FRANCE: An Introduction to Banking & Finance: Financial Services Regulation

The financial services regulation sector in the EU has reached considerable maturity and has shown remarkable resilience and character following Brexit, the COVID-19 pandemic and finally the war in Ukraine. This industry has always been countercyclical, and workflow at law firms on financial regulatory matters has steadily been increasing over the last few years.

Financial services regulation in Europe is today better equipped to engage in new areas of financial supervision as well as in the fine-tuning of existing rules.

We have set out below recent or imminent changes in the EU and French financial services regulations.

Banking 

Firstly, in the banking sector, the modifications of the Capital Requirements Directive and the Capital Requirements Regulation (CRD VI and CRR III) will result in new rules making EU banks more resilient to potential future economic shocks.

Investment Services 

Investment services providers are still working through the recent entry into force and transposition of the IFD/IFR package, which established a new regulatory framework for investment firms by categorising them into several classes and resulted in the creation of a new type of regulated entity in France: “investment and credit institutions” (établissements de crédit et d'investissement). In addition, MiFID II has been subject to material changes, including a Quick Fix modification.

Payment and E-money Services 

Although entities providing payment and e-money services have not recently faced important regulatory changes (after the long technical debates on strong customer authentication), the significant economic growth and expansion of the sector and of the volume of payment transactions executed by payment and e-money institutions have considerably increased these firms’ own funds requirements, thereby posing fundraising issues for these companies. The European Commission has also launched a consultation to review PSD II and a PSD III is even being envisaged, which could lead to the merging of the PSD II and the Electronic Money Directive.

Crypto Assets 

The surge of crypto assets led to the regulation on markets in crypto assets, also known as the MiCA Regulation, which now awaits publication in the Official Journal of the EU. The regulation aims at creating a new harmonised legal framework at the EU level for many types of crypto assets that are not covered under European law. It provides a set of definitions of the different crypto assets, including utility tokens and certain types of stable coins, and it creates a new licence (and passport) for crypto-asset service providers. In blockchain technology, a new regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT) will apply as from 23 March 2023. Within the same “digital finance” package, the regulation on the operational resilience of the financial sector (the DORA Regulation) has now been adopted and imposes new requirements on agreements between IT service providers and financial entities (applicable from 17 January 2025). In the field of digital currencies, the digital euro project is currently under study.

AML-CFT 

In 2021, the European Commission presented an ambitious package of legislative proposals to strengthen the EU’s AML-CFT legislation. The package notably includes a regulation establishing a new European authority to fight money laundering as well as a new regulation with directly applicable rules, notably in the areas of customer due diligence and beneficial ownership. The parliamentary discussions at the EU level and at the national level in France for transposition work will most likely spark interesting debates to fine-tune and upgrade the AML-CFT framework as we know it today.

Sustainable Finance 

Sustainable finance is more than ever at the main centre of interests in all areas of financial services. In this regard, the Taxonomy Regulation entered into force in 2020 and has set out overarching conditions that an economic activity has to meet to qualify as environmentally sustainable. AIFMD, UCITS and MiFID II have also been modified to integrate sustainability risks and factors within these regimes. The NFRD (Non-Financial Reporting Directive), which currently governs the extra-financial performance notifications of EU companies, has been replaced by a new directive known as the CSRD (Corporate Sustainability Reporting Directive), which will apply progressively from 1 January 2024.

Crowdfunding 

A new regulation on European crowdfunding service providers entered into force in 2021 and was supplemented by delegated and implementing regulations, with a local French transitional regime applying until 10 November 2023. After this date, the French regime for crowdfunding investment advisers (conseillers en investissement participatif) will be abolished. The French crowdfunding intermediary (intermédiaire en financement participatif) regime will remain in place mainly for activities involving interest-free loans and donations, which fall outside the scope of the new European regulation. Otherwise, the provision of the crowdfunding services covered by the new European regulation now requires prior authorisation from the AMF as a crowdfunding service provider (prestataire de services de financement participatif).

European Resolution 

The transposition into French law in late 2020 of BRRD II and the entry into force of the regulation on the recovery and resolution of central counterparties has further strengthened the European resolution framework and the ability of authorities to achieve resolution outcomes that are effective in safeguarding financial stability and public funds. The French transposition also took into account the long overdue French cooperative banking groups in this area of law.

Post-Brexit 

Although the dust seems to have settled on post-Brexit regulatory issues, the impact of Brexit is still being felt with many international financial institutions keen on setting up or expanding their European hub, by relocating certain activities into the EU, establishing newly licensed actors and/or developing their cross-border products offer within the EU.

M&A 

Finally, M&A in the banking sector suffered following the 2008 global financial crisis and has never completely recovered since. Bank M&A activity has started to pick up, even if they remain below pre-crisis levels, with the promise that achievement of the banking union, addressing one of the key sources of financial fragmentation, could unlock the potential for more cross-border M&A transactions.

In France, the continuity of Macron’s presidency has been beneficial to the financial services sector, and France is beginning to regain a leading position in Europe.

The French banking and financial sector benefits from many advantages:

o France has one of the most important concentrations of domestic banks in Europe, with most French banking groups having large market value and size (compared to the more fragmented banking systems in other EU jurisdictions);

o The French asset management sector is one of the largest in the EU and not in small part due to the high savings rate in France;

o Paris has proven to be a favourable place for innovation particularly for fintechs and more generally for all European financial projects;

o French universities and engineering schools continue to produce large numbers of highly sought-after traders and asset managers; and

o The strength and solidity of the French banking and financial system is in large measure the result of highly experienced and competent regulators in France.