FRANCE: An Introduction to Financial Services Regulation

General Economic Overview of France 

In 2023, the French economy faced an average inflation rate of 4.9% on the consumer price index (compared to 5.2% in 2022) and the French GDP growth reached 0.8% (compared to 2.6% in 2022). Economic activity is expected to remain sluggish in 2024 but should strengthen in 2025. However, such forecasts remain uncertain due mainly to the geopolitical context, with the ongoing war in Ukraine, tensions between China and the United States and the current situation in the Middle East. Recent macroeconomic shifts, such as high inflation rates and the increase in interest rates, coupled with the slowdown in growth, have put real estate markets under stress. Despite this situation, the French financial sector has demonstrated its attractiveness and now ranks as the leading post-Brexit Continental financial centre. Most major international banks from the United States and the United Kingdom have now chosen Paris as the hub for their staff dedicated to financial market activities in the Eurozone.

A notable political event in 2023 was the adoption of the French pension system reform. As suggested by surveys, such reform will certainly lead to an increase in the savings rate in France (namely, through private retirement savings plans). France is still one of the countries with the highest savings rate and at the end of 2023, the French household savings rate was close to its previous level at the beginning of the COVID-19 pandemic.

Corporate banking and M&A 

Highly dependent on the economic and political context, the French banking M&A sector suffered another tough year by closing one of the worst first semesters since 2008. Although the global volume of M&A deals decreased for the second year in a row, such decrease in 2023 was less significant than the previous year’s, which came after a historically high year in 2021. In 2023, mid-market deals held up and some sectors are already coming back in force, such as TMT (technology, media and telecommunications) and energy. Despite some adverse conditions compared to the past few years and uncertainties surrounding the macroeconomic and geopolitical landscape, there are reasons to be optimistic about a recovery in 2024.

Banking sector and payment services 

Despite the banking crisis in the United States and Switzerland in March 2023, French banks showed stability in their total deposit and complied with their short-term liquidity ratios. According to the Banque de France’s governor, this demonstrated an improvement in the French financial sector’s solvency. At the EU level, the new global regulatory reforms of Basel III are expected to be implemented, which would almost certainly lead to a revision of the EU Capital Requirements Directive (CRD) and the EU Capital Requirements Regulation (CRR). Such implementation will aim to strengthen the resilience of banks operating within the EU and enhance their monitoring and risk management. Moreover, the European Commission proposed amendments to the EU Payment Services Directive (PSD II) aiming to combat and mitigate payment fraud, and improve consumer rights and the functioning of open banking, among other objectives.

Digital assets 

The new Regulation (EU) 2023/1114 on markets in crypto-assets (MiCA) of 31 May 2023 came into force on 29 June 2023 and will be fully applicable from 30 December 2024. This regulation aims to establish a harmonised framework within the EU governing the issuance, offer to the public and admission to trading of crypto-assets (which are not already covered by existing EU regimes on financial instruments), as well as the provision of services related to crypto-assets. French crypto-asset service providers (within the meaning of the EU Regulation) will then have to be authorised by the French Financial Markets Authority (Autorité des marchés financiers – AMF).

In France, the provision of crypto-asset services has already been subject to a specific legal and regulated framework since the adoption of the “Pacte Law” of 22 May 2019, which created the regulated status of “digital asset service providers” (prestataires de services sur actifs numériques– PSAN). French PSANs already registered with the AMF will however benefit from an 18-month transition period to become authorised as crypto-asset service providers pursuant to MiCA. An adaptation of French law and the AMF’s General Regulations is now deemed necessary to ensure the implementation of MiCA in France. In addition, the AMF is currently working with stakeholders and industry associations to support the transition from the previous French framework to this new EU framework.

Finance and data 

The year 2023 saw the introduction of Regulation (EU) 2022/2554 (DORA) of 14 December 2022 on digital operational resilience for the financial sector. This new regulation promotes a common set of rules and standards to mitigate information and communications technology (ICT) risks for financial entities, within the meaning of DORA. These rules are based on five pillars: ICT risk management, ICT-related incident management, digital operational resilience testing, third-party risks management, and information sharing.

Moreover, the European Commission also published a proposal for an EU Regulation on a framework for financial data (FIDA) on 28 June 2023. This regulation will affect almost all financial institutions, which will have to comply with new requirements regarding financial data security, and guarantee access and transparency to their clients regarding their own financial data. They will also be compelled to become members of at least one financial data sharing scheme, a new entity created by this regulation.

Investment services 

Since June 2021, EU investment firms have been subject to a new regulatory and prudential regime, pursuant to Regulation EU 2019/2033 (IFR) and Directive EU 2019/2034 (IFD). The IFR/IFD package introduced a levelled and adapted supervisory and prudential regime based on the categorisation of investment firms into three classes according to their size, the nature of their activities, and their risk. Following the latest report from the French Banking Authority (Autorité de contrôle prudentiel et de résolution– ACPR), the implementation of the IFR/IFD package is still not finalised in France. There are currently 102 French investment firms, with 52 categorised as class 2 and 39 categorised as class 3.

The last few years have seen the development of new investment advice practices, delivered on an automated basis to retail clients through a “robo-adviser”. Such automated investment advice to retail investors constitutes one of the supervisory priorities of the AMF for 2024. According to the AMF, it will be focusing on the lack of standardisation in the advice given and this will lead to the publication of a thematic control report (“SPOT” control report) through which the AMF will highlight poor and good practices, and provide its specific guidelines in the use of robo-advisers.

Sustainable finance 

In France, assets under management in renewable energies represented EUR50 billion in 2022. Surveys suggest that 75% of French investors see the impact of their investments on the environment as an important consideration. Sustainable finance remains a crucial issue for regulators, and norms and standards are constantly evolving at EU and national levels. For instance, new guidelines from the European Securities Markets Authority (ESMA) (ESMA35-43-3172) require investment service providers to take into account investors’ sustainability preferences before providing investment advice. Meanwhile, in France, the French label on socially responsible investment (investissement socialement responsable– ISR) created in 2016 was updated on 12 December 2023 to strengthen its eligibility criteria.

Anti-money laundering and countering the financing of terrorism (AML/CFT)

On 18 January 2024, the European Council and Parliament announced that a provisional agreement had been reached on the EU’s new AML/CFT system, which will result in a new regulatory package (new EU directive and regulation). The purpose of such EU regulation, which will directly apply to any obliged entities in the EU, is to exhaustively harmonise rules on AML/CFT throughout the EU, enhance accessibility to the information on ultimate beneficial owners and require the application of enhanced due diligence measures in specific cases.

Such agreement is built upon a general action plan at the EU level to further strengthen the rules on AML/CFT, via a package of new legislative measures. The EU package includes, at its centre, the creation of a new EU authority on AML/CFT. Such new authority will be granted direct and indirect supervisory powers and will be able to impose pecuniary sanctions on obliged entities.

Crowdfunding 

Prior to the entry into force of Regulation EU 2020/1503 in 2021, France already had a national regime covering crowdfunding activities through three different statuses: (i) crowdfunding investment advisers (“CIPs”); (ii) investment service providers allowed to provide investment advice through a website; and (iii) crowdfunding intermediaries (for loans and donations) (“IFPs”). CIPs and IFPs that were already registered as such in 2021 benefited from a transitional regime until 10 November 2023, allowing them to carry on their activities under the former French legal framework. Since then, any French crowdfunding actors have had to comply with the EU regime on crowdfunding and be authorised by the AMF as crowdfunding service providers pursuant to the EU Regulation. In January 2024, 45 French entities were authorised as crowdfunding service providers.

Conclusion 

By way of conclusion, it is noted that specific national regimes that previously applied in France are gradually being supplemented or replaced by new, broader and more harmonised EU frameworks.

This trend, together with constant regulatory developments that have intensified over the past few years, has resulted in a complex and multi-dimensional regulatory framework that undoubtedly constitutes an ongoing challenge for regulated entities in the banking and financial sectors.