FRANCE

In 2008, France adopted a series of urgent measures, to support financing of the

economy, with the guarantee of the State in order to facilitate bank borrowing and to help
banks make capital investments to shore up their capital levels. These measures had been
authorized by the European Commission as they were State aid to enterprises. Given the
improvement in the markets, these measures have been stopped during 2009. The SFEF
(Société de financement de l’économie française, the agency set up in October 2008 to raise
government-guaranteed funds on the capital markets and then lend them to banks) decided to
end its activity in October 2009. Since 2008, the equivalent of EUR 77bn has been raised in
support of banks. The State has earned EUR 1.4bn for providing a guarantee for SFEF
issuance (source: SFEF). Overall, State budget revenues could reach EUR 2bn given the
remuneration of securities held by the SPPE (Société de prise de participation de l’Etat, a
dedicated vehicle set up to recapitalise credit institutions) and the fact that the banks have
repaid almost all their debts.

During the year 2009, French financial legislation included several structural reforms as
a consequence of the financial turmoil. These have been conducted in accordance with G20
orientations and European authorities.

Creation of the Prudential Control Authority

The reform of the French supervisory authorities is aimed at achieving three main objectives:
bolstering financial stability, reinforcing the security of consumers and increasing the visibility
of French positions within Europe and on the international stage.

The order of 21 January 2010 aims to modernise the French supervisory system for the
banking and insurance industries by merging the approval authorities i.e. the Comité des
entreprises d'Assurance (CEA Insurance Companies Committee) and the Comité des
établissements de crédit et des entreprises d'investissements (CECEI Credit Institutions and
Investment Companies Committee) with the control authorities i.e. the Banking Commission
and the Autorité de contrôle des assurances et des mutuelles (ACAM Insurance Companies
Supervisory Authority) to form a new structure to be called the Autorité de contrôle
prudentiel (ACP Prudential Control Authority).

Backed by the Banque de France, this new, independent administrative authority will be
headed up by the Governor of the Banque de France. Established in March 2010, it will help
increase consistency in the supervision of the various branches of finance. Its purpose is also
to strengthen the presence of the French authorities in international forums and the visibility of
the French two-pillar supervisory model: prudential authority (ACP) and market regulator
(AMF).

Reform of banking and financial regulation

• Reinforcing the control of risk and transparency

In order to improve risk control, 2 orders were decreed over the last twelve months : the order
of 29 October 2009 strengthening the fight against money laundering and combating the
financing of terrorism and the order of 19 January 2010 strengthening the system of measuring
and monitoring risk at banks, improving transparency vis-à-vis the regulator and forcing banks
to implement structures dedicated to monitoring risk.

• Controlling the compensation of market operators

On 25 August 2009, the President of the French Republic announced national reforms on the
compensation of market operators in line with international initiatives proposed at the meeting
of the G20 in Pittsburgh.
On 5 November 2009, an order was decreed that made France the first country to implement
the rules agreed by the G20, which include:

- Rules governing bonuses:

The system put in place bans multi-year guaranteed bonuses. It stipulates that bonuses must be
based on performance criteria. Moreover, an important percentage of variable compensation
(more than 50%) must be deferred over several years (at least three). An important percentage
of variable compensation (more than 50%) must be paid out in the form of shares that must be
held for a minimum length of time (at least 2 years). The order introduces the principal of a
malus or punitive bonus which would result in the bonus being cancelled or reduced in the
event of losses incurred by the activity.

- Transparency rules:
The order requires banks to publish annually quantitative data on the compensation paid to
both executives and market operators. This data includes, notably, the amount of compensation
broken down into fixed and variable remuneration, share-based component and the number of
beneficiaries. Data also includes the amount of variable compensation with the breakdown
between the deferred and non-deferred portions and the acquired and non-acquired portions.

• The fight against tax heavens

The amended finance law for 2010 of 30 December 2009 created an arsenal of sanctions
levelled against states on the OECD's list that have not yet signed a treaty with France. These
sanctions will also be applicable to states that have signed a treaty but do not adhere to it.
Theses sanctions notably include:
- taxing, in France, payments made in these states at the prohibitive rate of 50%
- taxing dividends deriving from these states
- stiffening rules permitting taxation, in France, of income that is artificially sheltered in
these states
- refusing to deduct payments in these states from corporation tax
- increased obligations regarding the documentation of corporate transfer prices.

On 12 February 2010, France published its own list of non-cooperative jurisdictions that could
be sanctioned. This list of 18 states includes the OECD list minus the states that have signed a
tax treaty with France. This list shall remain in effect until 1 January 2011 and will be re-
evaluated according to the initiatives that the states and territories will have taken.

• The proposed rule on banking and financial regulation

The proposed rule on banking and financial regulation passed on 10 June 2010 by the National
Assembly and will be submitted to the Senate in the coming weeks. It includes the following
measures: govern short selling, regulate the derivative markets and rating agencies and
reinforce the powers of banking sector supervisors and sanctions.
 Regulating derivative markets
The proposed rule on banking and financial regulation aims to reinforce derivative markets
regulation in the area of market abuse on derivative markets (notably CDS and commodity
derivatives).
On 29 March 2010, the activity of the French clearing house Clearnet SA (Paris) on CDS got
underway with a view to eliminating counterparty risks. At 2 June 2010, it had cleared more
than 300 transactions for a total of EUR 12bn.

Broaden the powers of the AMF

The French Financial Markets Authority (AMF), which shall now be the competent authority
in matters of:

Regulating short selling

- ban short selling on all instruments in exceptional circumstances
- impose transparency on short selling on all instruments

Controlling and sanctioning the rating agencies

- approve, control, sanction rating agencies and remind them of their responsibilities
- reinforce the responsibility of rating agencies in case of rating mistakes notably by
automatically voiding any clause limiting this responsibility.

The proposed rule on banking and financial regulation multiplies tenfold the upper limit of
sanctions that can be levelled against entities and persons under its jurisdiction, up to EUR 100
million.

Lastly, the proposed rule stipulates that rating agencies or subsidiaries of groups of rating
agencies registered with the AMF are liable for registration and operating fees of between
EUR 7,500 and EUR 20,000 to be made to the AMF. For each year following the registration a
contribution will be due of at least EUR 10,000 or the previous year's operating income
multiplied by a rate that cannot surpass 0.5%. It is payable after a 3-month window following
the closing of the financial year.

Improving the funding conditions of the economy

Continuing to finance the economy is at the heart of the initiatives to stem the financial crisis.
The proposed rule on banking and financial regulation of 10 June 2010 outlines also a raft of
measures to improve financing channels.

• Benefiting businesses

- Modernising the system of takeover bids to increase shareholder protection and prevent
"runaway" takeovers of listed companies. (Articles 8,9,10)

- Promoting the development of credit insurance by allowing credit insurers to use the
FIBEN database that lists the Banque de France's ratings of companies. (Article 13)
- Introducing procedures for takeovers and "squeeze-outs" on the "Alternext" market in
order to improve small and medium enterprises' access to markets as well as guarantees
offered to shareholders and investors. (Articles 11,12)
 - Facilitating SME's access to credit by merging the three public banking structures for
SMEs i.e. OSEO Financement, Garantie and Innovation (OSEO Financing, Guarantee
and Innovation agencies). (Articles 14 to18)

• Benefiting households

- Improving the financing of housing through the creation of "obligations à l'habitat" or

housing bonds that are securities issued by banks allowing them to refinance home
loans to individuals at a lower cost and with increased security. (Article 19)

The banks remain committed to increasing the information available to customers

concerning credit. Their responsible lending policy has allowed them, notably, to:

- improve disclosure on the insurance conditions for housing loans and to more easily
compare different offers by using a standardised form that has been obligatory since 1
July 2009,

- allow households to finance home improvements that boost energy efficiency thanks to
the 0% eco-loan created by the finance law for 2009 (the banks had made more than
75,000 offers at end-2009),

More recently, the law of 1 July 2010 on the reform of consumer lending, which transposes the
EU directive on consumer credit but also includes national provisions non-included in the
Directive, seeks to:

Guarantee responsible marketing of consumer loans and greater prevention of over-

indebtedness by:

- Reinforcing the regulation of advertisements in order to eliminate aggressive practices

that prevent households from making intelligent decisions when they are solicited.
- Making revolving credit more responsible by ending practices whereby loans become
permanent and are paid back too slowly or not at all. In this regard, the bill requires
revolving credit to impose a minimum amortisation of the principal for each payment.
- Increasing the obligations and responsibilities of lenders notably in terms of assessing
borrowers’ solvency.
- Controlling how loans are marketed at the point of sale and reforming the use of
loyalty cards as credit cards in order to obtain commercial advantages,
- Introducing consumer protection measures applicable to loan consolidation activities in
response to the growth in these activities.

Improve the way in which the situation of those in debt trouble is accounted for by:

- Accelerating the over-indebtedness procedures by reinforcing the powers of over-

indebtedness commissions.
- Shortening the time borrowers are on the FICP, the national database listing individuals
who have encountered loan repayment problems.
Harmonising the process for the supervision and combating of systemic risk

• Improving the monitoring and control of cross-border banking groups

Disparate banking supervision at the national level is inadequate given the current situation of
pan-European groups. In order to implement, in a consistent manner, financial regulation in
cross-border groups, improve the exchange of information, cooperation and the effectiveness
of decisions, the French banking supervisor has been put in charge of implementing three
European oversight bodies for BNP Paribas, Société Générale and Crédit Agricole. The
supervisors of European countries in which these groups have subsidiaries will participate in
these bodies (transposition of EU directive CRD2 by the law on financial and banking
regulation, Articles 5, 6 and 7).

• Financial regulation and systemic risk committee in France

One of the major advances of the proposed rule on banking and financial regulation is the
creation of a financial regulation and systemic risk committee in France. The committee will
be chaired by the minister of the economy. It will include all authorities in charge of
controlling the financial sector and will seek to coordinate France's initiatives within
international and European organisations in order to promote reform of financial sector
regulation at these various levels. The committee will also have the role of warning against
and preventing risk in this sector. It will be in relation with the future European Council of
Systemic Risk that should be created in the European Union in early 2011.

Sources:
Website of the French National Assembly http://www.assemblee-nationale.fr
Bill of 16 December 2009 on banking and financial regulation, minutes of the Council of ministers meeting of 16/12/09
and Impact Study
Law no. 2010-737 of 1 July 2010 on the reform of consumer credit, published in the Journal Officiel (official bulletin) of 2
July 2010

Website of the ACP (Prudential control authority) http://www.banque-france.fr/acp/index.htm

Website of the FBF www.fbf.fr and www.afb.fr, and FBF theme reports (Banking supervision, Major steps in the French
financing plan, etc.)
2009 FBF Management Report
Website of the Ministry of the Economy www.economie.gouv.fr, the financial accomplishments of the G20
The website of the French Senate www.senat.fr , Resolution of 24 September 2009 on the proposal of the directive of 13
July 2009 pertaining to capital requirements for trading portfolios and for re-securitisations, and prudential supervision of
compensation policies.
Finance bill for 2010
2009 Report by the AMF (French Financial Markets Authority) on rating agencies
Report by Jean-François Lepetit dated April 2010 on systemic risk