Sea of Change Regulatory reforms charting a new course. France to legislate on ring-fencing and resolution January 2013

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Allan Freeman
6 years ago
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1 January 2013

2 Contents Introduction 3 Key differences from existing proposals 4 Proposed requirement for separation of activities 5 Proposed new resolution regime 7 Contacts 9 This document is intended as a summary of the matters covered. It is not intended to be comprehensive or to provide legal advice. For more information, contact one of the lawyers named below. 2

3 The Government has proposed a new law on separation and regulation of banking activities. The proposal was published by the Ministry of Economy and Finance on 19 December 2012 and has now entered the legislative process. Implementation will require additional secondary legislation and regulations. The Government states that the proposals aim to protect depositors savings and to put finance at the service of the real economy. The text of the proposals is available at: The proposals are important for the French banking market and also signal the French Government s likely approach in the negotiations on the proposed EU recovery and resolution directive (RRD) and the Liikanen report on reforming the structure of the EU banking sector. The proposals may also affect the French subsidiaries of foreign banking groups but do not specifically address how they apply to French branches of foreign (EU or non-eu) banks. The proposals would require larger French banks to separate certain trading and investment activities into dedicated subsidiaries. The requirement affects limited types of proprietary trading and transactions with hedge funds but would have to be implemented by 1 July The proposals envisage a new resolution regime for banks and investment firms. The proposals are similar to those in the proposed RRD but with some important differences. The law also proposes other important changes. It would create a new macro-prudential oversight authority, the Conseil de stabilité financière, with powers to increase the levels of own funds required by regulated firms to constrain excessive credit growth and protect financial stability and to regulate the grant of credit to forestall speculative bubbles. It contains reforms relating to the regulators powers, including new powers over appointments of directors, and relating to central counterparties (CCPs), including powers for CCPs to take security by pledge rather than title transfer. It would introduce new consumer protection measures, including giving borrowers more transparency and choice in insurance products, capping fees for irregular use of bank accounts by some consumers, reinforcing the right to a basic bank account and changing the laws on over-indebtedness. 3

4 Key differences from existing proposals Separation of activities The proposed extent of separation is more limited than that contemplated by the EU Liikanen report or the UK Vickers report, as it only requires the transfer to a dedicated subsidiary of: A limited category of own account dealing. Investment in and unsecured transactions with hedge funds. In particular, banking entities would continue to be able to carry on a broad range of principal trading activities, including certain client services, market making and hedging activities. But unlike the Liikanen or Vickers proposals, there would effectively be a ban on banking groups carrying on certain limited activities, namely: Certain high frequency trading activities and Certain soft commodities business. Press comment suggests that the proposals would only affect a relatively small proportion of the business of major French banks. Unlike the Vickers report, the law does not propose a liquidation priority for depositors guaranteed by the deposit guarantee fund (although resolution funding by the fund will benefit from priority). However, the law sets an implementation deadline earlier than the Vickers report (1 July 2015 instead of 2019) New resolution regime In contrast to the RRD, under the proposed French regime: Resolution powers would not extend to all financial institutions within a group (only the bank/investment firm and holding companies). The proposed trigger for resolution is set further from insolvency, in particular in so far as it only requires a failure to meet minimum capital requirements. The proposed bail-in power is limited to capital and subordinated instruments and does not extend to general senior creditors (and there are no proposals to require French banks to carry additional amounts of bail-in eligible senior liabilities). There is no power to require affiliates to continue to provide services or facilities to entities in resolution. There is no general moratorium power or power to impose a temporary suspension of termination rights as part of resolution action. There are no specific safeguards to protect netting, set-off or collateral arrangements from the exercise of resolution powers. The existing deposit guarantee fund would provide resolution funding, rather than a dedicated resolution fund. There are no proposals for additional pre-funding of the guarantee fund (although the Government notes that the proposed amendments to the EU deposit guarantee directive would raise pre-funding to 1% of total deposits by 2020, i.e. from approx 2bn to an estimated 10bn). There are no proposals for the recognition in France of resolution actions taken by non-eu authorities in relation to non-eu banks. 4

5 activities may not: Proposed requirement for separation of activities Scope of application Banks and other credit institutions, financial holding companies or mixed financial companies (whose activities in financial instruments exceed thresholds to be set by the Council of State). Separation requirement Relevant entities may only carry on the following activities through a dedicated subsidiary: Dealing on own account in financial instruments (subject to exceptions for transactions for specified and defined purposes see below); Any operation including investment in or providing unsecured financing to hedge funds or similar funds. Restrictions on dedicated subsidiaries The dedicated subsidiaries may not: above Take insured deposits or provide payment services to customers whose deposits are insured under the French national deposit insurance scheme. Conduct high frequency trading operations which are taxable in France under the special provisions relevant for this purpose. Conduct certain transactions in financial instruments where the underlying subject matter is agricultural commodities. Enhanced prudential requirements The dedicated subsidiaries will be subject to stand-alone regulation as a bank or investment firm, including prudential rules. Banks and holding companies with a dedicated subsidiary will be subject to prudential rules on the basis of their individual and consolidated financial situation excluding the subsidiary on the basis of rules to be set by the Minister of the Economy. Banks must treat their dedicated subsidiary as not being a member of their group for the purposes of the bank's large exposure restrictions. The Authority for prudential control is to have wider powers to monitor and intervene in banks' activity, including powers to prohibit certain activities. Implementation deadline Banks must complete the transfer of activities necessary to comply with these requirements by 1 July

6 Bank entities could continue to conduct defined own account dealing activities Provision of investment services to clients Provision of investment and ancillary services when taking part in transactions in financial instruments with the aim of responding to clients' needs for hedging, financing or investment, where the expected earnings are derived from the services provided to clients and the sound and prudent management of the risks associated with those services. Clearing of financial instruments Likely to be in line with the EU regulation on OTC derivatives, CCPs and trade repositories (EMIR). Hedging The activity of a relevant entity taking part in transactions in financial instruments with the aim of reducing its exposures to risks of any kind related to its credit and market activities. The instruments used for hedging must have an economic relationship with the risks identified. Group investment activity The activity of buying and selling securities acquired with the intention of maintaining a durable holding (and related transactions on financial instruments) and purchases and sales of securities issued by entities in the same group. Treasury and group activity Sound and prudent management of the treasury of the group and financial transactions between credit institutions, financial holding companies and mixed financial holding companies and members of their group. Market making The activity of a relevant entity which, as an intermediary, takes part in transactions in financial instruments: by posting firm, simultaneous two-way quotes of comparable size and at competitive prices, with the result of providing liquidity on a regular and ongoing basis to the market; or as part of its usual business, by fulfilling orders initiated by clients or in response to clients requests to trade. 6

7 Proposed new resolution regime Resolution authorities The existing Authority for prudential control is appointed as the resolution authority and renamed as the Autorité de contrôle prudentiel et de résolution (ACPR): It will have separate committees responsible for prudential supervision, resolution and sanctioning. The resolution committee comprises the Governor and a deputy governor of the Bank of France, the director-general of the Trésor, the president of the AMF and the president of the deposit guarantee fund (or their representatives). The deposit guarantee fund is also renamed (as the Fonds de garantie des dépôts et de résolution FGDR) and is given certain functions in relation to resolution: Including powers to acquire or all part of the shares of an entity in resolution, to subscribe for capital of an entity in a bridge institution (établissement relais) and to support the financing of the entity in resolution or bridge institution (including by guarantee). The FGDR will act upon instructions from the ACPR. The FGDR is directly financed by banks and other credit institutions, financial holding companies and mixed financial holding companies. Moneys paid by the FGDR will benefit from priority under Article L the Code of Commerce. Recovery and resolution planning Credit institutions and investment firms (other than portfolio management companies) or their groups would be required to submit recovery plans to the ACPR if they are over a size threshold to be fixed by decree (and the ACPR can require other entities supervised by it to prepare such a plan). The ACPR is also tasked with preparing resolution plans for these entities or groups and can require them to remove any barriers to resolution. Scope of resolution regime Applies to credit institutions, financial holding companies, mixed financial holding companies and investment firms (other than portfolio management companies). The trigger for resolution action is if the APCR considers that (on an individual or group basis) there is no prospect of avoiding the failure of the relevant person within a reasonable time other than by use of resolution measures or a recapitalisation plan. For these purposes, an entity is failing if there are objective elements which show that in the near future: its own funds will fall below the level required to maintain its authorisation; it currently is or in the near future will be unable to pay its debts; or it requires extraordinary public financial assistance. 7

8 Proposed resolution powers for ACPR Restructuring powers Business transfer: To transfer all or part of the entity s branches of activity to a third party or of its assets, rights and liabilities to a bridge institution: Transfer benefits from full universal succession (no need for further formalities) and overrides contractual restrictions and termination rights on the transfer of relevant agreements to the transferee. The APCR can licence a bridge institution for this purpose (dispensing with otherwise applicable requirements). Transfer of shares: To transfer the shares of the entity in resolution to the FGDR or a bridge institution. Bail-in of capital instruments: To order a reduction of capital or cancellation of capital or liabilities or the conversion of liabilities to absorb losses in the following order: First, shareholders; Secondly, holders of subordinated debt of second priority issued under Article L of the Code of Commerce, participating securities (titres participatifs) and other second priority instruments whose terms of issue envisage that they would bear losses on a going concern basis; Thirdly, holders of other obligations that are subordinated under their terms of issue to senior secured or unsecured creditors. Recapitalisation: To require the entity in resolution to issue new shares or other instruments representing own funds (including preference shares and contingent convertibles). Suspension of payment: To prohibit the payment of all or part of the debts capable of being bailed-in under the bail-in powers and the payment of dividends or other distributions to shareholders of the entity in resolution. Management and control To require regulated entities and their directors, auditors and employees to provide information necessary for resolution purposes. To appoint an administrator to replace existing management (events of default based on such an appointment are overridden) and to empower the Trésor to finance administration costs, if needed. To remove the senior management of the entity in resolution (senior management s rights to deferred remuneration for the duration of the appointment of an administrator are unenforceable). To require the FGDR to intervene in accordance with its powers, provided that this does not give rise to contagion. To value the losses that would have been incurred by the assets and liabilities of the entity in resolution disregarding the resolution measures and any public support. To limit or prohibit temporarily the operations of the entity in resolution. Safeguards The APCR must ensure that no shareholder or creditor incurs losses in resolution greater than it would have suffered in a liquidation. The APCR must determine the issue price of new shares or other instruments and the terms of transfer or conversion on the basis of a valuation of an independent expert or in urgent cases can carry out the valuation itself (taking into account market values). Any judicial decision annulling a decision of the APCR will not affect the validity of prior actions as against third parties, except in the case of fraud. 8

Contacts Paris Frédérick Lacroix Partner T:

com Sébastien Praicheux Senior Associate T:

9 Contacts Paris Frédérick Lacroix Partner T: M: E: Bruno Fatier Counsel T: M: E: Sébastien Praicheux Senior Associate T: M: E: London Chris Bates Partner T: M: E: Simon Gleeson Partner T: M: E: 9

10 Worldwide contact information 35* offices in 25 countries Abu Dhabi 9th Floor Al Sila Tower Sowwah Square PO Box Abu Dhabi United Arab Emirates Tel +971 (0) Fax +971 (0) Bucharest Badea Excelsior Center Academiei Street 12th Floor, Sector 1 Bucharest, Romania Tel Fax Hong Kong 28th Floor Jardine House One Connaught Place Hong Kong Tel Fax Milan Piazzetta M.Bossi, Milan Italy Tel Fax Prague Jungmannova Plaza Jungmannova Prague 1 Czech Republic Tel Fax Sydney Level 16 No. 1 O'Connell Street Sydney NSW 2000 Australia Tel Fax Amsterdam Droogbak 1A 1013 GE Amsterdam PO Box AG Amsterdam The Netherlands Tel Fax Casablanca 169, boulevard Hassan 1er Casablanca Morocco Tel Fax Istanbul Kanyon Ofis Binasi Kat 10 Büyükdere Cad. No Levent Istanbul Turkey Tel Fax Moscow Ul. Gasheka Moscow Russian Federation Tel Fax Rome Via Di Villa Sacchetti, Rome Italy Tel Fax Tokyo Akasaka Tameike Tower, 7th Floor 17-7 Akasaka 2-Chome Minato-ku, Tokyo Japan Tel Fax Bangkok Sindhorn Building Tower 3 21st Floor Wireless Road Pathumwan Bangkok Thailand Tel Fax Doha QFC Branch Suite B, 30th floor Tornado Tower Al Funduq Street West Bay PO Box Doha State of Qatar Tel Fax Kyiv 75 Zhylyanska Street Kyiv Ukraine Tel Fax Munich Theresienstraße Munich Germany Tel Fax São Paulo Rua Funchal th Floor São Paulo SP Brazil Tel Fax Warsaw Norway House ul. Lwowska Warszawa Poland Tel Fax Barcelona Av. Diagonal Barcelona Spain Tel Fax Dubai Building 6, Level 2 The Gate Precinct Dubai International Financial Centre PO Box 9380 Dubai United Arab Emirates Tel Fax London 10 Upper Bank Street London, E14 5JJ United Kingdom Tel Fax New York 31 West 52nd Street New York, NY USA Tel Fax Seoul 21st Floor, Ferrum Tower 66 Sooha-dong Jung-gu, Seoul Korea Tel Fax Washington, D.C K Street NW Washington, DC USA Tel Fax Beijing 33/F, China World Office 1 No. 1 Jianguomenwai Dajie Chaoyang District Beijing China Tel Fax Düsseldorf Königsallee Düsseldorf Germany Tel Fax Luxembourg 2-4 place de Paris B.P L-1011 Luxembourg Grand-Duché de Luxembourg Tel Fax Paris 9 Place Vendôme CS Paris Cedex 01 France Tel Fax Shanghai 40th Floor Bund Centre 222 Yan An East Road Shanghai China Tel Fax Brussels Avenue Louise 65 Box Brussels Belgium Tel Fax Frankfurt Mainzer Landstraße Frankfurt am Main Germany Tel Fax Madrid Paseo de la Castellana Madrid Spain Tel Fax * s offices include a second office in London at 4 Coleman Street, London EC2R 5JJ. **The Firm also has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh. Perth Level 7, 190 St Georges Terrace Perth, WA 6000 Australia Tel Fax Singapore 12 Marina Boulevard 25th Floor Tower 3 Marina Bay Financial Centre Singapore Tel Fax Riyadh** (Co-operation agreement) Al-Jadaan & Partners Law Firm Building 15, The Business Gate King Khaled International Airport Road Cordoba District, Riyadh, KSA. P.O.Box: 3515, Riyadh 11481, Kingdom of Saudi Arabia T F

11 , 10 Upper Bank Street, London, E14 5JJ 2013 LLP is a limited liability partnership registered in England and Wales under number OC Registered office: 10 Upper Bank Street, London, E14 5JJ We use the word 'partner' to refer to a member of LLP, or an employee or consultant with equivalent standing and qualifications

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