January 12 2001
Banking activities have undergone striking economic and legal changes in recent years. Part of the change in the legal landscape is a result of the enactment of European banking regulations that emphasize competition. Economically, the demand for credit and investment opportunities and the technological innovations have reshaped banking services and the management of credit institutions.
Over the last 16 years, the Banking Law of 1984(1) has significantly reorganized and liberalized the French banking system, preparing French banks for integration into the European Single Market. This modernization resulted in numerous mergers and privatizations (eg, Paribas, Banque Nationale de Paris) throughout the financial sector. As a consequence, the number of credit institutions in France has dropped by 20% over the past five years. The diversity of the current French banking system is another consequence of the reorganization and liberalization movement. French banks vary widely in terms of size and function, from general purpose institutions like the large network banks (eg, Banque Nationale de Paris, Crédit Lyonnais, Société Générale), to institutions performing a limited range of bank functions for a particular clientele, to strictly regional institutions.
Law 96-597 of July 2 1996, which implemented EC Directive 93/22 on investment services in France, has amended the Banking Law so that French and EC banks, as well as EC investment firms, are authorized to carry out investment services in France. Before this, French brokerage firms were the sole intermediaries entitled to enter into transactions on securities listed on the French Stock Exchange.
From an institutional point of view, the 1996 law has reformed the French banking system. Banks are now subject to the same regime and the same authorities as investment firms, when carrying out securities transactions.
The French banking system also has a distinctly international feature. Foreign institutions have made substantial investments in the French banking system, and French institutions such as Crédit Lyonnais and Société Générale have flourished abroad since the beginning of the century.
Credit institutions created by the Banking Law
The Banking Law (Article 18) fosters diversity among French banks by setting forth six categories of credit institutions:
'Credit institutions' are defined in Article 1 as "legal persons who carry out banking operations, as their usual business". Consequently, credit institutions benefit from a monopoly on banking transactions as defined by the Banking Law (ie, "receipt/deposit of customers funds, credit transactions and management means of payment").
Some other activities may be carried out by credit institutions, but they do not pertain to the bank monopoly. The list of those activities is given in Articles 5 and 6 of the Banking Law and include "investment, subscription, purchase, management, custody, and sale of investment securities or any other securities". Another set of activities may be carried out by banks, according to Article 7 of the Banking Law. Those activities (eg, real estate, insurance) are not listed or defined by the law, but the credit institutions are allowed to carry them out provided that they comply with the conditions laid down by the Financial and Banking Regularity Committee (Article 30 of the Banking Law).
The authorities specific to the banking sector
Two types of authorities were created by the Banking Law: the regulatory authorities and the advisory authorities.
The role and organization of French regulators is unique among European banking
systems. In no other EU state has the legislature granted such broad power to
banking authorities. The Banking Law entrusts regulatory and supervisory functions
to three different bodies. First, the Financial and Banking Regulatory Committee
(Comité de la réglementation bancaire et financière)
enacts general rules applicable to credit institutions and investment firms.
As far as banks only are concerned, the committee is competent for:
Second, the Credit Institutions and Investment Firms Committee (Comité des Etablissement de Crédit et des Entreprises d'investissement or CECEI) is responsible for issuing individual decisions concerning credit institutions, including:
Third, the Banking Commission (Commission bancaire) has two primary functions: (i) to supervise credit institutions by reviewing the accounting information which institutions are required to submit to the commission, and (ii) to ensure that credit institutions comply with all applicable statutory and regulatory provisions by conducting periodic on-site inspections. If a review of the accounting information or an on-site inspection reveals an infringement or a default, the commission may exercise a broad range of disciplinary powers, such as:
The advisory authorities are the National Credit and Securities Council, Conseil National du Crédit et du Titre (CNCT), and the Consultative Committee, (Comité des Usagers). The CNCT performs two main functions, (i) monitoring and assessing the financial system and the operations of the banking sector, and (ii) responding to requests for advice from the Ministry of Economy and Finance concerning draft laws and decrees. The council must also issue an annual report to the Ministry of Economy and Finance concerning banking and financial activities in France.
The Consultative Committee is in charge of improving relationships between credit institutions and their clients. Its mission is to formulate proposals for change in institution-client relationships through scholarly research and studies. Proposals take the form of general advice and recommendations, and may be requested by the minister of economy and finance or the governor of the French Central Bank.
The Stock Exchange Commission (Commission des Opérations de Bourse), was formed pursuant to Ordinance 67-833 of September 28 1967. The commission is an administrative body to which the credit institutions are compelled to submit reports on activities such as public offerings and portfolio management. The commission benefits from regulatory powers (it may issue general regulations applicable to any persons) and it may also issue individual decisions which aim to ensure compliance with its general regulations, such as approvals (eg, approval for the provisions of services like portfolio management for account of a third party).
The Financial Market Council (Conseil des Marchés Financiers) was created by the 1996 law. The council issues general regulations which provide for the organization of the French financial markets (including rules governing takeover offers) and is empowered to take individual decisions concerning financial intermediaries. It is meant to approve the activities programme of the credit institutions. The council also enacts rules of good conduct applicable to the providers of investment services.
The French Central Bank (Banque de France) has a central mission defined in the law of August 4 1993 relating to the French Bank status, and the Banking Law. In addition to its own role as France's national bank, the French Central Bank is also responsible for establishing monetary policy and its application to credit institutions. However, the French Central Bank is not directly in charge of regulating, approving or controlling banking and financial business. In return, it is closely associated with those responsibilities. The governor of the French Central Bank is a member of the Financial and Banking Regulatory Committee, presides over the Banking Commission and is commissioned to ensure the stability of the banking system. The governor is also represented at the commission and the council, and is entitled to make suggestions regarding the regulations adopted by those authorities.
Cooperation with foreign authorities
According to the principles laid down by the Basel Committee, the French authorities are meant to cooperate with their foreign counterparts. The European Union has made it possible for member states to enter into treaties governing information exchange between them and third states (Directive 77/780/CEE). The Banking Law (Article 31.1-2) entitles the CECEI to transmit information to foreign authorities in charge of the approval and the control of credit institutions and financial entities, subject to reciprocity.
Information may be freely exchanged between member states. French authorities have entered into several treaties relating to bilateral cooperation with European counterparts. The provisions of these treaties define the means of implementation of the right of establishment and the freedom to provide services, and the supervision of these activities by the home member state (eg, treaty between France and Germany of October 1 1992).
Definition of a 'foreign bank'
The concept of a foreign bank no longer corresponds to a special type of credit institution recognized under the Banking Law. In France, foreign operations may be classified as full-time companies licensed as credit institutions, or as representative offices. Full-time companies include French branches of institutions headquartered abroad, and credit institutions organized under French law but owned by non-resident shareholders.
A non-resident wishing to establish a branch or subsidiary in France, or to take control of a credit institution organized under French law, must comply with the regulations determining the general conditions under which foreign investments are permitted in France.
Although branches are merely offices of foreign credit institutions and are not legal persons, they are nonetheless regarded as credit institutions by the Banking Law. In order to open a branch in France, a foreign institution from a non-EC or EEA member state must obtain a licence, which will be granted if the following conditions are satisfied:
Establishing a subsidiary
Foreign banking groups and foreign non-bank investors that decide to open a subsidiary in France need to incorporate a company under French law, and file a licence application with the CECEI, under the same conditions as French banking groups and investors.
Acquiring an existing
When a foreign bank or company wishes to acquire control of a French credit institution, it must obtain prior authorization from the CECEI. However, change of control applications filed by non-EC companies are subject to the same conditions as licence applications.
Special rules for European banks
Branching by EC institutions throughout the European Community is subject only to the regulatory authority of the home country, free from intervention by the host country. However, the CECEI must receive a letter from the home country indicating that it has received a branching application from the institution in question. If an EC institution or company wishes to establish a subsidiary credit institution in France, the CECEI will first consult the regulatory authority in the institution's home country before licensing the proposed subsidiary.
Finally, acquisitions of credit institutions licensed by the CECEI made by persons subject to the laws of one or more EC member states who already have de facto control of the institution do not require prior authorization, but must be reported to the CECEI.
The European Union aims to harmonize regulations and practices in order to enhance competition and reinforce customers' protection. This has led to the harmonization of the conditions to grant approval to credit institutions, as well as of the prudential ratios. (2)
Wherever in Europe a credit institution is created, it will be required to comply with the two Banking Directives: the directive of December 12 1977 (first directive on banking coordination) and the directive of December 15 1989 (second directive on banking coordination). These lay down the conditions applicable to any credit institution wishing to obtain the approval to establish in a member state.
Finally the directive 'post BCCI' dated June 29 1995 (adopted after BCCI's bankruptcy, whose registered office was located in the Cayman Islands) provides that credit institutions must establish their head office in the same country as their registered office.
With regard to the euro, since January 1 1999, in accordance with the Maastricht Treaty, national practices have been replaced with the European Central Bank and the European System of National Central Banks. This means that credit institutions will be able to provide similar services to clients from any country where the euro is in circulation. Competition between European banks will therefore be much stronger. All the services proposed by credit institutions whose registered office is located in the European Union will show the same characteristics and comparable charges and rates.
E-Business and Banking Law
The development of the Internet has raised many difficulties regarding disclosure of financial information on the Internet and the marketing of financial services. As a result, a draft European directive relating to distance marketing of financial services has been issued. This draft directive aims at granting consumers similar information and protection that consumers benefit from in the traditional market. To this end, the draft directive provides for a cooling-off period and a right to retract for the benefit of the consumers.
Under French law, this directive, once implemented, will only reinforce the protection of credit institutions' clients. Indeed, the duty to inform and to counsel was already defined within the terms of Article 58 of the 1996 law. Besides, the French Supreme Court has often highlighted credit institutions' duty to inform and to counsel their clients. (3)
For further information on this topic please contact Philippe Portier or Raphaële Navelet at Jeantet & Associés by telephone (+33 1 45 05 81 96) or by fax (+33 1 47 04 87 98) or by e-mail (email@example.com or firstname.lastname@example.org).
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