (creation, transfer, and specific timeframes for mergers), fund deposit timeframes, as well as the information rules in the framework of mergers, and the rules relating to regulatory publications ; enable OPCIs existing prior to the date on which the General Regulation amendments implementing the Directive were approved (3 October 2011) to comply with the requirement to issue a Key Investor Information Document ahead of 1 July 2013; remove the quarterly audit requirement for some non-ucits with assets under management of more than EUR 80 million; remove the rule on equal treatment and information for unitholders in feeder funds and those in master funds, since there is no such provision in the UCITS IV Directive; clarify the role of the centralising correspondent where a foreign collective investment scheme marketed in France is not registered with a French central depositary UCITS V and VI The draft UCITS V Directive relating to depositary functions, remuneration policies and sanctions is awaiting the amendments of the European Parliament and the Council. Meanwhile, in July 2012, the European Commission launched a consultation on a revision of the UCITS IV Directive. The draft UCITS VI Directive relating to a future regulatory framework for investment funds will cover the following points: the improvements which could be made to the UCITS IV Directive; portfolio management techniques; the range of eligible assets; OTC derivatives; liquidity management; the depositary passport; money market funds; long-term investments; possible alignment of the UCITS and AIFM regimes. The consultation, which ended on 18 October, triggered answers from ESMA and the AFG. 3.2 Update on AIFM The draft regulation laying down implementing measures for the Alternative Investment Fund Manager ( AIFM ) Directive, expected at the end of October 2012, has not been published by the European Commission yet. The draft has to be examined by the Parliament and the Council, which will have three months as from its publication to accept or reject it. Taking into account the prior consultation process, which took place informally between these institutions and ESMA from the beginning of 2012, it is hoped that a final text will be adopted by the end of the year or early in That would leave Member States less than one year to prepare for the transposition of the mechanism into national law (the deadline for this being 22 July 2013). On July , to assist the French authorities within the framework of this transposition process, the AMF published the final report of the Asset Management Stakeholders Committee on the transposition of the AIFM Directive and the development of French innovative asset management. This report contains twenty-five recommendations, organised around four themes, the main aspects of which are set out below. 15

16 3.2.1 Literal transposition The first recommendation is the now classic one: to transpose the directive faithfully into national law and ensure no measure will hinder free competition between European managers. This requirement is all the more important that the AIFM Directive provides for a passport for non-french managers allowing them to manage directly an AIF established in France, or via a branch. The literal transposition of the directive into French law will have to be accompanied by measures that reinforce the attractiveness of the French market place with regard to investors (French or non-french) and the responsiveness and expertise of the French regulator. The Committee thus calls for a clarification of taxation rules, notably via the conclusion with other States of tax treaties recognising the fiscal transparency of investment funds Maintenance of a single management company regime The objective to develop French asset management companies chiefly entails the maintenance of a single management company regime, which can be modulated depending on the type of management implemented. One of the important provisions of the AIFM Directive (article 7-4) is to authorise companies concerned by the UCITS Directive to also manage alternative investment funds, subject to the observance of certain conditions. However, taking the two directives into consideration, the regimes of the managers of coordinated funds and alternative investment funds do not necessarily coincide. Asset management companies concerned by the AIFM Directive can offer the reception/transmission of orders on behalf of third parties. Yet, the latter activity is not expressly provided for in the UCITS Directive. Thus, to maintain a single portfolio manager regime, the report recommends allowing management companies authorised under both the AIFM and UCITS directives to offer reception and transmission of orders. With regard to financial management delegation, the AIFM Directive (article 20) authorises the delegation to an entity that does not have the status of a management company, in contrast with French law. Under the faithful transposition principle, the report accepts the new measure, on condition that management only be delegated to regulated entities that can control risks and manage conflicts of interest Simplify and modernise the range of French products subject to the AIFM Directive The Committee recommends classifying collective investment schemes into three main categories (i) coordinated UCITS coming under the UCITS Directive of 2009, (ii) alternative investment funds for the general public (non-ucits, venture capital funds, and OPCIs in particular) and (iii) professional alternative investment funds (contractual UCITS and UCITS with streamlined investment rules). This simplification should be accompanied by a harmonisation of UCITS investment thresholds. Today, depending on the type of UCITS, these thresholds, of which there are five, can go up to 500,000 euros, and do not necessarily reflect the risks inherent to products. That is why the report recommends reducing these investment tickets to just two thresholds: (a) 0 or (b) 100,000 euros (the latter amount applying only to alternative investment funds for professional investors) Impact on depositaries Although most of the measures planned by the directive are already provided for in the French regulations, the report points out that depositary functions must be exercised by authorised entities that are specified on a list. In addition, the report considers it important to align the missions of the depositary of coordinated UCITS with those of the depositary of alternative investment funds. This alignment would initially only relate to the depositary's missions. With regard to the liability of depositaries, the Asset Management Stakeholders Committee points out that this point will be discussed in the context of the adoption of the UCITS V Directive, which is expected to be published soon. 16

17 3.2.5 Third-country passport According to the report, it seems to be especially risky for Europe to allow a third-country passport to be introduced in 2015 without any reciprocity measures. However, this question, as those addressed in the report, comes within the transposition works of the European Commission and ESMA, which are a long time coming and are slowing down the transposition process. 4 Prudential standards and compliance 4.1 Decree no dated 3 October 2012 Decree no dated 3 October 2012 concerning the vigilance and reporting obligation for the prevention of the use of the financial system for money laundering purposes and the financing of terrorism aims to clarify and reinforce the conditions of exercise of the measures of vigilance applicable in the fight against money laundering in highrisk situations, by professionals subject to them (transactions involving countries deemed non-cooperative by the financial action group GAFI; transactions involving a politically exposed person; transactions which are anonymous because the client is not present for identification purposes). To that end, article R of the Monetary and Financial Code has been modified in order to provide for more frequent updates of client files, requests for additional evidentiary documents or confirmation of the identity of the client by another regulated professional. In addition, article R (5) has been modified in order to limit to purchases of goods or services the ability for regulated professionals not to exercise vigilance with respect to electronic money instruments. Article R has been supplemented in order to specify that regardless of the amount, and without the former 8,000 euros floor, cash exchange transactions are subject to vigilance with regard to the fight against money laundering. Lastly, article R is modified to specify that vigilance applies throughout the business relationship and in accordance with the proportionality principle 4.2 Implementation of Regulation (EU) No. 236/2012 of the European Parliament and of the Council dated 14 March 2012 Regulation (EU) No. 236/2012 of the European Parliament and of the Council dated 14 March 2012 on short selling and certain aspects of credit default swaps (SSR) was published in the Official Journal of the European Union on 24 March This text reinforces and harmonises the regime applicable to short positions in shares and sovereign debt and prohibits purchases of uncovered sovereign credit default swaps. It came into force on 1 November The new European rules replace the previous transparency regime without substantially modifying it with regard to shares admitted to trading on a French regulated market or an organised multilateral trading facility (OMTF). Thus, the thresholds for notification and disclosure of short positions contained in the AMF General Regulation remain unchanged. The change for investors lies in the extension of the transparency obligations to short positions on all shares admitted to trading on a European market and to the sovereign debt issued by an EU Member State. In addition, the regulation defines speculative shortselling techniques at the European level. The requirements in terms of location of short-sold shares are reinforced in order to prevent delivery defaults. The purchase of sovereign CDSs is prohibited if it is not intended to cover a correlated exposure. The European regulation sets out the conditions under which the competent authorities can take emergency measures if justified by market conditions and confirms the powers of the European Securities and Markets Authority (ESMA) as concerns its mission of coordination and control of the application of European rules. 17

18 4.3 CRD IV proposal The legislative proposal of the European Commission dated 20 July 2011, known as CRD IV, designed to incorporate into European law the Basel 3 international reform of December 2010, was initially scheduled to come into force on 1 January The CRD IV legislative proposal provides for: (i) a directive reforming the existing framework governing access to and the practice of banking, the definition of competent authorities, the prudential supervision framework, the definition of the various capital buffers, and (ii) a regulation covering aspects relating to capital levels and risk evaluation, liquidity and leverage ratios as well as transitional and publication measures. On 15 May 2012, the ECOFIN Council adopted a compromise text. However, owing to persistent differences of opinion, the European Parliament did not adopt the amendments to the reform of banking prudential rules during the plenary session of November Liquidity ratios are still being discussed, and the net stable funding ratio in particular. Other sensitive issues include systemic buffers, the powers of the European Banking Authority (EBA) and the issue of remuneration. 4.4 European banking union The current financial crisis has highlighted the systemic banking risk within the European Union and has led European States to intensify their reflection on European banking integration. Within this framework, the European Commission presented, on 6 June 2012, a proposal for a Directive establishing a framework for the recovery and fault resolution of credit institutions and investment firms. This Directive proposal is considered a first step towards such European banking union. The proposal provides for a three-step process in order to manage banks that are in distress or failing: (i) prevention, which would require banks to prepare recovery and resolution plans, (ii) intervention, which would make it possible to impose a recovery plan if an institution fails or is unlikely to meet its capital requirements, and (iii) the restructuring or winding-up of an institution that is failing or likely to fail. The European Council and the meeting of the heads of state and government of the euro zone of 28 and 29 June 2012 also outlined what European banking union should mean. Such union should be based on two pillars: (i) a single framework for banking supervision, and (ii) a common framework for deposit guarantees and default resolution. The European Central Bank (ECB) is expected to be entrusted with final responsibility for banking supervision as well as a power of early intervention in respect of all banks. With regard to deposit guarantees, it is planned to coordinate national systems via a European authority, either the ECB or the European Banking Authority (EBA). Agreements between national systems could also be concluded. Banks would pay directly into a fund that would guarantee reimbursements to depositors. 4.5 Decree no dated 8 November 2012 Within the framework of the transposition into French law of the revised Prospectus Directive (Directive no. 2010/73/EU modifying the Prospectus Directive no. 2003/71/EC), the register of qualified investors has been abolished and the notion of qualified investor has been aligned with that of a professional client within the meaning of article L of the Monetary and Financial Code since the modification of article D of the Monetary and Financial Code. Natural persons or legal entities registered in the qualified investors file (and were thus not qualified investors by operation of law), are not automatically considered professional clients and cannot invoke their registration in the qualified investors file within the framework of transactions requiring that capacity. To claim the capacity of professional client, these persons must henceforth: (i) satisfy at least two of the three criteria specified in article D of the Monetary and Financial Code; 18

19 (ii) or, failing this, opt to be considered a professional client pursuant to article of the AMF General Regulation. The investment service provider then verifies, in particular, that these persons meet at least two of the criteria of article of the AMF General Regulation. 5 Insolvency proceedings 5.1 Unfair assistance Necessary proof of the improper nature of loans granted Pursuant to article L of the Commercial Code, when safeguard, receivership or winding-up proceedings are opened, creditors may not be held liable for harm in relation to credits granted, except in cases of fraud, indisputable interference in the management of the debtor or if the guarantees obtained for the loans or credits are disproportionate. In this case, the manager of a company granted a joint and several guarantee of 120,000 to a bank which granted the company a loan of 200,000. The loan was also secured by interest-bearing notes worth 200,000. When the borrower went into liquidation, the bank claimed against the guarantor. In defence, the guarantor alleged that the guarantee was disproportionate within the meaning of article L of the Commercial Code and requested damages on that ground. The Court of Cassation confirmed the appeal court decision which found that the guarantor's undertaking was not disproportionate and found no fault with the bank since the financial assistance for which the guarantee had been given was not improper. Thus, in addition to the offences specified in article L of the Commercial Code, liability for unfair assistance also requires a fault in the granting of the loan. To win their suit, claimants will not only have to prove one of the three cases referred to in article L , but also that the financial assistance was improper. (Court of Cassation, Commercial Chamber, 27 March 2012, no ) Bank not guilty of any fault when assisting an insolvent company In a judgement dated 19 June 2012, the Court of Cassation found no fault with a bank, a creditor of a company involved in safeguard proceedings, since the latter had no recourse other than the bank loan to pay off its liabilities and the loan granted by the bank had the beneficial effect of reducing the interest rate of its debt as well as replacing a due debt by a loan payable over eight years, with a grace period of one year. (Court of Cassation, Commercial Chamber, 19 June 2012, no ). 5.2 Cœur Défense case: Epilogue In its referral court judgement dated 19 January 2012, the Court of Appeal of Versailles answered two remaining questions in this case, relating to the conditions for the opening in France of safeguard proceedings concerning a Luxembourgish company: (i) the court ruled in accordance with the ECJ's Eurofood and Interedil decisions and using the body of evidence technique, that the centre of main interests of the Luxembourgish holding company was Paris. Having noted that the company Dame Luxembourg had no employees or activities in Luxembourg and generated no turnover there, whereas the most important legal documents concluded with third parties had been signed in Paris, the Court reversed the presumption of article 3 of Regulation 1346/2000 dated 19 May 2000 and declared that France was the centre of the company's main interests. (ii) The Court also considered that the risk of immediate calling in of the loan granted to Dame Luxembourg was real and justified a request for the opening of safeguard proceedings (Court of Appeal of Versailles, 13 th ch., 19 January 2012, no. 11/03519). 19

20 6 Project financing 6.1 Partnership contracts and other complex contractual arrangements Financial evaluation prior to the conclusion of public/private partnership contracts and certain other administrative contracts of the State and its public corporations having a public accountant Decree no dated 27 September 2012 supplementing the provisions on the conclusion of certain public contracts subjects the use of a partnership contract by the State or a public corporation of the State employing a public accountant to a new condition. In addition to a preliminary evaluation, a study is now required in order to assess the consequences of the transaction on public finances and the availability of credit and, if it entails the occupation of the State's public or private domain, its compliance with the State's real estate policy. Such a study is also required for leases granted by the State to holders of a temporary domain occupation authorisation that constitutes rights in rem concerning buildings to be built pursuant to article L of the General Code of Public Property (CGPPP). This new obligation is an additional demonstration of the increased distrust towards standard contractual arrangements in the local public investment sector, which are designed and too often used to circumvent budgetary constraints and avoid the consequences of such constraints as to the registration of government debt Conditions of use of the public / private partnership contract Administrative courts are paying ever greater attention to public authorities' compliance with the conditions set by law for the use of public / private partnership contracts. Such is the case, in particular, of the condition concerning the complexity of the project, i.e. the objective incapacity of the public body to define on its own the technical resources that meet its needs or to set up the financial or legal arrangement of the project. In connection with Biarritz's proposed partnership contract for the creation of the Cité du Surf and the extension of the Marine Museum's aquarium, the Administrative Court of Appeal of Bordeaux (CAA Bordeaux 26 July 2012, no. 10BX02109) reiterated that in relation to complexity, the contracting authorities may not simply refer to technical difficulties but must show precisely their incapacity to define, alone and in advance, the technical resources to meet their needs or the financial or legal arrangement of the project. The judge considered that the final report on the preliminary evaluation and the opinion of the Mission d'appui au Partenariat Public-Privé (Public-Private Partnership Support Mission) could not in themselves constitute a proof of complexity. In this case, the Administrative Court of Appeal of Bordeaux ruled that the project was already at an advanced stage, from both financial and technical viewpoints, when the procedure for the conclusion of the partnership contract was launched and that consequently, the City of Biarritz was not unable to define on its own and in advance the technical resources or the legal and financial arrangement of the project. According to the ruling cited above, the complexity of the project must result from the inability of traditional contractual formulas to provide the required answer and the burden of proof of this inability rests on the public body, which cannot limit itself to invoking the difficulties inherent to any project. There is no doubt that the prospect of a contract or its conclusion procedure being voided will reduce the number of public/ private partnership contracts, purely on account of financial considerations. 6.2 Loans and contracts covering the interest rate risk of local and regional authorities Request for registration of a structured loan The Regional Court of Accounts of Auvergne, Rhône- Alpes has ruled that the repayment of a loan, whose lawfulness was disputed before a civil court, does not constitute compulsory expenditure that needs to be 20

21 recorded (Regional Court of Accounts of Auvergne, Rhône-Alpes, opinion no , 31 May 2012, Commune Sassenage). In this case, the town of Sassenage had decided to repay a loan taken out with Dexia Crédit Local, repayable in 2011, except for interest. The prefecture of Isère subsequently referred the matter to the Regional Court of Accounts of Auvergne, Rhône-Alpes, pursuant to articles L and L of the General Local Authorities Code, so that the latter could recognise the compulsory nature of the expenditure, in order to allow it, if necessary, to record this expenditure in the budget of the local authority. The Regional Court of Accounts considered that this expenditure could not be considered compulsory because the town was challenging it before the Regional Court of Nanterre. Compulsory expenditure items are specified in the legislative provisions of the General Local Authorities Code. Such items include interest payments and repayments of the principal by towns (article L , 30 of the General Local Authorities Code), departments (article L , 6 and 17 of the General Local Authorities Code), and regions (article L , 6 of the General Local Authorities Code). More generally, due debts constitute compulsory expenditure (article L , 32, L , 18, and L , 9 of the General Local Authorities Code). The view of the Regional Court of Accounts is hardly surprising since case law only deems expenditure to be compulsory if it is not seriously contestable: the Regional Court of Accounts may recognise that an expenditure item is compulsory for a town and order the latter to record it in its budget only in respect of debts that are due, certain, liquid, and not seriously contested in their principle and their amount and resulting from the law, a contract, an offence, a quasi offence or any other source of obligations (Conseil d'état 18 September 1998, Chambre de commerce et d'industrie de Dunkerque, no ). In general, an expenditure item whose legality is challenged in a substantive court is not considered compulsory by the financial courts: when a Regional Court of Accounts receives a request for the inclusion, in the budget of a local authority, of a sum corresponding to a debt the principle or amount of which was seriously challenged by the authority, the Court cannot but reject this request, without having to consider the merits of the challenge (Conseil d'état 21 March 2007, Commune de Plestin-les-Grèves, no ). Admittedly, the existence of court proceedings does not necessarily imply that the expenditure is seriously contested (Regional Court of Accounts Nord-Pas-de- Calais, 1 October 2009, Commune of Saint-Pol.-on-Ternoise, no ). In the case in point however, the debt was seriously contestable on two grounds. The first ground was that there were alleged errors and omissions in the calculation of the annual percentage rates as well as breaches by the credit institution of its professional obligations. The second ground was that the town had filed a legal action against Dexia Crédit with the Regional Court of Nanterre on 19 December 2011 seeking the annulment of the loan contracts for fraud and the existence of a potestative condition Swap contract and summary proceedings The Court of Appeal of Paris refused to order the Town of Saint-Etienne to make an interim payment under article 809, para. 2 of the Code of Civil Procedure owing to the existence of a serious challenge based on the allegedly speculative nature, in the Town's view, of a swap contract (Court of Appeal of Paris, 4 July 2012, no. 11/21801, Royal Bank of Scotland v. V. Saint-Etienne). The Town of Saint-Etienne contracted nine interest rate swaps with the Royal Bank of Scotland (RBS) between 2006 and On 21 February 2011, the Town of Saint-Etienne filed an action to have these contracts voided on that ground that they were illegal. The Town, which had ceased to pay the quarterly instalments, was formally requested by RBS to resume the payments, which it refused to do because of the annulment proceedings that had been initiated. In the Town's view, the swap was invalid and did not have to be performed. On 26 April 2011, RBS filed an urgent application requesting that the Town be ordered to make an interim payment. By order dated 24 November 2011, the judge of urgent matters of the Regional Court of Paris dismissed RBS s application. RBS lodged an appeal against that order on 6 December In its judgement dated 4 July 2012, the Court of Appeal of Paris also rejected the bank's application owing to 21

22 the existence of a serious challenge resulting from the allegedly speculative nature of the swaps. Local and regional authorities may not subscribe for speculative financial products. In theory, local and regional authorities may enter into hedging transactions (Ministry of the Interior Circular no. NOR/INT/B/92/00260/C, 15 Sept. 1992). However, these instruments may only be used to hedge the risk of an increase in the interest rate of a loan; therefore the income derived from hedging products may not exceed the amount of the loan and its interest (Ministry of the Interior Circular no. NOR/INT/B/92/00260/C, 15 Sept. 1992). In the Court's view, that was not the case in this affair: although the provisions of article 1134 of the Civil Code cited by Royal Bank provide that agreements lawfully entered into operate as law for the parties thereto, this legal force applies before the judge of urgent matters, a judge of evidence, only if the legality of the agreement is not seriously challenged; Such is not the case here since it is not contested that the loans in question are subject, following an initial fixed-rate period, to a floating rate, with no cap, which violates the prohibition imposed on these local authorities to enter into speculative contracts and refers to the conditions of conclusion of these loans, with particular regard to this legal constraint and Royal Bank's obligation to advise. It is worth noting that one of the facts pointed out by the Court for acknowledging that the Town's arguments provided grounds for a serious dispute was the absence of any cap on the floating rate during the second period of the contract. The following people contributed to this 2012 Annual Overview of Banking and Finance Law : Nicolas Aynès, Stéphanie Baudry-Desombre, Benoit Caillaud, Manon Carissimo, Xavier Clédat, Hubert Dugueyt, Alain Gauvin, Christophe Jacomin, Céline Larmet, Benoit Louis, Nicolas Mordaunt-Crook, Olivier Ortega, and Antoine Pampouille. 22

23 Contacts Alain Gauvin Partner Financing, Regulation and Asset Management Tel. (France): +33 (0) Tel. (Morocco): +212 (0) Christophe Jacomin Partner Financing, Asset Management and Regulation Tel.:+33 (0) GSM (France): +33 (0) GSM (Morocco): +212 (0) Nicolas Mordaunt-Crook Partner Asset Management, Regulation and Financing Tel.:+33 (0) Xavier Clédat Partner Banking and Finance Disputes Tel.: +33 (0) Hubert Dugueyt Partner Banking Disputes and Enforcement Olivier Ortega Partner Public Commercial Law Tel.: +33 (0) Tel.:+33 (0)