## Detailed Assessment of Compliance — IMF Staff Country Report _cr05186 ## Source details **Canonical URL:** [Detailed Assessment of Compliance — IMF Staff Country Report _cr05186](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05186.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05186.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05186.pdf.json) --- ### General assessment and mission - Assessment context and timing: - Update of 2001 MAE BCP assessment for France performed during the 2004 FSAP mission. - Assessment conducted January 28–February 10, 2004. - Prepared by Jan Willem van der Vossen (MFD). - Institutions assessed: - Banque de France (BdF), Commission Bancaire (CB), CECEI, CRBF (to be replaced), AMF, CCAMIP, Conseil National du Crédit et du Titre (CNCT), Fonds de Garantie des Dépôts (FGD). - Prior findings: - 2001 MAE: “compliant” gradings for 21 out of 25 BCPs; remaining four graded “largely compliant” or “largely compliant—improvement underway.” ### Banking sector — institutional framework, powers, and resources (BCP Principles 1–22) - Institutional allocation and legal basis: - COMOFI codifies regulation: MoE (regulation), CECEI (licensing), CB (supervision), AMF (markets). - CB described as an “independent administrative authority”; MoE holds regulatory powers (COMOFI Art. L.611-1). - Independence, governance, and staffing: - CB Collège composition: 7 members (BdF governor chair ex officio; Director of the Trésor on board); CECEI board includes BdF governor as chair. - Governor and two deputy governors of BdF appointed for irrevocable six-year, once renewable term; remaining six Governing Council members appointed for irrevocable renewable nine-year term. - Budgets of CB and CECEI are part of BdF budget. - Supervisory workload/staffing: - Almost 1,200 institutions under CB supervision. - CB and CECEI together have some 585 staff. - Supervisory powers and tools: - CB powers: information requests, off-site monitoring, on-site inspections, injunctions, sanctions including withdrawal of license (COMOFI Arts. L.613-8 to L.613-23). - Enforcement: proven capacity and past decisive actions (examples: Banque Pallas Stern, Banque Opera, Transmedia, Crédit Lyonnais acquisition by Crédit Agricole). - On-site/off-site systems: - ORAP (CAMELS-type bank rating). - SAABA early warning system. - BdF databases (FIBEN etc.) supporting concentration analysis. - Licensing and ownership controls: - CECEI exclusive authority to issue/withdraw banking licenses (COMOFI Arts L.612-1, L.511-10, L.511-15). - 2002 CECEI activity statistics: - Approved 20 new licenses (14 new institutions; 6 restructuring or category changes). - 97 withdrawals of licenses. - 79 shareholder structure approvals (31 cases change of control). - Almost 390 requests for approval of management appointments. - Minimum capital per CRBF Regulation 92-14 Art. 1: EUR 5 million, EUR 2.2 million, EUR 1.1 million or EUR 1 million depending on type. - Ownership notification thresholds in CRBF Regulation 96-16 Art. 2(1): 33.3 percent, 20 percent or 10 percent of voting rights; exemptions for internal EEA restructurings. - CB can require information on holders of between 0.5 percent and 10 percent of outstanding capital stock. - Prudential requirements and prudential supervision: - Minimum 8 percent own funds to risk-weighted assets (CRBF Reg. 91-05 and 95-02), consolidated basis. - Capital components defined in CRBF Reg. 90-02 and CB Instructions 90-01 and 96-01; Tier 1, Tier 2, Tier 3 limitations. - Market risk: standardized approach (CRBF 95-02); internal models permitted with CB approval (specialist team; five models validated to date). - Loan classification/provisioning: CRC No. 2002-03 detailed disclosure; doubtful if payments three months overdue (six or nine months for property/local authorities); provisioning rules and CB follow-up. - Large exposures and connected lending: - Single borrower/group limit: 25 percent of own funds (CRBF 93-05); aggregate exposures ≥10 percent may not exceed 800 percent of own funds. - Reporting of exposures over 10 percent quarterly; 5 percent for shareholder/manager exposures. - Related-party reporting and limits: reporting when exposures exceed 5 percent of own funds; deductions from own funds for commitments to shareholders/staff >3 percent (CRBF Regs). - Problem bank resolution and safety net: - FGD established by SFSA June 25, 1999; codified in COMOFI Articles L.312-4 to L.312-18. - FGD guarantees deposits and certain securities; maximum protection EUR 70,000 per customer, per bank. - FGD may intervene at CB request (COMOFI Art. L.312-5 II); may lend/take equity; mutual banks mandatory members (COMOFI Art. L.312-7 III). - CB remedial powers strengthened under 1999 SFSA; appeals against CB/CECEI decisions do not in principle suspend implementation (unless court finds likely overturn / irreparable harm). - Assessment highlights: - Most BCPs assessed: Compliant; one BCP (Investment criteria BCP 5) Largely compliant — improvement underway (CECEI prior approval for nonfinancial equity acquisitions under revision). - Principle 1 family: Compliant for clear responsibilities, operational independence and resources (with comments on Trésor presence and BdF linkages), legal protection for supervisors satisfactory. ### Market structure and governance — overview and risks - System characteristics: - French banking system: “large, sophisticated, and of international importance.” - Dominated by six vertically integrated universal banks; four organized on a mutual basis. - Two large financial institutions remain government owned: La Poste and Caisse des Dépôts et Consignations (CDC). - Risks and corporate governance: - Sector consolidation could pose “too big to fail” concerns. - Mutualist organizations expanding activities; governance of large mutualist organizations needs close review. - Accounting and disclosure: - CRBF’s and CNC’s accounting rules generally appropriate, convergence to IAS advanced; CRC No. 2002-03 enhances disclosure of NPLs. - Basel II implementation expected to harmonize credit risk treatment across EU. --- ### Payment and securities settlement systems — BdF oversight and system assessments (CPSS Core Principles; TBF, PNS, SIT) - BdF oversight role: - BdF responsible for payment system oversight within ESCB framework (Art. 105(2) Treaty of Maastricht; Statute of ESCB); oversight powers laid down in COMOFI. - Oversight unit SEPI; operational units SERI and SEMOP; separation of operational/oversight functions in place. - Systems assessed: TBF (RTGS), PNS (hybrid large-value), SIT (retail deferred net settlement). - TBF (Transferts Banque de France) — summary findings: - Legal basis and finality: Observed (finality under COMOFI Art. L.330 I-II; notification under Finality Directive 98/26 EC). - Liquidity and intraday credit: unlimited intraday credit against eligible collateral; more than 99 percent of payments settle without queuing. - Optimization, queuing and finality: two queues (high priority and other), FIFO; rejection rates low (in 2002, four payments totaling EUR 109 million rejected). - Security/operational reliability: complex three-platform architecture; incidents in 2001–2002; availability 99.94 percent (May 2001–May 2004). - Cost recovery: heavily subsidized; only 15 percent of costs covered by revenues; pricing and cross-subsidies issues identified. - Observance summary: CPs 1, 3, 4, 6, 9, 10 Observed; CPs 2, 7, 8 Broadly observed. - Selected recommendations: clarify participant behavior in emergencies; simplify system architecture; automate contingency processing for critical payments; revise cost allocation methodology. - PNS (Paris Net Settlement) — summary findings: - Legal basis and finality: Observed (COMOFI finality; PNS notified). - Functionality: liquidity-saving features; multilateral optimization runs thrice daily; minimum EUR 15 million opening liquidity requirement; limited access (capital EUR 250 million criterion). - Availability: 99.98 percent (April 2001–March 2004). - Observance summary: CPs 2,3,4,6,7,8,10 Observed; CPs 1 and 9 Broadly observed. - Selected recommendations: align irrevocability wording; broaden participant access; strengthen emergency procedures; cost-accounting transparency. - SIT (Système Interbancaire de Télécompensation) — summary findings: - Legal and documentation: CIRCE rulebook; SIT designated payment system (2002). - Risk management gaps: no current measure to ensure settlement in event largest net debtor fails → CP5 Not Observed; planned protection to be implemented by 2008. - Access and participation: total participants 1,084; direct 14; indirect 626; customer credit institutions 444 (Jan 2004); access criteria volume-based (direct participant min 0.20 percent of whole volume ~20 million payments/year). - Operational reliability: availability 100 percent (2000–2003); business continuity arrangements broadly observed but backup site concerns. - Observance summary: CPs 1,2,3,4,6,8,10 Observed; CPs 7 and 9 Broadly observed; CP5 Non-observed. - Selected recommendations: implement protection against default of largest net debtor ASAP; strengthen contingency/back-up; broaden access criteria. - BdF as overseer — assessments: - BdF’s oversight transparency and reporting: Observed overall; recommended to publish clearer operating procedures, formalize MoUs, strengthen cooperation and audits. - TBF/PNS/SIT recommended action plans provided in report; BdF committed to pursue improvements (SIT CP5 compliance by 2008). ### Securities clearing and settlement (Euroclear France, Relit+, RGV2) - Euroclear France role and systems: - Euroclear France CSD: almost 99.7 percent of securities dematerialized. - Systems: Relit+ (model 2 DvP, gross/net; cash leg settled thrice daily in TBF), RGV2-TFT (trade-for-trade DvP with intraday finality), liquidity bridge to TBF. - Cross-border structure: links (13 direct, 1 indirect, 14 relayed via Euroclear Bank Brussels); most links FOP. - Legal and finality: - Legal framework consistent; COMOFI supports dematerialization, netting, securities lending, repos and finality protections. - RGV2-TFT: model 1 DvP; finality and irrevocability recognized under French law. - Operational and risk findings: - Contingency and operational risk: two production sites with synchronous replication; wide-area disaster coverage limited; fall-back recovery times in tests up to seven hours vs target two hours; need full stress testing and improved SLAs. - Failed settlement metrics: Relit+ average monthly unsettled trades 2.65 percent (remained below 2 percent for 13 of 18 months); average duration of end-of-day fails never exceeds two working days. - Deferred net settlement risks: Relit+ deferred net settlement lacked safeguards if largest obligation fails — Recommendation 9 Non-observed; mutual guarantee fund and limits to be implemented before end-2004. - Governance and disclosure: governance improved under Euroclear Bank ownership; need publish criteria for AMF opposition to non-EEA applicants and clearer conflict-of-law procedures; move to international message/ID standards recommended. - Cost and pricing: lack of comprehensive analytic accounting; cross-subsidization risk; plan to implement analytical accounting. - Oversight and cooperation: - AMF specifies principles and approves operating rules; BdF oversight role defined; MoUs in place among domestic and foreign authorities but not all public. - Recommendations include formalized MoU between AMF and BdF for transparency and division of tasks. - Assessment summaries: - Recommendations observed broadly across Rec. 2,3,5–8,10–19 with specific Non-observed items (Rec. 9 and certain cross-border link issues). --- ### Securities regulation and market oversight — AMF assessment (IOSCO Principles) - Institutional changes and scope: - LSF (Aug 1, 2003) merged COB, CMF, CDGF to form AMF; AMF commenced operations Nov 24, 2003; organizational structure announced Feb 12, 2004. - “Twin peaks” model: separates prudential and conduct-of-business regulation. - AMF governance, independence, and resources: - AMF: independent public authority with legal personality and ability to levy fees; Board (16 members) and separate Commission des Sanctions (12 members). - Secretary General investigates, rapporteur system for sanctions. - AMF budget ≈ EUR 45 million (annual); staff ≈ 320 (end-2003). - Assessment: Principle 1 Broadly Implemented; Principle 2 Broadly Implemented; Principle 3 Fully Implemented. - Regulatory processes and transparency: - AMF issues instructions/rescrits; Règlement Général in preparation to consolidate prior rules; publication of rules in JORF required for enforceability. - Public consultation processes exist (CCLRF, CCSF), AMF participates in CESR. - Assessment: Principles 4, 6–7: Observed/Fully Implemented. - Powers: inspection, investigation, enforcement: - AMF and CB have power to inspect books/premises without prior notice; seizure requires court order. - Enforcement: administrative fines up to EUR 1.5 million and ten times profit made; sanctions process before Commission des Sanctions; appeal to Conseil d’Etat or Appellate Court. - Assessment: Principles 8–10: Fully/Broadly Implemented. - Issuers, disclosure and accounting: - Periodic and ongoing disclosure rules: annual audited, semiannual accounts, prospectus Visa process. - IFRS implementation planned in 2005; AMF oversees prospectuses and market disclosures. - Assessments: Principle 14 Fully Implemented; Principle 15 Broadly Implemented; Principle 16 Partly Implemented (auditor oversight and IAS impacts). - Collective investment schemes and asset management: - AMF authorization, NAV reporting, depository supervision; AMF inspects managers (80 visits in 2002; 71 in 2003); NAV data published on AMF website. - Assessment: Principles 17–20 Broadly/Fully Implemented (some resource constraints noted). - Market conduct, exchanges, and intermediaries: - Exchange oversight, market surveillance, insider trading/market abuse detection systems in place; Euronext clearing via LCH-Clearnet; settlement via Euroclear France. - Deferred settlement facility SRD exposures and broker netting concerns highlighted; recommendations to ensure exposures transparent and monitored. - Assessment: Many secondary market Principles Fully Implemented; overall IOSCO summary: Fully implemented 18 principles; Broadly implemented 7; Partly implemented 2. - Recommended actions: - Strengthen AMF–CB information sharing for prudential/conduct overlap. - Annual audited AMF financial statements published on pre-announced schedule; enhance internal audit and governance disclosure. - Increase on-site resources for conduct-of-business supervision (bank distribution networks, depositories). --- ### Insurance supervision — CCAMIP (IAIS ICP assessment) - Market size and structure (end-2002 stats): - France: 5 percent market share of gross premiums in OECD (2001); 5th largest in world and 3rd in Europe. - Insurance penetration ~ slightly over 10 percent of GDP; density ranking tenth in OECD. - Company counts: Life and mixed 126; nonlife 295; reinsurance 33. - Asset shares (end-2002): Life and mixed >80 percent of total assets (30 percent life; 53 percent mixed); non-life 14 percent; reinsurance 4 percent. - Providers by premium income: Stock companies 80 percent; mutual 11 percent; public-owned 9 percent; foreign branches <0.1 percent. - Supervisory framework and recent changes: - Financial Security Law (Aug 1, 2003) created CCAMIP (merger of CCA and CCMIP), granting financial independence and strengthened coordination. - CCAMIP supervises insurance undertakings; CEA handles licensing; MoE retains rulemaking power (no administrative rulemaking by CCAMIP). - Observance summary (IAIS ICPs): - Observed: 21 principles (ICP 1,2,4,5,6,7,8,11,12,13,14,15,16,19,20,21,22,23,25,26,27). - Largely observed: 4 (ICP 9,10,17,18). - Partly observed: 3 (ICP 3,24,28). - Key deficiencies and recommendations: - ICP 3: supervisory authority lacks power to issue rules by administrative means (essential criterion b) → Partly observed. Recommendation: give supervisory authority rulemaking power or merge CEA and CCAMIP to improve operational efficiency and remove industry participation in decision-making. - Staffing: CCAMIP staff “around 130 persons” with 50 commissaires-contrôleurs; recommendation to increase commissaires-contrôleurs to at least 75–80 to meet inspection cycles. - Intermediaries (ICP 24): supervisory powers lacking; intermediaries not fully registered or supervised; transposition of EU Intermediary Directive (scheduled 2005) expected to address. - AML/CFT (ICP 28): Partly observed — gaps in statutory CDD requirements (non-face-to-face, PEPs, beneficial ownership), low on-site inspection rates (28 on-site exams in four years), limited sanctioning power over intermediaries; recommendations to increase AML/CFT supervisory resources and extend enforceable guidelines to intermediaries. - Corporate governance and internal control codes: recommendation to empower CCAMIP to issue enforceable codes of conduct (ICP 9 and 10). - Solvency metrics (end-2002): - Life sector solvency margin (including unrealized gains): 9.3 percent of provisions, or 2.4 times required minimum. - Non-life solvency margin (including unrealized gains): 39.3 percent of provisions, or 4.8 times required minimum; alternatively 72.4 percent of premiums. - Asset allocation life sector: > three quarter invested in fixed-income instruments; equity 12 percent; real estate <5 percent. - Recommended action plan (summary): - Grant CCAMIP power to issue regulations, increase staff, monitor new organization, remove industry participation from decision-making bodies, require intermediaries registration and supervision, strengthen AML/CFT on-site inspections, and enact legislative amendments to meet revised FATF Recommendations. --- ### Deposit Guarantee Fund (FGD) — structure and transparency - Legal basis and coverage: - Established by SFSA (June 25, 1999); COMOFI Articles L.312-4 to L.312-18; CRBF Regulations 99-05, 99-06, 99-07. - Coverage: EUR 70,000 per customer, per bank. - Funding: member contributions; CB calculates individual bank contributions and pay-out levels. - Governance: Conseil de Surveillance and directoire; overall contribution levels fixed by MoE. - Activation: FGD may intervene at CB request (COMOFI Art. L.312-5); right to sue managers; may lend or take equity. - Transparency and reporting: - FGD prepares audited annual financial statements submitted to MoE but not publicly disclosed (assessment: Not observed for public disclosure). - Website exists with legal/regulatory information; however FGD lacks periodic public reports, aggregate data disclosure, and proactive communication by senior officials (many transparency items rated Partly observed or Not observed). - Recommended actions: - Publish audited financial statements on a pre-announced schedule; publish aggregate data on operations and contributions; formalize public reporting and senior official communications; disclose procedures for information sharing with domestic/foreign agencies. --- ### Anti–Money Laundering / Countering Financing of Terrorism (AML/CFT) — comprehensive assessment - Legal and institutional framework: - Longstanding AML framework: ML criminalized since 1987; TRACFIN established 1990; successive legal expansions (1990–2004) broadened reporting and sector coverage. - France ratified Vienna Convention, UN FT Convention, Palermo Convention, Strasbourg Convention; implements UNSC listings and EU regulations, with limitations regarding UNSCR 1373 within EU. - FIU — TRACFIN: - Mandate: receive, analyze and disseminate STRs; operational independence; Egmont member. - Resources and activity: - Staff: total 48 (33 operational). - STRs: 6,896 in 2002 (3,598 in 2001; 2,537 in 2000); 269 cases forwarded to Prosecutor in 2003 (~8–10 percent of STRs). - Quality concerns: STR quality uneven; sectoral reporting uneven (banks >60 percent of reports; low reporting from insurance, high-value dealers, casinos historically). - Powers: can oppose execution of a transaction for 12 hours (used sparingly — seven occasions since inception). - International cooperation: agreements with 24 FIUs; active Egmont/EU engagement. - Recommendations: improve STR quality, electronic reporting form, outreach to DOM-TOM (notably Guyana), increase TRACFIN staffing and training, increase use/awareness of 12-hour blocking, more detailed STR statistics. - Preventive measures and supervision: - Coverage: broad (banks, insurance, investment firms, portfolio managers, currency exchangers, real estate intermediaries, casinos, dealers in high-value goods, auditors, lawyers with certain activities). - CDD and recordkeeping: five-year retention of identification and transaction records (Article L.563-4); identification rules for occasional transactions (EUR 8,000 threshold). - Gaps identified: - Enhanced diligence (FATF R.14) statutory threshold of EUR 150,000 for “large transactions” may not capture all complex/unusual transactions — recommended align statutory language to FATF standard (no threshold for complex/unusual). - Wire transfers: no statutory requirement to include full originator information in transfer messages for all institutions; EU-level work ongoing; recommended legislate SR VII requirements. - Application to branches/subsidiaries abroad: explicit obligations only for credit institutions and currency exchangers; recommended extend to other financial entities. - Internal controls, compliance and audit: comprehensive binding requirements exist for credit institutions and certain investment firms (CRBF Regs); weaker for insurance, portfolio managers, brokers; recommendation to strengthen binding internal controls and require AML/CFT controls considered at licensing. - Supervisory coverage/resources: CB well-resourced; AML/CFT supervision weak for life insurers, brokers, individual/collective portfolio managers, direct marketers and La Poste; on-site inspections low (e.g., CCAMIP conducted 28 on-site exams in 4 years). - Criminal justice, confiscation, and international cooperation: - Criminalization: ML and FT comprehensively criminalized; extraterritoriality provisions and jurisprudence allow ML conviction without prior predicate conviction. - Confiscation and freezing: - Seizure and confiscation legal frameworks exist (Code of Criminal Procedure Articles and Penal Code) but confiscation often applies only to assets seized during judicial procedure; practice yields limited asset recoveries. - Administrative freezing of terrorist assets limited by EU list coverage; France preparing national framework to implement UNSCR 1373 for EU-based terrorists (draft bill in consultative process). - TRACFIN and authorities have limited FT convictions to date. - Mutual Legal Assistance: France participates actively and maintains MLA statistics; recommendation to enrich MLA statistics with nature and outcomes. - FATF-related compliance highlights (selected): - Many Recommendations rated Compliant (e.g., R.10, R.11, R.12, R.15, R.16, R.17, R.32, R.33, R.34, R.37). - R.14, R.21, R.19, R.20, R.28, R.29, R.26 largely compliant with recommendations to strengthen scope/implementation in some sectors. - SR III (freeze/confiscate terrorist assets): Materially non-compliant (limited administrative freezing for EU-based terrorists due to EU legal distinctions); authorities contest this characterization and are preparing national measures. - SR VII (wire transfers): not rated (EU implementation timetable to Feb 2005). - Recommended priority actions (selection): - Amend statutes/regulations to align enhanced diligence (no monetary threshold) with FATF R.14. - Implement SR VII compliant requirements for wire transfer originator information. - Extend explicit AML/CFT branch/subsidiary application to all financial entities. - Strengthen enforceable AML/CFT internal controls for insurance, portfolio managers, brokers, currency exchangers; require AML controls assessed at licensing. - Increase TRACFIN capacity, outreach, electronic reporting, and STR quality feedback loops. - Implement national legislative measures to permit administrative freezing for EU-based terrorists to comply with UNSCR 1373 (draft bill in consultative phase). - Improve confiscation practice and compile seizure/confiscation statistics; consider central seized-assets management. --- *Italicized source: IMF Staff Country Report — Detailed Assessment of Compliance of the Basel Core Principles; CPSS/IOSCO assessments of payment and securities systems; IOSCO assessment of AMF; IAIS assessment of CCAMIP; FGD, and AML/CFT detailed assessment — content unit _cr05186 (FSAP missions and associated assessments, January–May 2004).* ### 1. Detailed Assessment of Compliance of the Basel Core Principles..................................15 ### 1. Detailed Assessment of Compliance of the Basel Core Principles ### General - This update of the 2001 MAE assessment of compliance by France with the Basel Core Principles for Effective Banking Supervision was performed during the 2004 assessment of France in the context of the FSAP. - The assessment was conducted from January 28–February 10, 2004. - The assessment covered the activities of the key banking regulatory and supervisory bodies in France, in particular: - Banque de France (BdF) - Commission Bancaire (CB) - Comité des Établissements de Crédit et des Entreprises d’Investissement (CECEI) - Comité de la Réglementation Bancaire et Financière (CRBF) - The updated assessment was prepared by Jan Willem van der Vossen, Monetary and Financial Systems Department (MFD). ### Information and methodology used for assessment - The 2001 BCP assessment performed by MAE showed a very high level of compliance with the BCP, with “compliant” gradings for 21 out of 25 BCPs. - The four BCPs which had not been graded “compliant” had been graded “largely compliant” or “largely compliant—improvement underway.” - The 2004 assessment was prepared on the basis of: - the Basel Core Principles Methodology, - the April 2000 self-assessment by the French authorities, - the August 2001 MAE assessment, - information provided by the French authorities on how the recommendations of the 2001 assessment had been addressed, - the response to the pre-FSAP questionnaire. - The mission studied laws and regulations relative to banking regulation and supervision. - Discussions were held with representatives of the regulatory and supervisory agencies, and with representatives of the major banks, rating agencies and of the accounting and auditing profession. - The mission consulted the Annual Reports and Official Bulletins of the BdF, the CB, the CECEI, and the Conseil National du Crédit et du Titre (CNCT), websites of the major banking groups, a Cour des Comptes report titled L’Intervention de l’État dans la Crise du Secteur Financier, a KPMG publication on comparative bank performance data in the EU, rating agency reports, and other sources. - The authorities provided information notes on specific topics, including: - compliance of the French accounting system with IAS, - the institutional structure of the system for financial sector regulation and supervision. *Source: Detailed Assessment of Compliance of the Basel Core Principles (FSAP mission; assessment conducted January 28–February 10, 2004).* ### 4. The authorities were very open and cooperative, made excellent preparations for the ### 4. The authorities were very open and cooperative, made excellent preparations for the meetings of the mission, and provided helpful post-mission information. ### Market structure overview - The French banking system is "large, sophisticated, and of international importance." - The system is dominated by six vertically integrated universal banks and their subsidiaries. - Four of the six are organized on a mutual basis. - Further consolidation of the sector could pose a range of challenges, including stability concerns that many banks are “too big to fail.” - Two large financial institutions, La Poste and the Caisse des Dépôts et Consignations (CDC), remains in government ownership. ### Preconditions for effective banking supervision — Macroeconomic soundness and stability - After a slowdown in economic activity during 2002–03, a cyclical recovery has been gathering pace. - Inflation has only moderately picked up and ex-post real interest rates have sunk to unusually low levels. - Despite slow growth up to mid-2003, the financial situation of the corporate sector has deteriorated only slightly since 2000; except for a few large companies, corporate leverage is generally low. - Households’ debt levels relative to incomes and assets are comparatively low (albeit rising), and savings rates are high. - Low interest rates and rising prices may induce households to take out larger mortgage loans, which may impact on their future financial position. - Equity prices remain below their 2000 highs, despite the recent recovery, but some investors enjoy offsetting gains on bonds. - Commercial real estate prices have remained stable following the early-1990s boom-bust cycle. ### Public infrastructure and institutional arrangements for supervision - The legal and regulatory framework for banking supervision in France is clear, easily accessible and updated periodically (Principle 1(1)). - All banking and financial laws are codified in the Code Monétaire et Financier (COMOFI). - The COMOFI incorporates new legislation on the Fonds de Garantie des Dépôts (FGD), and on the new Autorité des Marchés Financiers (AMF), which regulates and supervises securities operations, including banks’ asset management activities for third parties. - The main banking and accounting regulations are collected in the Recueil des Textes Réglementaires published by the CRBF. - Legal framework for conducting banking business is well developed; the legal profession and the judiciary are well trained with strong understanding of financial and banking issues. Supervisory staff are well versed in application of financial sector legislation. - Rules on contracts and contract enforcement, establishment and foreclosure of security interests are well developed, although legal procedures are lengthy. - The accounting and auditing professions are well regulated, subject to rigorous training and entry requirements, and subject to regulation and codes of conduct issued by the Haut Conseil du Commissariat aux Comptes (HCCC) and the Compagnie Nationale des Commissaires aux Comtes (CNCC). ### Institutional coordination and governance - France has separate supervisory institutions for the main financial sectors: banking, insurance and securities; arrangements ensure coordination between these authorities. - Supervisory and regulatory agencies: CB, CRBF, CECEI, Commission de Contrôle des Assurances, Mutuelles et Institutions de Prévoyance (CCAMIP), and AMF. - Later in 2004, the CRBF, which issued banking regulations subject to approval by the minister in charge of the economy (MoE), will close to exist; henceforth, the MoE will issue regulations directly under his own name, after consultation of the Comité Consultatif pour la Législation et la Réglementation Financieres (CCLRF). - Financial sector oversight is structured as a matrix with separate columns for banking, securities and insurance, coordinated through joint bodies for cooperation, coordination and exchange of information and cross-membership in oversight boards. - Legal provisions on financial sector regulation and supervision are incorporated in the COMOFI, except for insurance sector rules, which are laid down in the Code des Assurances. - Examples of coordination and cooperation: - Joint working groups of the CB and the Commission des Opérations de Bourse (COB) (precursor of the AMF) issued common recommendations on measures to deal with transactions that have failed to clear (are in suspens); a common recommendation on financial information concerning credit risk, and a common recommendation on asset de-recognition and de-consolidation. - The CB and the COB (AMF) jointly prepared restrictions on the use of credit derivatives by unit trusts, rules on large exposures for unit trusts, and cooperated on many practical issues. - Annually, more than 50 bilateral or multilateral meetings take place between the CECEI, the CB, CCAMIP and the AMF, as well as approximately 100 exchanges of letters between the CB ad the COB (AMF). - Cooperation and coordination between the BdF, CB, the AMF and CCAMIP also takes place through their membership in the CACESF, chaired by the MoE. - Cooperation specifics: - Cooperation between the CCAMIP and the CB is formalized in a charter signed in October 2001; cooperation extends to mutual training, exchange of staff, exchange of information, performance of joint studies, coordinated on-site inspections of institutions that combine banking and insurance activities. - Cooperation between the CB and the CCAMIP strengthened through the Financial Security Act of August 2003; joint meetings take place as needed, but at least twice a year; the CB chair is member of the CCAMIP and vice versa. - Coordination between the CB and the AMF is supported by BdF membership in both bodies. Off-site supervisors meet on a monthly basis, on-site staff bi-monthly. Participation of CB inspectors in AMF inspection teams is based on a 1999 agreement between the CB and the CMF (merged with the COB in the AMF). The AMF retains responsibility for follow-up to these inspections. - The BdF remains pivotal in governance and day-to-day operations of the CB and the CECEI; it provides their staff and other resources. The two institutions meet monthly to discuss individual cases. The CB, CECEI and AMF meet with the same frequency to discuss general as well as institution-specific issues. Staffs are in day-to-day contact on licensing issues, changes in shareholdings, and assessment of business plans. Cooperation between insurance and banking supervisory agencies takes place through dedicated working groups, joint on-site inspections and regular meetings. - Crisis management and independence: - Authorities stress that the CB is the responsible agency in a crisis involving an individual banking institution. - Given complex institutional arrangements, it could be useful to lay down an explicit protocol for crisis-management involving more than one supervisory body, as speed of action will be essential and established procedures may need to be cut short. - Independence of banking supervision, with an autonomous board, is generally adequate (Principle 1(2)), although the presence of the Director of the Trésor on the board of the CB could raise the issue of independence from the MINEFI. - Presence of industry representatives on the Boards of the CECEI and the AMF raises a potential conflict of interest; authorities note: (i) rules of procedure require recusal when conflict arises; (ii) members are under strict secrecy obligations; (iii) industry representatives can provide valuable input; and (iv) this structure promotes acceptance of supervisors’ work by the industry. - The CB and the CECEI are clearly not independent from the BdF, which controls resources and whose governor chairs its board. Given (i) the independence of the BdF itself; and (ii) the absence of obvious conflicts of interest with prudential objectives of the CB and the CECEI (particularly in view of the centralization of monetary policy decisions at the European Central Bank), the linkages do not appear to be a matter for serious concern. - The staff of the CB, particularly on-site, is still somewhat tight in view of the size of the French banking system, but it is steadily growing. The professionalism of the CB and CECEI staff is well-recognized. - Legal protection of supervisors (Principle 1(5)), although not explicit in statute, is a well recognized tenet of administrative law in France—and other EU countries—and is considered satisfactory. ### Market discipline and governance - The CRBF’s and CNC’s accounting rules and regulations may be considered to be generally appropriate and in line with European and international standards. - Since the assessment in 2001, authorities have taken actions to enhance convergence between IAS and French accounting standards (See also description of BCP 21). - Important reforms enacted through the 1999 SFSA and further improvements aiming at better disclosure in several key areas have been made. - A more systematic approach to and more disclosure of nonperforming loans (NPLs) have been introduced, facilitating comparisons of risk exposure and management across banks. - Introduction of the Basel II framework in all EU countries will further harmonize treatment of credit risk in France with other EU countries. - Credit institutions should sometimes adopt more systematically open and timely communication policies as regards significant difficulties or relevant external events that affect their risk exposure. ### Problem resolution - French supervisory system has a good record of early detection of troubled institutions, based in part on effective analytical and micro-monitoring capabilities (Principle 16). - Notable systems: - CB’s early warning system (SAABA). - CAMELS-type bank-by-bank assessment and rating system (ORAP), which make extensive use of available databases, including the BdF’s voluminous database on enterprises. - The CB has an adequate enforcement capacity, derived from well designed coordination arrangements between on-site and off-site supervisors and with other financial sector supervisory bodies, a flexible and comprehensive set of notification and corrective action procedures, effective follow-up, and sound legal and other enforcement powers (Principles 1(4), (16), and 22). - As regards bank exit policies, substantial progress has been achieved with the reform of the deposit insurance system in defining more effective bank resolution procedures and allowing for intervention in banks by the FGD at the request of the CB. - Appeals against decisions of the CB and the CECEI do not in principle suspend implementation of the decisions, unless the institution can show to the court that the decision will most probably be overturned, or if implemented, would cause irreparable harm to the institution involved, and should therefore not be implemented pending a final court decision. - In theory, this can hamper efficient implementation of supervisory decisions. - A system in which the implementation can go forward, but the supervisor might afterwards be held liable for damages could address this problem. - In actual practice, the possibility to obtain such a suspension of implementation has not been successfully applied. - Bank governance needs to be kept under close review, especially with regard to the large mutualist organizations, which are seen to be to a lesser or greater degree expanding their activities and changing their corporate structures in order to make better use of their accumulated cooperative capital bases. ### Safety net - The FGD was established by the SFSA of June 25, 1999, codified in the COMOFI under Articles L.312-4 through L.312-18. - The FGD replaces the previously existing separate guarantee funds. - The COMOFI sets out that the FGD guarantees deposits and other nominally repayable funds deposited in any registered credit institution in France. - The FGD’s legal personality, activation, scope, governance, funding, intervention powers, its right to sue managers of the institution, as well as an enabling clause for the Minister in charge of the economy to issue more detailed regulations, are clearly set out in the COMOFI. - Depositors in banks are protected to a maximum of EUR 70,000 per customer, per bank, through the FGD. - Depositors wishing to achieve full coverage of their deposits, should these be larger than EUR 70,000, may spread their deposits over several banks, limiting their deposit in each bank to EUR 70,000. - Regulations 99-05, 99-06 and 99-07 of the CRBF provide more detail on the functioning of the FGD. *IMF Staff Country Report content unit: _cr05186 — section beginning "The authorities were very open and cooperative, made excellent preparations..."* ### 25. Furthermore, banks have access on their own initiative to the Eurosystem marginal ### _cr05186 - 25. Furthermore, banks have access on their own initiative to the Eurosystem marginal ### Overview - Source text presents a principle-by-principle assessment of compliance with the Basel Core Principles for banking supervision as applied in France, under the legislative framework compiled in the COMOFI (Banking Act 1984 and subsequent amendments including FAMA 1996, SFSA 1999, and FSA 2003 (LSF)). - Main supervisory bodies identified: Minister in charge of the economy (regulation), CECEI (licensing), and CB (supervision). BdF, CB, and CECEI are closely connected through joint staff and chairmanship. ### Principle 1. Objectives, autonomy, powers, and resources — Key findings - COMOFI identifies and regulates three authorities responsible for: (a) regulation: Minister in charge of the economy; (b) licensing: CECEI; (c) supervision: CB. - CB described as an “independent administrative authority” responsible for supervision of individual credit institutions and investment firms; CB has powers to issue injunctions and impose sanctions. - Under FSA 2003, MoE (Minister in charge of the economy) is directly responsible for setting regulations for credit institutions and investment firms (internal controls, minimum capital, management standards); COMOFI, Art. L.611-1 vests authority in the MoE. - AMF (an “independent public authority”) supervises asset management companies, rules of conduct for investment firms and credit institutions, and participates in oversight of European/international markets (COMOFI L.621-1). - France does not have a unified financial sector supervisor; separation by sector with mechanisms for coordination and cooperation. - Deposit Guarantee Fund (FGD): - Regulated by COMOFI Articles L.312-4 through L.312-18. - Legal personality; reimburses deposits unavailable due to illiquidity; covers bank guarantees and certain securities investments (COMOFI Articles L.322-1 and L.322-2). - Funded by participating institutions through contributions and if needed borrowings or guarantees. - Oversight by Conseil de Surveillance (bank members) and managed by a directoire. - Overall contribution levels fixed by the MoE; CB performs individual bank contribution calculations and pay-out levels. - Mutual banks are mandatory members (COMOFI Art. L.312-7 III). - FGD may intervene on request of CB (COMOFI Art. L.312-5 II), may lend to or take equity in banks in distress, and accept participations in mutualist structures. - Coordination mechanisms in place (examples from COMOFI and practice): - College des Autorités de Contrôle des entreprises du Secteur Financier (CACESF). - Chairmanship links: governor of BdF chairs CECEI and CB (COMOFI Articles L.612-3 and L.613-3). - Representation of BdF governor on AMF Board (COMOFI Art. 621-2). - Overlap of board membership across CB, CECEI, AMF (COMOFI L.612-3, L.613-3, L.621-2). - Regular staff rotation between BdF departments servicing CB and CECEI. - Exchange of information among CB, CECEI, AMF, CCAMIP, CEA, FGD, market enterprises, and chambres de compensation (COMOFI, Art. L.631-1). - Joint CB–CCAMIP meetings at least twice a year (COMOFI, Art. L.613-3 (3)); bilateral and multilateral meetings between CB, CECEI, and AMF services before CECEI board meetings and at least monthly. - Practical functioning: - Authorities state clarity on lead supervisor in most situations; CB takes lead on bank stability issues. - Historical examples of interventions: Mutua Equipement (delicensed and liquidated, November 1997); Banque Pallas Stern (1995); Banque Commerciale Privée (end-1994; business transferred); Banque Opera and Laficau (delicensed 1997); Transmedia (delicensed November 1998); Crédit Lyonnais acquisition by Crédit Agricole (2003) mentioned under licensing changes. ### Principle 1(1). Clear responsibilities and objectives - Description emphasizes legislative basis (COMOFI) and the delineation of responsibilities across MoE, CECEI, CB, AMF, BdF. - Assessment: Compliant. ### Principle 1(2). Operational independence and adequate resources — Findings and statistics - CB is a Collège of seven members: governor of BdF (chair ex officio), president of CCAMIP, Director of the Trésor of the MINEFI, and four members appointed by MoE (including Conseil d’Etat member, Cour de Cassation judge, two experts). - CECEI board composition includes governor of BdF (chair), Director of the Trésor, Chairperson of the AMF, Chairperson of FGD managing board, and eight other members (including Conseil d’État member, Cour de Cassation member, senior managers, trade union officials, experts). - Governor and two deputy governors of BdF appointed by Council of Ministers for irrevocable six-year, once renewable term; remaining six Governing Council members appointed for irrevocable renewable nine-year term. - Budgets of CB and CECEI are part of BdF budget, insulating from direct political interference. - Supervision workload and staffing: - Currently, almost 1,200 institutions under supervision of the CB. - CB and CECEI together have some 585 staff. - Staff qualifications, IT systems, and resources: well trained, competitive salaries, allocated funds for training and inspection travel; capacity to attract temporary and permanent senior staff from banks and academia. - Assessment: Compliant. - Comments: CB and CECEI are independent administrative authorities but not independent from BdF; dependence considered not a concern; involvement of Director of the Trésor and MINEFI in governance means policies not entirely independent from government; staff size viewed as somewhat limited but budgets/staff considered adequate by senior management. ### Principle 1(3). Legal framework for authorization and ongoing supervision - CECEI has exclusive authority to issue and withdraw banking licenses (COMOFI Articles L 612-1, L 511-10 and L 511-15); CB is competent authority when license withdrawn as a sanction. - CECEI must be notified of significant changes (shareholder restructurings, legal form, senior managers); CECEI consulted by Conseil de la Concurrence for ownership changes affecting competition. - CECEI implements single EU banking passport rules for cross-border establishment and services. - CB has full supervisory powers including information requests, off-site analysis, on-site inspections, and sanctions including withdrawal of license (COMOFI Arts. L.613 vv). - MoE holds key regulatory powers (COMOFI Art. L.611-1 vv.) and issues regulations after consultation with CCLRF. - Assessment: Compliant. - Comments: New regulations prepared in close cooperation with banking industry and implemented smoothly. ### Principle 1(4). Powers to address compliance, safety and soundness — Key powers and process - CB authorized to inspect, monitor financial condition, conduct off-site and on-site supervision, and require corrective action (COMOFI Articles L.613-8, L.613-10, L.613-11, L.613-15, L.613-16). - Sanctions include warning, reprimand, prohibition of activities, suspension/removal of managers, appointment of temporary administrator, striking from register, dividend prohibition, money penalties; disciplinary sanctions appealable to Conseil d'Etat (COMOFI Art. L.613-21). - CB can appoint provisional administrator (COMOFI, Art. L.613-18) or liquidator (COMOFI, Art. L.613-22). - FGD may intervene at CB request and take preventive action (COMOFI Art. L.312-5); CB must hear FGD Chairman when seeking FGD intervention (COMOFI Art. L.613-34). - 1999 SFSA strengthened orderly exit framework and enhanced CB remedial powers; authorized FGD support to potentially insolvent institutions. - Assessment: Compliant. - Comments: CB has demonstrated ability to take strong action in past cases cited. ### Principle 1(5). Legal protection for supervisors - CB and CECEI operate under French administrative law; actions against their acts/omissions are brought against the French state. - Public servants protected from personal liability for administrative errors in course of duty; employer may cover legal expenses unless personal fault or criminality alleged. - Collegial decision-making of CB provides added protection; legal protection for supervisors assessed as satisfactory. - Assessment: Compliant. ### Principle 1(6). Information sharing and confidentiality - Art. 60 of SFSA created CACESF for information exchange among CB, AMF, CCAMIP. - COMOFI Art. L.631-1 permits exchange of information among CECEI, BdF, CB, CCAMIP, AMF, FGD subject to professional secrecy. - COMOFI Art. L.613-12–L.613-13 and Art. L.613-20 set rules for exchange with EEA and non-EEA supervisors (bilateral agreements and conditions for sharing without agreement subject to secrecy and reciprocity). - CB has concluded bilateral agreements with multiple authorities (examples with dates): Czech National Bank (June 2002); OSFI Canada (July 2002); State of New York Banking Department (July 2002); National Bank of Slovakia (November 2002); Bank of Slovenia (October 2002); Commission Fédérale des Banques of Switzerland (November 2002); Financial Supervisory Commission of Korea (September 2003); Board of Governors of the Federal Reserve System, OCC, FDIC (May 2004). - COMOFI Art. L.641-2 criminalizes breaches of professional secrecy. - COMOFI Art. L.613-14 requires CB to refuse assistance requests prejudicial to French sovereignty, security, economic interests, or public policy, or when criminal proceedings are initiated. - Assessment: Compliant. ### Principle 2. Permissible activities — Findings - France defines “credit institution” broadly in Art. L.611-1 of COMOFI as “legal persons carrying out banking operations as their usual business.” - “Banking operations” defined to include: receipt of funds from the public, credit operations, and making available or managing means of payment. - Art. L.511-9 refines types of banking operations permitted by category of institution. - COMOFI Art. L.511-5 prohibits non-credit institutions from carrying out banking operations on a regular basis; Arts. L.511-8 and L.531-11 prohibit misleading use of business names or advertising implying authorized credit institution status under criminal liability (COMOFI Articles L.571-3 and L.573-2). - CECEI may impose license terms/conditions (Art. 511-10); CB may sanction non-compliance (COMOFI Art. L.613-21). - Assessment: Compliant. ### Principle 3. Licensing criteria — Findings and statistics - CECEI reviews several hundred applications per year (new licenses, changes, ownership, management). - 2002 CECEI activity statistics: - Approved 20 new licenses (14 new institutions; 6 restructuring or category changes). - 97 withdrawals of licenses (38 cessations of business; remainder restructuring or category changes). - 79 approvals of changes in shareholder structure (31 cases resulted in change of control, including Crédit Lyonnais acquisition by Crédit Agricole in 2003). - Almost 390 requests for approval of management appointments were received. - COMOFI (Art. L.511-10 – L.511-13) licensing requirements include: - Ensure minimum capital requirement (Art. L.511-11) and CRBF Regulation 92-14 as amended. - Two senior managers of integrity and experience responsible for overall direction (Art. L.511-13). - Review business plan (in coordination with CB) and technical/financial resources (Art. L.511-10). - Assess suitability (fit and properness) of investors or guarantors (Art. L.511-10). - Assess applicant capacity to achieve development objectives compatible with smooth working of banking system (Art. L.511-10). - CECEI may withhold authorization if supervision hindered by equity links, control links, or foreign laws/regulations. - Minimum capital requirement (Art. 1 of CRBF Regulation 92-14) specified as: EUR 5 million, EUR 2.2 million, EUR 1.1 million or EUR 1 million depending on type and characteristics of credit institution. - CECEI consults CB in practice though not legally required; CECEI collects detailed Authorization Dossier including management, control procedures, strategy, origin of initial capital; may insist on increased initial capital. - Centralized database FIDEC for “fit and proper” characteristics is operational. - Assessment: Compliant. - Comments: CECEI routinely requests evidence of EEA home supervisor’s prior consent for subsidiaries though not a formal legal requirement; introduction of a formal regulation would be desirable. ### Principle 4. Ownership — Licensing controls over significant ownership transfers (intro) - CECEI prior authorization required when intended actions would: (a) acquire or relinquish effective control over management of institution; or (b) acquire or relinquish... (text continues beyond supplied extract). *Source: IMF staff detailed assessment excerpt from the COMOFI-based review as provided in the supplied content.* ### 33.3 percent, 20 percent or 10 percent of the voting rights of the bank (this requirement is ### _cr05186 - 33.3 percent, 20 percent or 10 percent of the voting rights of the bank (this requirement is ### Ownership thresholds and filing requirements - CRBF Regulation 96-16, Art. 2 (1) references thresholds of "33.3 percent, 20 percent or 10 percent of the voting rights of the bank". - The requirement to notify at those thresholds is "omitted in the case of an internal restructuring by French or other EEA groups" (CRBF Regulation 96-16, Art. 2 (1)). - Each bank must file with the CB information on each holder of at least "10 percent of its outstanding capital stock". ### Information rights for smaller holdings - The CB has the right to exact all necessary information on holders of "between 0.5 percent and 10 percent of such outstanding capital stock". - Any acquisition of "5 percent or more of the institution’s (or firm’s) voting rights must be immediately reported to the CECEI". - The CECEI may require that an institution (or firm) identify those shareholders declaring holdings of "between" (text continues in source). *Source: _cr05186 - excerpt referencing CRBF Regulation 96-16.* ### 0.5 percent and 5 percent of an institution’s voting rights (Art. 3). ### _cr05186 - 0.5 percent and 5 percent of an institution’s voting rights (Art. 3). ### Ownership changes, notification and CECEI powers - Transactions effected outside France that change the allocation of an indirect equity interest in an institution or firm subject to CRBF Regulation 96-16 (Art. 2.1) must be reported immediately to the CECEI (Art. 2.2). - CECEI may decide a transaction warrants re-examination of the regulatory position of the institution (or firm) (Art. 2.2). - For credit institutions listed on regulated markets, a person intending to initiate a takeover bid must inform the Governor of BdF, as Chairman of the CECEI, eight business days before the bid is filed with the AMF and/or made public (COMOFI Art. L.511-10). - If CECEI does not decide within three months, a positive decision is considered taken. - Where a transaction is completed without prior CECEI authorization, COMOFI (Art. L.611-2) allows CECEI to apply to the courts to have voting rights applicable to the shares in the transaction suspended. - CRBF Regulation 96-16 requires prior approval or notification for changes resulting in changes of ownership or exercise of voting rights over thresholds or in controlling interest; CECEI may reject requests and must state reasons. - Assessment: Compliant. ### Principle 5 — Investment criteria (scope, limits, approvals) - A participation (equity interest over 10 percent) in another corporation (except financial institutions or an EEA registered insurance company) may not exceed 15 percent of the bank’s own funds (CRBF Regulation 90-06, Art. 4; COMOFI Art. L.511-2). - Aggregate such acquisitions may not exceed 60 percent of the bank’s own funds; limits applied on a consolidated basis. - CB may authorize a credit institution to exceed limits; excess deducted from regulatory capital (CRBF Regulation 90-06, Art. 4). - CRBF Regulation 90-06, Art. 3b allows temporary exceptions for stock held from financial support operations, held for account of third party, bought underwriting, or purchase orders executed on behalf of third party. - CECEI prior approval required for investments in a supervised institution when acquisition leads to control, or shareholdings exceed or fall below 10, 20, or 33 percent of votes; any acquisition over 5 percent must be notified to CECEI (CRBF Regulation 96-16). - Notification suffices when acquisition (i) between subsidiaries of same corporation; and (ii) located within the EEA. Transactions between companies registered outside France concerning supervised companies registered outside France must be notified immediately to CECEI. - No requirement to obtain approval for acquisitions of interests in banking business in EEA countries before implementation; CB relies on an annual survey of banking establishments outside France to identify such transactions. - COMOFI Art. L.511-7 limits nonbanking activities in general terms; CRBF Regulation 86-21 limits total revenues from nonbanking activities to 10 percent of net banking income. - CRBF Regulation 90-06 does not require supervisor review of planned acquisitions below quantitative limits beforehand; COMOFI Art. L.613-16 authorizes CB to issue injunctions to restore financial equilibrium or organization. - CECEI/CB collegiality ensures close collaboration on proposed ownership changes; CECEI can reject corporate structures that present undue risk or impede supervision. - Assessment: Largely compliant. - Comment: Implementation of Directive 2002/87/EC will extend prior consultation to insurance companies in France and other EEA countries; revision of CRBF Regulation 96-16 under preparation will require prior CECEI approval for acquisition of nonfinancial equity holdings and for opening by French banks of branches or subsidiaries outside the EEA — improvement underway. ### Principle 6 — Capital adequacy (requirements, components, compliance) - Laws/regulations require absolute minimum capital (CRBF Regulation 92-14, Art. 1) and minimum ratio of own funds to risk weighted assets (CRBF Regulation 91-05 and 95-02). - COMOFI Art. L.511-40: assets must exceed liabilities by at least the minimum capital at any time. - CRBF Regulation 91-05 and 95-02: minimum 8 percent ratio of own funds to risk weighted assets, on a consolidated basis, covering market risk exposure and off balance sheet exposure. - Capital adequacy requirements apply to all credit institutions and financial holding companies. CB can require solo or sub-consolidated requirements and may refuse inclusion of certain resources in own funds calculation. - Components and calculation defined in CRBF Regulation 90-02 and CB Instructions 90-01 and 96-01. Tier 1 restricted to core capital and general reserves; Tier 2 allowed if meeting strict stability/absorbency requirements; Tier 3 strictly limited to coverage of market risks. - French requirements aligned with Basel Capital Accord and European legislation; CB/CECEI may require higher solvency ratios at their discretion. - Market risk capital adequacy: standardized approach (CRBF Regulation 95-02); major banks may use internal models subject to CB assessment and approval (CB has specialist team). - Semi-annual comprehensive reporting on solvency mandatory; CB may require corrective action when requirements not met or ratios risk shortfalls. - Assessment: Compliant. - Comment: France intends to implement Basel II and permit IRB and advanced operational risk approaches; working groups and Information Missions in 2003 undertaken; participation in quantitative impact studies. ### Principle 7 — Credit policies (internal control, lending process) - CRBF Regulation 97-02 (amended) sets internal control standards; management and board responsible for credit administration, risk measurement/monitoring, and supervision of policies (Arts 18-24). - Internal controls include operations control, accounting/IT systems, risk/result measurement, risk monitoring, documentation systems; consolidated system adapted to size and activities required. - Regulation requires clear criteria for loan granting, comprehensive forecast analysis of credit risk, independent unit for analysis, dual authorization for lending/commitment decisions (senior positions for certain transactions). Commitments subject to strict and frequent monitoring. - Board, executive body, internal and external auditors responsibilities defined; annual report to supervisory authorities on internal control and exposure measurement/monitoring required. - Assessment: Compliant. - Comment: Tough competition in SME credit has impaired margins; BdF/CB issued warnings and white paper; limited results so far; revisited under Principle 8. ### Principle 8 — Loan evaluation and provisioning - CRBF Regulation 97-02 requires loan quality assessment via classifications into buckets according to internal rating; provisioning on individual reviews or statistical analysis of past losses. No harmonized bucket number; banks use judgment case-by-case (except small homogeneous loans). - CRC No. 2002-03 requires detailed information on doubtful, “compromised” and restructured debts; new subcategories: restructured debts with nonmarket conditions; “compromised” doubtful debts. - A debt must be classified as doubtful when: (a) payments are three months overdue (six or nine months respectively for property loans or loans to local authorities); or (b) debtor situation makes nonrecovery probable even without overdue payments; or (c) legal proceedings filed. - Banks must obtain recent and reliable customer financial information and have access to BdF Credit Register; BdF in-house rating (cotation BdF) widely used. - Provisions must take account of prudently valued security and recovery costs/likelihood; provisions constituted as soon as risk of nonrecovery arises; provisions must cover at least recognized but not yet collected interest income on doubtful loans; CRC No. 2002-03 requires discounting method when impacts significant. - Internal controllers/auditors and external auditors (CAC) play main role; CAC not required to certify loan classification. CB reviews classifications on-site/off-site, often recommending re-classifications and additional provisions; CB may deduct from regulatory capital for under provisioning or demand publication of rectified accounts. - CB obtains detailed quarterly loan portfolio information and has comprehensive BdF databases for concentration analysis (capital links, management/board functions, outstanding balances). - Assessment: Compliant. - Comments: Some banks create general loan loss provisions (non-tax-deductible) for nondoubtful loans; recognition of provisions differs (liability-side contingencies vs asset write-downs); dynamic forward-looking provisioning discussed internationally; IASB retained “incurred loss model” in final IAS 39 (Dec 2003) though exposure draft allowed bankers’ expert judgment. ### Principle 9 — Large exposure limits - CRBF Regulation 93-05 and CB Instruction 2000-07 limit large exposures to single borrower/group of connected borrowers to 25 percent of the bank’s own funds; applied on a consolidated basis for on- and off-balance sheet exposures. - Aggregate of individual exposures of 10 percent or more may not exceed 800 percent of own funds. - Large exposure measured net of collateral, guarantees or other deductions. “Single borrower” defined as persons connected so that one’s financial problems likely cause payment problems for others (CRBF 93-05 Art. 3). - Regulation 97-02 requires monitoring procedures for large exposures, with top-management involvement. CB has discretion to adapt notion of closely related exposures and may require compliance on individual or sub-consolidated basis when distribution of own funds is unsatisfactory. - All exposures over 10 percent must be reported quarterly to CB (5 percent for exposure to a shareholder or manager). Quarterly reporting mandatory for exposures in excess of 10 percent of own funds; principal risks on a gross basis if they exceed 10 percent of own funds or EUR 300 million (CB Instruction 2000-07). - CB accesses BdF databases and local agencies for portfolio and company information; information system developed for on-site inspection preparation. - Assessment: Compliant. ### Principle 10 — Connected lending - 1966 Commercial Companies Act regulates related-party transactions; arm’s-length lending, full board authorization and reporting to annual General Assembly required for non-day-to-day or nonmarket transactions with directors/senior managers/close relatives. - Related parties defined in CRBF Regulation 93-05, Art. 3 (capital links, common management, or connections causing contagious payment problems). - CRBF Regulation 97-02 (Art. 21, Art. 42(f)) requires internal controls to monitor/ control connected lending. Lending to related parties and parent/subsidiaries/significant shareholders must be reported when exceeding 5 percent of banks’ own funds; supervisors may require aggregation of exposures. - CRBF Regulations 90-02, Art. 6 ter and 2000-09 impose deduction from regulatory own funds of commitments to shareholders or linked staff exceeding 3 percent of own funds (exceptions for investment grade commitments). - Assessment: Compliant. ### Principle 11 — Country risk - CB Instruction 2001-01 on international claims applies to balance sheet and off-balance sheet exposures to private or public borrowers residing in non-G10 and non-EEA countries or with such nationality; includes local claims denominated in local currencies on private sector and short term local commercial loans. - CRBF Regulation 97-02 requires information and management systems for country-risk identification, monitoring and control; reviewed during on-site inspections. - Annual (semi-annual for share held by large/internationally active banks) reports on country risk exposure except to G10 and EEA countries sent to CB. Exposures broken down by borrower type and credit type; CB carries out cross studies on prudential reports. - Country-risk provisions not mandatory; CB may recommend minimum provisions case-by-case when country situation deteriorates. External auditors and CB pay special attention to country risk provisioning. - CB conducts cross studies on emerging economies, performs stress tests to assess resilience of French banks to deterioration in emerging countries. - Assessment: Compliant. ### Principle 12 — Market risks - CRBF Regulation 95-02 and annexes require banks to retain sufficient capital to cover trading portfolio risk, exchange rate risk, and settlement risk. CB can authorize use of internal models subject to validation. - Institutions may use standardized method or internal models; CB explicit approval required for internal models after validation by specialist team; five models validated to date. Institutions using internal models must apply a multiplier, hitherto consistently set higher than regulatory minimum. - Semi-annual reporting imposed by CB Instruction 96-01. Regulation 97-02 defines strict internal control and daily recording/assessment of trading book and foreign exchange operations. - Model validation involves VAR approaches, Monte Carlo and extensive stress-testing; systems must aggregate positions across products/markets at individual and group levels. CB specialists involved in on-site inspections and model testing. - Assessment: Compliant. ### Principle 13 — Other risks (liquidity, interest rate, operational) - CRBF Regulation 97-02 covers major risks including credit, market, interest rate, settlement and liquidity risk. Regulation 90-07 addresses interbank risk; Regulation 88-01 and CB Instructions 88-03 and 89-03 regulate liquidity and provide a quantitative “liquidity ratio.” - CB ensures banks have a general liquidity strategy approved by top management and Board, regularly audited by internal auditor, and not over-reliant on lender of last resort; stress tests and contingency plans required; banks must describe liquidity and asset/liability management in annual reports. - CB has instituted specific monitoring (daily/weekly) when concerns arise; no liquidity squeezes reported over past two years. - Articles 32–37 and Articles 11 and 17 of CRBF Regulation 97-02 require systems to measure/monitor internal limits and to analyze risk of new activities. - Non-executive board members must meet at least twice a year to review internal audit results; executive management informs non-executive members at least once per year of main risks and measures. - Working group on operational risk established to prepare Basel II implementation; largest six banking groups monitored continuously. - Assessment: Compliant. - Comment: Corporate governance improvements (Loi sur les Nouvelles Régulations Economiques, 2003 FSA) and Basel II implementation will further strengthen risk management. ### Principle 14 — Internal control and audit - Rapports Viennot (1995, 1999) and Rapport Bouton (Sept 2002) encouraged improved corporate governance; major banks now have audit committees. CECEI-developed database (FIDEC) assists “fit and proper” checks. - CRBF Regulation 97-02 (and amendments) codifies Basel Committee recommendations on internal controls; mandatory comprehensive annual reporting on internal control systems and auditors’ reports required. CB regularly requires system improvements and can suspend/remove senior managers (COMOFI Art. L.613-21). CECEI approves management appointments. - Internal audit offices must have unfettered access, adequate staffing and independence; CB reviews during on-site inspections. External auditors obliged to inform CB of irregularities that could threaten a clean opinion; auditors receive CB on-site findings. - Assessment: Compliant. - Comments: Efforts to generalize internal audit committees continue; Regulation 2004-02 adds operational risk and business continuity planning. ### Principle 15 — Money laundering (AML/CFT) - COMOFI requires customer identification and verification; occasional customers identified for transactions above EUR 8000; Décret No. 91-160 sets additional requirements for legal entities. - COMOFI requires retention of identity and transaction records for five years and reporting to TRACFIN suspicious transactions related to drug trafficking or organized criminal activity. Decree 91-160 requires written internal AML procedures and staff training. - CRBF Regulation 91-07 and 97-02 require internal controls and procedures for AML compliance; no specific statutory requirement to appoint an AML officer. - CB responsible for regulating/supervising AML/CFT compliance, conducts on-site/off-site and special AML/CFT examinations; banks submit annual AML/CFT questionnaires and internal control reports. CB prioritizes examinations on a risk basis and has sufficient resources. - CB can impose disciplinary sanctions up to withdrawal of license; fines up to amount equal to minimum capital. Sanctions have ranged from warnings to removal from register; decisions publicized. - Assessment: Compliant. - Comment: Detailed AML/CFT compliance assessed in a separate AML/CFT detailed assessment report. ### Principle 16 — On-site and off-site supervision (structure, tools, activity) - COMOFI Art. L.613-6: General Secretariat of CB carries out off-site monitoring and on-site supervision. In 2003, CB conducted 188 inspections in banks/investment enterprises; 22 inspections of foreign establishments of French banks (17 outside the EEA). - Supervisory organization: DC (≈160 staff; 40 focused on six largest groups), DCP (≈180 staff on-site), DS (≈100 staff for international relations, accounting, IT, macro-prudential studies). Total CB and CECEI staff ≈585. - Off-site tools: ORAP (CAMELS-type with 15 indicators producing overall bank rating), SAABA (automated early warning using 25 databases), BAFI, SCR (loans > EUR 75,000), FIBEN (200,000 firms covering 90 percent of total bank credit to businesses), BdF databases. - On-site: general periodic inspections, focused inspections, triggered inspections, thematic inspections (AML/CFT, Basel II preparedness), follow-up inspections. SIGAL system provides on-line inspection support. On-site teams led by Chief Inspector; specialists for IT and model risk analysis. - Inspection frequency: “Big Six” near-continuous inspections (4–5 per year); nonsystemic institutions on 3–5 year cycle; ~240 on-site inspections per year. Draft reports discussed with management; final report and lettre de suite communicated to Board and auditors; DC follows up remedial actions. - CB developing macro-prudential tools and SAABA modules for sector/housing stress scenarios; reinforced surveillance program for systemically important groups. CRBF 97-02 to be amended to include business continuity planning. - Assessment: Compliant. - Comments: Analytical tools continuously improved; engagement in ECB Banking Supervisory Committee macro-prudential work. ### Principle 17 — Bank management contact - Frequent contacts with bank senior management: quarterly discussions, ~ten technical meetings annually, yearly top-management meeting; for large groups, ongoing contact and multiple inspections per year. CB meets regularly with CACs. - On-site and off-site interactions used to assess management quality; inspection assessments feed into ORAP; CB may take disciplinary action against Chairman/executive officers when serious deficiencies found. - CRBF Regulation 96-16 requires banks to notify CECEI of significant changes including senior manager appointments (Arts 9–11); CECEI can request license modification or reject appointments. - Assessment: Compliant. ### Principle 18 — Off-site supervision (reporting, consolidation) - COMOFI Art. L.613-8 empowers CB to define documents/data to be submitted and request clarifications; CB database compiled from prudential and accounting reports. Large institutions file monthly reports; all file quarterly reports including foreign branches; profit and loss accounts filed twice a year; consolidated accounts annually. Repeated errors/late filings may be sanctioned. - CRBF/CB regulations/instructions cover own funds, solvency, large exposures, market risk capital, liquidity, and related reporting; most require solo and consolidated reporting. CB may require individual or sub-consolidated compliance when distribution of own funds is unsatisfactory. - CRC Regulation 99-07 and CRBF Regulation 2000-03 (and amendments) define consolidation rules and require fully consolidated accounts for mutualist groups and reporting on subsidiaries/branches abroad. - Off-site data feed SAABA and ORAP; CB may request any necessary information. - Assessment: Compliant. - Comment: Since 2001 assessment, mutualist groups now report on a consolidated basis. ### Principle 19 — Validation of supervisory information (external audit role) - CRBF Regulation 91-01 requires annual financial statements certified by a Commissaire Aux Comptes (CAC). CB has access to all supervised institution information and may require auditors’ reports and other accounting documents (COMOFI Art. L.613-8; Art. L.613-9). CB inspectors meet CAC twice during on-site inspection. - 2003 CSF created Haut Conseil du Commissariat aux Comptes (HCCC) to monitor CACs; decree requires institutions to advise CB of proposed external auditors and gives CB two months to give an opinion; CB may designate supplementary CAC or ask Court/CNCC to dismiss or suspend a CAC. CB can require an audit firm other than the nominated one to perform a specific mission. - CB seeks greater benefit from external auditors given resource limits and inspection cycles. - Assessment: Compliant. - Comments: Reforms since 1999 SFSA and 2003 FSA implementation strengthen relations between CB and auditors; some implementing decrees remain. ### Principle 20 — Consolidated supervision (scope and powers) - CRBF Regulation 2000-03 (and amendments) require regulatory filings on consolidated basis; CB may exclude entities from consolidation where information transfer obstacles exist (CRBF 98-03). COMOFI empowers CB to supervise entire activities of credit institutions including branches and subsidiaries; CB has on-site access to parent and controlling legal persons and their subsidiaries (COMOFI Arts L.613-10 and L.613-11). - CRBF Regulation 96-16 requires CECEI prior authorization for acquisition of defined levels of equity in credit institutions; indirect acquisitions through parent company by acquirers domiciled outside France require immediate notification to CECEI. - CRC Regulation 99-07 sets consolidation rules including special-purpose entities and networks affiliated with a central body; mutualist groups now provide fully consolidated accounts. - CB has MoUs and information exchange mechanisms with domestic and foreign regulators; where no MoU, on-site inspections require host permission. CB monitors relationships with other jurisdictions to ensure global consolidated supervision. - Assessment: Compliant. - Comment: Authorities encouraged to continue efforts to obtain access to information from all countries where French banks have business units. ### Principle 21 — Accounting standards and disclosure - COMOFI assigns CRC competence for accounting regulation for banks/investment firms after consultation with CCLRF; CRBF and prior bodies issued extensive accounting/valuation rules (e.g., Regulation 91-01). CRBF Regulation 97-02 aims at “auditability” of accounts. CRC Regulations 99-07 and 99-02 specify consolidated accounts modalities. - CACs certify accounts; 1999 FSFA strengthened CB capacity to request CAC assistance. CB published Livre Blanc (Dec 1998) noting limited/less standardized disclosure on credit and market risk; urged improvements. Subsequent measures and recommendations issued to improve disclosure (market risk, credit risk, deconsolidation, consolidated/solo accounts, CRC No. 2002-03 on credit risk disclosure). - CRC Regulation 2002-03 requires disclosure of gross amounts of standard, restructured, doubtful and compromised loans and criteria used; provisions rules and changes must be disclosed; loans broken down by significant sectors, geography, counterparty and residual maturity. - CB study (2001) and 2002 analysis highlighted need for earlier/smoother provisioning; IAS 39 final standard based on “incurred loss” model; CB expects IAS 39 to impact provisioning practices. French banks progressing on Basel II Pillar 3; May 2003 survey shows majority of market risk disclosure requirements met but credit risk disclosure needs work. - Assessment: Compliant. - Comment: Progress toward convergence with IAS ongoing; authorities stimulate greater comparability. ### Principle 22 — Remedial measures and sanctioning powers - COMOFI Arts L.613-1, L.613-15-19, L.613-21-23 confer wide enforcement powers on CB: recommendations, injunctions, warnings, supervisory reprimands, prohibition to perform activities, suspension/removal of managers, appointment of temporary administrators, withdrawal of license, pecuniary sanctions, withdrawal of voting rights, prohibition to pay dividends, obligation to disclose disciplinary sanctions, referral to Public Prosecutor. - CB is administrative judiciary authority; its decisions can be challenged before Conseil d’Etat; in urgent cases appeals do not suspend implementation (Art. L.613-23 II). - CB can request FGD intervention when bank risk threatens customer commitments (COMOFI Art. L.312-5). CB and FGD cooperate closely. - 2002 disciplinary statistics: one injunction, 8 warnings, 15 supervisory complaints (some with pecuniary penalty), one bank limited in activities, delicensed three investment companies, five disciplinary actions against money changers. - Assessment: Compliant. ### Principle 23–25 — Global consolidated supervision, host country supervision, foreign banks’ establishments - CRBF Regulation 2000-03 obliges compliance with prudential standards on consolidated basis including foreign entities. CRBF Regulation 97-02 requires banks to view risks on a consolidated basis including foreign subsidiaries and branches. CB as home supervisor may carry out inspections abroad and consult/coordinate with host supervisors; EEA branches notified to CECEI prior to establishment with home authority retaining sanctioning powers. - CB has extensive MoUs and bilateral agreements within and outside EU; for non-EEA countries, MoUs require equivalence in transparency/prudential standards and reciprocity; where cooperation limited, CB may require institutions to provide information. 2003 FSA broadens scope of cooperation with non-European groups and enables group information exchanges where bilateral agreements exist. CB has created working arrangements for Basel II cross-border implementation. - Host-country cooperation: CB may refuse a project to branch out if supervisory cooperation unacceptable. EU Directive 2002/87/EC expands supplementary supervision of financial conglomerates (France planned to comply before August, 2004). - Foreign banks’ branches: EEA branches supervised by home country (liquidity and rules of conduct/money laundering exceptions), non-EEA branches subject to same rules as French banks though CB may accept different requirements if home-country consolidation and supervision satisfactory and reciprocity exists. Subsidiaries incorporated in France fully subject to CB supervision and FGD coverage. CECEI may seek home-country supervisor advice in licensing. - Assessments: Compliant across Principles 23–25. *Source: _cr05186 - 0.5 percent and 5 percent of an institution’s voting rights (Art. 3).* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Banking: Overall finding and recommended actions - The system in France for banking regulation and supervision is of high quality. - Only one Basel Core Principle (BCP) was assessed as largely compliant and not fully compliant. - Authorities might consider additional steps to address two specific issues noted by the mission. Recommended action plan to improve compliance of the Basel Core Principles - Investment criteria (BCP 5) - Introduce the obligation to obtain prior approval of the CECEI for acquisitions of equity in nonfinancial enterprises by banks (measures have been developed but not yet enacted). - Accounting Standards (BCP 21) - Continue to strive toward convergence between French accounting standards and IAS. Authorities’ response - The authorities are broadly in agreement with the assessment. ### Insurance: Assessment scope and methodology - The assessment examines France’s observance of the IAIS Insurance Core Principles (ICP) according to the October 2003 ICP methodology. - The mission took place in February 2004; the team consisted of Andrea M. Maechler (IMF) and Helmut Müller (formerly German Bundesaufsichtsamt für das Versicherungswesen). - Information reviewed included: - An extensive self-assessment prepared in 2000 by the former Commission de Contrôle des Assurances (CCA). - Comparison with the Core Principles and Core Principles Methodology. - Review of relevant laws governing insurance in France (Code des Assurances, numerous decrees, implementation regulations, and the Loi de sécurité financière (LSF)). - On-site work: meetings and discussions January 29–February 11, 2004, with the insurance supervisory authority, the MINEFI, the BdF, the CB, industry associations (FFSA, GEMA), Institut des Actuaires, private insurers, intermediaries, CNCC auditors, and other financial institutions. - The assessment attempted to evaluate faithful and effective implementation of the legal framework. ### Institutional changes and transitional context - The assessment was undertaken during a period of transition: - ICP revised in 2003 (newer than the 2000 version). - Financial Security Law of August 1, 2003 created CCAMIP (Commission de Contrôle des Assurances, des Mutuelles et des Institutions de Prévoyance) by merging CCA and CCMIP. - The law granted financial independence to CCAMIP, strengthened coordination with banking supervisors, and extended information powers. - Implementation orders (décrets d'application) were under review by the Conseil d'Etat at the time; transition ended as of July 2004 with publication of outstanding orders. - Note: Legally the supervisory authority is CCAMIP; in practice, at the time of assessment meetings were held with CCA as CCAMIP not yet operational in all respects. ### Institutional and macro-prudential overview of the insurance sector - Size and ranking: - France had a 5 percent market share of gross premiums in the OECD in 2001, ranked the fifth largest in the world and the third largest in Europe. - In terms of insurance penetration (premiums as a percentage of GDP) France was slightly over 10 percent, ranking eighth in the OECD. - In density (premiums per capita) France ranked tenth in the OECD. - Industry composition (counts): - Life and mixed (126), nonlife (295), reinsurance (33). - Asset shares (end-2002): - Life and mixed sectors accounted for over 80 percent of total assets (30 percent for life and 53 percent for mixed). - Non-life insurance represented 14 percent of total assets. - Reinsurance accounted for 4 percent of total insurance assets. - Legal form of providers by premium income: - Stock companies: 80 percent. - Mutual insurance companies: 11 percent. - Public-owned institutions: 9 percent. - Branches of foreign companies (outside the EEA): less than 0.1 percent. - Approximately 80 small mutual companies are not under CCAMIP supervision and provide social-security related insurance under state control. - Market structure and distribution: - Life sector concentration at end-2002: three (10) largest companies represented 29 percent (60 percent) of total assets. - Non-life concentration at end-2002: three (10) largest companies represented 22 percent (45 percent) of total assets. - Bancassurance is prevalent; a large minority (by assets) of insurers are bank subsidiaries and banks also offer policies from nonsubsidiaries. - Distribution channels include tied agents, insurance brokers, salaried sales forces, direct writing mutuals, and financial institutions. ### Products and product mix - Life-sector product mix: - Mixed capital insurance (assurance à capital différé avec contre-assurance en cas de décès) accounts for almost 65 percent of total life premium income. - Paid out as lump-sum or multiple payment on death or survival. - Policies often include a guaranteed rate of return used to calculate technical provisions. - Group policies account for 7 percent of pure endowment premium income. - Unit-linked contracts represent 15 percent of total life premium income (policy benefits fluctuate with market values; investment risk borne by policyholders unless linked to minimum guarantees). - Unit-linked products represent 18 percent of life and mixed insurance premiums (post-equity market declines). ### Regulatory framework and solvency - Life insurance regulatory pillars: - (i) Solvency requirements (approximately 4 percent of total mathematical provisions for endowment products and 1 percent for unit-linked contracts). - Note: In life insurance, this minimum requirement can be lowered up to 15 percent, depending on existing reinsurance agreements. - (ii) Regulations on measurement of liabilities (technical provisions). - (iii) Regulations governing investment policies (including conservative accounting principles applied to asset valuation). - Solvency metrics (end-2002): - Life sector solvency margin (including unrealized capital gains): 9.3 percent of provisions, or 2.4 times the required minimum. - Non-life regulatory minima: - Minimum regulatory ratio equal to 18 percent of annual premiums (16 percent for large companies), or 26 percent of average claims paid out in the preceding three years (23 percent for large companies), whichever is higher. - Note: In non-life insurance, this minimum requirement can be lowered up to 50 percent, depending on existing reinsurance agreements. - Non-life solvency margin (including unrealized capital gains) at end-2002: 39.3 percent of provisions, or 4.8 times the required minimum. - Alternatively, at end-2002, the solvency margin (including unrealized gains) represented 72.4 percent of premiums. - Asset composition (life sector): - Over three quarter of total assets invested in fixed-income instruments. - Equity represents only 12 percent of total assets. - Real estate less than 5 percent of total assets. - Remaining 84 percent invested in fixed-term instruments. - Supervisory practices: - Since 2001 insurers are required to conduct periodic stress tests to monitor effects of financial market shocks (interest rates, equity, real estate) on asset-liability matching. ### Sources of stability and resilience - Identified sources: - (i) Ability of life sector to reduce guaranteed interest rates progressively (to zero percent for most new contracts) and shorten contract duration to reduce interest-rate risk. - (ii) Greater product diversification with unit-linked products where investment risk is fully borne by policyholders. - (iii) Conservative investment portfolios: over three quarter in fixed-income instruments, limiting exposure to equity market declines. - (iv) Despite large bancassurance groups, limited risk transfer between banking and insurance sectors. - (v) A relatively small reinsurance activity, accounting for only 3 percent of total assets in the insurance sector. - Observed resilience to shocks: - The sector demonstrated resilience to a significant fall in international equity prices in 2001–2003, historically low interest rates, and natural catastrophes including September 2001 and major storms/flooding in 1999 and 2000. ### Challenges and emerging risks - Main challenges identified: - (i) Demographic trends: longer life expectancy and decline in working population, raising concerns about financial sustainability of state-funded pension and medical plans. - (ii) Upcoming implementation of International Accounting Standards (IAS) norms in 2005, exposing the industry to accounting risks. - (iii) Possible sharp and sustained increase in interest rates could trigger a wave of contract repurchases forcing insurers to sell fixed-income assets at losses to meet surrender values. - Authorities’ contemplated mitigants: - Promotion of a new generation of private retirement products. - Ensuring sound and sophisticated industry-wide asset-liability management. ### Preconditions for effective supervision and institutional features - Supervisory basis: - Supervision is based on EU Directives and French insurance law, ordinances, codes, and circulars. - Regulatory requirements originate in both company law and insurance law. - Regulation falls under jurisdiction of the MoE; supervision under CCAMIP and the CEA. - Legal and professional environment: - Legal system operates effectively. - Auditing and accounting professions are well developed and follow best international practices. - For large companies, financial statements must be confirmed simultaneously by two sets of external auditors. - Auditing and accounting rules generally comply with international standards; full harmonization expected in 2005 with EU implementation of IAS. - The actuarial profession is large and well-developed. - Macroeconomic context: - The French economy is large, well diversified, and generally relatively stable in real and nominal terms—conditions that support insurance sector growth and effective supervision. ### Principle-by-principle assessment (summary) - Overall observance: - Most of the 28 IAIS ICP are observed. - ICP 9, 10, 17 and 18 are largely observed. - ICP 3, 24 and 28 are partly observed. - Assessment criteria explanations: - Observed: all essential criteria observed (or only non-applicable exceptions). - Largely observed: only minor shortcomings exist. - Partly observed: shortcomings raise doubts about ability to achieve observance. - Not observed: no substantive progress toward observance. - Not applicable: criterion does not apply given jurisdiction structure. ### Principle 1 (Conditions for effective insurance supervision) — key points - Principle 1 requires: - A policy, institutional and legal framework for financial sector supervision. - A well developed and effective financial market infrastructure. - Efficient financial markets. - Description of France’s position: - The environment in which the French insurance supervisory authority operates is conducive to effective supervision and achievement of its objectives. - France pursues national and international policies aimed at ensuring financial stability, including via the Financial Security Law of August 1st, 2003 (LSF). - Legal and institutional framework is mostly enshrined in codes (e.g., Code des Assurances), described as comprehensive, carefully drafted, and publicly disclosed. - Laws and regulations are updated as necessary to maintain consistency with national and international standards and best practices. *Source: _cr05186 - 1. Objectives, Autonomy, Powers, and Resources* ### 2. Financial market infrastructure ### 2. Financial market infrastructure ### Infrastructure for effective supervision - The infrastructure necessary for effective supervision is in place. - The general legal system (civil law, administrative law, penal law, tax law, etc.) is accountable and reliable. - The court system is generally reliable and transparent. - Accounting, actuarial and auditing standards are consistent. ### Professional capacity and statistics - Qualified and experienced actuaries, accountants, auditors and lawyers are available. - General and special statistics are accessible. - Professional associations are available to assist and protect persons and companies in their various different functions for the insurance sector. ### Macroeconomic and tax environment - Macroeconomic policy promotes overall stability and the conditions under which the population and industry have incentives to make use of insurance (for example, by maintaining low and stable inflation rates). - Tax policy is also used to encourage demand for insurance. *Source: _cr05186 - 2. Financial market infrastructure* ### 3. Efficient capital market ### 3. Efficient capital market ### Overview - Paris is described as "one of the most important and sophisticated financial centers of the world, with well functioning money and security markets." - Assessment: Observed. ### Principle 2. Supervisory objectives - Main supervisory objective: protection of the interests of the insured (Art. L.310-12 Code des Assurances). - "Interests of the insured" include policyholder, the insured person, the beneficiaries and—where relevant—the interests of victims in third party liability insurance. - No other legal objectives that could conflict with the main objective are identified. - Assessment: Observed. ### Principle 3. Supervisory authority - Key institutional structure and responsibilities: - Supervisory responsibilities are allocated between the Comité des Entreprises d’Assurance (CEA) and the Commission de Contrôle des Assurances, des Mutuelles et des Institutions de Prévoyance (CCAMIP). - The new LSF assigned to the CEA responsibilities previously held by the MoE: issuing authorizations, fit and proper tests for owners/board members/senior managers, and authorizing portfolio transfers and mergers. - The Financial Security Law mandated the merger of the CCA with the CCMIP to form the CCAMIP, which will supervise all insurance undertakings as defined in Art. 8 of the First EU Non-Life and the First EU Life Insurance Directives. - The MoE retains some functions (e.g., power to issue rules by administrative means, and possibility of asking the CEA to postpone any of its decisions; Art. L.413-5 Code des Assurances). - Composition of bodies: - CEA composition: chairman (appointed by the MoE), director of the treasury, chairman and secretary general of the CCAMIP, and eight members appointed by the Minister of the Economy, Finance, and Industry for terms of three years: two representatives of insurance companies; one representative of the staff of insurance companies; one representative of the health mutual societies and professional protection schemes (without voting right); two members representing the Conseil d’Etat and the Cour de Cassation; and two individuals selected for their knowledge in the insurance sector. - CCAMIP composition: nine members — the chairman; the governor of the BdF; one member of the Conseil d’Etat; one member of the Cour de Cassation; one representative of the Cour des Comptes; and four individuals selected for their competence in insurance. The CCAMIP has a secretariat headed by a Secretary General (attends meetings but has no voting power). - Legal framework and powers: - Code des Assurances fixes allocation of authority in insurance supervision. - Neither CCAMIP nor CEA have power to issue rules by administrative means. - Supervisory authority mandated to ensure insurance companies can fulfill obligations to policyholders (Art. L.310-12 §2 Code des Assurances). - Where no regulation or poor regulation exists, CCAMIP can only give recommendations, not mandatory rules. - Independence, accountability, and transparency: - Internal governance requirements dispersed across laws (Code Pénal, Code des Assurances, etc.). - CCAMIP prepared a Code of Conduct for staff (to come into force after approval by new Commission) covering legal requirements, jurisprudence principles, prohibitions, guidelines on staff conduct and internal information sharing. - Appointment/dismissal procedures for CCAMIP head and members exist; chairman and members cannot be removed during appointed period except for crime. - Institutional relationships with executive, legislature and judiciary are clearly defined. - Minister of the Economy, Finance and Industry cannot give directions or guidelines to the supervisor. - Supervisory authority financed in a manner that does not undermine independence. - Supervisory processes are transparent; decisions must be justified; proposals for new legislation normally subject to prior hearings; disclosure limited by confidentiality and protection of policyholders’ interests. - Financial and human resources: - Secretariat of the CEA provided by the MINEFI. - CCAMIP has budgetary independence; budget proposed by CCAMIP Secretary General (Art. L.310-12-3 Code des Assurances) and needs approval by the CEA. - CCAMIP expenses paid by supervised entities (Art. L.310-12-4 Code des Assurances); a decree specifying implementation details under review by the Conseil d’Etat at time of assessment. - Legal protection provided by public service legislation covering civil service. - CCAMIP staffing: "around 130 persons." Of these, "50 are commissaires-contrôleurs" responsible for operational supervision over about "500 insurance companies." In addition, more than "1,000 health mutual societies and professional protection schemes" must be supervised and staff of former CCMIP will be transferred to CCAMIP. - CCAMIP intends to provide more and better training and to contract specialists in insurance to attract and maintain skilled staff. - Confidentiality: - Supervisory staff must observe confidentiality requirements established in relevant EU Directives. - Assessment: Partly observed. - Key comments, findings and recommendations: - Principal deficiency: supervisory authority lacks powers to issue rules by administrative means; this power belongs exclusively to the MoE. This is not compliant with ICP3 (essential criterion b) because the supervisory authority must have administrative means to issue and enforce the regulatory framework (regulations, circulars, guidelines, codes of conduct). - Staffing needs: number of commissaires-contrôleurs should be increased from "50 to at least 75–80" to meet objectives (inspect each company every three to five years) given expanded scope of supervision (conglomerates, cross-border activities, reinsurance, anti-money laundering) and forthcoming supervision of thousands of intermediaries under the EU Intermediaries Directive. - Organizational fragmentation concern: supervision segmented across four functional units (MoE for regulation; CEA for licensing, withdrawals, fit and proper tests, portfolio transfer; CCAMIP for sanctions; general secretariat for ongoing supervision) — risk of slow operation hampering efficient supervision; French authorities reference banking supervision experience to downplay risk. - Conflict of interest risk: insurance industry participation in CEA supervisory functions may impair supervisory work. French authorities argue for practitioner representation; report suggests advisory bodies (CCSF and CCLRF) could provide industry experience without industry representation on CEA; alternatively, introduce policyholder representatives. - Recommendation: merging CCAMIP and CEA would improve compliance and operational efficiency while retaining segregation of duties within CCAMIP between monitoring and decision-making on sanctions; decision-making body should be balanced, independent from industry, and have adequate insurance expertise. Performance of current four-functional-unit arrangement should be closely monitored and reviewed by a set date. - Conclusion: three main essential criteria not fulfilled (no administrative regulation power; possible conflicts of interest in CEA; insufficient staff) — ICP3 considered only partly observed. ### Principle 4. Supervisory process - Supervisory process established in Code des Assurances and associated regulations; updated regularly following discussions with the insurance industry. - Measures by supervisory authorities are consistent and equitable. - Insurance companies have right to appeal supervisory decisions to relevant court; appeal does not suspend the measure. - Role, objective and activities of supervisory authorities publicly described (internet, annual reports, Annex III of former CCA Annual report). - CCAMIP publishes market situation information, national and international developments, important decisions, cooperation with other institutions, and current issues in annual report and tableaux de synthèse des entreprises d’assurance et de réassurance. - Assessment: Observed. ### Principle 5. Supervisory cooperation and information sharing - Domestic cooperation: CCAMIP may exchange information with other French financial supervisors without restrictions. In October 2001, CCA and CB concluded a Charte relative à la coopération en matière de contrôle et d’échange d’information. - EEA cooperation: Cooperation and information sharing among EEA insurance supervisors regulated by directives and multilateral protocols; arrangements allow unrestricted exchange of information, including cross-sector basis for groups/conglomerates; French legislation incorporates these arrangements. - Non-EEA cooperation: CCAMIP authorized to enter into agreements with foreign competent authorities for exchange of relevant information provided foreign supervisor is subject to professional secrecy constraints; agreements may allow CCAMIP to carry out on-site inspections in foreign branches of French undertakings and permit, under certain conditions, foreign supervisors to participate in CCAMIP on-site inspections in French branches of foreign companies (Art. L.310-21 Code des Assurances). - Assessment: Observed. ### Principle 6. Licensing - Carrying out insurance business in France without a license is prohibited, except freedom of services for EEA-home-office companies under mutual recognition and EU Directives coordination. - Licensing responsibility: - Licenses previously issued by MoE; after Financial Security Law, CEA responsible for licensing. - CCAMIP advises CEA and can object; if CCAMIP objects, CEA must refuse—this is an informal arrangement without legally enforceable power for CCAMIP over licensing; after license granting, CCAMIP conducts a special check on undertakings’ commitments toward policyholders. - Licensing criteria and process: - Licensing requirements transpose EU Directive criteria and align with ICP6 essential criteria. - Several permitted legal forms distinguished in Insurance Code. - Owners and managers must submit information adequate to assess suitability; authorized representatives of foreign branches subject to same controls as directors of French firms. - CEA must be informed of natural and legal persons holding direct or indirect qualifying participation. - Supervisor may request audit reports and key information (extracts from register of commerce). - Supervisor can exchange information with relevant authorities inside and outside jurisdiction respecting reciprocity and confidentiality. - Supervisor may refuse license if applicants not fit and proper (knowledge, integrity), or if holders of qualifying participation: (i) are in an economic situation which may endanger applicant; (ii) lack sufficient resources to keep company solvent on an on-going basis; (iii) have been involved in illegal transactions affecting suitability; (iv) intend to abuse insurer for criminal purposes (e.g., money laundering); or (v) are connected with applicant in a way that would obstruct effective supervision. - Applicant must submit a five-year business plan covering: types of obligations (life) or risks (nonlife); basic insurance/reinsurance program principles; estimated installment costs and financing; projected development of business (forecast balance sheets and profit and loss accounts, with assumptions), coverage of technical provisions, solvency margins, cash situation. - Minimum capital required for all insurance companies. - Supervisor can request and check information on products (policy conditions, technical basis for premium rates and provisions); articles of incorporation, actuaries and auditors information required. - Life and nonlife separation: a company licensed for life may not be licensed for nonlife, and vice versa, except restricted cases (health and disability) as permitted by EU Directives and Insurance Code; supervisor checks separation of risks and related assets where mixed activities permitted. - Insurance companies not allowed to carry on noninsurance business in accordance with EU Directives. - Refusal of license must be motivated and notified to applicant. - CCAMIP may withdraw a license on grounds of substantial irregularities (solvency, provision requirements, investment rules) that threaten commitments to customers. - Assessment: Observed. ### Principle 7. Suitability of persons - Legal requirements: - Code des Assurances (Art. L.322-2) requires board members to be fit and proper in competency, experience and integrity; details laid down in decrees compliant with EU standards and ICP7 criteria. - Insurer must justify candidate meets requirements; company must inform supervisor at least one day before an appointment comes into force; CEA must decide within "at least three months" whether license must be removed due to board changes (Art. R. 321-17-1, A. 310-2 Code des Assurances). - In practice, CCAMIP may take alternative measures (e.g., appoint temporary administrator) if manager deemed not fit and proper. - Insurer not legally required to inform supervisory authority if it becomes aware of circumstances that may lead to doubts about fitness and propriety of a person. - Supervisory authority exchanges information on board members with other authorities at home and abroad if necessary. - Actuaries and auditors: - Actuaries are not legally required to be employed in an insurance company; no institution of an appointed actuary or responsible actuary with special functions as in UK/Germany. - External auditors (commissaires aux comptes) must be notified to supervisory authority (Art. L.319-19-1 Code des Assurances). If CCAMIP doubts an auditor’s quality, it may nominate a second auditor in whom it has confidence; if auditor violated duties, CCAMIP can ask relevant court to dismiss auditor. - Assessment: Observed. - Comment/recommendation: - Introduce regulations requiring an insurance company to inform the supervisory authority if it becomes aware of circumstances that may lead to doubts about fitness and propriety of owners, senior management, and others in positions of responsibility. - Note: Senior managers of French companies are members of the board (Administrative Board or Managerial Board). ### Principle 8. Changes in control and portfolio transfers - Principle statement provided; substantive Description section is not included in the supplied content. *Source: _cr05186 - 3. Efficient capital market* ### 1. Changes in control ### 1. Changes in control ### Legal and regulatory framework - The process regarding the changes in control of an insurance company is laid down in the relevant EU Directives, which are transposed into French law. - The European requirements are compliant with ICP7. - The Code des Assurances lays down the obligation to notify to the CEA of changes in control and whenever changes in shareholding are planned that affect 10, 20, 33 or more than 50 percent of shares or voting rights. ### Supervisory powers and procedures - The CEA is entitled to refuse the operation within a maximum delay of 3 months. - Any violation of the obligation to declare changes in participation exceeding the thresholds indicated by the Code des Assurances is a cause for the suspension of the voting rights attached to the shares concerned. - In all cases, the suitability of the new owners and the consequences of these changes for the business plan are checked. - Based on these checks the CEA can oppose the operation or ask for commitments ensuring the soundness and stability of the insurance undertaking. *Source: _cr05186 - 1. Changes in control* ### 2. Portfolio transfer ### 2. Portfolio transfer ### Portfolio transfer: legal requirements and process - Transfer of portfolio (totally or partly) needs prior approval of the supervisory authority (the CEA) (Code des Assurances, Art. L.324-1). - Policyholders and creditors must be informed by publication in the Journal Officiel. - Policyholders and creditors can present objections during the two month following publication. - The CEA checks together with the CCAMIP whether the interests of the policyholders of both the transferee and the transferor are protected. - Policyholders can immediately cancel their contract even if the CEA approves the transfer. - A transfer is possible without approval of the supervisory authority if all policyholders declare explicitly that they agree to the transfer and consent to conclude a new contract with the cessionary. - Assessment: Observed. - Comments: None. ### Principle 9. Corporate governance - Description: - Corporate governance regulations covered largely in the Code de Commerce (Art. L.225-17 etc.) for joint stock companies, and in the Code des Assurances (L.322-26-2, etc.) for mutual companies. - Regulations are general and not very detailed; many essential criteria of ICP9 are not mentioned (for example: establishment of independent risk management functions and audit and actuarial functions; distinction between responsibilities; decision-making, interaction and cooperation between different boards and functions; establishment of a remuneration policy; fair treatment of customers; responsibilities of senior management; prohibition of incentives encouraging imprudent behavior; appointment of a compliance officer). - Supervisory authority (CCAMIP) requires and verifies compliance mainly through on-site inspections. In case of irregularities supervisor can give recommendations (Art. L.310-17 Code des Assurances) and, if necessary, take sanctions (Art. L.310-18 Code des Assurances). - Where principles are not clearly established in regulations, supervisory agency can issue recommendations (Art. L.310-17) but enforcement is more difficult except where noncompliance threatens solvability margin and fulfillment of policy commitments (see Art. L.310-12 § 2 and Art. L.310-18). - Neither legislature, supervisory authority, nor industry associations have issued codes of conduct regarding corporate governance; some large companies have established their own codes. - Assessment: Largely observed. - Comments: - Many principles in essential and advanced criteria of ICP 9 are established in regulations dealing with corporate governance. - Recommendation: Give the CCAMIP the power to issue a Code of Conduct of Corporate Governance for all insurance companies supervised by this authority. Suggested Code should contain requirements for efficient internal control to be respected by all supervised insurance companies. ### Principle 10. Internal control - Description: - Legal framework limited: internal control expressly mentioned in Art. R. 336-1 Code des Assurances but requirements refer only to investment policy and investment business. - Art. L.322-2-4 Code des Assurances requires the board to prepare an annual report on solvency containing information on financial condition, technical provisions and assets; this report submitted to external auditors and supervisory authority. - Regulations do not address how internal auditing function is exercised (access to business lines, files, independence, sufficient resources), nor internal control of actuarial and compliance functions, market conduct activities, or regular (not only annual) provision of information. - Supervisory authority can directly require and enforce actions only in areas expressly mentioned in regulation; in other areas it can give recommendations (Art. 310-17) and enforce via general clause (Art. 310-18), but sanctions represent only indirect enforcement powers. - Internal control systems are checked during on-site inspections. - Assessment: Largely observed. - Comments: - Current regulations focus mainly on investment policy and a limited report. - Supervisory authority cannot directly require and enforce some measures necessary for efficient internal control. - Recommendation: Empower supervisory authority to issue a Code of Conduct containing requirements for efficient internal control for all supervised insurance companies; this code could be combined with corporate governance code. ### Principle 11. Market analysis - Description: - CCAMIP analyzes market conditions that can influence the insurance sector to foresee trends and scenarios that could cause systemic and other risks. - Analysis based on internal and external perceptions, published and confidential information, national and international developments. - Supervisory authority may require information only in certain areas defined in legislation; other information provided voluntarily. - CCAMIP and industry associations (Fédération Française des Compagnies d’Assurance—FSSA—and GEMA) publish aggregated market data (for instance Tableaux de Synthèse des entreprises d’assurance et de réassurance published by the CCAMIP). - Assessment: Observed. - Comments: None. ### Principle 12. Reporting to supervisors and off-site monitoring - Description: - Insurance companies must send the following documents to the CCAMIP every year (Art. A. 344-8 Code des Assurances): - within 5 months after the end of the financial year, a detailed file including: general information on the company (name, bylaws, managers, auditors, classes and countries of activity, staff including intermediaries, list of reference contracts); balance sheet (including off-balance sheets accounts), profit and loss accounts and appendix; forms analyzing the accounts (coverage of technical provisions, solvency margin, claims, technical provisions and their development, claims ratio per year of occurrence of the claims etc.) - within a month after their approval by the shareholders’ meeting: the balance sheet; the profit and loss account and the appendix; the management report by the company’s board and the report by the auditors; in motor insurance, provisional forms analyzing the accounts are to be provided before March 15. - Each insurance company must send a quarterly report (Art. A.344-13 Code des Assurances) concerning investments and other data (number of contracts, premiums, claims, expenses, financial returns) to the CCAMIP. - Each company must provide the annual solvency report (Art. L.322-2-4 Code des Assurances) demonstrating adequacy of technical provisions, required solvency, capacity to fulfill commitments, and a report on investment policy. Standards for preparing these documents set by the Code des Assurances. - Supervisors analyze all documents and have powers of investigation to obtain additional information through special requests, on-site inspections and communication with auditors. - According to Articles R. 332-23 to R. 332-29 Code des Assurances, CCAMIP can prescribe valuation of any kind of asset by an expert at the expense of the company. - In some circumstances when companies want to waive a rule of tariff or valuation of provisions, they need to provide evidence based on actuarial estimates. - Assessment: Observed. - Comments: None. ### Principle 13. On-site inspection - Description: - CCAMIP has wide-ranging powers to conduct on-site inspections and gather necessary information (Code des Assurances Art. L.310-12 to 310-17, Art. L.310-19 to 21, Art. R 310-17 and 18). - On-site inspections are undertaken exclusively by the staff of the CCAMIP (commissaires-contrôleurs). - Supervisors can verify on site the operations of any company at any moment. - Art. L.310-15 allows extension of checks to any company in which the supervised insurance company holds, directly or indirectly, more than half the capital or voting rights, and to bodies having agreements likely to affect independence of operation or decision-making. - When company subject to remedial measures, inspections can be extended to legal persons controlling it to check capacity to provide financial support. - CCAMIP can submit to supervision any natural or legal person with underwriting or management mandate from a supervised insurance company, or pursuing insurance brokerage. - Supervisors can examine all company documents: books, registers, contracts, statements, reports and vouchers. - Focus of inspection at discretion of supervisors; range never limited a priori; investigations may be extended without formal procedure. - On-site inspection procedure entails full hearing of both sides; supervision report sent to managers who may present remarks before final conclusions. - Assessment: Observed. - Comments: None. ### Principle 14. Preventive and Corrective Measures - Description: - Code des Assurances (Art. L.323-1, L.323-1-1, R. 323-1 to 323-10) provides CCAMIP a wide range of powers to act preventatively to protect policyholders’ interests, even before law/regulation breached. - Regulation foresees progressive escalation of actions and measures. CCAMIP may ask for information on important decisions the company intends to take. - CCAMIP can verify company fulfills legal and supervisory requirements and demands. - Protective measures: - If financial situation jeopardizes policyholders’ interests, CCAMIP can place company under special supervision and require a recovery program for approval within one month. - CCAMIP can restrict or prohibit free use of company assets. - CCAMIP can appoint a provisional receiver transferring necessary powers of company management (Art. L.323-1-1). - CCAMIP can order a life insurance company to suspend payment of surrender values or advances on contracts (Art. L.323-1). - When solvency margin does not reach required level, CCAMIP requires a restoration plan; if solvency margin falls below the guarantee fund (one third of the required solvency margin), supervisor requires undertaking to submit a short-term finance scheme to its approval. - These decisions can be taken without first holding a full hearing; law authorizes CCAMIP to hear managers at a later date. When restricting/prohibiting use of assets or appointing a provisional administrator, CCAMIP must withdraw or confirm measures within three months after allowing managers to present remarks. - Power of injunction: - CCAMIP can send a warning to a company deemed to have infringed legislative provision or adopted behavior endangering underwriting liability (Art. L.310-17). - CCAMIP can issue an injunction compelling measures in a given time frame to re-establish or strengthen financial balance or correct prejudicial practices. - Warning and injunction powers apply under Art. L.310-18-1 to reinsurance companies subject to French supervision (only French reinsurers) and to insurance holdings companies infringing provisions in Book III of the Code des Assurances. - Assessment: Observed. - Comments: None. ### Principle 15. Enforcement or sanctions - Description: - Supervisors (commissaires-contrôleurs) have no sanctions power; only the Commissioners of the CCAMIP have sanction powers. Definite legal rules must be respected in sanction process. - After issuing an injunction, CCAMIP assesses measures implemented. If insufficient measures or law infringed, CCAMIP can start disciplinary proceedings against company or its managers. - Disciplinary proceedings entail a full hearing of both sides: company managers heard by Commissioners after supervisors’ report. Commissioners, meeting with secretary general, can impose sanctions under Art. L.310-18 Code des Assurances: - a warning; - a reprimand; - prohibition to carry on certain operations and other limitations on pursuit of business; - temporary suspension of one or several company managers; - total or partial withdrawal of license; - compulsory transfer of all or part of the portfolio of contracts; or - pecuniary sanctions, which cannot exceed 3 percent of the company’s turnover before deducting VAT during the last closed tax year (5 percent for a repeat offence). - When a reinsurance company subject to supervision or an insurance holding company infringes a provision or does not comply with an injunction, CCAMIP can, in same conditions, pronounce a warning or reprimand, decide on publication, and impose pecuniary sanctions. - Assessment: Observed. - Comments: None. ### Principle 16. Winding-up and exit from the market - Description: - Winding-up follows withdrawal of the license (Art. L.326-2 Code des Assurances). License can be removed as a sanction if company has not fulfilled legislative requirements (Art. L.310-18). - Company can lose license if it has not begun business in the first year after license grant or had no business during the last two years (Art. R. 321-20/21). - Procedure defined by law (Art. L.326-1 etc.). Court opens procedure on application by CCAMIP. Two liquidators appointed: one by court, another by CCAMIP. CCAMIP must establish and verify insurance obligations and assets linked to obligations. - A certain priority is given to policyholders in receiving payouts for all lines of business and all assets (privilège général). - A policyholder protection fund established for life insurance policies and compulsory insurance (details see Art. L.423-2 and 421-1 Code des Assurances). - Assessment: Observed. - Comments: None. ### Principle 17. Group-wide supervision - Description: - Supervision of insurance groups regulated on EEA level by the EU Insurance Group Directive, transposed into French regulations (Art. L.334-2 and 334-2, Art. R. 334-40 to R. 334-45, A. 334-4 and 334-5, A335–14 Code des Assurances). - Practical implementation issues addressed in the “Protocol of Helsinki” by the former Conference of EU Supervisory Authorities (now CEIOPS). - Insurance groups and scope of supervision clearly defined. Effective group-wide supervision can be ensured by CCAMIP. Legal framework allows cooperation with other supervisors domestically and abroad. Responsibilities well defined. - Group structure, capital adequacy, reinsurance relationships, risk concentration, intra-group transactions and exposures, internal control mechanisms, risk processes and fit and proper tests of management are object of group-wide supervision as supplement to solo supervision. - CCAMIP requires groups to have reporting systems to fulfill information requirements. License can be removed if group structure hinders effective supervision. - EU Directive dealing with financial conglomerates not yet transposed into French law. CCAMIP monitors existing conglomerates in close cooperation with banking and security supervisors on an informal basis. - Assessment: Largely observed. - Comments: - Regulation on financial conglomerates is incomplete. Supervisory authority lacks the power to intervene if necessary. - Transposition of the relevant EU Directive is expected in the near future; assessment may then be “Observed.” ### Principle 18. Risk assessment and management - Description: - Supervisory authority can require a risk management system for investment policy (R. 336-1 Code des Assurances). For other risks (technical, operational) there is no special legal basis. - Large insurers have risk management policies and systems covering main material risks. - CCAMIP can assess financial situation through off-site and on-site inspection. Solvency report (Art.322-2–4) and accounting information help supervisor assess prudence of premium and provision calculations and appropriateness of reinsurance policy. - When significant inadequacies found, supervisor can issue recommendations (Art. 310-17) and impose sanctions if recommendations not respected (general clause Art. 310-18). For less serious shortfalls, enforcement is more difficult and CCAMIP relies on recommendations and follow-up. - Assessment: Largely observed. - Comments: - Under current arrangements, an insurer may fail to manage its business prudently and supervisor may not be able to apply preventive supervisory measures in a timely fashion. - Recommendation: Legislation should explicitly require all insurance companies to establish risk management systems covering all material risks. Supervisor should have powers to require establishment of effective risk management systems appropriate to complexity, size and nature of insurer’s business. ### Principle 19. Insurance activity - Description: - CCAMIP requires companies to have underwriting and tarification policies. Board approval not expressly required in regulation but such items imply board agreement. - Companies must establish controls for expenses related to premiums and claims (acquisition costs, administration and claims settlement expenses) (Art. A.344-10 Code des Assurances). - In life insurance, companies must fulfill requirements regarding mortality tables and interest rate (Art. A.335-1 Code des Assurances). - In nonlife, form C10 and C11 (Art. A.344-10) permit CCAMIP to check whether tariffs and expenses for claims settlements were calculated prudently. - CCAMIP has power to ask any information necessary for duties, especially regarding tarification (Art. L.310-14). - Company’s reinsurance strategy (nature and amount of ceded risks, choice of reinsurer) must be approved by the board of administration or supervision (Art. R. 335-5). - CCAMIP reviews appropriateness of reinsurance cover and security of reinsurer. - Two new forms (C8 and C9 (Art. A. 344 – 10)) will be introduced in the near future asking companies for information on reinsurance strategies, names of reinsurers and some simulations of negative events. - Assessment: Observed. - Comments: None. ### Principle 20. Liabilities - Description: - Code des Assurances contains requirements for establishing technical provisions, including detailed accounting and actuarial principles. - CCAMIP responsible for assessing sufficiency of technical provisions on a regular basis through on-site and off-site inspections. - CCAMIP has authority to require provisions be increased if necessary. - Liabilities toward policyholders are assessed before reinsurance. - CCAMIP allows amounts recoverable under reinsurance to cover gross liabilities provided collectability is reliably secured (collateral or letters of credit). - Reinsurance arrangements not approved a priori by supervisors; supervisor can ask company to change cover if insufficient. - Requirement of a reinsurance cover report will be included in the regulation in the near future. - Financial reinsurance must include an element of risk transfer; otherwise CCAMIP will not accept it as valid to affect valuation of liabilities. CCAMIP can prescribe changes in accounting treatment of financial reinsurance if not accurate; these powers reinforced by implementation of new solvency rules and provisions on calculation of technical provisions (see ICP 23). - Assessment: Observed. - Comments: None. ### Principle 21. Investments - Description: - EU insurance directives require member states to set standards ensuring safety, profitability and liquidity of assets which should, at all times, cover technical provisions. - Code des Assurances (Art. 332-2 to 332-30) defines: - Categories of assets eligible for covering technical provisions (debt securities, bonds and other money and capital market instruments, loans, shares, buildings and immovable property rights, etc.). - Requirements concerning diversification of assets covering technical provisions to ensure no excessive reliance on any particular category of asset, market or investment. - Every insurance undertaking is required to invest no more than 65 percent of its total gross technical provisions in shares, other negotiable securities treated as shares, and unsecured loans; 40 percent of its total gross technical provisions in land and buildings; 10 percent in secured loans. - Quantitative limits to avoid risk concentration: except for bonds issued by OECD countries, general rule is every insurance undertaking is required to invest no more than 5 percent of its total gross technical provisions in loans, shares and other negotiable securities issued or guaranteed by the same undertaking (this limit may be raised to 10 percent if an undertaking does not invest more than 40 percent of its gross technical provisions in the loans or securities of issuing bodies and borrowers in each of which it invests more than 5 percent of its assets). - One piece of land or building cannot represent more than 10 percent of total gross technical provisions, and unlisted securities or unsecured loans cannot represent more then [text cut off in source]. - Assessment: [text cut off in source at end of provided content]. - Comments: [text cut off in source at end of provided content]. *IMF staff report — section 2. Portfolio transfer and supervisory framework (excerpts).* ### 0.5 percent of this amount. In addition, the CCAMIP can, in some specific and exceptional ### _cr05186 - 0.5 percent of this amount. In addition, the CCAMIP can, in some specific and exceptional ### Asset allocation, valuation, and currency/geographical limits - Limits for allocation by geographical area: Assets covering technical provisions have to be located in the EEA. - Limits for allocation by currency: Risks underwritten in a certain currency have to be covered by assets ruled by the same currency up to 80 percent (currency matching). - Valuation principles: - Assets covering technical provisions have to be valued net of any debts arising out of their acquisition. - They must be valued on a prudent basis, allowing for the risk of any amounts not being realizable. - In France, as in a majority of EU Member States, assets are valued on a historical cost basis. - Market value is disclosed in the annex to the balance sheet. - Oversight: - The CCAMIP is responsible for assessing insurance undertakings’ compliance with these principles and monitoring the asset/liability position. - By legal requirement (Art. L.322-2-4 Code des Assurances), the board has to describe its investment policy in the solvency report; this report must be provided to external auditors and to the CCAMIP. - New regulations (2002) require preparation of an investment report including risk management and internal control of asset management (Art. R. 336-1 to 336-4 Code des Assurances). - Annual reports must disclose assets item by item; quarterly reporting of portfolio broken down by type of assets (bonds, listed equities, real estates, etc.) is required. - Internal control and risk monitoring: - Risk management system must take into account market, credit and liquidity risk (Art. R. 336-2 Code des Assurances). - Companies must report quarterly on assets liabilities adequacy (interest rate risk) and stress testing. - CCAMIP requires every insurance company to have an asset/liability management system (état T3 - simulation actif-passif; Art. A. 344-13 Annexe du Code des Assurances). - Assessment: Observed. - Comments: None. ### Derivatives and similar commitments (Principle 22) - Regulatory stance: - Requirements regarding investment indirectly address restrictions in the use of derivatives and other off-balance sheet items; these products are considered financial assets. - Derivatives can be used only to reduce the risks of the insurance company; insurance companies are not allowed to act as pure counterparts. - New rules (July 2002; Articles R.332-45 to R.332-58 Code des Assurances): - Define the purposes for which derivatives can be used and the types of derivatives that are restricted or not authorized, considering market illiquidity and scope for external verification of pricing. - Emphasize that the Board of Directors is primarily responsible for asset management policy and internal risk control methodology. - Require investment risk management systems capable of identifying, measuring, controlling and reporting risks from derivatives activities (internally and to the supervisor). - Assessment: Observed. - Comments: None. ### Capital adequacy and solvency (Principle 23) - Framework: - Solvency relies on technical provisions, adequate coverage of these provisions by relevant assets, and the existence of an additional capital buffer (solvency margin). - Requirements regarding the solvency margin are defined in EU directives and transposed in the Code des Assurances. - Quantitative requirements: - In life insurance, the minimum solvency margin roughly corresponds to 4 percent of mathematical provisions. - In nonlife insurance, the solvency margin is defined roughly by the highest of: - 18 percent of the premiums (16 percent for large companies), or - 26 percent of the claims (23 percent for large companies). - Composition of the solvency margin: - Corresponds to the assets of the undertaking free of any foreseeable liabilities, less any intangible items. - Included items: paid-up share capital, any profits brought forward, half of the unpaid share capital, subordinated debts, and hidden reserves (the last two admitted only according to specific conditions). - Supervisory powers and procedures: - EU Directives forbid member states to prescribe rules as to the choice of assets covering the solvency margin. - CCAMIP can require a restoration plan if solvency margin falls below minimum required. - CCAMIP can take safeguarding measures (e.g., restrict or prohibit free disposal of assets) if financial situation jeopardizes policyholders’ interests. - EU directive on consolidated supervision of insurance groups (being transposed) will empower CCAMIP to prevent inflation of supervisory capital through double or multiple gearing. - Developments and assessments: - EU solvency requirements are being reviewed; a first round adjusted existing requirements for inflation (Art. 323-1-1 Code des Assurance). A new proposal for a solvency directive with more sophisticated risk-based features is expected. - Current law allows CCAMIP to require holding more capital than legal requirement only if other requirements are not fulfilled (e.g., inadequate coverage of technical provisions). - Since financial year 2001, adequacy of capital at the group level is assessed (Art. R. 334-40 to R. 334-45 Code des Assurances). - Every company must provide CCAMIP with annual solvency report (Art. L.322-2-4 Code des Assurances) justifying sufficiency of technical provisions, required solvency and capacity to fulfill commitments, and the investment policy report. - Assessment: Observed. - Comments: None. ### Intermediaries (Principle 24) - Requirements and registration: - Intermediaries (brokers and agents) must be honorable and have necessary professional knowledge. - Brokers must provide financial guarantees and professional third party liability insurance cover. - Brokers (not agents) must be registered (register of commerce and societies). - Supervisory limitations: - The CCAMIP has no enforcement powers regarding intermediaries (cannot force a broker to apply for registration). - CCAMIP has no power to require intermediaries to give customers information about their status (broker or agent); intermediaries have no such obligation. - Compliance with existing requirements does not seem to be monitored or enforced; there is scant on-going supervision. - Assessment: Partly observed. - Comments: The supervisory authority lacks powers to supervise insurance intermediaries. Agents are not registered. Brokers cannot be forced to apply to be registered. Transposition of the EU Intermediary Directive into French Law (scheduled for beginning of 2005) will most likely lead to full compliance of ICP 24. ### Consumer protection (Principle 25) - Objective and competence requirements: - Objective of French insurance supervision is protection of the policyholder in a broad sense (including insured, beneficiaries and victims in third party liability insurance). - Professional competence requirements are high for management and intermediaries (Art. L.322-2, R. 513-1 to 4 Code des Assurances). CCAMIP monitors compliance. - Commercial practices and complaint handling: - CCAMIP monitors commercial practices through on-site supervision. - Bureau des Relations avec le Public of the CCAMIP helps insured and responds to complaints and questions; it collects consumer concerns. - CCAMIP can intervene if company or intermediary fails to respect regulations on fair and correct treatment of policyholder. - In accordance with Third EU Directives, CCAMIP requires insurers and intermediaries to assess a client’s needs before concluding a contract; companies and intermediaries must inform clients about product, obligations, expenses (Art. L.112-2, L.132-5-1, A.132-4, L.140-4 Code des Assurances). - CCAMIP and insurers’ associations have established institutions dealing with complaints and claims (Bureau des Relations avec le Public of the CCAMIP, Médiateur du FFSA, Médiateur du GEMA). - Assessment: Observed. - Comments: None. ### Information, disclosure and transparency (Principle 26) - Disclosure obligations: - Insurance companies must report to the public their financial positions and risks (Art. L.342-1, R.341-1 to R.341-8 Code des Assurances). - Insurance companies must produce audited financial statements made available to stakeholders (Art. R.341-2, R.341-8, A.344-4 Code des Assurances). - Based on Art. L.310-12 § 2 Code des Assurances, CCAMIP monitors that prescribed information is disclosed. - Assessment: Observed. - Comments: None. ### Fraud (Principle 27) - Legal framework and supervisory role: - Insurance fraud is regulated under the Code Pénal; the MoE issues regulations in this area. - The supervisory authority does not have powers to establish regulations in this area or to require companies to take measures to combat fraud. - CCAMIP monitors through on-site inspections whether companies take effective action to prevent fraud and provides recommendations. - The industry has taken necessary measures in nonlife and life insurance (death). - Supervisory authorities have explicit authority to cooperate with supervisors abroad to combat fraud (see ICP 5). - Assessment: Observed. - Comments: None. ### AML/CFT (Principle 28) - Legal and supervisory framework: - COMOFI sets out main AML/CFT requirements and scope; requirements apply to insurance companies, agents and brokers, and other financial institutions. - COMOFI sets suspicious transaction reporting requirements and other measures of diligence. - Code des Assurances sets additional requirements for insurance companies. - Gaps identified: - In general, no specific CDD requirements to account for risks associated with non-face–to–face transactions, politically exposed persons, reliance on third parties for CDD, nor a requirement to systematically identify and verify beneficial owners as required by revised FATF 40 Recommendations. - CCAMIP recommendations to assist companies are neither enforceable nor do they extend to intermediaries. - Authorities are reviewing the regulatory framework and drafting legislative amendments to comply with revised FATF 40 Recommendations. - Authorization and supervision shortcomings: - CEA issues business authorizations but does not consider existence or appropriateness of AML/CFT internal controls when issuing authorizations — Authorities should consider introducing such a test. - CCAMIP supervises life and nonlife insurers and intermediaries for AML/CFT; CCAMIP employs about 130 persons, inspection department of about 35 persons, and an AML/CFT unit of two persons. - CCAMIP has conducted only 28 on-site examinations in the last four years and only two sanctions have been imposed for failure to comply with AML requirements. - Recommendation: examination efforts and corresponding resources of CCAMIP should be increased substantially. - Supervision of brokers and agents: - Brokers and agents do not require business authorization; brokers must register with the Corporations Register and are encouraged to register with a professional association list. - A registration requirement will be introduced for EU insurance brokers per upcoming EU Directive on Intermediaries (2002–92). - CCAMIP must take a formal decision to conduct an on-site examination of brokers; since 1996 CCAMIP has conducted only two on-site examinations of brokers. - CCAMIP does not have authority to sanction brokers for failure to comply with AML/CFT requirements, though legislative amendments are planned. - Supervisory efforts regarding brokers are neither sufficient nor effective; remedial action recommended. - Suspicious transaction reporting: - Reporting by insurance companies and intermediaries is steadily improving but levels remain generally low. - Recommendation: CCAMIP should maintain efforts, cooperate with TRACFIN and private sector associations, and raise awareness, notably with respect to brokers. - Assessment: Partly observed. - Comments: - Key issues include: - (i) Authorities do not consider quality of insurers’ AML/CFT internal controls when issuing business authorizations. - (ii) Rate of on-site examinations is low; urgent need to substantially increase supervisory resources for insurers and intermediaries. - (iii) No effective supervision of intermediaries, including sanctioning powers. - (iv) Guidelines issued are neither enforceable nor extend to intermediaries, and there are no specific measures to implement CDD requirements under revised FATF 40 Recommendations for higher risk customers. ### Observance summary (Table 5) - Observance of IAIS Insurance Core Principles — Principles Grouped by Assessment Grade: - Observed: 21 — ICP 1, 2, 4, 5, 6, 7, 8, 11, 12, 13, 14, 15, 16, 19, 20, 21, 22, 23, 25, 26, 27 - Largely observed: 4 — ICP 9, 10, 17, 18 - Partly observed: 3 — ICP 3, 24, 28 - Non-observed: 0 — -- - Not applicable: 0 — -- ### Recommended action plan (excerpt and summary) - Supervisory authority: - Give power to the supervisory authority to issue regulation. - Increase staff of the supervisory authority. - Monitor effectiveness and efficiency of the new organization, setting a date for reviewing the structure. - Eliminate participation of the industry in supervisory decision making. - Suitability of persons: - Introduce requirement that an insurance company must inform the supervisory authority if it becomes aware of circumstances that may lead to doubts about the fitness and propriety of owners, senior management, and others in positions of responsibility. - Corporate governance: - Empower the CCAMIP to issue and enforce a Code of Conduct of Corporate Governance for all supervised insurance companies. - Internal control: - Empower the CCAMIP to issue and enforce a Code of Conduct containing requirements for effective internal control for all supervised insurance companies (could be combined with corporate governance code). - Group-wide supervision: - Issue regulation regarding group-wide supervision of financial conglomerates headed by insurance companies (transposition of the EU Directive on financial conglomerates). - Risk assessment and management: - Require by law that all insurance companies establish risk management systems covering all material risks. - Intermediaries: - Empower the CCAMIP to supervise intermediaries. Require all agents and brokers be registered. - Anti-money laundering: - Increase supervisory staff and raise AML/CFT on-site inspections of insurance companies and intermediaries. - Regulate and supervise, with appropriate enforcement powers, intermediaries for AML/CFT activities. - Consider adequacy of internal AML/CFT controls when issuing business authorizations. - Issue enforceable guidelines for insurance companies and extend these to intermediaries. - Promptly enact draft legislative amendments to comply with FATF 40 Recommendations. ### Authorities’ response to the assessment (selected points) - Regarding ICP 3 essential criterion b (“power to issue and enforce rules by administrative means”): - The French framework distinguishes the Treasury (legal framework) and the Insurance Control Commission (implementation); this framework is explicitly allowed by ICP n°3. - The Financial Security Law (passed August 1, 2003) harmonizes bank and insurance regulatory framework, creates the CCAMIP as the only insurance companies and mutuals supervisory authority, and enables CCAMIP to recruit staff and invest in necessary equipment. - Financial security law transferred responsibility for licensing insurance companies from the Minister of Finance to an independent collegial body (CEA), limiting concentration of powers by the Ministry of Finance. - Regarding essential criterion g (“freedom from undue political, governmental and industry interference”): - The mission’s question deals only with CEA (participation of the industry). CEA members are retired professionals tied by strict deontology and secrecy rules. - CCAMIP is entirely free of undue interference; authorities request that this criterion be considered “largely observed.” - Regarding essential criterion o (“own budget sufficient to enable effective supervision”): - Merging of CCA and CCMIP may lead to temporary staff shortages, but financial independence of CCAMIP (budget funded by levy from industry) will enable management of its own budget and hiring of sufficient staff in the near future. - Authorities consider this criterion “largely observed.” - Other comments: (text continues in source.) *Source: Extract from the provided IMF-assessed document.* ### 50. In the third paragraph of the comments, it is stated that “Four different ### III. OBSERVANCE OF THE CPSS CORE PRINCIPLES FOR SYSTEMICALLY IMPORTANT PAYMENT SYSTEMS ### Comments on CCAMIP/CCA and ICP 28 - Clarification of institutional structure: - “CCA (MIP) is one entity and the distinction between the board and the secretariat is a distinction of functions inside an entity which remains an unique one.” - Art. 6 of European Convention of Human rights requires preliminary investigations be separated from the decision when a body is entitled to take sanctions; this motivates a “clear distinction … between the board and the staff of the Secretariat Général.” - Financial autonomy and supervisory capacity: - “The financial autonomy of the CCAMIP should facilitate staff recruitment, which is necessary to reinforce AML/CFT controls, and higher the rate of on-site controls.” - “Until now, the CCA has focused on life companies (as the principles stresses it).” - Supervision of brokers and intermediaries: - Financial security law authorized the supervisory authority to impose sanctions on brokers. - The directive on insurance intermediates (to be implemented in France very soon) creates: - a national registry of all intermediates, - a requirement for intermediates to have a financial guarantee and a professional civil responsibility insurance police, - centralized control on fit and proper conditions, - the ability for the CCA to withdraw a broker's registration on grounds of regulation infringement. - Licensing and regulatory measures: - “The CEA is considering regulatory measures, so that the quality of insurers’ AML/CFT internal controls be considered when licensing insurance companies.” - Conclusion on ICP 28 assessment: - “To the extent that criterion a, b, c, e are observed, considering ICP 28 as ‘partly observed’ would not give an exact picture of the reality.” ### General description of the CPSS observance assessment - Scope and systems assessed: - Three systemically important payment systems in France: Transferts Banque de France (TBF) (public RTGS), Paris Net Settlement (PNS) (private large-value), Système Interbancaire de Télécompensation (SIT) (private retail). - Assessment context: - Assessments conducted during two missions in February and May 2004 under the IMF/World Bank Financial Sector Assessment Program (FSAP). - Assessors: Daniel Heller (Swiss National Bank) and Jan Woltjer (IMF (MFD)). ### Information and methodology used for assessment - Methodology: - Derived from the Guidance Note for Assessing Observance of Core Principles for Systemically Important Payment Systems of the IMF and the World Bank of August 2001. - Data sources and preparatory work: - BdF made self assessments and filled in the Questionnaire on Payments and Securities Settlement Systems. - Assessors studied laws, articles, brochures, guidelines, data and presentations provided by the BdF and used CPSS publication “Payment and Settlement Systems of Selected Countries.” - Meetings and consultations: - Discussions with directors and senior officials from several BdF departments. - Meetings with private sector operators: Centrale des Réglements Interbancaire (CRI) and Groupement pour un Système Interbancaire de Télécompensation (GSIT), the Bankers’ Association, and commercial banks. ### Institutional and market structure—Overview - Legal/operational definitions: - French banking law defines means of payments as “all instruments which, irrespective of the medium or technical procedure used, enables any person to transfer funds.” - Issuance and management of means of payments may, according to the COMOFI, be conducted only by credit institutions, the Treasury, the Post Office, the CDC, the BdF and the monetary institutions for the French Overseas Departments and Territories. - Market structure and participants: - “Roughly 1,000 credit institutions conduct business in France (compared to 1,608 in 1994).” - The Post Office’s financial arm holds a significant number of demand accounts and time accounts. - BdF responsibilities: - Payment system oversight is an integral part of BdF’s statutory tasks within the framework of the ESCB (Art. 105 (2) of the Treaty of Maastricht; Articles 3 and 22 of the Statute of the ESCB). - Responsibilities and powers with respect to payment system oversight are laid down in the COMOFI. - Oversight explicitly covers Securities Settlements systems (SSSs) and Central Counter Parties (CCPs). - BdF entitled to monitor security level of payment media and make recommendations. ### Payment instruments and usage - Checks and debits: - Checks remain widely used but their share in cashless payments has been declining since 1993. - Direct debits introduced in 1967 and widely used for recurrent payments. - Titre Interbancaire de Paiement (TIP) usage growing; payer signs TIP form for each payment. - Credit transfers: - Widely used in retail area; interbank exchange of all credit transfers in paperless form. - Ordinary transfers settled on day of presentation; future-dated transfers presented two or three days in advance. - Cards and e-money: - Bank cards mostly debit cards usable at POS and ATM nationwide. - Chip-equipped cards reduced fraud to a very low level. - “At the end of 2001, 32,500 ATMs and 750,000 POS terminals were installed nationwide.” - Electronic money circulation still fairly limited; three consortiums providing e-money schemes. ### Systemic payment systems and infrastructure - Dominant systems: - Large-value: TBF (RTGS, BdF-managed, French component of TARGET) and PNS (hybrid, managed by CRI). - Retail: SIT (deferred net settlement; managed by GSIT). - Industry and BdF initiatives: - A separate oversight unit established within BdF payment department to deepen oversight quality and independence. - TBF and PNS approaching end of life cycles and will be obsolete with introduction of TARGET 2 in 2007. - Increasing retail clearing in SIT led BdF to appraise SIT as systemically important; SIT must comply with the Core Principles. - Unclear effects of the Single European Payments Area (SEPA) on retail clearing and settlement landscape pose a challenge for SIT. - Infrastructure and legal environment: - “France fulfills all prerequisites for effective payment clearing and settlement systems.” - Private sector plays important role in payment instruments and clearing; BdF is an established player. - Oversight is three-tiered: define principles/standards, monitor implementation, oversee actual operation; embedded in Eurosystem framework. - “The legal framework is sound. Fraud and delays are minimal. Mechanisms for dispute resolution are in place and respected.” ### Assessment of observance of the CPs by the TBF — Principle 1 (Legal basis) - Overall finding: - Assessment: Observed. - Key legal strengths: - “A consistent and reliable set of laws, regulations, and contractual arrangements that form the legal basis for TBF and payment transfers executed in this system.” - All relevant laws and contractual arrangements “are fully enforceable.” - Finality and irrevocability: - Zero hour rule and suspect period under French Bankruptcy law do not apply while transactions are processed within a payment system or SSS (Art. L.330 I-II of the Monetary and Financial Code). - TBF falls within scope of finality regulation and is notified pursuant to the Finality Directive (directive 98/26 EC). - “All payment orders are irrevocable from the moment they are accepted by the system.” - Finality occurs at the moment the account of the bank involved is debited; account of receiving bank will simultaneously be credited. - Final payments by a direct participant on its own behalf or on behalf of an indirect participant cannot be challenged and no retroactive action is possible. - Collateral enforceability: - Collateral arrangements fully enforceable; legal basis formed by Art. L.330-2 of the COMOFI. - Transfer of collateral via transfer of ownership; RGV2 uses repo transactions settled trade for trade, in real time, on delivery versus payment basis. - International master agreement for repurchase agreements fully recognized under French Law. - Transfer of ownership of bank loans used to collateralize intraday credit is regulated under the Loi Dailly. - Electronic processing: - Art. 1316-3 of the Civil Code: payment order may be given electronically; electronic data has same value as paper writing. - Recognition of electronic signature established (Art. 1316-4 Civil Code and decree no. 2001-272 of March 30, 2001). - Relevance of foreign law: - BdF requires foreign participants to provide a legal opinion compliant with ECB Governing Council terms (art 1.2 of Conditions spécifiques d’accès aux systèmes PNS et TBF). - “Providing of legal opinion was not requested from foreign participants already participating in the system before 1999.” A grandfather clause applied for this category. - “At the moment, there are 10 direct foreign participants in TBF, only four of them having provided a legal opinion.” - Relevance of foreign law is limited because foreign banks participate via branches in France to which French law applies. ### Assessment of observance of the CPs by the TBF — Principle 2 (Rules and procedures enabling understanding of risks) - Documentation and system description: - Annex 7 of the TBF settlement account convention (Specifications utilisateurs TBF) provides “a comprehensive description of the system design, functionalities, timetables and risk management procedures.” - Rules and clarity: - Relevant rules and regulations extend over documents issued by BdF and CRI; for many issues documents of both sources are relevant. - Recommendation implied: “The overall organization of the documentation should be clarified. Similarly, a handbook could be made available in which the relevant topics would be accessible to users in a practical way (topic by topic, including the …” (text ends). *Source: IMF staff report excerpt (sections 50–63 and detailed assessment of TBF Principles 1–2).* ### references to the different rules and regulations) and which would be updated ### _cr05186 - references to the different rules and regulations) and which would be updated ### Key deficiencies in participant agreements and emergency procedures - Some essential issues are not dealt with in participant agreements: - procedures and behavior of participants in case of a failure of their own platform; - behavior of participants in case of a technical failure of a major participant; - procedures to be followed in case of bankruptcy of a direct participant or an indirect participant and the manner in which a participant might or should react. - Assessment: Broadly observed (transparency in stress situations could be improved; accessibility and organization of documentation could be improved). ### Availability and public access of rules and documentation - All participants in the TBF system are provided with relevant documents when they sign contracts with the BdF and with the CRI. - All rules and regulations relating to payment systems, enclosed in the COMOFI, are published on the internet. - Comment: Accessibility and ready understanding could be increased by improving overall organization and practical availability of documentation. ### Principle 3 — management of credit and liquidity risks (TBF) Description and protections - TBF is an RTGS-system with queuing facilities, which settles in central bank money. - Liquidity risk addressed through unlimited intraday credit provided against collateral; no interest rate or other fees charged. - Sources of abundant liquidity: 1) Eurosystem policy allowing banks to use cash reserve requirements during the day; 2) liquidity optimization facilities in the Paris Net Settlement System (PNS); 3) liquidity bridges between TBF, PNS and the RGV2 system; 4) easy access to intraday liquidity facilities of the BdF and a broad range of eligible collateral (securities and private bank loans). - More than 99 percent of payments are settled without being queued. - Some banks do not use their cash reserve requirements at all during the day. Intraday finality and queuing - Payments settled in TBF are final (irrevocable and unconditional) under COMOFI finality regulation. - Two queues: one for high priority payments and one for all other payments. - High priority includes monetary policy operations, settlement of debit positions of ancillary systems, CLS pay-ins via TARGET, and requested returned payment orders in case of errors. - Payments in queue are settled on a strict FIFO basis; time-critical payments can be placed in a queue and checked at a sender-designated point in time. - If not settled at end of day, payments are automatically rejected. Rejections are very low: in 2002, four payments of a total value of EUR 109 million were rejected. Optimization mechanisms - Two optimization routines: - global optimization computes virtual balances for each group of accounts; - a second routine invoked for settlement of ancillary systems. Liquidity arrangements by BdF - Two arrangements for intraday credit: - Intraday loans guaranteed by bank loans (Prêts garantis intra journaliers): participants transmit weekly files and daily allocations; eligibility checks and haircuts applied; credits at opening. Scheme not fully watertight; CB empowered for on-site checks. - Intraday repos on domestic assets issued in the EEA: assets to be held in Euroclear France or another euro area country; underlying assets must be declared eligible by the Eurosystem and ECB haircuts apply. - Intraday loans reimbursed at end of day; BdF can extend overnight via Lombard facility repos. - Investment firms can obtain intraday credit in RGV2 but are not eligible counterparties to monetary policy operations; they must have backing by a credit institution or be subject to BdF credit limits. BdF may apply dissuasive penalties or modify conditions if an investment firm fails to square intraday credit. Account group structure - Account group allows a participant to be debited even if it results in a debit position if group as a whole has enough balances; if not, payments are queued. - All participants in an account group are collectively responsible for debit positions; BdF has discretion to distribute possible losses over group members. - Legal enforceability affirmed under French regulations and jurisprudence with two prerequisites for centralisation of cash flows. Timing, pricing and incentives - Operating hours of TBF align with TARGET Guideline. - No throughput guidelines (quotas) exist. - Pricing is not used to incentivize risk management or throughput; special fee for late payment allowed in rules but not used. - Non-settlement of end-of-day debit position in netting schemes settled in TBF: fine of EUR 7,600 and possible exclusion from system. - Y-copy message flow: prospective receivers are notified of payments still in senders’ queues, which may cause premature reactions; under normal conditions risk negligible due to short queues; in unusual situations (e.g., bankruptcy) risk more imminent and difficult to assess without clear procedures. Assessment: Observed ### Principle 4 — final settlement (TBF) - TBF provides real-time gross settlement with finality at the moment payer’s account is debited and receiver’s account is credited. - Finality fully endorsed under French law; no retroactive actions possible other than due to willful negligence and fraud. - Assessment: Observed ### Principle 5 — multilateral netting (TBF) - TBF is RTGS, not a multilateral netting system. - Assessment: Not applicable ### Principle 6 — settlement assets (TBF) - TBF settles in central bank money (operated by BdF). - Assessment: Observed ### Principle 7 — security, operational reliability, contingency (TBF) System complexity and incidents - TBF consists of three platforms: TBF platform, CRI platform (IP-based communication for TBF and PNS), and ICOTT (communication between domestic and European networks within TARGET). Separate interface exists between TBF and PNS; multiple ancillary system interfaces exist (SIT, Relit+, RGV2, ADCRI). - Complexity makes TBF vulnerable to technical failures; severe incidents occurred in 2001 and 2002; one resulted in long recovery time. Contingency arrangements - BdF and CRI have backup systems, secondary production sites at adequate distance; production and data communication backups and disaster recovery procedures regularly tested. - Plan de Secours de Place: emergency procedure using physical exchange of floppy disks for settlement of time-critical payments if all production sites and SWIFT/telephone communications unavailable. - Crisis team includes BdF, CRI, main ancillary system managers and several users. - Post-September 11 analysis and actions: Paris Market Place Crisis Committee established; emergency tests of several systems simultaneously. Risk analysis, auditing and data protection - Internal Audit Department of BdF audits the system; TARGET Security Analysis methodology implemented; Payment Policy Division responsible. - Firewalls and measures to ensure integrity, confidentiality, authentication of data communications; development and procurement quality controls in place. Availability and scalability - Availability between May 2001 and May 2004: 99.94 percent (above TARGET requirement of 99.4 percent). - Peak capacity sufficiency difficult to test due to system complexity; ICOTT appears weakest spot; testing limited by lack of technical facilities to simulate peaks. Assessment: Broadly observed Recommendations (selected) - analyze possibilities to simplify complex structure; - suppress system features no longer needed; - investigate automation of contingency-mode processing for critical payments and categorize domestic critical payments to prioritize in emergencies where contingency capacity is exceeded; - require participants to make securities and emergency procedures available for analysis and to test emergency procedures frequently, switching to second site regularly and sending summary reports to system operator; - implement a “payment injector” for throughput testing; - investigate merits of regular annual audits by competent bodies. ### Principle 8 — practicality and efficiency (TBF) Crucial functions and functionality - TBF channels monetary policy operations, provides settlement channel for ancillary systems, and is used for commercial and interbank payments domestically and cross-border. - Standard RTGS facilities present (sending, queuing, inquiry) plus optimization procedures and gridlock algorithm; facility for time-critical payments and group account settlement. Liquidity management and intraday credit - Banks can use cash reserve requirements during the day; intraday credit granted against eligible Eurosystem tier 1 and tier 2 lists and is abundantly available. - Collateral on French tier 2 (large segment private bank loans) have particularly low opportunity costs; BdF levies no fee for rating, registration, transfer and custody of collateral. - Liquidity bridges allow transfers among TBF, PNS, RGV2 and raising intraday credit via RGV2 repos. - Over 99 percent of payments processed without queuing; average settlement time about seven seconds. Cost recovery and pricing deficiencies - TBF heavily subsidized by BdF: only 15 percent of all costs (operating and investment) covered by revenues. - Costs related to provision of intraday credit against private bank loans not addressed in accounting methodology. - Lack of turnover in TBF due to possibility of settling payments in PNS and RGV2 reduces economies of scale. - Membership fee includes access to PNS; banks also pay SWIFT messaging costs (Y-copy messages more expensive). - Assessment: Broadly Observed Recommendations (selected) - revise methodology to determine cost of TBF payment by isolating CRI costs relative to PNS from those relative to TBF to avoid cross-subsidies; - analyze simplification to save costs; - examine whether acceptance of private loans as collateral creates undesired subsidy given BdF costs to assess and realize these loans. ### Principle 9 — access criteria (TBF) - Participation open to credit institutions and investment firms established in France and EEA authorized to carry on activities in France under European passport. - Smaller banks may benefit from specific price conditions: can conduct all monetary operations in TBF but not send more than 500 payment orders a year if they opt for specific pricing. - Indirect participation available; currently 21 indirect participants in TBF. - Investment firms cannot be indirect participants. - Assessment: Observed ### Principle 10 — governance (TBF) - TBF operated by BdF with appropriate framework for operating, auditing and oversight. - Decisions on system changes made by Assemblée Générale of CRI; users can voice needs in working groups. Smaller banks have no representative in Assemblée Générale but may participate in working groups. - Assessment: Observed ### Observance summary for TBF (Table 8 content) - Observed (6 Core Principles): 1, 3, 4, 6, 9 and 10. - Broadly observed (3 Core Principles): 2, 7 and 8. - Not applicable: 5. - Partly observed: 0. - Non-observed: 0. ### Recommended action plan for TBF (selected actions from Table 9) Understanding and management of risks - Set out procedures for participant behavior in specific emergency situations; - Improve accessibility of rules and regulations. Security and operational reliability, contingency - Analyze simplification of system structure; - Suppress obsolete features; - Analyze automation of contingency processing for critical payments and categorize critical payments with priority rules; - Require participants to make securities and emergency procedures available and to test backup sites regularly with summary reports to system operator; - Improve technical facilities for throughput tests; - Investigate regular annual audits. Efficiency and practicality - Revise cost-determination methodology to isolate CRI costs relative to PNS from TBF costs; - Analyze simplification to save costs; - Examine if acceptance of private loans as collateral creates undesired subsidy. ### Assessment highlights for PNS (selected CP assessments and recommendations) Principle 1 (PNS) - Legal framework: French law and contractual relations provide reasonably comprehensive legal foundation. - Finality: COMOFI finality regulation (Art L.330 I-II) applies; PNS notified under Finality Directive (98/26 EC). - Concern: scope of finality protection limited in practice due to many “customer banks” using settlement banks; settlement bank exposed to retroactive action from its customers’ insolvency. - Recommendation: align wording of “irrevocability” across bylaws; encourage settlement banks to change clients’ status to indirect participants to reduce legal risk. Principle 2 (PNS) - Rules and procedures enable participants to understand normal risk exposures; annexes and lettre d’adhésion detail roles and liabilities. - Emergency events: lack of procedures for technical failures or bankruptcy events; transparency on possible authorities’ measures should be enlarged. - Tiered structure: only banks/investment firms with capital above EUR 250 million can be direct participants; currently 19 direct participants and over 440 customer banks; 26 indirect participants registered. - Assessment: Observed - Recommendation: establish clear procedures for participant behavior in stress situations and improve transparency. Principle 3 (PNS) - Real-time settlement, bilateral limits, intraday finality, FIFO rule (with exception for payments < EUR 1 million), bilateral and multilateral optimization facilities. - Multilateral optimization runs automatically three times per day (10:30 a.m., 2:30 p.m., close at 4:00 p.m.); typically unlocks 30-80 percent of queued payments at 10:30 a.m., though value involved is relatively low (1-10 percent of queued payments). - Minimum intraday liquidity requirement at opening: participants must transfer EUR 15 million from TBF to PNS account (Art. 8 Convention PNS); no clear procedure if participant fails to meet requirement. - Assessment: Observed - Recommendations include actions under Art. 11 of Convention PNS for liquidity shortfalls, clear recording of rejected payments, and establishing comprehensive emergency procedures. Principle 6 (PNS) - PNS settles in central bank money; participants can transfer funds to/from TBF via liquidity bridge. - Concern: restricted access exposes smaller banks to settlement bank risk; recommendations to map concentration and analyze/reduce risks. Principle 7 (PNS) - Contingency: CRI has backup systems, secondary production site(s), Plan de Secours de Place using floppy disks if extreme; participants required to have secondary site (Art. 5.1 Règlement général). - Risk analysis and auditing: PNS not regularly audited by external auditor; BdF audit department has audited CRI platform in 1998 and 2000. - Availability April 2001–March 2004: 99.98 percent. - Recommendations: consider regular external audits; require participants to test backup sites and transmit securities procedures. Principle 8 (PNS) - PNS practical due to liquidity saving facilities; settlement fee EUR 0.25 per payment; system able to fully recover costs. - Concern: cost-accounting methods may not fairly distribute costs between CRI and BdF; practicality for indirect participants/customer banks unknown. - Recommendation: revise cost methodology to isolate PNS vs CRI platform costs. Principle 9 (PNS) - Access criteria: capital requirement EUR 250 million for direct participation; indirect participation possible (26 indirect participants) but investment firms and public bodies not admitted as indirect participants. - Assessment: Broadly-observed. - Recommendation: consider abolishing capital requirement to broaden access. Principle 10 (PNS) - Governance: CRI owned by nine major banks and BdF; BdF has veto rights on decisions jeopardizing security; Assemblée Générale meets monthly; working groups exist; customer banks not officially represented. - Assessment: Observed Observance summary for PNS (Table 11 content) - Observed (7 Core Principles): 2, 3, 4, 6, 7, 8 and 10. - Broadly observed (2 Core Principles): 1 and 9. - Not applicable: 5. - Partly observed: 0. - Non-observed: 0. Recommended action plan for PNS (selected from Table 12) - Legal foundation: align “irrevocability” wording across bylaws; encourage settlement banks to change clients’ status to indirect participants. - Understanding and management of risks: establish comprehensive procedures for stress situations; ensure actions under Art. 11 for failure to transfer minimum liquidity; record rejected payments and require justifications; establish emergency procedures. - Settlement: map concentration of payment flows from customer banks via settlement banks and analyze concentration risk. - Security and contingency: consider regular external audits; require participants to test backup sites and transmit securities procedures. - Efficiency: revise cost-accounting methodology to isolate PNS and CRI costs. - Criteria for participation: abolish EUR 250 million capital requirement. ### Selected assessments for SIT (highlights) Principle 1 (SIT) - Legal basis: SIT operates under French civil code, commercial code, COMOFI; transposed Settlement Finality Directive via Art. L.330-1 and L.330-2 and decree of March 7, 2003. - CIRCE is the binding contractual rulebook; SIT designated as payment system in 2002. - Assessment: Observed Principle 2 (SIT) - CIRCE and technical annexes (more than ten binders) detail system design, rights/obligations, netting, rejection procedures, contingencies; documentation available in paper format at GSIT; CIRCE updates disseminated—one set free to direct participants, costs apply to others (EUR 140 for CIRCE plus EUR 735 for annexes). - Assessment: Observed - Recommendation: consider digital distribution and clearer access for indirect participants. Principle 3 (SIT) - Direct participants: 14 out of ~1000 participants are direct participants. - Rule: value and volume exchanged by a direct participant for its indirect participants must remain below 30 percent of direct participant’s own payments (fulfillment not systematically monitored). - Upper limit per payment accepted at SIT: EUR 800,000. - No safety mechanism currently in place for settlement failure of a direct participant; unwinding procedure exists: remove defaulter’s transactions, recalculate net balances and resubmit for settlement. - Netting ratio close to 65 percent. - Fine for failing to settle net obligation: EUR 8,000 (TBF rule); SIT (CIRCE chapter 14) allows suspension/exclusion. - Assessment: Observed - Comment: SIT provides only limited tools to manage risk; extent of liquidity risk depends on TBF functionality. Principle 4 (SIT) - Operating structure: SIT open 24 hours a day, 6 days a week, 5 settlement days; multiple exchange periods and technical period. - Cut-offs: - Cut-off 1 (1:30 pm): credit transfers and card transactions for same-day settlement; - Cut-off 2 (6:00 pm): truncated checks, TIP and truncated bills of exchange for next-day settlement; - Cut-off 3 (7:30 pm): direct debits for next-day settlement; - Cut-off 4 (9:10 pm or 11:10 am on Saturday): nonaccounting transactions and referenced credit transfers for next-day settlement. - Closing of accounts (multilateral netting) at 2:30 pm; final settlement in TBF between 2:45 pm and 3:40 pm. - M2 acknowledgement normally sent within seconds after M1; netting at 2:30 pm and settlement shortly after implies CP4 observed. - Assessment: Observed Principle 5 (SIT) - No measures in place to ensure settlement in event of default of participant with largest single settlement obligation. - At BdF request, GSIT developed planned protection principles: protection against failure of largest single debit position, permanent mutual fund supplemented by individual collateral, upper limits. Implementation required no later than 2008. - Assessment: Not observed - Recommendation: planned protection should be implemented as soon as possible, preferably before 2008. Principle 6 (SIT) - Settlement in TBF (BdF) => central bank money; assessment Observed. Principle 7 (SIT) - Operational reliability: CIRCE covers capacity, redundancy, contingency arrangements. - SIT partially outsourced to Capgemini and ATOS Origin under SLAs. - Availability 2000–2003: 100 percent; participants’ gateways availability: between 99.86 percent and [value not provided in excerpt]. - Assessment: Observed - Recommendations: require participants to test backup sites and send summaries; require transmission of securities procedures to system provider; consider regular external audits. Final assessment tables and recommended actions for TBF, PNS and SIT are summarized in the source tables and recommended action plans. *Italicized source attribution line: IMF staff country report detailed assessments and recommended action plans for TBF, PNS and SIT as provided in the source document.* ### 99.88 percent. ### _cr05186 - 99.88 percent. ### Operational capacity and monitoring - System availability referenced as "99.88 percent." - Capacity planning: - Minimum network capacity depends on the expected annual peak day plus a safety margin of 10 percent. - Each participant must adapt its capacity to send and receive messages based on individual forecasts. - A minimum daily and hourly capacity is determined accordingly. - Change and incident management: - Operations department (Direction des Opérations) maintains a Change Management Steering Committee (Cellule de pilotage des changements) to review significant SIT network changes from a risk perspective and follow up recommendations after incidents. - In development, GSIT uses test software integrated into the incident management process; methodological guides for development and project management are used. - All incidents on production and test networks are logged and investigated through network administration software. - For incidents impacting a workstation, three levels of intervention are defined according to incident gravity. ### Security - Security policy framework: - Documented in “Security Policy of SIT and GSIT” (Politique de sécurité du SIT et du GSIT). - Policy is based on ISO 17799. - General objectives: protect the system physically and systemically against fraud, theft or sabotage of hardware or software. - No assessment of the security controls of GSIT against the security policy has been performed so far. - CIRCE (chapter 9) and the “SIT security correspondent handbook” (manuel du correspondant de sécurité) further develop security policies and operational service levels. - Network security architecture: - Primary network links participants’ gateways, the Management Center and the Accounting Center; ensures message security between entities. - Connections use a TCP/IP Virtual Private Network with a two-tiered security model: - the telecom operator provides GSIT with a TCP/IP MPLS Virtual Private Network completely dedicated to SIT; and - authentication, confidentiality and integrity of messages are provided by GSIT-operated IP encrypting equipment (security and key management under GSIT’s sole responsibility). - Secondary network links participants’ gateways and their internal systems; primary responsibility for security of this network remains with participants, with GSIT strong recommendations (Art. 9.3.2 of CIRCE). - Nonrepudiation: - Not currently available for two main reasons: - participants have not expressed a clear desire for nonrepudiation (although there have been talks about this issue); and - the technical solution envisaged was not compatible with the high volumes exchanged in SIT. ### Audits and risk management - GSIT Audit, Security and Risk Management Department (Direction de la Gestion des risques, de l’Audit et de la sécurité - DGL/GR) responsibilities: - Internal audit, review of risk management processes, identification of potential risks and establishment of mitigation measures. - Governance of security oversight: - Monthly “Security Committee” (CODIRSEC, Comité Directeur de la sécurité), chaired by the General Manager of GSIT, approves the security policy and ensures implementation. - Participants’ security correspondents meet regularly; CODIRSEC ensures follow-up of DGL/GR recommendations. - Interbank audits: - In 2000, an external “interbank” audit by internal audit departments of SIT's main users reviewed implementation of 1995 audit recommendations and SIT’s objectives/strategy. - Overall, no major issues were raised; next audit of this kind planned for 2005. - Recommendation in source: - The costs and benefits of more regular external audits, for instance every three years, should be analyzed. ### Business continuity and contingency arrangements - Overall objective: - Resume operations within 48 hours according to a variety of plausible scenarios, including a wide area disaster. - Business continuity objectives based on a risk analysis first carried out in 1993 and validated by top management in 1994. - All business continuity arrangements formally endorsed by senior level management. - Identified critical components and sites: - Three critical components, each located in a different site: Accounting Center, Management Center and Remote Control Center. - Accounting Center continuity: - First level: high availability fault tolerant hardware; last failure occurred in 1999. - Second level: cold backup; depending on timing of failure, can take up to three days for cold backup to become operational. - Backup site located more than 25 kilometers away from the primary site. - Primary and secondary sites are alternatively used in production; migration to secondary site does not necessitate relocation of personnel (operated remotely from the Remote Control Center). - Management Center continuity: - Fall back on backup site possible within 10 minutes. - Backup site located more than 25 kilometers from the primary site. - Primary and secondary sites used alternatively in production; no migration of human resources necessary. - Remote Control Center continuity: - Fall back on backup site possible within 4 hours. - Two backup sites located more than 25 kilometers from the primary site. - Backup site regularly tested and used in production several times a year. - Staff have to relocate from the primary to the secondary site. - Network redundancy and telecom: - Each SIT Center has redundant access to the primary network through multiple physically separate lines connected to at least two different France Telecom gateway nodes; no single point of failure. - Primary network built so that a total failure of a link between any two of the three sites does not isolate any site. - SLA between GSIT and the telecom operator: in the event of a failure of any of the lines, the connection should be restored within 4 hours. - GSIT uses a single telecom provider. - Crisis management: - Business continuity procedures are tested regularly with participants. - Clear lines of responsibility and decision-making process to set up alert, crisis or enlarged crisis teams depending on incident gravity. - Availability of participants in crisis teams tested periodically. - Assessment and recommendation in source: - Assessment: Broadly observed. - Comment: Current business continuity arrangements appear to be insufficient with regard to the back up site. - Recommendation: Measures should be put in place as soon as possible to be able to settle on the day of value in case of a large operational disruption. ### Principle 8 — Efficiency and practicality of the system - SIT is the sole retail payment system in France and has achieved a high degree of operational reliability. - GSIT is a nonprofit organization achieving full-cost recovery. - Fees: - Average processing fee: EUR 0.0599 per transaction. - Annual membership fees: EUR 147,000 for a direct participant and EUR 13,100 for an indirect participant. - GSIT profile indicators: - Operational reliability: 31 indicators (including number of technical failures, quality of management, quality of disaster procedure tests). - New projects: 8 indicators (including cost control and schedule adherence). - General and administration: 5 indicators (including budget control). - Latest profile: did not reveal any serious issue regarding quality of services delivered. - Communication and user satisfaction: - GSIT communicates via decision making and consultation bodies; no evidence users’ needs are unmet. - Assessment: Observed. - Comment: SIT provides a reliable service to its direct participants; transaction fees are at an internationally competitive level. ### Principle 9 — Participation criteria and access - Participant categories: - Direct participants: full technical and financial responsibility; only direct participants can send and receive payment orders. - Indirect participants (connected institutions): exchange transactions via a direct participant; known by the system. - Customer banks: perform transactions via a direct or indirect participant; unknown by the system. - Participant counts (end of January 2004): - Total participants: 1,084. - Direct participants: 14. - Indirect participants: 626. - Customer credit institutions: 444. - Eligible entities per CIRCE (Art. 2.2.1): - credit institutions incorporated in France; - credit institutions and investment firms established in the EEA and authorized to carry on activities in France under the European passport; and - public entities covered by Art. 8 of the French Bank law (BdF, IEDOM, Treasury, the Caisse des dépôts et Consignations and the Post Office). - Access criteria (volume-based): - Direct participant minimum volume: 0.20 percent of the whole volume exchanged in the system (equivalent of around 20 million payments a year). - Direct participant may lose status if volume falls below 0.15 percent of the whole volume exchanged two years in a row. - Indirect participant minimum: 5,000 transactions exchanged yearly; maximum: 0.20 percent of whole traffic. - Upper limit for payments by indirect participants that a direct participant may process: 30 percent. - Customer banks not allowed to exchange more than 5,000 transactions per year; above threshold they must become indirect participants. - Management Committee determines maximum number of direct participants; currently 25. - Practical and governance facts: - In practice GSIT has no information on volumes exchanged by “customer” banks. - Access criteria effectively provide automatic access to direct membership should a bank account for more than 0.2 percent of total volume. - Current direct participants overlap to a great extent with owners of the system. - Assessment: Broadly observed. - Comment and recommendation in source: - Comment: Access criteria are quite restrictive (only 14 direct participants); safety does not seem sufficient justification; alternatives include financial soundness criteria or lowering volume thresholds. - Recommendation: Adjust access criteria to provide option for some indirect participants to become direct participants (e.g., lower volume thresholds, introduce explicit financial soundness criteria, or both). ### Principle 10 — Governance, transparency and accountability - Legal and organizational framework: - Governance rules in Statuts du GSIT (April 2003) and règlement intérieur for application conditions. - GSIT is an economic interest group (groupement d’intérêt économique, GIE), nonprofit, owned and managed by 12 banks (founding members). - GSIT composed of 229 member banks represented by 12 founding members; no new members accepted since they did not contribute to initial funding. - Members of GSIT are credit institutions and investment firms; GIE members are liable for all debts incurred by GSIT; balance sheet of a GIE is audited. - Decision-making bodies: - Management Committee (comité de direction): representatives of signatories of Articles of Association, representative of other direct participants, observers from AFECEI and FBF; defines strategy, elects Chairman and Executive Committee members, approves budget. - Executive Committee (le bureau): Chairman, a BdF representative (ex officio), five representatives elected from Management Committee, and General Manager; consultative body; meets every other month with Management Committee. - General Meeting: composed of all GSIT members; approves accounts, validates budget, elects/revokes General Manager and controllers, admits/excludes members, modifies Statutes. - Specialized committees: Operating Committee, Development Committee, Administrative and Organization Commission. - Transparency and disclosure: - GSIT annual report disclosed to participants and available on GSIT website; includes value and volume processed, safety/reliability/quality indicators, system operation and management evolutions. - GSIT annual information document publicly disclosed on website detailing system operations and prospective changes. - GSIT monthly reports publicly disclosed on website with statistics on operations (value, volume, peaks). - Monthly reports for direct participants: essential statistics, service quality, safety and reliability, incidents, participant profiles, and GSIT administrative role. - Participants represented at Executive or Management Committees have access to information within those bodies. - Assessment: Observed. - Comment: Governance structure aligns with Core Principles and is broadly comparable with other private sector systems. ### Overall assessment summary (from source) - Table 14 (Summary Observance by SIT of the CPSS Core Principles): - Observed: 7 Core Principles — 1, 2, 3, 4, 6, 8 and 10. - Broadly observed: 2 Core Principles — 7 and 9. - Partly observed: 0. - Non-observed: 1 Core Principle — 5. - Recommended action plan for the SIT (Table 15): - Settlement: Implement adequate safeguards against the default of the largest net debtor as soon as possible. - Security and operational reliability, and contingency arrangements: - Put in place as soon as possible adequate measures to ensure settlement on the day of value in case of a large operational disruption; and - Consider whether to establish more regular external audits. - Criteria for participation: Broaden access to the system via a revision of the present participation criteria. - Other areas: Investigate whether documentation on SIT rules and procedures could be made available in digital versions and distributed more directly through electronic channels. - Table 17 (Summary Observance of the Central Bank Responsibilities in Applying the CPs): - Observed: 4 Responsibilities — A, B, C and D. - Recommended action plan on central bank responsibilities (Table 18): - Responsibility B: Strengthen the cooperation with other internal and external entities (especially auditors). - Responsibilities A, C, D: None. ### BdF oversight roles and assessments - BdF legal and institutional framework: - BdF operates within the European System of Central Banks (ESCB); Article references frame the BdF’s role to promote smooth operation of payment systems. - Art. L141-4 of the COMOFI: “the BdF shall ensure the smooth operation and the security of payment systems, within the framework of the task of the ESCB relating to the promotion of the smooth operation of payment systems.” - BdF threefold role: operational involvement (operates TBF), oversight (legal entrustment), and catalyst role with banking community. - Separation of operational and oversight functions: - Oversight unit: SEPI (Service de surveillance des systèmes de paiements et de titres). - Operational units: SERI (Service des règlements interbancaires) operates TBF; SEMOP (Service études, maîtrise d’ouvrage et organisation des systèmes de paiements) deals with business and policy issues. - SEPI composed of 8 experts in payment systems plus support staff. - Assessments performed by SEPI: - TBF assessment (May 2003): self-assessment 93 pages long; concluded full observance of CP1, CP6, CP9, and CP10, and broad observance of CP2, CP7 and CP8. - PNS assessment (2003): 58 page assessment; concluded full observance of CP1, 3, 4, 5, 6,7,8,9,and 10 and broad observance of CP2. - SIT draft assessment (spring 2004): 67 pages; found full observance of CP1, 2, 5, 6, 8, 9, and 10; broad observance of CP3; nonobservance of CP7. BdF awaiting feedback from GSIT on draft assessment. - Oversight tools and cooperation: - Oversight database contains directory of participants, all payment orders back from 1999 with details (references, participants, amount, date/time, queued status, optimization release type, monetary policy operations info, intraday credit details). - BdF participates in Eurosystem and international committees and has MoUs with supervisory authorities for cooperation and crisis management. - Assessment: Observed. - Comment: BdF has a sound legal framework, appropriate oversight skills, and a well-developed network for cooperation; recommendation to strengthen cooperation with internal and external entities (especially auditors). *Source: _cr05186 - 99.88 percent.* ### 66. The BdF takes note that the IMF largely endorses its own findings regarding both ### _cr05186 - 66. The BdF takes note that the IMF largely endorses its own findings regarding both ### Payment systems — BdF observations and planned actions - The BdF takes note that the IMF largely endorses its own findings regarding: - the overall situation of the French payment infrastructure; and - the assessments of TBF, PNS and SIT, performed against the Core Principles as well as BdF responsibilities. - The BdF indicates it has already taken several steps to urge payment systems to achieve full observance with the Core Principles in the remaining areas needing improvement. - Specific commitment: compliance of SIT with CP5 is planned to be achieved no later than 2008, in line with the policy stance endorsed by the Eurosystem. ### Implementation of the IOSCO Objectives and Principles — General framework - The assessment addresses the securities regulatory framework in France following the Financial Security Act of August 1, 2003 (Loi Nº. 2003-706, de Sécurité financière or LSF). - The statutory compilation is known as the Code Monétaire et Financier (COMOFI). - The revised regulatory framework is described as a “twin peaks” model that: - separates prudential and conduct of business regulation (insurance providers treated separately and not comprehensively integrated); - was chosen to: - take account of different cultures and expertise related to supervision of banking and trading firms; - acknowledge differences in techniques between prudential and conduct of business oversight and enforcement techniques; - provide separate lines of decision making to reduce potential conflicts of interest; - provide coverage of all relevant financial intermediaries, including managers of portfolios for third parties and financial analysts. - The Autorité des Marchés Financiers (AMF) merges the COB, the Conseil des Marchés Financiers (CMF) and the Conseil de discipline de la gestion financière (CDGF). - The AMF has broader powers with respect to collective investment vehicles, asset management, international information sharing and enforcement than is typical of twin peaks models. - The AMF shares certain licensing powers with prudential authorities. - The AMF concentrates oversight powers previously divided between professional and administrative bodies and creates an independent structure for imposing sanctions. ### Scope of the assessment and institutional interactions - The assessment focuses on the remit of the AMF while accounting for activities of other institutions whose competences affect implementation of the IOSCO Objectives and Principles of Securities Regulation (Principles). - The assessment places particular emphasis on the efficacy of arrangements for interaction and cooperation among institutions in regulatory, supervisory and enforcement functions. - The assessment is performed by a securities expert designated to the IMF under an IOSCO Protocol: - Assessor: Ms. Andrea Corcoran, Director of the Office of International Affairs of the US Commodity Futures Trading Commission and Chairman of the IOSCO Task Force on Implementation of the Principles. - The conclusions are provided in her personal capacity as an expert under contract to the IMF, not as a US government employee or IOSCO representative. - The assessment tests legal and regulatory framework—and its application in fact—against IOSCO standards, noting that such assessments “...cannot be expected to provide assurance against a political or economic failure or the possibility that a sound regulatory framework can be circumvented.” ### Information and methodology used for the assessment - Guidance used: - the IOSCO Principles; - Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (Assessment Methodology), to the extent applicable; - Assessment methodology for “Recommendations for Securities Settlement Systems” (RSSS Assessment); - the consultation draft of the CPSS/IOSCO Recommendations for Central Counterparties (March, 2004); - IMF Guidance Notes and Templates; - relevant IOSCO reports referenced in the Assessment Methodology and the Principles. - Sources and inputs reviewed: - meetings with the MINEFI; - interviews with senior AMF staff (including Chairman and Secretary General); - sessions with staff of the Commission Bancaire (CB), Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI), and the BdF (relevant to securities roles); - discussions with the Agence des participations de l’Etat (APE) on market structure; - discussions with Euronext, NV (Paris operations), Euroclear, LCH-Clearnet, SA; - meetings with selected asset management and investment firms and professional associations; - selective review of websites, annual reports, the COMOFI, existing regulations, published guidance, statistics on operations, issuer information systems, licensing databases, publication mechanisms for regulatory actions, exchange oversight and surveillance systems; - AMF responses to IOSCO and IMF questionnaires, draft AMF responses to the Methodology and predecessor COB questionnaires; - programmatic information, charts, demonstrations, and multiple conference calls. - The AMF provided a draft answer to the Assessment Methodology; the IMF did not require submission using the Methodology but found responses useful for developing the detailed report. ### Institutional and macroprudential setting — market structure and industry statistics - Capital markets in France are described as large and sophisticated with equity, debt, derivative, and mutual fund products. - As a percentage of household savings in France, investments in securities and mutual funds comprise roughly 7.9 percent of disposable income (savings/disposable income of 16.7 percent in 2002), with life insurance products and savings accounts comprising 6.4 and 2.7 percent respectively. - Mutual funds (including UCITS) are important; mutual fund asset to GDP ratio in 2003: - France: 64 percent; - U.S.: 68 percent. - Large proportion of mutual fund products are created and sold for the account of life insurance firms due to substantial tax benefits for households holding life insurance saving products. - Financial sector composition: - Six major domestic banks dominate universal banking; - 90 licensed investment/broker firms; - 346 commercial banks (1011 credit institutions); - roughly 500 asset management firms. - 41.5 percent of assets under management in France is managed by the big six banks’ asset management companies. - Top ten asset management companies listed in source (names preserved exactly). ### Equity and risk-shifting markets — Euronext Paris and trading statistics - Euronext Paris is France’s only stock exchange and operates a fully electronic equity exchange. - In 2003, France ranked fourth in stock market capitalization after the U.S., U.K., and Japan. - Euronext structure: - formed from consolidation of Paris, Amsterdam, Brussels and later Lisbon (and Porto) exchanges under Euronext NV; - consists of national subsidiaries holding local licenses; - single quote and common cross-border order book for listed securities; - single clearing system: LCH-Clearnet, SA; - single settlement system: Euroclear France. - Internal market segments for Euronext Paris: Premier Marché, Second Marché, Nouveau Marché; options to trade NextPrime and NextEconomy; Marché Libre is an unregulated market with 258 issues. - 2003 equity market statistics: - total transaction value in equities (Electronic order book, counted on one side): EUR 877.7 billion; - average daily turnover: EUR 3,442 million; - number of trades in 2003: 101 million; - average daily turnover (number of trades): 396,288; - five most actively traded shares accounted for 30 percent of turnover. - Trading composition: equities are primarily traded by institutions and foreign investors. - Exchange-traded futures and options markets (MATIF and MONEP) are part of Euronext; derivatives integrated into Euronext-liffe; CAC 40 most active contract. ### Bond markets - Government bond market instruments and shares of marketable government debt outstanding: - Long-term instruments (7 to 30 year maturities; OATs, OATis, OAT€is, and TEC10 OATs): OATs comprise 65 percent of marketable government debt outstanding; - Medium term instruments (2 and 5 year maturities; BTANs): BTANs 20 percent; - Short-term instruments (1 year or less; BTFs): the remainder. - Inflation-linked OAT issuances have grown since introduction of European inflation-linked bonds (OAT€is) in 2001: - Inflation-linked bonds now comprise about 10 percent (Euro 44.5 billion) of the outstanding stock of OATs (or 8 percent of total outstanding government debt instruments). - Main investors in inflation-linked instruments: insurance companies, international pension funds, asset managers and alternative traders. - Nonfinancial corporate bond market growth: - At end-1998 corporate bonds comprised 12 percent of outstanding French bonds; - at time of report it stands at 22 percent; - Most of this (20 percent) is issued by credit institutions. - By comparison, in the U.S. corporate bonds represent roughly 40 percent of outstanding bonds. - Inter-dealer trading in government bonds has largely migrated to the MTS electronic trading platform, improving liquidity and reducing trading cost. - Other markets: Powernext, a commercial energy exchange owned by Euronext, facilitates nonintermediated trading. ### Regulatory structure and AMF functions - The AMF is an independent public authority with legal personality and ‘taxing’ authority. - Composition: - 16–member Board (College), chaired by a full time Chairman; - separate 12-member Commission des Sanctions; - 5 consultative commissions, each with its own Chairman and Vice Chairman: 1. Organisation et fonctionnement du marché — transposition and implementation of the new investment services directive and market abuse directive; 2. Activités de compensation, de conservation et de règlement-livraison — international work on clearing and settlement; 3. Activités de gestion individuelle et collective — application of European guidance, creation of new management techniques and rules of good conduct for managers of individual and collective investments; 4. Opérations et information financière des émetteurs — application of new transparency and prospectus directives; 5. Epargnants et actionnaires minoritaires — minority shareholders and savings. - The French press characterized the AMF’s legal status as sui generis. - AMF responsibilities include: - licensing and prudential supervision of operators of publicly offered collective investment schemes and portfolio (asset) managers for third parties; - regulation of public offers and reporting of financial information, marketing, and takeover information flows; - responsibility for custodians for securities and assets of collective investment schemes, and for clearing and settlement systems and related custodians (without prejudice to BdF functions regarding payments); - broad sanctioning powers exercised through the separately constituted Commission des Sanctions. *Italic: IMF staff report content as provided in the source excerpt.* ### 91. Proceedings before this panel can be commenced against any person, whether or not ### _cr05186 - 91. Proceedings before this panel can be commenced against any person, whether or not ### Proceedings, investigations, and sanctions - Proceedings before this panel can be commenced against any person, whether or not that person is a regulated person (paragraph 91). - The Secretary General of the AMF opens investigations and retains authority until referral to the rapporteur designated by the Commission des Sanctions (paragraph 91). - Cases may be referred to the Commission des Sanctions by the AMF board based on a report of an investigation undertaken by the Secretary General (paragraph 91). - The AMF board may also refer cases upon review of a file submitted by the Governor of the BdF, or the Chairman of either the CB or the CCAMIP (L.621-15) (paragraph 92). - The AMF may delegate/licence specified individuals to perform certain investigative and compliance activities regarding their members, including transmission of orders by financial services providers (L.621-9-2), in accordance with procedures specified by regulation and subject to conditions defined by decree of the Conseil d’Etat (Art. 11, 12 and 13 of the Decree) (paragraph 95). ### Institutional responsibilities and operational arrangements - Licensing (except for insurance companies engaging in insurance activities) is committed to the CECEI; consultation with the AMF is required for credit institutions and investment services providers engaged in investment services, pure custodians and clearing members, and with approval of the program of operation if authorization for asset management activities is sought (paragraph 93). - Prudential oversight, including oversight over members of markets, clearing organizations and custodians (but not including insurance companies acting in the capacity of insurance companies), is committed to the CB (paragraph 93). - The BdF commits staff to the licensing and prudential supervisors and provides leadership through the Governor’s participation as Chair of both the CB and the CECEI (L.613-3; 612-3) (paragraph 93). - The BdF has competence over payment system functions and, as a consequence, certain aspects of securities settlement (paragraph 93). - Coordination mechanisms: - Day-to-day: inter-staff contacts, information sharing, certain combined databases, and regular monthly meetings (paragraph 94). - Policy/cross-market matters: an inter-institutional, statutorily-prescribed board (the Collège des autorités de contrôle des entreprises du secteur financier, the College (L.631-2)) composed of heads of financial services agencies, which must meet at least three times a year and is presided over by the Minister of Finance or his representative (paragraph 94). - Cross membership: AMF Chair participates on the Board of the CECEI (L.612-3); Governor of the BdF participates on the AMF Board (paragraph 94). ### Market infrastructure, rules, and cross-jurisdictional arrangements - Exchanges and clearing/settlement organizations control/monitor operations through rules adopted subject to review of the competent authority; those rules and powers/actions for infringement are regarded as founded in contract and not in public law (paragraph 96). - Protocols exist among national regulators and markets within Euronext, NV group, and related clearing and settlement institutions (Euroclear and Clearnet) determining operation and supervision across jurisdictions (paragraph 97). - Euronext France; LCH-Clearnet, Ltd.; and LCH-Clearnet, SA are credit institutions, implying supervision responsibilities for the CB and the BdF as well as the AMF (paragraph 97). - France does not automatically recognize remote clearing members (paragraph 99). ### Legal framework, consolidation, and consultation - Securities law is largely contained in the COMOFI and precursor instructions, recommendations, and regulations being revised into a to-be-proposed Règlement Général of the AMF, which when complete will consolidate, streamline and update previous guidance and fully enforceable regulations of the COB and CMF and align French regulatory framework with new European directives (paragraph 98). - Pending completion of the Règlement Général, rules of the CMF and the COB remain in full force and effect (paragraph 99). - Applicable law also includes company law, bankruptcy law, commercial law, property law, penal law, and administrative codes or human rights doctrines (paragraph 99). - As part of the EU, France recognizes credit institutions and investment firms that passport into France from other EEA jurisdictions via right of establishment or cross-border services; France does not automatically recognize remote clearing members (paragraph 99). - French financial law mandates two forms of consultation informing governmental decision-making: - Comité Consultatif du Secteur Financier (CCSF): representatives of financial professionals representing each sector including insurance agents and their clients — concerning relations between the financial sector and its clients (paragraph 100). - Comité Consultatif de la Législation et de la Règlementation Financières (CCLRF) (L.614-1-2): concerning all legislation and rules except those within sole competence of the AMF (L.621-7V), yet to be formed at the time of writing; membership for these bodies is required for each financial services provider (paragraph 100). - Each investment services provider and market must adhere to an association of its choice charged with representing collective rights and interests (L.531-8); this organization will be affiliated with the Association Française des Etablissements de Crédit et des Enterprises d’Investissement (L.511-29) (paragraph 100). ### Preconditions for effective securities regulation and market openness - Preconditions listed as necessary for effective regulatory framework: - Existence of a legal framework supporting integrity of contract and property rights (paragraph 101). - Legal recognition of instruments traded and rules facilitating their trading (paragraph 101). - Commercial and insolvency regime facilitating taking of collateral, use of clearing services, and enforcement of guarantees (paragraph 101). - Sound company law protecting direct investors (paragraph 101). - Laws supporting ability to identify and protect client assets (paragraph 101). - Reliable and consistent accounting standards (paragraph 101). - Confidence that rules will be consistently and equitably enforced, and can be applied notwithstanding bankruptcy of market participants (paragraph 101). - Judicial, administrative, and regulatory authorities that reliably honor and equitably apply the rule of law (paragraph 101). - The report states there is no evidence these preconditions are not met in France (paragraph 101). - Regulators historically open to cross-border arrangements within the EU and beyond; authorities support maximizing use of the Lamfalussy process and broader use of mechanisms for regulatory development and consultation of the Committee of European Securities Regulators (CESR) (paragraph 102). ### Observations, market incentives, and structural design - Anecdotal evidence indicates fiscal treatment of various instruments may: - Induce market preference for insurance products that may not be the most value-based for retail public, or - Predispose high wealth individuals to offshore investment (paragraph 103). - IOSCO has not comprehensively treated preconditions for effective regulation beyond exposition of the Principles; many issues (stability of governmental and legal system, macroeconomic situation) are beyond IOSCO remit and more relevant in less mature systems (paragraph 103). - The twin peaks structure in France intends to focus contemporaneously on high priority customer protection and prudential issues (e.g., finality of netting) (paragraph 104). - Functionality of the new framework should be tested after experience with changes effected by the LSF (paragraph 104). - Design intended to account for different cultures of securities conduct and prudential regulation to maximize expertise and avoid conflicts of interest; recommendation that the design be kept under review to determine if further efficiencies, streamlining, and essential cooperation are occurring (paragraph 105). *Source: Extract from the provided IMF content unit _cr05186 (paragraphs 91–105).* ### 106. Finally, the AMF, although continuing the tradition of its predecessors, just ### Principle-by-principle assessment — Principles Relating to the Regulator ### Overview - The AMF is the successor agency to the COB, the Conseil des Marchés Financiers (CMF), and the Conseil de Discipline de la Gestion Financière (CDGF), created by merger under the LSF, dated August 1, 2003, as made effective November 24, 2003. - The AMF commenced operations November 24, 2003 and announced its new organizational structure, February 12, 2004. - Further review of the tentative ratings after some period of operations is recommended to reflect implementation of changes currently in progress. - The AMF’s remit reflects the three objectives of IOSCO: investor protection, fair, efficient and transparent markets and reduction of systemic risk. - The assessor’s comments for the first five principles focus on the AMF while recognizing roles of the CB, CECEI and BdF; no basis to change ratings for the Regulator under the IOSCO Principles based on those securities functions performed by the CB and the CECEI and by the BdF. ### Principle 1 — The responsibilities of the regulator should be clear and objectively stated Findings - Responsibilities, powers and authority of the AMF are primarily stated in Section 4, Book VI, Unique Chapter on the AMF (COMOFI; Decree N° 2003-1109, dated November 21, 2003). - AMF responsibilities include: - oversight of offerings of securities and disclosures related to takeover bids; - oversight of conduct of business by investment services providers and their management and compliance employees responsable du contrôle des services d’investissement (RCSI) in the case of investment firms, including asset managers and publicly offered collective investment schemes; - oversight of sale or solicitation of securities; - oversight of organization and functioning of markets and rules for execution thereon; - rules relating to organization and functioning of clearing and settlement systems; - surveillance of investment services providers as to professional obligations including market abuses and insider trading (L.621-9); - enforcement and information sharing; representation in international forums (L.621-1). - The AMF can exercise general regulatory authority subject to validation by the MoE; regulations must be made public in the Journal officiel de la République Française (JORF); other regulatory information appears in the BALO. - The AMF either has sole power or shared power to cover each functional area specified in the IOSCO Principles and related Assessment Methodology. - CECEI addresses licensing of intermediaries (L.612-1 to L.612-7); CB addresses prudential issues for investment services providers except asset managers (L.613-1 to L.613-34; L.613-2; L.613-21 to 24; L.613-31); BdF contributes staff to CECEI and CB and has responsibilities for payments systems (L.141-1 to L.141-9, and in particular L.141-4). - The AMF can issue instructions and recommendations (e.g., Procédure de Rescrit; Règlement COB 90-07) which, while not directly binding as law, can give content and precision to existing regulation; rescrits are published and protect the requesting person who acts in good faith from AMF sanctioning with respect to the rescrit (but may be sued on other grounds). - The AMF is consolidating the rulebook and rulings of the merged entities; expects completion in 18 months; interim rules and guidance of CMF and COB remain in effect; not all rules published on AMF website; CIS rules are difficult to locate and only some available in English. - Domestic cooperation: cross-Board membership, requirement to exchange general information at head-of-delegation level (Collège des autorités de contrôle des enterprises de secteur financier), legal authority to share information (L.631-1), history of cooperation; CECEI required to consult with AMF on certain licensing decisions but cooperation among authorities supervising same entity is otherwise not required by law. Assessment - Broadly Implemented. Comments / Observations - Formal and informal mechanisms for coordination among CB, CECEI, AMF and BdF exist and have a long history of cooperation. - Not clear that the CB must promptly support the AMF if so requested (L.631-1); practical arrangements and legal support for assistance could be clearer. - The assessor notes that while protocols or exchanges of letters may suffice, where two authorities supervise the same entity cooperation should be required as a matter of law. - The AMF believes Art. L.631-1 authorization to share information is equivalent to a requirement based on established practice and cross-membership; exchange of letters among authorities is being considered to formalize procedures. ### Principle 2 — The regulator should be operationally independent and accountable Findings - By law, the AMF is an independent public authority with legal personality and financial autonomy with power to impose specialized taxes on regulated entities (L.21-1; L.621-5-2). - AMF governance: - Board and separate Commission des Sanctions. - Salaries of Members fixed by Decree submitted for opinion of the Conseil d’Etat; terms set by law; Members compensated for time. - Chairman vested with “own” powers and delegated powers by the Board within limits of Decree n°1109 of November 2003 (L.621-5). - Secretary General appointed by Chairman in consultation with the Board subject to nonobjection of the Ministry; has specific statutory powers related to investigations. - Board of 16 members including the Chairman: a counselor from each of three highest courts; a representative of the BdF; three qualified persons appointed by three Constitutional assemblies; six qualified persons appointed by the Minister of Finance after consultation; Chairman of the Conseil national de la comptabilité; representative of employee shareholders in consultation with unions. - Commission des Sanctions has 12 members: two counselors each from the Conseil d’Etat and the Cour de Cassation; six experienced members from the industry appointed by the Minister of Finance; two representatives of financial sector employees (L.621-2). - Board meets approximately fortnightly; Commission des Sanctions meets as needed and can empanel two panels of six. - Members have fixed terms of five years; membership rotated by half every 30 months; members not removable except for failure to attend or by special investigative committee. - Commissaire du gouvernement (Ministry representative) attends Board and Commission but is not a full Member; can request a second deliberation in Board cases; cannot ask for second deliberation in Commission des Sanctions; attends without voice in deliberations (L.621-3). - Decisions by majority with Chair as tie-breaker; in practice decisions are by consensus. - Minister must approve the Règlement Général (L.621-6); Minister does not take positions on individual matters or validate licensing determinations (though Treasury representative sits on CECEI). - Consultation mechanisms: consultative commissions under LSF, special committees, open consultation, CESR participation. - Accountability: - Accounts prepared by an Agent Comptable (serves at Minister’s discretion), accepted by Board, deposited with Cour des comptes; AMF must submit annual report with financial statements to the President and the Parliament (L.621.19 a 1-3 & 4); can be requested to appear before Commission of Finance of both parliamentary assemblies. - Regulatory actions published in JORF and BALO. - Appeals: decisions subject to appeal to Conseil d'Etat (decisions of general scope against professionals) or Appellate Court of Paris, with further appeal on purely legal grounds to the Cour de Cassation. - Persons affected by cases before Commission des Sanctions must be duly “invited” to exercise defense; decisions must be motivées (reasons in writing) (L.621-15 IV; Art. 19 and 20 of Decree n°1109 of November 23, 2003). - Law of professional secrecy applies; information may be passed to another authority in appropriate circumstances. - Staff and Members have qualified immunity for bona fide actions; AMF can itself be sued but liability ordinarily only for faute lourde. - Contemporaneous Basel Report: CB and CECEI are independent administrative authorities, governance subject to checks and balances, neither independent of BdF; dependence on BdF not a concern; fixed terms desirable for Secretary Generals; role of Ministry of Finance broader than in case of AMF. Assessment - Broadly Implemented. Comments / Observations - Structure provides safeguards to independence; membership appointments include judiciary to reduce political ties. - Presence of Ministry representative (commissaire du gouvernement) on Commission des Sanctions and Board is a point of concern for potential chilling effect despite limited formal powers; AMF states commissaire has never interfered. - Minister’s homologation of Règlement Général is characterized by AMF as a “stamp” and Ministry reportedly has not refused homologation historically. - Almost 80 percent of legislation is with respect to implementation of Directives; Lamfalussy process and Europe-wide rulemaking reinforce independence. - Conflict of interest provisions should be strictly enforced given private sector representation on the Board; initial postings of the Règlement include provisions relating to Conflicts. - The two-Board structure replaces previous structure where sanctioning authority resided within COB board; previous structure was challenged under impartiality; impartiality doctrine to be considered in enforcement. ### Principle 3 — The regulator should have adequate powers, proper resources and the capacity Findings - AMF has powers, alone or with prudential authorities, to fulfill IOSCO standards: licensing (investment services providers other than asset managers, with CECEI), surveillance, inspection (with CB for providers other than asset managers), investigation, enforcement and cooperation. For asset management companies, AMF is sole authority. - AMF has financial autonomy (“autonomie financière”) and employees can be public sector or private sector contractors (L.621-5-1). AMF raises funds through taxing authority; ability to set rates within parameters in COMOFI (L.621-5-3) is committed to Government through Ministry (Decree). - AMF currently has an annual budget of about 45 million Euros. - AMF can apply resources to its regulatory priorities subject to presentation of Annual Report to President and Parliament (L.621-19); not restrained by overall government budget for allocation among specific functions; has a reserve account equivalent to one year’s actual funding costs. - Accounts prepared by Agent comptable (Art. 34 of Decree n° 2003-1109); approved by Board prior to submission to Cour des comptes; subject to audit. - Human resources: - AMF had approximately 320 staff as of year-end 2003. - Of those, 283 were former COB staff and remainder from former CMF. - Approximately 18 percent of staff is support staff (strict definition). - Staff expertise includes legal; audit, accounting, statistics, other quantitative disciplines; information technology; investigations; engineering; private sector market oversight and public administration. - AMF can hire staff under public law contracts (majority) or private law contracts; can offer medium term positions to civil servants from central administration (e.g., BdF specialists). - Salaries of private sector contractors comparable to private sector; portions of labor code related to organization applied to AMF staff for first time post-merger. - Technology and training: - Shares FIDEC database on “fit and proper” characteristics maintained by CECEI with CB and CECEI. - Developed and uses sophisticated market surveillance system; expanding technology to increase transparency of financial information. - AMF statistics indicate an average of 4.86 training days per employee. - Recent training offered on International Financial Reporting Standards, specialized instruments (credit derivatives, hedge funds, structured products, financial mathematics). - AMF can borrow funds if securities business downturn significantly affects revenues; could apply to Ministry for augmentation of funding authority. - CB and CECEI consider their funding adequate per Contemporaneous Basel Report; BdF funding not an issue. Assessment - Fully Implemented. Comments / Observations - Staff size and expertise appear sufficient but AMF may need to devote more human resources to on-site inspections; current on-site inspections and staff allocated to them are relatively limited. - AMF can and does ask CB, market undertakings and external auditors to inspect on its behalf; CB inspectors can be appointed by AMF since 1999; AMF permits use of external auditors since 1996; LSF provides new inspection authority. - AMF is expert authority for conduct of business, market conduct, and monitoring of depository functions with respect to CIS—these may require on-site reviews and resources should be assured. - Consideration of additional capacity may be needed for conduct of business oversight in bank distribution networks (partly provided by consumer law, AMF complaint responses, and some monitoring) and for investment management services to third party portfolios if business grows. - Adequate commitment of human, technological and other resources to cooperation among sectors is necessary given distribution of functions. ### Principle 4 — The regulator should adopt clear and consistent regulatory processes (partial) Findings (from available text) - AMF is subject to general administrative law applicable to public authorities, procedural requirements for investigations, granting of visas and licenses, and sanctioning process provided by Decree submitted to the Conseil d’Etat (e.g., L.621-9-1), and relevant procedural requirements of Paris Court of Appeal and Cour de Cassation; procedures to be included in the Règlement Général. - Subject to law on professional secrecy, conflicts of interest, and restrictions on trading and professional conduct in Règlement intérieur (see Principle 5). - AMF has procedures for consultation with the public but has not established a specific policy for consultation on rulemakings. - AMF has constituted several consultative commissions under LSF to provide advisory opinions and to address organization and functions of markets; collective and individual asset management; clearing and settlement; minority shareholders; uses Board and outside experts. - Exposure drafts of rules and important policies (e.g., reforms relating to disclosure of financial information) can be circulated to market participants. - AMF is actively represented in CESR, which has its own working groups and exposure process for European legislation implementation. - New law provides an instrumentality for consultation among regulatory authority, industry and general public (L.614-1). (Note: source content ends mid-discussion of Principle 4.) *Source: Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation (excerpts from PDF chapter)._cr05186 - 106.* ### introduction above). These arrangements for consultation are intended to address the impact of ### _cr05186 - introduction above). These arrangements for consultation are intended to address the impact of ### Transparency, Publication, and Rule Accessibility - All regulations are published in the JORF and are accessible on the AMF website http://amf-france.org and/or on the central French Administration website http://www.legifrance.gouv. - Publication is required for a rule to be enforceable; other regulatory actions are published in the BALO or in the AMF Bulletin Mensuel or Review. - The Annual Report for the period ending 2003 for the COB includes extensive discussion of policies, actions taken, and issues brought to the AMF mediation facility. - Investigative reports are not made public; only certain sanctions are published. Publication of sanctions is not required by law but is practiced more broadly to educate the public. - AMF produces plain-language brochures, holds investor seminars, and maintains a public documents room. - Assessment: Fully Implemented. - Recommendation: Adoption of a final comprehensive Règlement Général to consolidate prior rules, internal procedures, and to specify rulemaking and consultation procedures to enhance accessibility and understandability of AMF rules and procedures. ### Procedural Fairness, Appeals, and Reasoned Decisions - Administrative actions are appealable to the Conseil d’Etat; other decisions are appealable to the Court of Appeals in Paris. - A person subject to sanction has an opportunity to be heard by the rapporteur and then before the commission, and a right of appeal (L.621-15IV; see also Art. 18,19,20 II and the texte de référence of the Decree of November 21). - A sanctioned person must be provided with the reasons in writing; L.621-15 IV requires decisions to be “motivées” (see also Decree, Art. 20 V). - Assessment: Fully Implemented. - Comment: Codification of internal professional rules of conduct and monitoring of compliance with ethics standards is desirable. ### Professional Standards, Confidentiality, and Conflicts of Interest - Under the COMOFI (L.621-4), members and staff of the AMF and experts are subject to professional secrecy and penal sanctions for violations (L.642-1 and L.621-4 II). - Members must disclose interests and positions (including within two years of appointment); recusal required where appropriate. - Restrictions on staff securities activity: direct purchase and portfolio management prohibited; staff may hold mutual funds (UCITS) or give discretion to a fund manager. - As of March 30, 2003, Art. 1-1-6 of the Règlement Général applies similar restrictions to board Members; the President oversees Members’ holdings (Art. 1-1-7). - An internal audit group (not currently staffed) expected to be staffed with a Director and Deputy during the summer; will review all AMF operations and report directly to the Board. - Professional standards currently in a Statut des personnels (Code of Conduct) subject to review by an Ethics officer (Déontologue) who reports to the President and can investigate violations including Internet-related ones. - Assessment: Fully Implemented. - Comment: Strong support for codification of internal professional rules and monitoring of compliance due to past lapses. ### Inspection, Investigation, Surveillance Powers (Principles 8–10) - Legal basis: Book VI, Title II, Section 4, sub-section 3; AMF and, where within competence, the CB have power to inspect books, records and premises without prior notice or evidence of specific misconduct. - AMF may require provision of all information reasonably needed; to seize records requires court order from President of the regional tribunal where records located. - Delegation to third-party investigators permitted under appointment and oversight [L.621-9-1]; conditions in Decree 2003-1109 of November 21, 2003. - Authorized market undertakings and clearing houses may be “authorized” to examine or investigate members by contract; authorization withdrawable. - Criminal penalties: obstructing investigation or providing false information punishable by two years imprisonment or a fine of EUR 300,000 (L.642-2). - Telephone records in investment firms must be retained for six months (Regulation of the CMF, Art. 3-4-3, Decision No. 99-06); transaction data under exchange/CMF rules retained for five years (Regulations of the CMF, Art. 7-1-7, General Directive No. 99-05); Commercial Code accounting records retained for 10 years. - AMF may summon and hear persons, access business premises (L.621-10), obtain client identity information for regulated entities. - Cooperation: AMF and CB engaged in 50 bilateral meetings and sent approximately 100 letters of correction in the past year; CB conducted 10 (2001), 13 (2002), and 8 (2003) examinations of licensed entities on behalf of the AMF. - Assessment: Fully Implemented. - Comment: Coordination between AMF and CB important given overlap of conduct and prudential issues; arrangements for continued cooperation should be kept under review. ### Enforcement Powers and Procedures (Principle 9–10) - AMF enforcement powers: administrative fines, suspend authorization, require cessation of violations (provisional effect), seek/seize records, freeze assets via court order, refer for criminal prosecution (L.621-14 &15). - AMF may seek freezing of assets, escrow deposits, temporary bans, withdraw license for credit institutions performing investment services; Sanctions Commission can pronounce temporary/permanent bans. - Fines up to EUR 1.5 million and ten times the profit made, if any; fines must be proportionate (L.621-15 III). - Trading suspension: Chairman may suspend trading for up to two consecutive days; extension beyond two days requires Minister of Finance agreement (L.421-4&5). - Processing of enforcement: Board notifies person of reasons, sends case to Commission des Sanctions with rapporteur conducting adversarial investigation (L.621-15IV); rapporteur does not participate in deliberations. - AMF cannot be partie civile in Criminal court and simultaneously carry out sanction procedure for same person and facts (Art. L.621-16-1); may bring administrative case if Prosecutor declines to proceed. - Information sharing with Public Prosecutor; certain offenses must be reported (L.621-20-1). - AMF cannot seek disgorgement through administrative sanctioning process. - Assessment: Fully Implemented. - Comments: - Some offenses reported to Public Prosecutor may affect extent of AMF action. - Clarification and further review recommended on CB–AMF arrangements for sharing prudential and market information. ### Enforcement Resources, Monitoring, and Case Statistics - Enforcement department composition: 50 persons with various competences (lawyers, accounting specialists, judges, police officers, mathematicians); of these, 30 are investigators and 15 engage in market surveillance (of the latter, eight monitor the equity markets). - Within Direction des Prestataires de la Gestion et de l’Epargne: 16 inspectors. - Electronic transaction review system accounts for 50–60 percent of investigations. - AMF carries out about 1200 verifications of unusual activity and 80 full investigations a year. - AMF conducts about 84 cases presented to predecessor Boards in 2003: 25 insider trading cases; 5 market manipulation cases; 17 dissemination of false information cases; 11 asset management related cases (3 on CIS, 5 on companies, 2 on depositories, 1 unauthorized business); and 26 foreign assistance cases. - AMF reports that an investigation takes on average 8 months to complete; minimum duration usually 3 months and maximum observed 18 months. - Assessment: Broadly Implemented. - Comments: - More information desirable on dispositions; some historical cases have long court proceedings (some proceedings over 10 years). - Consider increasing provisions for alternative out-of-court settlements to reduce lengthy proceedings. - Watch pending court proceeding on impartiality and use of monitoring information by the Commission des Sanctions. ### Information Sharing and International Cooperation (Principles 11–13) - AMF authority to share public and nonpublic information with domestic and foreign counterparts, judicial authorities, and Public Prosecutor (L.621-1); some cases must be transmitted to the Procureur (L.621-20-1). - Sharing of information obtained for foreign assistance protected from automatic provision to criminal authorities unless specifically agreed (L.621-21; see Principle 13). - AMF may enter into information-sharing agreements; such arrangements must be approved by the Board and published in the JORF (L.621-21, para.6). - AMF has signed 36 bilateral agreements, one regional agreement (with CESR), and two multilateral agreements (Boca Declaration and IOSCO MMoU). - Domestic cooperation: AMF can communicate, free from professional secrecy, with BdF; CECEI; CB; CCAMP; CEA; FGD and insurance guaranty fund (references: L.631-1; L.563-5). - The collège des autorités de contrôle des entreprises du secteur financier (chaired by Minister of Finance) meets at least three times a year to facilitate exchange on matters of common interest (L.631-2). - AMF opened investigations on behalf of foreign authorities in 68 cases in the last three years, primarily insider trading. - Assessment: Fully Implemented. - Comments: - Exceptions to sharing (national security, ongoing criminal investigations) noted and consistent with IOSCO and EU law. - Consider whether more domestic arrangements should be committed to formal protocols and whether domestic law is sufficiently permissive regarding prudential matters. ### Issuers: Disclosure, Prospectuses, and Ongoing Obligations (Principles 14–16) - Disclosure obligations: periodic financial disclosure for issuers listed on regulated markets (annual audited and semi-annual accounts as well as quarterly turnover for issuers of shares) (Code de Commerce; AMF Reg. 98-01; 95-01; 98-08). - Prospectuses required and subject to AMF prior review and approval (Visa); issuance of Visas published daily on AMF website and in the BALO. - Ongoing disclosure requirement: all public issuers must disclose information that could significantly impact price of securities or holders (AMF Reg. 98-07). - Private placement exceptions: (1) qualified investor entities (financial institutions, commercial companies with total assets of EUR 150 million, governmental entities); (2) limited offers to restricted circle persons. - Issuers may publish a document de référence (shelf registration); in 2003 about 400 issuers published a document de référence (138 on Nouveau Marché, 262 voluntarily). - For takeovers: disclosure requirements, crossing of thresholds, insider purchases and sales posted on AMF website updated daily; notice periods: at least 15 days before annual meeting approving accounts or 30 days notice for meetings (see Principle 15). - Accounting and auditing standards: French GAAP set in Code de Commerce, Plan Comptable General, Regulation CRC no. 99-02; movement toward IFRS required by EU in 2005; differences remain between French GAAP and IFRS. - AMF has powers regarding accounting and auditing of listed companies, including auditor appointment and review (L.621-22). - Assessment: Principle 14 — Fully Implemented; Principle 15 — Broadly Implemented; Principle 16 — Partly implemented. - Comments: - For Principle 15, disclosure of material changes in beneficial ownership may not be sufficiently timely below price-sensitive thresholds; further Règlement Général guidance could upgrade rating. - For Principle 16, public oversight of auditing standards being augmented; execution should be kept under review. ### Collective Investment Schemes (CIS) — Authorization, Monitoring, Valuation (Principles 17–20) - CIS regulation covers product, manager/operator, depository/custodian, and marketing eligibility. Public offers require AMF authorization (L.214-1 et seq.; AMF competent authority L.621-6). - Types of funds: UCITS, second level registered funds for qualified investors, and third level contractual funds (see Principle 18). - Asset manager types: Sociétés de gestion de portefeuille (SGP), Sociétés de gestion d’OPCVM (SGO), and investment services providers offering asset management. - As of November 2003: 525 approved SGPs; 45 approved for real estate funds; 6 for securitized offerings listed on AMF website; 170 investment services providers and credit institutions permitted to offer asset management services; 87 depositories; more than 8000 funds (not including private equity, real estate, employee savings). - AMF inspections: visited 80 management companies and investment services providers in 2002, and 71 in 2003; target coverage all managers within five-year period; on-site inspection staff small (7). - NAV reporting and monitoring: NAV established daily for 2300 funds (total 7900 funds); other funds calculate NAV at least every 2 weeks; NAV data available on AMF website since mid-March 2004 for any fund offered to the general public (6500/7900 funds). - AMF conducts theme inspections on valuation, derivatives, market timing; requires third-party valuation validation for structured products without reliable pricing reference. - Assessment: Principle 17 — Broadly Implemented; Principle 18 — Fully Implemented; Principle 19 — Fully Implemented; Principle 20 — Broadly implemented. - Comments and recommendations: - Increase monitoring and human resources, especially oversight of depositories and distribution through banking networks where AMF conduct-of-business powers may be less intense. - Strengthen depository inspection program promptly; AMF conducted theme inspections of depositories in 2003 but more active program desirable. - Clarify suspension-of-redemptions powers and guidance; AMF contemplating guidance on suspension of redemptions. ### Market Intermediaries and Licensing (Principle 21) - Licensing regime: market intermediaries must be licensed; new one-step procedure under L.532.1 to L.532-5; coordination between AMF and CECEI required for approvals. - CECEI statistics as of 30 April 2004: 923 licensed in France (357 credit institutions; of these 346 established in France and 11 in a third country); 141 investment firms licensed by CECEI; 68 ISPs operating in France are branches of foreign ISPs belonging to the EEA (45 credit institutions; 23 investment firms); in all 1258 firms exercise free right to offer cross border services in the EEA; 427 asset managers. - Licensing criteria include fitness of management (honorabilité), financial/capital condition, internal organization, capital requirements; applicants must identify direct and indirect shareholders with a qualifying holding of 10 percent. - Démarchage (direct marketing/unsolicited selling) registration required for persons performing démarchage; lists to be maintained and consultable by the public (L.341.6–7). Central securities depositories and securities settlement systems are licensed by the AMF. - Compliance manager (RCSI) required; must obtain a “professional card” from the AMF within 6 months. - Assessment: Broadly implemented. - Comments: - Publication of license status aids public protection; list of démarcheurs not yet posted pending decision on public disclosure—AMF working on elaboration of the list. - Consider more immediate public notice of firms undergoing withdrawal processes and expand publication of licensed persons. *Source: _cr05186 (excerpted content provided).* ### references be identifiable from the AMF website (see Principle 4). ### _cr05186 - references be identifiable from the AMF website (see Principle 4). ### Monitoring, Cooperation, and Information Sharing - The CB and the AMF both have programs for monitoring their respective areas of responsibility and employ cooperative practices (for example, a common database, monthly meetings of senior staff). - Suggested action: the CB and AMF should continue to explore arrangements to assure that potential conduct of business violations may be treated as prudential violations (or vice versa) and are adequately addressed by cooperation mechanisms. - The CB uses preventive analysis called Organisation et Renforcement de l’Action Préventive to assess risks associated with each investment services provider; ideally this information should be available to the AMF on an as needed basis. - The CB indicates monthly meetings with the AMF (and CECEI) to share information on individual cases and more immediate discussion of actions taken. - CB inspectors can be (and are) appointed by the AMF to investigate compliance with AMF rules; in the last three years the CB has conducted 31 such inspections (in one year amounting to one-third of those conducted). Reports of inspections are provided to the AMF, if completed by the CB, and also to external auditors. ### Prudential Requirements for Market Intermediaries (Principle 22) - Legal framework aligns with the Capital Adequacy Directives of the European Union for investment services providers; prudential standards specified by the Comité consultatif de la législation et de la règlementation financières (CCLRF) and confirmed by the Minister (L.611-3; L.533-1). - Asset management companies minimum capital: - EUR 50,000 - EUR 150,000 if the company holds client funds - or 25 percent of overhead if higher - This requirement is about to be augmented based on the amount of funds under management. - Other investment services providers minimums: - If customer accounts are held with the firm: EUR 150,000 and EUR 1.9 million respectively (depending on activity) - If such accounts are not held, minimum amounts are correspondingly reduced (CRBF Reg. 96-15). - Custodians: firms carrying out securities custody activities currently subject to a minimum capital requirement of EUR 3.8 million (CMF Regulation 6-2-3); further regulation expected in 2004 to define prudential requirements for custodians. - For all investment firms (L.531-4), except asset management companies, own funds must equal the higher of: - 25 percent of overhead for the previous year - and total client positions divided by 150. - Client positions definition includes positions on regulated markets and over-the-counter markets, cash debits, uncovered short positions, sum of long and short positions, plus any debit balance on settlement accounts (or minus credit balance). - Large exposures definitions and limits: - Large exposures are exposures in excess of 10 percent of own funds. - Exposure to any one client must be less than 15 times own funds. - Exposure to any one counterparty must be less than 25 percent of own funds. - Total large exposures must be less than 8 times own funds (CRBF Reg. 97-04). - CRBF 95-02 (market risk and volume of activities) and 93-05 (large exposures limits and stress tests) also apply. Large exposures must be reported quarterly. - Reporting and publication requirements: - Publication of annual individual accounts within 45 days of their approval (CRBF 97-03, as amended), including the statutory auditor’s report. - Firms must report to auditors and the AMF a yearly report on how internal control is assured. - Quarterly reports required for firms with a balance sheet total in excess of 3 billion francs (conversion provided: EUR 457,347,000). - Half-year statements of operations required for listed firms. - Investment firms trading financial instruments involving commodity derivatives must file monthly statements showing their positions in the commodities market with the CB (CRBF 97-04, Art. 9). - Recordkeeping and operational requirements: - Firms must maintain records to record transactions and determine positions and profits and losses daily (CRBF 97-04; CRBF 97-02). - CB primarily responsible for monitoring prudential (capital) status of investment firms; AMF responsible for prudential supervision of asset management companies. - Supervisory frequency: - CB attempts to visit each investment services provider (excluding asset management companies) at least once per year. - AMF aims to visit every asset management company every five years, using a risk-based inspection allocation. - Remedial and sanction powers: - CB can issue warnings, prohibit executions of certain operations, impose limitations on business. - CECEI and CB can require more stringent capital monitoring and higher ratios when justified; AMF can restrict types of activities of asset management companies (L.532-4 to L.532-9). - Assessment: Partly Implemented. - Key comment: Annual or semi-annual reports may not be sufficient to detect timely deteriorations of capital—risk-based or more frequent measures may be required; trading culture of investment services firms may warrant more direct and frequent supervision than banking institutions. ### Specific Concerns Highlighted under Principle 22 (SRDs and Broker Exposures) - Deferred settlement (SRD) practice among brokers permitted by Euronext Paris: - Deferred delivery of securities upon deposit of margin while broker settles on T+3; customer makes a net settlement with the broker at month end; customer required to post margin daily. - Potential for sizeable net exposures at month end "as much as EUR 100,000,000" in net exposures. - Monthly reporting on deferred settlements may not identify problems in a timely way; occasional review of margin collections may be insufficient. - Broker SRD exposures are transparent only to the broker, not to the clearing system or market. - Euronext Paris requests a monthly report showing customers' exposures above EUR 1.5 million; reports aggregated by Euronext Paris (and, since January 2004, by LCH-Clearnet SA); summary transmitted to the AMF. - AMF and CB include information on exposures to SRDs in capital ratio calculations; AMF ran a test on how often the 20 percent cash margin deposit had been exceeded in a single day over the past 13 months. - Compensation funds: Euros 70,000/account (exceeds EU requirement) provide buffer to customers in event of firm insolvency. ### Internal Organization and Operational Conduct (Principle 23) - COMOFI requires investment services providers to have appropriate management and internal control systems (Principle 21 and L.611-3; see L.613-16 and L.613-15). Management organization and internal control structure are part of licensing. - Specific internal control requirements for firms other than asset managers (CRBF Reg. 97-02; 97-04): - Must address credit, market, interest rate, settlement, liquidity, intermediation, operational and legal risk. - Must include mechanisms for supervising risk limits and assessing exposure to unsettled transactions. - 2004 amendments contemplated to clarify contingency planning and legal compliance. - Internal control system components required by law: - Organization of accounting and information processing systems - Risk and result measurement systems - Risk monitoring and control systems - Cash/securities flow monitoring systems and arrangements to address settlement risks - Mechanisms acceptable to the CB for valuing financial instruments without an active market - Separation of functions: CRBF Reg. 97-02 requires units initiating transactions to operate independently of those validating, settling, and monitoring risk. - Reporting to supervisors: - AMF requires a yearly report on conditions in which services are provided. - Investment services providers supervised by the CB must provide an internal control report listing investigations performed, shortcomings observed, corrective action taken, changes to control environment, measurement and monitoring of risks, and compliance with limits; presented to the decision-making body and to the CB. - Record retention: - Order tickets must be maintained for five years; trading records at the market maintained longer. - Accounting records must be retained for 10 years. - Telephone tapes must be retained for six months; market operator archives transaction information electronically for ten years. - Conduct of business obligations (L.533-4 et seq.; L.533-6): loyalty, equity, competence, care and diligence, resource allocation, client situation and experience assessment, conflict of interest rules, suitability/know your customer rule; piste d’audit (audit trail) required; clients receive statements of account. - Assessment: Fully Implemented. - Comment: For asset management companies, AMF procedures to review internal controls exist but regulations lack significant guidance on general expectations and do not require independent assessment of controls; AMF should consider more specific requirements on "know your customer" and document planned enhancements. ### Failure Procedures and Contingency Planning (Principle 24) - CB powers in case of firm deterioration: - Appoint provisional administrator or liquidator (L.613-18; L.613-22). - Direct amelioration of financial or internal control position; require corrective action; act without proceeding in case of urgency (L.613-16; L.613-23). - Liquidation protections: - Funds and collateral held by broker and clearing institution can be used to pay debit balances and such payments cannot be reversed by an administrator or in liquidation (L.442-6; L.431-6). - Customer securities and funds must be identified on books of the investment firm and clearing organization; liquid balances held in amount owed to customers. - Project underway to enhance protection of customer funds. - Compensation fund may be applied; may be asked to intervene by CB in cooperation with AMF (CRBF reg. 99-05 to 99-08; 99-14 to 99-17) (L.322-1 to 4). - French authorities do not permit remote clearing members without appropriate comfort letter from jurisdiction of establishment; AMF can restrict remote membership if cooperation arrangements of third countries inadequate (L.442-2). - Assessment: Fully Implemented. - Comment: Compensation fund is EUR 70,000 for all accounts of the same customer held with the same institution anywhere; question on extent compensation arrangement can be drawn on to prevent consequences of failure. Need to assure transferability of customer open positions for futures in event of firm insolvency (General Regulations of the CMF, Art. 4-2-23). Keep contingency planning under review, especially for leveraged positions at brokers not subject to clearing or frequent inspections. ### Secondary Market: Authorization, Supervision, Transparency, Market Abuse, and Risk Management (Principles 25–30) - Principle 25 — Authorization and oversight of trading systems and exchanges: - Regulated markets recognized by the Minister of Finance upon recommendation of the AMF (L.421-1). - Market rules must be submitted to AMF for approval; amendments notified to AMF and BdF and authorized by AMF. - Prospectus must be approved by AMF prior to listing. - COMOFI General Regulation Art. 2.4.4: operators of multilateral trading facilities (Powernext and MTS) must be recognized as investment services providers. - Market undertakings must commit to enforce rules related to price manipulation, wash trading, volume aberrations, trading ahead, misallocation, disclosure of price sensitive information, congestion and corners. - Euronext Paris is the sole market operator in France managing multiple regulated markets; cash market cleared through LCH Clearnet SA and settled through Euroclear France; derivatives cleared through LCH Clearnet Ltd and LCH Clearnet SA. - Market undertakings will be required to have own funds to cover operational risks, but Euronext is grand-fathered and has systemic protections as a special purpose credit institution under CB oversight. - Assessment: Fully Implemented. - Principle 26 — Ongoing regulatory supervision of exchanges and trading systems: - AMF approves regulated market rules, can audit trading systems at any time. - Euronext Paris carries out real-time surveillance for transactions on all Euronext cash markets. - AMF receives information on all trading, clearing, settlement and/or deliveries of products traded on Euronext Paris. - AMF equity monitoring team: 14 persons. - AMF automated system monitors trades on a T+1 basis; surveillance identifies up to 1000 matters for additional review and resulted in referral of 100 cases annually and imposition of 24 sanctions in 2003 (COB and CMF). - Coordination arrangements: MoU among exchanges and authorities; Coordination Committee on Clearing Euronext (MoU March, 2001) issued Joint Guidance June 2002; Euronext and clearing organizations coordinate oversight. - Assessment: Fully Implemented. - Principle 27 — Transparency of trading: - “Concentration rule”: requires all trades in listed equities to be concluded in a regulated market of the EEA if executed by an intermediary for a customer established or customarily residing in France and less than EUR 7.5 million in value or of 10 percent of the capitalization. - Listed bonds required to be transacted in on a regulated market if transaction size < EUR 30,000. - Euronext publishes the five best bids and offers; regulated markets must publish best bid and ask and related quantities. - Publication timing: - Immediately for continuous trading products. - By opening of the following trading session for auction-settled trades. - T+1 for over-the-counter trades (trades reported immediately to Euronext and AMF). - Upstairs trades executed as agent: report and publish immediately. - Proprietary trades: if < five times Normal Block Size published in 60 minutes; if > that within 120 minutes. - Hidden orders permitted but receive new time priority when activated. - Assessment: Fully Implemented. - Principle 28 — Detection and deterrence of manipulation and unfair trading: - Market or price manipulation, misleading information, insider trading, front running and other abuses are prohibited by law and market rules. - AMF and market authority employ real-time monitoring and end-of-day batch surveillance; electronic trading provides a complete audit trail. - AMF requires orders be retained for 5 years; telephone tapes for six months; market operator archives for ten years. - Assessment: Fully Implemented. - Principle 29 — Management of large exposures, default risk, and market disruption: - Market algorithm includes automatic halts via price limits as cooling-off provisions. - CRBF regulation 97-04 extended large exposure limits of 93-05 to investment firms: large exposures defined as 10 percent of own funds; maximum 25 percent exposure to any one counterparty. - AMF Chairman can halt whole or portions of the market and trading in individual shares in extraordinary events. - Clearing members must reduce positions if risk of customer default; clearing organization can request market reduce member trading and request reduction or transfer of positions. - Cross-market exposures addressed via communication among regulatory authorities and participation in Boca Declaration for Matif and companion information sharing arrangements for LCH and Euronext. - Clearing house rules define event of default and actions; clearing house can transfer positions and liquidate open derivatives positions free from reversal in bankruptcy (Act L.442-6 transfers collateral/margin deposits upon default and liquidation). - Assessment: Fully Implemented. - Comments — three issues of concern: 1. Euronext Paris only knows net positions in its markets, including derivatives markets — clearing members may be carrying undisclosed gross risks. 2. SRD (30-day deferred settlement facility) on about 200 highly liquid securities: settles on T+3 with broker carrying customer risk; margined (20 percent cash; 40 percent securities); margin oversight not at clearing house; broker maintains net exposure; positions tradable within 30-day settlement period; net positions settled against broker who must meet EUR 1.9 million capital requirement and make monthly per customer position reports to the CB. 3. Market and clearing institutions are separate entities; clearing organization can request the market to restrict trading even after a default — question whether this is sufficient to manage post-default events. - Principle 30 — Oversight of clearing and settlement systems: - Systems for clearing and settlement subject to regulatory oversight by AMF, CECEI, CB and BdF. - Members (direct participants) must be investment firms or credit institutions and are subject to oversight. - Assessment: Not Rated (deferred to specialist assessment under Recommendations for Securities Settlement Systems and for Central Counterparties). - Comment: Specialist may consider implications to clearing of SRD facilities provided by brokers who are clearing members. ### Overall Implementation Summary (Table 21 reproduced in text) - Fully implemented: 18 principles — 3,4,5,8,9,11,12,13,14,18,19,23,24,25,26,27,28, and 29. - Broadly implemented: 7 principles — 1,2,10,15,17,20, and 21. - Partly implemented: 2 principles — 16 and 22. - Not implemented: 0. - Not applicable: 3 — 6 and 7 not applicable and 30 not rated. ### Recommended Actions (selected, by theme) - Principles Relating to the Regulator (P 1–5): - Explore additional arrangements to assure timeliness and certainty of information sharing between CB and AMF, ensuring AMF receives prudential information relevant to conduct of business oversight. - Keep under review the effectiveness of arrangements protecting AMF independence (Commission des Sanctions) to avoid political influence perceptions. - Continue assessing deployment of resources between off-site and on-site oversight; assure human resources for expanded monitoring; address prospectus review and miss-selling through banking networks. - Continue to address conflicts of interest at Board and staff levels. - Principles for Enforcement (P 8–10): - Evaluate timeliness of proceedings under the new organizational structure; aggressively pursue overturning judiciary interpretations of impartiality that could undermine monitoring and enforcement capacity. - Develop public statistics to demonstrate enforcement and investigatory performance. - Principles for Cooperation (P 11–13): - Continue exemplary cooperation powers; consider articulating further cooperative arrangements with CB for inspections and expand information availability to foreign securities regulators via the AMF. - Principles for Issuers (P 14–16): - Consider a materiality standard for immediate disclosure of large shareholder and management insider transactions; encourage further work on minority shareholder rights; assist in oversight of auditors and ensure Haut Conseil accounts for AMF views. - Principles for Collective Investment Schemes (P 17–20): - Consider more robust guidance on related party transactions in CIS; consider using legal authority to provide more guidance on suspension of redemptions. - Principles for Market Intermediaries (P 21–24): - CECEI and AMF should promptly assure licensing information is readily available to the public. - CB and AMF should assure adequate provisions to detect deteriorating capital situations promptly so corrective actions are possible without systemic impact or adverse effects on customers. - Principles for the Secondary Market (P 25–30): - Maintain vigilance to ensure risks within clearing brokers are not transmitted to clearing system; ensure cross-border cooperation arrangements can be effective in market events; ensure markets and clearing organizations coordinate approaches to market disruptions. - Address SRD-related capital monitoring in relation to intermediary oversight. *Source: _cr05186 - references be identifiable from the AMF website (see Principle 4).* ### 107. The AMF contends that within the French system, AMF’s structure has been ### _cr05186 - 107. The AMF contends that within the French system, AMF’s structure has been ### AMF institutional independence, enforcement, and response to recommendations - The AMF contends that within the French system its structure has been designed explicitly to be as independent as possible. - The AMF disputes that its current structure is in any way susceptible to political interference, but recognizes that issues raised about structure could be of relevance to outside observers and appearances. - The AMF expects to continue assuring that no improper interference in individual cases occurs. - Enforcement system: - The assessor found the AMF’s enforcement system to have appropriate powers and authorities and to have produced significant cases; the AMF states it is currently effective. - Processes for cooperation with the Public Prosecutor on offenses that are both criminal and civil, such as insider trading and market abuse, have proved effective to date. - The AMF does not have a history of settlement procedures or a process for administrative restitution; these are not required by international standards but may be considered enhancements. - The AMF (and predecessors) has kept enforcement programs under review and may consider further enhancing enforcement powers over time. - Where the judiciary has potentially put certain powers into question, the AMF has acted aggressively to contest adverse judicial interpretation. - On recommendations: - Although the AMF contested some characterizations of regulatory structure with respect to independence and transparency, it indicated that despite lack of a specific requirement to cooperate, in all cases domestic regulators do so in fact. - The AMF essentially does not disagree with the specific recommendations and indicates that most recommended areas of enhancement are currently under consideration or in train. - In particular, the AMF supports assuring human resources are sufficient to execute its expanded powers, including with respect to depositories and having sufficient authority to effect outcomes with respect to audit oversight of the Haut Conseil. ### Observance of CPSS/IOSCO Recommendations for Securities Settlement Systems — scope and systems assessed - Assessment context: - As part of the Financial Sector Assessment Program, an assessment of observance of CPSS/IOSCO Recommendations for Securities Settlement Systems was prepared by Jan Woltjer, IMF (MFD). - Prior to the mission, the BdF made a thorough self-assessment of Euroclear France used as the basis for the assessment. - Scope: - The assessment covers Euroclear France as Central Securities Depository (CSD) for a broad range of securities: treasury bills, all other negotiable short-term instruments, public sector and corporate bonds, and equities. - Almost all securities in France (99.7 percent) are dematerialized in Euroclear France. The residual securities are immobilized in this CSD. - Euroclear France settlement systems: - Relit+: - Ensures delivery versus payments on a gross-net basis (model 2 DvP). - Multilateral net positions at the cash side are settled three times a day in Transferts Banque de France (TBF), the Real-Time Gross Settlement (RTGS) payment system operated by the BdF. - LCH-Clearnet SA settles via Relit+ its positions vis-à-vis its counterparties stemming from transactions on the stock exchange. - RGV2 irrevocable channel (RGV2-TFT): - Clears all transactions on a trade-for-trade basis with intraday finality (model 1 DvP). - Cash leg is settled on dedicated cash accounts opened with the BdF and directly operated by Euroclear France. - A liquidity bridge enables participants to transfer cash between RGV2 dedicated cash accounts and their cash account held in TBF to optimize liquidity management. - RGV2-TFT is used for executions of monetary transactions and collateralization of intraday credit operations. ### Institutional and market structure — key arrangements and participants - Market scale and activity: - France ranks fourth in the world in terms of stock market capitalization (in dollar value terms) and debt securities market capitalization. - The value of all listed securities amounted slightly above 200 percent of GDP at end-2003. - Exchange and clearing arrangements: - Euronext-Paris manages the stock exchange in Paris; since September 2000 it is a wholly owned subsidiary of Euronext NV (holding company under Dutch law). Euronext resulted from a merger between the stock exchanges of Belgium, France and the Netherlands; separate identities were retained to meet regulatory requirements. - Euronext Holding also operates Euronext Lisbon and, since the beginning of 2002, Euronext Liffe. - Both securities and derivatives are traded on Euronext Paris platforms. - Secondary market turnover: - Total turnover amounted to EUR 905 billion in 2003, against EUR 1,045 billion in the previous year. - Average daily turnover in 2003 amounted to EUR 3.5 billion. - All stock exchange transactions are cleared via Clearnet, the central counterparty and single clearing house of the Euronext group; it clears transactions in Belgium, France, the Netherlands and Portugal and OTC transactions in different markets in France and abroad. - At the beginning of 2004 an alliance was formed between Clearnet and London Clearing House and Clearnet was renamed LCH-Clearnet SA. - Euroclear France: - Fully owned by the Belgian Euroclear Bank, which also possesses CSDs in Belgium, the Netherlands and the U.K. - Total value of all trades settled in Euroclear France’s securities settlement systems amounted to EUR 52,996 billion in 2002. - Table of trades settled (instructions in millions; value in Euro billions): - 1997: Instructions 18; Value 22,660 - 1998: Instructions 22; Value 32,046 - 1999: Instructions 28; Value 38,892 - 2000: Instructions 41; Value 36,835 - 2001: Instructions 31; Value 43,635 - 2002: Instructions 29; Value 52,996 - 2003: Instructions 28; Value 52,528 - Regulatory and oversight structure: - In France, the Autorité des Marchés Financiers (AMF) and the BdF are the competent authorities for regulation and oversight of Securities Clearing and Settlement Systems (SCSS). - According to Art. 621-7 of the COMOFI, the AMF specifies the general organization and operational principles of securities settlement systems and has to approve operating rules; the AMF also regulates custodians. - Without prejudice to AMF competencies, the BdF is charged with oversight of SCSS; there is close cooperation between AMF and BdF. - Representatives of the BdF have consultative roles on the Board of the AMF and in some committees; activities with respect to SSS regulation and oversight are clearly coordinated. - LCH-Clearnet SA, being a credit institution, is supervised/overseen by the AMF and BdF and also by the CB. - Cross-jurisdictional nature of Euronext, LCH-Clearnet and Euroclear led to cooperative cross-border arrangements codified in MoUs signed by all relevant authorities in different countries. ### Assessment methodology and scope adjustments - Information and methodology: - The assessment was based on the BdF self-assessment using the CPSS/IOSCO assessment methodology for Recommendations for Securities Settlement Systems. - Discussions were held with the BdF, the AMF, Euroclear France and market participants. - Relevant rules and regulations, audit reports, MoUs, business plans, and discussion papers between Euroclear and market participants were made available. - Scope decision: - Although BdF’s self-assessment contained an assessment of risk management in the context of recommendation 4, it was decided in consultation with authorities to postpone assessment of LCH-Clearnet SA until new CPSS/IOSCO recommendations for central counterparties are finalized. - A complete assessment of LCH-Clearnet will be conducted in the framework of an Art. IV Consultation based on a self-assessment by French authorities. ### Assessment findings — Recommendation 1: Legal basis, enforceability, and key legal features - Underlying legal framework and public accessibility: - There is a consistent set of laws, regulations and contracts forming the legal foundation for central custody and clearing and settlement. - Not all texts are publicly available. Not published are: - (i) agreements between Euroclear France and the BdF on settlement in central bank money and outsourcing of the execution of the settlement bank function to Euroclear France for RGV2-TFT; - (ii) agreements between Euroclear France and Central Depositories in other countries and Euroclear bank Brussels concerning links between systems. - Legal assurance of key aspects for custody, clearing and settlement: - Enforceability of transactions: - Laws and contracts are fully enforceable in the French jurisdiction. - Courts function adequately; property rights are fully defined and respected; there are proper procedures for legal processes. - Appeals can be made to the Court of Justice in the EU. - Access criteria ensure participants have legal capacity to pursue remedies. - The purpose and content of Euroclear France services must be approved by the AMF; AMF assesses compliance with relevant laws, statutes and regulations. - Customer asset protection: - Euroclear France as CSD has no legal title to securities on its books; customer assets are legally protected against insolvency of the CSD and/or a custodian or intermediary (Art. L.431-6 COMOFI). - Securities owned by the end-investor/client fall outside the bankruptcy estate and cannot be claimed by creditors of those institutions. - Dematerialization: - Based on Art. L.211-4 COMOFI; provides for dematerialization and specifies transfer of ownership by electronic book entry. - Almost all securities in France are dematerialized; only a small segment is represented by paper—often immobilized by way of a global note. - Netting arrangements: - RGV2-TFT settles on a trade-for-trade basis and normally involves no netting. - An optimization routine allows participants who have immediately resold securities they bought to settle combined transactions in which they have a flat securities position (back-to-back operation); endorsed by COMOFI (Art. L.330-1). - Securities lending arrangements: - Legal framework explicitly recognizes securities loans (art L 432-6 to L.432-11) and repurchase agreements (COMOFI, Art. L.432-12 to L432 -19). - Provisions define the instrument, eligible securities and counterparties; enforceability toward third parties is ensured. - Collateral in securities loan or repo context will not expose the lending party to risk of the transaction being challenged by a third party or liquidator by re-characterizing the transaction as an improper pledge. - Irrevocability and finality: - Orders in the system are irrevocable at the moment they match. - Finality in RGV2-TFT is well defined and recognized under French law: finality occurs when cash is transferred from buyer to seller by crediting and debiting the accounts and securities are transferred by debiting seller’s securities account and crediting buyer’s securities account; transfers occur simultaneously. - Bankruptcy procedures contain a zero hour rule and suspect period regulations; due to finality regulations in COMOFI no retroactive action is possible in the system on the day a bankruptcy procedure is opened against a participant with respect to payments done by that participant on that day. - Delivery versus payment (DvP): - RGV2-TFT is a model 1 delivery-versus-payment (DVP) system (gross/gross) per BIS connotation. - RGV2 rules relating to final settlement (Art. 6.35) specify irrevocable and final delivery of securities occurs simultaneously when the buyer’s cash account in RGV2 is debited; these rules are endorsed by COMOFI finality regulation. - In event of default of a customer, intermediary or custodian may avail of full title to securities purchased on the customer’s behalf or cash received from counterparty if the customer fails to fulfill obligations to pay or deliver while intermediary or custodian is bound to perform or has performed according to DVP rules in RGV2 (COMOFI, Art. L431-3). - Examination of legality of rules and regulations: - No case law exists in which rules and regulations of Euroclear, especially rules with respect to DVP, are challenged or overruled. - Enforceability in event of bankruptcy: - Due to COMOFI finality regulation, all rules and regulations of the system are enforceable in the event of a bankruptcy and transactions on such a day cannot be unwound or reversed within the system. *Source: _cr05186 - 107. The AMF contends that within the French system, AMF’s structure has been (IMF PDF content).* ### 4. Conflict of law issues ### 4. Conflict of law issues ### Admission of foreign participants (Recommendation 1) - Finding: The admission of foreign participants to Relit+ has not been submitted to a procedure by the AMF of participants from countries outside the European Economic Area (EEA). - Assessment: Broadly observed. - Comment / Recommended action: It is recommended that the conflict of laws issues in the system be evaluated comprehensively and that clear procedures be implemented regarding the acceptance of foreign participants (the requirement of a legal opinion, etc). ### Confirmation of trades (Recommendation 2) - Recommendation: Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation by indirect market participants is required, preferably on T+0, but no later than T+1. - Description: All settlement instructions in RGV2-TFT are prior to settlement matched and confirmed on trade date (T+0) or at the latest at 12.00 on T+1. The aforementioned trades are generally confirmed by indirect participants by T+1. - Assessment: Observed. ### Rolling settlement and settlement cycle (Recommendation 3) - Recommendation: Rolling settlement should be adopted in all securities markets. Final settlement no later than T+3. Assess benefits/costs of shorter than T+3. - Description / Key statistics: - RGV2-TFT clears transactions and repos done in the primary market, the OTC market, the money market, as well as monetary policy operations on a trade-for-trade basis. - Most transactions, 70 percent and more, are settled within three days and around 35 percent are settled the same day (T+0). - The number of failed settlements is small and has not exceeded 0.3 percent in the period January 2002 to June 2003. - Cash intraday credit from the BdF is available via intraday repo against securities on the tier 1 list of the Eurosystem deposited in Euroclear France; intraday repos are executed automatically provided sufficient eligible securities. - Euroclear France does not operate a securities lending facility; securities can be borrowed in the market via repo or securities lending to be settled same day in real time through RGV2-TFT. - Rolling settlement: failed trades are recycled up to 30 days after the initial settlement date. - Penalty: Euroclear charges a fine of around EUR 40 a day for each instrument when a seller is unable to deliver at contractual settlement date. - Assessment: Observed. - Comment: Longer OTC settlement cycles are not considered a major violation given involvement of professional parties, deliberate choice of longer periods, and low failure rates. ### Central counterparty assessment (Recommendation 4) - Description: Transactions on Euronext platforms in Paris, Amsterdam, Brussels and Lisbon are cleared and settled via LCH-Clearnet SA, which acts as the central counterparty. LCH-Clearnet SA also clears and settles derivatives and commodities and OTC interdealer transactions. LCH-Clearnet SA will be assessed vs newly drafted recommendations for central counterparties (under consultation). - Assessment: Not applicable. ### Securities lending and repo (Recommendation 5) - Recommendation: Encourage securities lending/repurchase agreements to expedite settlement and remove barriers. - Description / Key points: - Law recognizes securities loans and repurchase agreements and validity of collateral transfers (COMOFI Art. L.432-6 to L.432-19). - To prevent tax avoidance, only legal entities are allowed to enter into repurchase agreements; securities yielding interest/dividends subject to withholding tax are not allowed to be used in securities lending or a repo during the period the interest/dividends will fall due. - No automated securities lending facility is in place for the OTC markets; plans in 1998 were not executed due to insufficient business case. - Euroclear France is considering launching a lending and borrowing facility to expedite settlements of government bonds in RGV2-TFT between primary dealers, including intraday overdraft on securities accounts backed by Ministry of Finance approval and potential role as lender of last resort. - Compliance of such a facility with CPSS/IOSCO Recommendation for Securities Settlement Systems still to be assessed. - Regulation ensures sufficient collateral for client-to-broker securities lending where deferred settlement is involved. - Assessment: Observed. ### Dematerialization and transfer of title (Recommendation 6) - Recommendation: Securities should be immobilized/dematerialized and transferred by book entry to the greatest extent possible. - Description / Key statistics: - At least 99.7 percent of securities issued in France (representing over 29 000 ISIN codes) are dematerialized. - Other securities issues (mostly warrants, euro-bonds and foreign securities — 80 issues in total) are immobilized, mostly via a global note. - Transfer of title is only possible by book-entry (Art. 1 of decree 83-359 of May 2, 1983). - Issuers open an “investors account” directly with Euroclear France (Art. 8 of the decree of August 4, 1949). - Assessment: Observed. ### Delivery versus Payment and elimination of principal risk (Recommendation 7) - Recommendation: Eliminate principal risk by linking securities transfers to funds transfers to achieve DVP. - Description / Key points: - RGV2-TFT is a BIS model 1 DVP system (gross/gross); technical, legal and contractual framework ensures DVP. - Rules for DVP set in RGV2 rules relating to final settlement (Art. 6.35): final delivery of securities takes place when buyer’s RGV2 cash account is debited. - Technical framework: transfers of funds executed on same platform as securities settlement; no exchange of messages required between Euroclear France and BdF within DVP procedure. - DVP procedure steps: 1) Euroclear France checks buyer and seller have required cash and securities to settle. 2) RGV2 debits seller’s securities account and buyer’s cash account, and credits buyer’s securities account and seller’s cash account simultaneously — settlement is final. - More than 95 percent of securities transactions are on a DVP basis. - Assessment: Observed. ### Final settlement timing and intraday finality (Recommendation 8) - Recommendation: Final settlement on a DVP basis should occur no later than end of settlement day; intraday/real-time finality where necessary. - Description / Key statistics: - Final settlement is on-line and real-time on a gross basis with intraday finality. - Settlement with value day D is possible during 19 hours a day (from 20.00 hours D-1 to 17.00 hours on D, with a two hours technical break from 5 to 7 am). During the night, transactions are settled in batch mode. - Cash and received securities can be used immediately without risk for fulfilling obligations. - No multilateral netting end-of-day in RGV2 except triparty back-to-back transactions with flat securities position. - Monthly average value of repos reached EUR 2,940 billion during the first half of 2003. - Most cross-border link transactions are FOP. - Matched instructions cannot be unilaterally revoked; cancellation/modification requires bilateral agreement; penalties can be applied for non-settlement on contractual date. - Assessment: Observed. ### Deferred net settlement safeguards and intraday credit (Recommendation 9) - Recommendation: Ensure timely settlement if participant with largest obligation fails; fully collateralize credit exposures when CSD extends credit or arranges securities loans. - Description / Key points: - RGV2-TFT is trade-for-trade, on-line, real-time with intraday finality; no multilateral netting late in the day. - Intraday credit granted by BdF as principal, executed by Euroclear France as operating agent; Euroclear France not exposed to credit risk. - Intraday credit procedure: 1) Securities are transferred to the BdF and dedicated to guarantee the credit. 2) Buyer receives corresponding intraday credit on its cash account. 3) Cash corresponding to price is transferred from buyer to seller position. 4) Intraday credit operation is squared as soon as sufficient cash on buyer’s position. - If unable to reimburse intraday credit, BdF can roll intraday loan over to overnight Lombard facility. - Pursuant to TARGET rules, investment firms may obtain intraday credit from BdF but are not eligible counterparties for monetary policy operations; investment firms must obtain financial backing of a credit institution or be subject to BdF credit limits. - Automated securities lending schemes: No automatic securities lending in RGV2-TFT. - Overdrafts/debit balances in securities are strictly forbidden by Euroclear France. - Multiple defaults: liquidity effects isolated; counterparties can borrow missing securities via securities lending/repo and cash via automatic intraday funds from BdF. - Assessment: Not applicable. ### Use of central bank money and settlement banks (Recommendation 10) - Recommendation: Assets used to settle the cash leg should carry little or no credit risk; if central bank money not used, protections should exist against settlement bank failure. - Description / Key points: - Banks and investment firms can open a cash settlement account with the BdF operated by Euroclear France; participants have a direct claim on the BdF, not on Euroclear France. - Cash settlement services offered by BdF and operated by Euroclear are fully integrated in RGV2-TFT and dedicated to settlement of securities and related payments. - To use cash for other purposes participants must transfer balances via liquidity bridge between TBF and RGV2-TFT to TBF. - Participants not meeting TARGET access criteria or not willing to open BdF cash account must use another participant/cash position holder as settlement bank. Fourteen out of 188 participants do so. - No explicit rules set by operator/regulator/overseer on financial soundness of settlement banks; settlement banks are subject to prudential supervision by CB or home-country supervisors; BdF monitors concentration and settlement flows. - Noncash account holders can reuse cash received during the day via their settlement bank. - Assessment: Observed. ### Operational risk identification and contingency (Recommendation 11) - Recommendation: Identify and minimize operational risks; systems reliable, secure, scalable; contingency plans and back-up facilities established. - Description / Key points: - Independent risk management function created in 2001 reporting to management committee and board; objectives: identify/prioritize operational risks, evaluate risks, define protection principles (controls, transfer, insurance, outsourcing). - Bi-annual self-assessment required; new products/services assessed and approved. - Mid-2002 CMF (now AMF) inspection findings included: internal audit lacked IT audit capability; no service level agreement between Euroclear France and Clearnet (now LCH.Clearnet SA); unwinding risk not tackled; participant files not always updated; system capacity partly known; lack of proactive overall analysis of operational risks. - Improvements confirmed: hiring IT specialists, service level agreement to be signed during second half of 2004, unwinding issue to be solved, participant files updated, decision to implement tool for regular volume tests, Risk Management department responsible for review of operational incidents and follow-up. - New committee (Conformity Action Committee) created April 2003 to verify monthly achievements of external audit recommendations. - Contingency plans and backup: - Two production sites with real time synchronous data replication; both sites have backup power generators. - Back-up facility on primary side in hot stand-by mode. - Wide area disaster scenarios not addressed because two production sites not at adequate distance; envisaged third site permanently staffed and on a distance of 300 km from the primary. - Contingency plans tested regularly; full fall-back test recovery time was seven hours vs objective about four hours; users do not participate in tests. - Protection of data communication: integrity, authentication, confidentiality, nonrepudiability measures and firewalls in place. - Availability and scalability: sufficient qualified staff; medium/minor incidents July 2002-July 2003 but operations resumed within two hours in line with business continuity objectives. - Capacity tests carried out for key systems individually; no complete capacity tests to determine maximum capacity under stress. - Development and procurement: dedicated IT environments separated from operational environment. - Audits: internal audit plan on a three-year plan; external audits by AMF and CBFA; no formal procedures on when external audits should be conducted. - Assessment: Broadly observed. - Comments / Recommended actions (verbatim): - to implement adequate tools for complete stress tests; - to take adequate measures to be able to resume operations in case a full back up is necessary on a timely basis and in line with the objectives set within Euroclear s business continuity policy (within two hours); and - to conclude appropriate service level agreements in case of outsourcing of tasks, such as with respect to the operation of ISB, an inter-dealer broker facility operated by LCH-Clearnet SA. - Further on, in line with the AMF/KPMG recommendation, Euroclear France may wish to consider the strengthening of their operational risk policy by putting in place a proactive risk analysis methodology to conducting an overall analysis of operational risks (threats) in the systems and organization of Euroclear France, and that adequate measures are taken to contain the indicated risks or to transfer or outsource them through insurance or other means. ### Protection of customers' securities and custody practices (Recommendation 12) - Recommendation: Entities holding securities in custody should employ accounting and safekeeping procedures to fully protect customers' securities from custodian creditors. - Description / Key points: - Ownership rights evidenced by records of the authorized custodian (Art. 1 of the executive order no 83-359 of May 2, 1983). - Customer assets are legally protected against insolvency of Euroclear France, a custodian or intermediary; they fall outside the bankruptcy estate and cannot be claimed by creditors (COMOFI, Art. L.431-6). - In case of custodian insolvency, administrators verify instrument-by-instrument whether securities meet obligations; if shortage, securities apportioned pro rata to end-investors; investors can be compensated for loss under securities guarantee scheme established under Art. L.312-4 of the COMOFI and managed by the DGF. - Custodians obliged to segregate end-investor assets from own assets at CSD level; segregation at Euroclear France possible via different securities accounts or specific subaccounts. - AMF general regulations require custodians to be credit institutions, investment firms, public bodies or full subsidiaries; custodians must reconcile records daily and maintain audit trails; specific performance requirements for custody account keepers (Decision No. 2001-01 of the CMF). - AMF responsible for ongoing control through off-site and on-site inspections (COMOFI, L.622-9). - Assessment: Observed. ### Governance arrangements (Recommendation 13) - Recommendation: Governance for CSDs and CCPs should fulfill public interest and promote owners' and users' objectives. - Description / Key points: - Euroclear France is a private sector entity fully owned by Euroclear Bank SA/NV and organized as a société anonyme de forme commerciale. - Clear internal governance with independent internal audit reporting to management; committees include risk, audit, compliance; Board composition determined by Euroclear Bank. - Market Advisory Committee (MAC) established 2001, ~20 representatives, chaired by participant representative; MAC reports to Board of Euroclear Bank since November 2002 and to Board of Euroclear France; chairman of MAC appointed as “censor” (censeur) participating in Board meetings with consultative role. - Assessment: Observed. - Comment: Governance improved after take-over by Euroclear Bank Brussels (EBB). Oversight/regulators should pay attention to whether the present governance remains adequate when local CSDs and Euroclear Bank Brussels operational activities are integrated; issues include potential conflicts of interest between owner/operator and user-competitors and defining/serving the public interest of the new cross-border infrastructure. ### Objective and public participation/access criteria (Recommendation 14) - Recommendation: CSDs and CCPs should have objective publicly disclosed criteria for participation permitting fair and open access. - Description / Key points — Access criteria (entities allowed to become participants in RGV2): - credit institutions and investment firms incorporated in France; - clearnet Clearing Members having the status of specialized firm; - French public entities (Treasury, BdF, financial services of the Post office); - legal entities incorporated within the EEA and allowed to provide investment services pursuant to the free provision of services and free establishment principles as organized by the European Directives; - custodians duly authorized by the AMF to hold securities accounts on behalf of customers; - French CSDs authorized by the AMF and foreign CSDs; and - other legal entities incorporated within or outside the EEA and performing activities comparable to the other categories of entities allowed to become RGV2 participants. - Foreign entities incorporated in the EEA but not established in France allowed under same conditions as French entities; if they participate in RGV channel and have credit institution or investment firm status they may also open a “cash position” on the books of the BdF. - Difference for remote EEA entities: prohibition to access intraday credit with the BdF due to Eurosystem rules. - Foreign entities outside the EEA: pursuant to RGV2 operating rules (Art. 2.4), the AMF has the right to oppose their access to RGV2 within one month following notification of the Board decision to admit the applicant (criteria to oppose are not published). - Exit criteria: - termination on request of participant; - termination at requirement of AMF following withdrawal of necessary authorization; - termination by Euroclear France in case of breach threatening integrity of system. - RGV channel agreement (Art. 13) specifies minimum time lags and immediate termination provisions including unpaid fees and insolvency. - For cash settlement agents, BdF may terminate membership under Art. 12.3.2 of the “cash position agreement” for: payment incident; abnormal functioning of cash position; opening of insolvency procedure; financial soundness endangering RGV or TBF. - Assessment: Observed. - Comments / Recommended actions: - to develop and make public the criteria on which the AMF can oppose an applicant from outside the EEA and the procedure followed. In addition to the requirement that an applicant has to be adequately overseen or supervised, it might be worthwhile to consider whether a legal opinion should be made available that determines whether there might be a conflict of laws that could threaten the smooth and secure functioning of custody and settlement of securities in France. - to specify in the rules and regulations the consequences of a termination of an RGV2 cash position of a settlement participant. ### Cost-effectiveness and pricing (Recommendation 15) - Recommendation: SSSs should be cost-effective while maintaining safe and secure operations. - Description / Key points: - Euroclear France manages costs on an annual budget system with bottom-up approach; budget monitored during year. - Prices set in agreement with users; absence of comprehensive analytical accounting means price structure not directly related to cost of each service; over 155 services provided. - Prices allow Euroclear to make a profit; cross-subsidization cannot be ruled out. - Plan to implement comprehensive analytical accounting partially available; no clear planning disclosed for extending to entire cost structure. - No benchmarking of costs/prices/service levels against other CSDs; group-level integration/harmonization of prices planned. - No explicit review of service level and consultation of users, though MAC involved for proposed changes/new services. - Operational reliability indicators developed; maximum capacity levels not exactly known. - Assessment: Broadly observed. - Comment / Recommended action: It is recommended that a comprehensive analytical accounting framework be implemented in order to monitor costs and benefits more closely so as to have an appropriate tool for price determination. ### International communication procedures and standards (Recommendation 16) - Recommendation: Use or accommodate relevant international communication procedures and standards to facilitate efficient cross-border settlement. - Description: - Main communication channel is the Radianz network; after implementation of Euroclear Application Access in December 2003 participants can also use the Swift network. - System uses international standard message types and procedures for securities identification, but Radianz securities messages are based on a proprietary format and counterparty identification is not based on internationally recognized identifiers. Conversion to international standards possible with difficulty. - Assessment: Broadly observed. - Comment / Recommended action: Facilitate adoption of international standards, particularly for participant identification procedures. ### Disclosure of risks and costs (Recommendation 17) - Recommendation: Provide market participants sufficient information to identify risks and costs of using CSD/CCP services. - Description: - Market participants are provided with a full description of rights/obligations; cost of participation; rules/regulations/laws; governance procedure; risks and mitigation steps. - Information generally available in a language commonly used in financial markets and/or French; operating rules published on AMF and Euroclear France websites. - CPSS/IOSCO Disclosure Framework completed and disclosed; last updated version made available in March 2002, containing changes on some issues (e.g., oversight/supervision of Euroclear France). - Assessment: Broadly observed. - Comment / Recommended action: Update the Disclosure framework or alternatively publish the assessed answers to “key questions.” ### Regulation and oversight (Recommendation 18) - Recommendation: SSSs should be subject to regulation and oversight with clearly defined responsibilities/objectives of securities regulator and central bank; cooperation between authorities. - Description / Key points: - RGV2 subject to AMF regulation and BdF oversight. Euroclear France is not a credit institution or investment firm so CB is not involved in its supervision. - AMF regulatory competence organized by law (Art. L.622-7 of the COMOFI): authorize central depositories, approve operating rules, set general principles for organizing/operating SSSs, without prejudice to BdF powers under Art. L.141-4. - BdF oversight competence relies on Art. L.141-4 of the COMOFI: BdF in charge of monitoring safety of securities clearing and settlement systems. - CBFA has interest due to prudential supervision of consolidated/nonconsolidated situation of Euroclear Group. - Roles and responsibilities are statute-based, clearly defined and publicly disclosed; BdF oversight mission published on its website. AMF can carry out on-site inspections and conduct external audits; BdF can carry out audits based on agreement with Euroclear France. - Both regulators have sufficient qualified staff. - Cooperation: close cooperation between AMF and BdF; representatives of BdF have consultative roles on Board of AMF and some committees; regular meetings and information exchange. - Two MoUs signed: - MoU dated October 22, 2001 between BdF, CMF (currently AMF), Banque Nationale de Belgique/Nationale Bank van België (BNB), and CBFA setting principles for cooperation for oversight/regulation of Euroclear Group settlement systems. - MoU dated July 9, 2002 between same parties plus De Nederlandsche Bank and the Netherlands Authority for Financial Markets to organize cooperation for settlement services provided by Euroclear group for Euronext settlement. - Regular meetings and exchanges of information between signatories and Euroclear Group representatives. - Assessment: Observed. - Comment / Recommended action: Procedures could be formalized in an MoU to work out cooperation and division of tasks between AMF and BdF and published to enhance transparency. ### Links to settle cross-border trades (Recommendation 19) - Recommendation: CSD links should be designed/operated to reduce risks associated with cross-border settlement. - Description / Key points: - Types of links between Euroclear France and national/international CSDs: - 13 Direct links; - 1 Indirect link; - 14 Relayed links using Euroclear Bank Brussels as intermediary CSD. - Risk analysis conducted for financial and operational integrity of linked CSDs, although legal risk of depositing/clearing/settlement of foreign securities in Euroclear France might not be fully assessed. - All links only used for Free-of-Payment transfers except direct and indirect link with Euroclear Bank Brussels and direct link with Clearstream Banking Luxembourg which allow for Delivery versus Payments in commercial bank money. - Provisional transfers prohibited in both directions in principle. Credits and debits of omnibus securities accounts of foreign CSDs on Euroclear France books can be made only when final (in RGV2 and/or in foreign SSS). - Euroclear France does not extend credit to participants nor is it involved in securities lending schemes. - Assessment: Observed. ### Summary of recommended actions (from Table 26) - Rec. 1 Sound legal basis: - evaluate comprehensively the conflict of law issues in the system and implement clear procedures regarding the acceptance of foreign participants. - Rec. 11 Operational reliability: - implement adequate tools to conduct complete stress tests; - take adequate measures to be able to resume operations in a timely manner in case of a full fall back to the second site; - conduct appropriate service level agreements in case of outsourcing of tasks; - consider putting in place a proactive risk analysis methodology and conducting within this framework an overall analysis of potential operational risks. Ensure that adequate measures will be taken to contain the indicated risks or transfer or outsource them through insurance or other means. - Rec. 13 Governance arrangements: - the overseer/regulator should pay attention whether the present governance structure will still be adequate when the operational activities of local CSD’s and Euroclear Bank Brussels will be integrated in the near future. - Rec. 14 Access criteria: - develop and publish the criteria on the basis of which the AMF can oppose an applicant from outside the EEA and the procedures followed. Consider whether a legal opinion on possible conflicts of laws should be made available by the applicant; - specify in the rules and regulations the consequences of a termination of an RGV2 cash position of a settlement participant. - Rec. 15 Cost-effectiveness: - implement a comprehensive analytical accounting methodology in order to monitor more closely costs and benefits in order to facilitate price determination of the different services offered. - Rec. 16 International communication standards: - facilitate the adoption of international standards in all communication channels used, particularly in the area of procedures for participants identification. - Rec. 17 Disclosure of risks and costs: - update the Disclosure framework or alternatively publish the assessed answers to key questions. - Rec. 18 Oversight: - consider to work out the cooperation and the division of tasks between the AMF and the Banque de France in a Memorandum of Understanding that could be made available to all parties concerned and to the public. *Source: _cr05186 - 4. Conflict of law issues* ### 1. Underlying legal framework and public accessibility ### _cr05186 - 1. Underlying legal framework and public accessibility ### Underlying legal framework - There is a consistent set of laws, regulations and contracts that form the legal foundation for central custody and the clearing and settlement of securities. ### Legal assurance of the key aspects for custody and clearing and settlement - Enforceability of transactions - Laws and contracts are fully enforceable under French jurisdiction. - The courts of the jurisdiction function adequately; property rights are fully defined and respected; and there are proper procedures for legal processes. - An individual or firm, of the opinion its basic rights are violated and not respected in court or the judicial treatment of their case was incorrect, can appeal a decision by submitting its complaints to the Court of Justice in the European Union. - The access criteria ensure that participants have legal capacity. - The purpose and content of services to be provided by Euroclear France have to be approved by the Autorité des Marches Financiers (AMF) and within this framework the AMF will assess whether these services comply with the relevant laws, statutes, and regulations. - Customer assets protection - Euroclear France as the Central Securities Depository (CSD) has no legal title to the securities on its books and customer assets are legally protected against the insolvency of a CSD of a custodian or intermediary. - The securities owned by end-investors/clients fall outside the bankruptcy estate and cannot be claimed by the creditors of the aforementioned institutions (COMOFI Art. L.431-6). - Dematerialization of securities - Dematerialization is based on Art. L.211-4 of the COMOFI. This article provides for dematerialization of securities and specifies that transfer of ownership is arranged for by book-entry. - Almost all securities in France are dematerialized. Only a small part is represented by paper; all immobilized, often via a global note. - Netting arrangements - Netting (including close out netting) is endorsed by the COMOFI (Art. L.330-1). - The RGV2 Rules do not describe how multilateral netting takes place. - Netting is mentioned in Art. 6.30, §2, but in this case it concerns (bilateral) netting between settlement participants and indirect participants and not multilateral netting between settlement participants just before settlement of the revocable channel in TBF. - Only the mention of cash balances in Art. 6.28 suggests the idea of netting prior to settlement in TBF, though the article does not specify what is meant by multilateral netting. - The reference to authorized limits also argues in favor of the netting idea, but in all events it is not clear from a reading of the RGV2 Rules whether the limits are bilateral or multilateral. - Netting is mentioned in the rules of the irrevocable channel (RGV2-TFT), in Art. 6.44, §1, despite the fact that in principle no netting occurs in this channel (except for back-to-back transactions), which may be confusing. - Securities lending arrangements - The legal framework supports securities lending by recognizing explicitly securities loans (Art. L.432-6 to L.432-11) and repurchase agreements COMOFI (Art. L.432-12 to L.432-19). - These provisions define the instrument, the range of securities which can be lent or repurchased and the eligible counterparties. - Enforceability of the securities lending and repurchase agreements towards third parties is ensured. - Collateral provided in the context of securities loan or repurchase agreements will not expose the lending party to the risk that the transaction can be challenged by a third party or a liquidator by re-characterizing the securities lending or the repo as an improper pledge. - Irrevocability and finality - Orders in the system are irrevocable at the moment they match. However, there are some exemptions. No matching takes place for certain types of transactions; in this case they are irrevocable once they are entered in the system. - Finality in Relit+ is well defined and recognized under French law. The preliminary transfers of securities become final as soon as the settlement of the netted cash positions takes place in TBF, and the BdF has informed Euroclear France on the final settlement of the cash position. - Bankruptcy procedures contain a zero hour rule and regulations with respect to a suspect period. However, due to the finality regulations in the COMOFI, no retroactive action or unwinding by the liquidator is possible in the system on the day a bankruptcy procedure is opened against a participant with respect to the payments done by that participant on that day. - Delivery versus payment (DVP) - According to the BIS connotation, Relit+ is a model 2 DVP system (gross/net). - The legal and contractual basis of the Relit+ DVP settlement procedure is based on Articles 6.32 and 6.33 of the RGV2 Rules. These articles state that the settlement of the securities leg, which is processed on a gross basis, does not become final as long as the cash leg, which is operated on a net basis, is not settled in TBF. These rules are endorsed by the finality regulation in the COMOFI. - In the event of a default of a customer, the intermediary or the custodian may avail himself of full title to the securities purchased on his customer’s behalf or to the cash received from the counterparty; the custodian may also avail himself of full title to the securities purchased or cash received from the counterparty if the customer does not fulfill its obligations to pay or to deliver while the intermediary or custodian is bound to perform its obligation according to the DVP rules in RGV2 or has performed them already (COMOFI Art. L.431-3). - Examination of the legality of rules and regulations - There exists no case law in which the rules and regulation of Euroclear and, especially, the rules with respect to DVP, are challenged or overruled in court. ### Enforceability of rules and regulations in the event of a bankruptcy - Due to the finality regulation in the COMOFI all the rules and regulations of the system are enforceable in the event of a bankruptcy and transactions on such a day cannot be unwound or reversed within the system. ### Conflict of law issues - The admission of foreign participants to Relit+ has not been submitted to procedures analyzing conflict of law issues. - Nor is a legal opinion to be provided within the context of the approval procedure by the AMF of participants from countries outside the European Economic Area (EEA). ### Assessment and comments - Assessment: Broadly observed. - Comments: It is recommended that conflict of laws issues in the system be evaluated comprehensively and that clear procedures be implemented regarding the acceptance of foreign participants (the requirement of a legal opinion etc). ### Recommendation 2 (trade confirmation) - Recommendation: Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation of trades by indirect market participants (such as institutional investors) is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1. - Description: All settlement instructions in Relit+ are prior to settlement matched and confirmed on trade date (T+0) or at the latest at 12.00 on T+1. The aforementioned trades are generally confirmed by indirect participants by T+1. - Assessment: Observed. ### Recommendation 3 (settlement cycle) - Recommendation: Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be assessed. - Description: Settlement cycles - Ninety-five percent of the outright trades, 100 percent of the issuance of debt instruments, 84 percent of repos and above 75 percent of subscription and repurchase transactions of mutual funds are cleared and settled on T+3 or a shorter settlement cycle in Relit+. - Failed trades and facilities to smooth the settlement process - In Relit+, the monthly value of unsettled trades, which amounted to 1.76 percent on average during the period January 2002 to June 2003, has never exceeded *Source: _cr05186 - 1. Underlying legal framework and public accessibility* ### 2.65 percent. It remained below 2 percent during 13 of the 18 months in this period. ### _cr05186 - 2.65 percent. It remained below 2 percent during 13 of the 18 months in this period. ### Settlement operations and performance - Fails and duration - 2.65 percent. It remained below 2 percent during 13 of the 18 months in this period. - The average duration of end-of-day fails never exceeds two working days. - Failed trades are recycled up to 30 days after the initial settlement date. - Cash leg and settlement frequency - The cash leg is settled three times a day in TBF. - Cash net settlement occurs three times a day—once in the morning and twice in the afternoon. - Once cash balances are communicated to BdF, securities final posting occurs two minutes after confirmation and can last from one to six minutes, producing securities finality between three and eight minutes after cash leg settlement. - Intraday funding and liquidity - Participants or their settlement agents can borrow intraday funds from the BdF to cover settlement obligations. - Participation in TBF is open to credit institutions and investment firms established in France and to eligible EEA entities; remote participants cannot access intraday credit from BdF due to Eurosystem rules. ### Incentives, penalties, and failed delivery treatment - Penalties for late cash settlement - EUR 2,500 for the first default and EUR 5,000 for each following default in the same calendar year, applied by both Euroclear France and the CRI for inability to settle cash obligations on time. - Penalties for failed securities delivery - Euroclear charges EUR 41.92 per day and per instrument for securities not delivered at the end of the contractual settlement date. - Closing of open positions and collateral - No procedure is in place with respect to the closing of open positions. - Euroclear France does not require its participants to collateralize market or pre-settlement risks. - Recycling and unwinding - If cash settlement cannot be completed, Euroclear France may partially or totally unwind securities transfers per Art. 6.33 of RGV2 Rules, recalculate net balances, and transfer excluded securities back to the seller’s account. ### Securities lending, repos, and market access - Market practices and legal framework - Securities lending and repurchase agreements are recognized by law; accounting and tax treatments are detailed in COMOFI (Art. L.432-6 to L.432-19). - Only legal entities are allowed to enter into repurchase agreements; securities with forthcoming interest/dividend withholding tax cannot be used in securities lending/repos during the interest/dividend period. - Automated facilities and market sourcing - Euroclear France does not operate an automated securities lending facility for OTC markets; plans for 1998 were not executed. - Lacking securities can be borrowed in the market via a repo or a securities lending transaction to be settled the same day and online in RGV2-TFT. - Supervision - Regulations require that sufficient collateral be made available by clients to brokers in securities lending operations. ### Dematerialization and immobilization - Scope and procedures - At least 99.7 percent of securities issued in France (representing over 29 000 ISIN codes) are dematerialized. - The other securities issues, mostly warrants, euro-bonds and foreign securities (80 issues in total) are immobilized, mostly via a global note. - Transfer of title is only possible by book-entry (Art. 1 of decree 83-359 of May 2, 1983). ### Delivery versus Payment (DVP) and finality - Legal and technical DVP linkage - RGV2 Articles 6.32 and 6.33: securities leg (gross) does not become final until the cash leg (net) is settled in TBF. - Securities transfers occur once Euroclear France verifies availability; if available, securities are transferred and technical cash balances are simultaneously effected. - Finality timing and fallback - Securities transfers become final within a short time lag (between three and eight minutes) after cash leg settlement. - Euroclear France’s secondary site can register final deliveries in case of technical failure. - Use cases and channels - Relit+ settles mainly retail/stock-exchange transactions; participants requiring online real-time finality can use RGV2-TFT. - Securities delivered through links are normally Free-of-Payment; Flux Bourse project allows Euronext transactions to be settled via Relit+. ### Risk controls in deferred net settlement (Recommendation 9) - Current situation and deficiencies - Relit+ is a deferred net settlement system; at present there are no measures to ensure timely settlement if the participant with the largest obligation is unable to settle. - Unwinding and recalculation procedures can take several hours, potentially postponing settlement until late afternoon or the following settlement day, creating liquidity pressures and securities shortfalls for nondefaulting participants. - Remedial measures and timelines - BdF and AMF required Euroclear France in 2002 to define and implement adequate measures. - Implementation was launched: the measures’ heart is a mutual guarantee fund supplemented by limits on net cash positions. - Full implementation is foreseen before the end of 2004. The measures will not cover multiple failures. - Assessment - Recommendation 9: Non-observed. - Comment: It is recommended that adequate measures be implemented ASAP to ensure timely settlement if the participant with the largest position to pay cannot settle. ### Settlement assets and settlement bank risk (Recommendation 10) - Multi-tiered cash settlement structure - Relit+ first level: participants owning Relit+ technical cash balances called “cash clearers”; no clear criteria in rules for which institutions can act as cash clearers. - Second level: settlement in central bank money via TBF—participants that have opened a TBF account can act as Relit+ settlement participants and settle their own and others’ operations. - Concentration and bank risk - During the first three quarters of 2003, nearly 20 percent of Relit+ payment flows were settled via the largest settlement bank/TBF account holder. - Three groups of accounts concentrated more than 50 percent on average of payment flows; the first 10 groups concentrated slightly above 80 percent on average in the same period. - Same-day funds - It is not known whether institutions could transfer money received on the settlement bank account on the same day to other accounts for general payments or money market transactions. - Assessment and recommendation - Assessment: Observed. - Recommendation: establish adequate criteria in the rules and regulations of Euroclear France for access to Relit+ technical cash balances (definition of cash clearers). ### Operational risk management and business continuity (Recommendation 11) - Governance and risk function - Independent risk management function created in 2001 reporting to management committee and Board; objectives: identify/prioritize, evaluate, and define measures to protect or transfer operational risk. - Bi-annual self-assessments and product approval required. - Findings from mid-2002 inspection and follow-up - Inspection noted shortcomings: internal Audit lacked IT audit capabilities; no signed service level agreement with LCH-Clearnet; unwinding risk not tackled; participant files not always updated; capacity limits partly unknown; lack of proactive operational risk analysis. - Progress reported: IT audit competences hired; service level agreement with LCH-Clearnet SA to be signed during the second half of 2004; unwinding issue to be resolved; measures for timely settlement in default to be implemented before end of 2004; participant files updated; tool to measure and test volumes to be implemented; Risk Management department now reviews operational incidents and follow-up. - New Conformity Action Committee established April 2003 to verify monthly achievement of external audit recommendations. - Contingency and recovery - Two production sites with real-time synchronous data and backup power generators; hot standby on primary site. - Wide-area disaster scenarios not fully addressed because two production sites are not at adequate distance; third site at distance of 300 km is envisaged within centralization plans. - Contingency tests: full fall-back recovery time in latest test was seven hours; business continuity objective is more like four hours. - Users have not participated in contingency tests. - Data protection, capacity, audits - Adequate measures for integrity, authentication, confidentiality, nonrepudiability; firewalls in place. - Capacity tests carried out for key systems individually; no complete capacity tests; maximum capacity levels not exactly known. - Internal audit program on a three-year plan; external audits conducted by AMF and other supervisors; no formal procedures for timing of external audits. - Assessment and recommendations - Assessment: Broadly observed. - Recommended actions: - implement adequate tools for complete stress tests; - ensure timely resumption of operations in full fall-back consistent with two-hour business continuity objective; - conduct appropriate service level agreements for outsourcing (e.g., ISB operation by LCH-Clearnet SA); - strengthen operational risk policy with proactive risk analysis methodology; - conduct an overall analysis of operational risks and ensure measures to contain/transfer risks (insurance or other means). ### Custody, accounting, and investor protection (Recommendation 12) - Legal protection and segregation - Ownership rights evidenced by custodian records (Art. 1 executive order No. 83-359 of May 2, 1983). - Customer assets are legally protected against insolvency of Euroclear France, a custodian or an intermediary (COMOFI Art. L.431-6); assets fall outside bankruptcy estate. - Restitution procedure: administrators/temporary administrators verify instrument by instrument; if shortages occur, securities are apportioned pro rata; investors can be compensated under the securities guarantee scheme managed by FGD (Art. L.312-4 COMOFI). - Custodians must segregate end-investor assets at the CSD level; segregation options include separate accounts per customer or subaccounts. - Operational and supervisory requirements - AMF general regulations and Decision No. 2001-01 impose detailed custodial standards (transparency, human/IT resources, accounting, reconciliation, audit trails). - Custodians must be credit institutions, investment firms, public bodies, or full subsidiaries thereof and are subject to prudential supervision. - AMF performs off-site and on-site inspections. - Assessment: Observed. ### Governance, access, and cost-effectiveness (Recommendations 13–15) - Governance (Rec. 13) - Euroclear France: private, fully owned by Euroclear Bank SA/NV, organized as société anonyme de forme commerciale. - Internal governance: independent internal audit; committees include risk, audit, compliance; Board composition determined by Euroclear Bank. - User participation: Market Advisory Committee (MAC) established 2001 with around 20 participant representatives; MAC reports to Euroclear Bank Board and Euroclear France Board; MAC chair appointed as “censor” participating in Board meetings. - Assessment: Observed. - Comment: governance improved after takeover by Euroclear Bank Brussels; future centralization of settlement processing raises questions about conflicts of interest and defining public interest. - Access criteria (Rec. 14) - Accepted participants include credit institutions and investment firms in France; LCH-Clearnet SA Clearing Members with specialized firm status; French public entities; legal entities in the EEA authorized under European Directives; AMF-authorized custodians; French and foreign CSDs; other comparable entities inside/outside EEA. - Foreign EEA entities not established in France may participate under same conditions; remote participants cannot access BdF intraday credit. - AMF may oppose access by entities outside the EEA within one month of notification; criteria to oppose are not published. - Participants may terminate membership by request, AMF requirement after withdrawal of authorization, or Euroclear France for rule breaches; insolvency is not per se a cause for termination. - Assessment: Observed. - Recommendations: publish criteria and procedures for AMF opposition to non-EEA applicants; consider legal opinions on conflicts of laws; consider introducing status of indirect participant. - Cost-effectiveness (Rec. 15) - Budgeting: annual bottom-up budget monitored during the year. - Pricing: prices set with users; lack of comprehensive analytical accounting linking prices to service costs; over 155 services offered; Euroclear profits from pricing; cross-subsidization cannot be ruled out. - Planned actions: implementation of comprehensive analytical accounting is planned but no clear timeline disclosed. - Benchmarking and service levels: no benchmarking against other CSDs; MAC consulted on changes; maximum capacity levels not exactly known. - Assessment: Broadly observed. - Recommendation: implement comprehensive analytical accounting for cost-benefit monitoring and price determination. ### Standards, disclosure, oversight, and cross-border links (Recommendations 16–19) - Communication standards (Rec. 16) - Main communication: Radianz network; after December 2003, participants may also use Swift via Euroclear Application Access. - Securities messages on Radianz use a proprietary format; counterparty identification not based on internationally recognized identifiers; conversion to international standards is possible with some difficulty. - Assessment: Broadly observed. - Recommendation: facilitate implementation of international standards, especially participant identification. - Disclosure (Rec. 17) - Operating rules, rights/obligations, costs, governance, and risks are made available generally in French and/or a language commonly used in financial markets; operating rules published on AMF and Euroclear France websites. - CPSS/IOSCO Disclosure Framework completed; last update March 2002 with some subsequent updates. - Assessment: Broadly observed. - Recommendation: update the Disclosure Framework or publish assessed answers to “key questions.” - Oversight and cooperation (Rec. 18) - Regulation by AMF; oversight by BdF; Euroclear France is not supervised by the Commission Bancaire due to corporate status. - Legal bases: AMF powers (Art. L.622-7 COMOFI); BdF oversight (Art. L.141-4 COMOFI). - Two MoUs: October 22, 2001 (BdF, CMF/AMF, BNB, Belgian CBFA) and July 9, 2002 (adding De Nederlandsche Bank and Netherlands Authority for Financial Markets) to coordinate oversight of Euroclear Group and Euronext settlement services. - Assessment: Observed. - Comment: procedures could be formalized in a published MoU between AMF and BdF to enhance transparency. - Cross-border links (Rec. 19) - Links: 13 Direct links; 1 Indirect link; 14 Relayed links using Euroclear Bank Brussels as intermediary CSD. - Most links used for Free-of-Payment transfers; transfers normally final and irrevocable. - Exception: outward link with Euroclear Bank in French securities through direct participation in Relit+ allows provisional transfers the night before final cash settlement—implemented July 2002 (Flux Bourse Project). - Risks: provisional transfers may raise risks for Euroclear Bank participants in case of unwinding of Relit operations following a cash default; possible temporary undue creation of French securities in Euroclear Bank before buy-in and loss-sharing procedures. - Assessment: Non-observed. ### Summary observance and recommended action plan (selected items) - Observance counts (Table 28) - Observed: 11 (Rec. 2, 3, 5, 6, 7, 8, 10, 12, 13, 14 and 18). - Broadly observed: 5 (Rec. 1, 11, 15, 16 and 17). - Partly observed: 0. - Non-observed: 2 (Rec. 9 and 19). - Not applicable: 1 (Rec. 4). - Key recommended actions (Table 29; selected) - Rec. 9: implement as soon as possible adequate measures to ensure timely settlement in the event the participant with the largest position to pay is not able to settle its obligations. - Rec. 10: establish adequate criteria in the rules and regulations of Euroclear France for access to Relit+ technical cash balances. - Rec. 11: see recommendations for RGV2—Trade for Trade channel (operational reliability). - Rec. 14: develop and publish criteria for AMF opposition to non-EEA applicants and consider indirect participant status. - Rec. 15–18: see corresponding recommendations for RGV2—Trade for Trade channel (cost-effectiveness, international standards, disclosure, oversight). *Source: _cr05186 - 2.65 percent. It remained below 2 percent during 13 of the 18 months in this period.* ### 125. The recommendations of the IMF are in line with the findings of the BdF and the ### _cr05186 - 125. The recommendations of the IMF are in line with the findings of the BdF and the ### VI. OBSERVANCE OF THE IMF CODE OF GOOD PRACTICES ON TRANSPARENCY IN MONETARY AND FINANCIAL POLICIES — A. Introduction - Assessment scope: transparency of France’s policies and practices in: - (i) banking regulation and supervision; - (ii) deposit insurance; - (iii) insurance regulation and supervision; - (iv) payment and settlement systems oversight; and - (v) securities regulation. - Monetary policy transparency covered by the assessment of the European System of Central Banks (IMF Country Report No. 01/195). - Assessment team composition: Mr. Wim Fonteyne (IMF/MFD) lead, with Ms. Andrea Corcoran (US Commodity Futures Trading Commission) and Mr. Toni Gravelle (IMF/ICM) for securities; Mr. Jan-Willem van der Vossen (IMF/MFD) for banking supervision and deposit insurance; Ms. Andrea Maechler (IMF/MFD) and Mr. Helmut Müller (formerly German Bundesaufsichtsamt für das Versicherungswesen) for insurance; Messrs. Jan Woltjer (IMF/MFD) and Daniel Heller (Swiss National Bank) for payment and settlement systems oversight. - Assessment basis: - FSAP missions of January-February and May 2004 discussions with regulatory agencies, major banks, rating agencies, accounting and auditing profession; - pre-mission self-assessments by authorities; - study of relevant laws and regulations; - review of annual reports, publications and websites of relevant agencies; - earlier IMF team assessments in 2000 Art. IV consultation. ### B. Transparency of Banking Supervision — Legal and Institutional Framework - Legal framework: Code Monétaire et Financier (COMOFI). - Key agencies and roles: - CB (Commission Bancaire) — supervision; - CECEI (Comité des Etablissements de Crédit et des Entreprises d’Investissement) — licensing; - Minister in charge of the economy (currently MINEFI) — regulation (formerly CRBF; CRBF transformed into advisory CCLRF). - Institutional arrangements: - CB, CECEI, and CCLRF are specialized agencies within the group; draw on BdF for staff and resources; - Governor of the BdF is also president of the CB and the CECEI. ### V. CLARITY OF ROLES, RESPONSIBILITIES AND OBJECTIVES OF FINANCIAL AGENCIES - 5.1 Broad objectives and institutional framework - Practice: COMOFI Articles L.611-1, L.612-1 through L.612-5 and L.613-1 identify agencies and roles; Art. L.614-1 establishes Comité Consultatif du Secteur Financier (CCSF). - Assessment: Observed. - 5.1.1 Public disclosure of broad objectives - Practice: Objectives in Articles L.611-1, L.612-1 and L.613-1 cover: - (i) prudential regulations for bank soundness and fair/competitive markets; - (ii) client asset protection; - (iii) enforcement of applicable laws and regulations; - (iv) maintenance of market and systemic liquidity. - Disclosure channels: Journal Officiel de la République Française (JORF), semi-annual Bulletin de la Commission Bancaire, monthly Bulletin de la Banque de France, Annual Reports of CRBF/CCLRF, CECEI, CB, BdF, and agency websites. - Assessment: Observed. - 5.1.2 Public disclosure of responsibilities and authority - Practice: Responsibilities set out in COMOFI Arts. L.611-1 through L.611-9, L.612-1, L.613-1 and L.613-2; authority in Arts. L.611 through L.613-20; compendium published annually (Recueil des Textes Relatifs à l’Exercice des Activités Bancaires et Financières). - Assessment: Observed. - 5.1.3 Disclosure of accountability modalities - Practice: Art. L.143-1 requires the Governor of the BdF to issue an annual report to the President of the Republic and to Parliament; Governor must appear before Finance Commissions of the National Assembly or the senate if requested; Art. 20 of the Constitution of October 4, 1958 makes the minister in charge of economic affairs collectively responsible with other members of government to parliament. - Assessment: Observed. - 5.1.4 Appointment, terms, and removal procedures disclosed - Practice: Appointment procedures specified in Art. 13 of the Constitution of 1958 and Art. L.142-8 of COMOFI; Governor of the BdF is Chairman of CECEI and CB for a six-year term appointed by decree of the Council of Ministers; Director of the Treasury also appointed; remaining appointments by decree of Minister in charge of economic affairs; terms: CB Art. L.613-3 — 5 years, renewable once; CECEI Art. L.612-3 — 3 years; appointments irrevocable; civil service appointees may be removed for high treason or serious professional misconduct; other appointees removable for cause under Penal Code; public disclosure in JORF and its website. - Assessment: Observed. - 5.2 Relationship among financial agencies publicly disclosed - Practice: Relationships determined by terms of reference; Art. L.631-2 establishes CACESF (Collège des Autorités de Contrôle des Entreprises du Secteur Financier) comprising chairs of CB, governor of BdF, CCAMIP, AMF, and a MINEFI representative to facilitate information exchange; Art. 631-1 authorizes information exchange; agencies meet generally monthly; CACESF meets at least three times a year; president of CCAMIP sits on the CB; CB and CCAMIP have a 2001 charter disclosed via official publications and websites. - Assessment: Observed. - 5.3 Role of oversight agencies regarding payment systems - Practice / Assessment: Not applicable. - Comment: Agencies in charge of banking regulation and supervision have no oversight responsibilities over payment systems; payment systems oversight is a responsibility of the BdF’s payment systems department. - 5.4–5.5 Oversight of self-regulatory organizations and guidance - Assessment: Not applicable. - Comment: Agencies in charge of banking regulation and supervision have no oversight responsibility for self-regulatory organizations. ### VI. OPEN PROCESS FOR FORMULATING AND REPORTING FINANCIAL POLICIES - 6.1 Transparency compatible with confidentiality - Practice: CB provides extensive information via publications and website; data and decisions regarding individual institutions remain confidential except when an institution is closed (described in CB’s annual report); CB/CECEI members and staff subject to professional secrecy (Art. L.613-20 of COMOFI); CECEI decisions published in the JORF (Arts. L.511-14 and L.612-2). - Assessment: Observed. - 6.1.1 Public disclosure of regulatory framework and operating procedures - Practice: Framework disclosed in legislation/regulations and official publications; operating procedures disclosed via regulations, descriptive documentation, notices, technical guides, official publications. - Assessment: Observed. - 6.1.2 Public disclosure of financial reporting regulations to agencies - Practice: COMOFI L.613-8 authorizes CB to obtain needed information and set reporting requirements (content, format, reporting deadlines); regulations on prudential standards, internal controls and accounting publicly disclosed via JORF, annual compendium and websites; CB issues instructions specifying reporting requirements in greater detail, published in its publications and website. - Assessment: Observed. - 6.1.3 Regulation of organized financial markets - Assessment: Not applicable. - Comment: Regulation of organized financial markets is the domain of the AMF. - 6.1.4 Fee structures for agencies - Assessment: Not applicable. - Comment: Agencies responsible for bank regulation and supervision in France do not charge fees. - 6.1.5 Formal procedures for information sharing and consultation - Practice: Framework defined in COMOFI; 2001 charter between CCA/CCAMIP and CB published on websites; Art. L.613-12 empowers CB to enter bilateral agreements with European counterparts; Art. L.613-13 authorizes non-EEA agreements; Art. L.612-6 authorizes CECEI to enter into bilateral agreements; such bilateral agreements publicly disclosed in the Bulletin of the BdF and other official publications; example: June 2004 issue of the Bulletin of the BdF contains an agreement between the CB and its US counterparts. - Assessment: Observed. - 6.2 Public announcement of significant changes in financial policies - Practice: New legislation subject to transparent consultation and disclosure applicable to French legislation; new regulations subject to extensive consultation process and typically do not enter into effect until three months or more after consultation ends; jurisdictional decisions of the CB published; annual reports discuss financial policies; officials available to discuss with Parliament and media. - Assessment: Observed. - 6.3 Periodic public reports on pursuit of policy objectives - Practice: Annual reports published separately by BdF, CB, CECEI; CB publishes biannual Bulletin de la Commission Bancaire and occasional reports and jurisdictional decisions; BdF publishes biannual Financial Stability Review (FSR) to which CB contributes. - Assessment: Observed. - 6.4 Presumption in favor of public consultations for substantive regulatory changes - Practice: Drafting/amendment process includes: - Formulation by MoE of general principles and disclosure to industry; - Discussion of preliminary drafts with industry experts; - Periodic consultations of banks when new regulations are preparatory, with consultation period typically exceeding three months; - Formal consultation by Secretary General of the CCLRF, sending drafts to banking associations (e.g., Association Française des Etablissements de Crédit et des Entreprises d’Investissement); - CCLRF advises MoE on drafts bearing on insurance or banking sectors per Art. L.614-2 of COMOFI (does not advise on AMF competence); - Sometimes consultation of AMF or Commission Nationale de l’Informatique et de la Liberté; - Final draft sent to CCLRF members for approval; - If CCLRF issues negative legal opinion and MoE wants to ignore it, MoE must request a second reading. - Additional stage: ECB consultation when draft legislation might affect stability of institutions and financial markets (except for measures implementing EU Directives). - Consultation process enhancements: - Banking industry direct representation on CCLRF; - Comité Consultatif du Secteur Financier (CCSF) composition and nomination conditions decided by Decree; - Compulsory membership of licensed banks and investment firms in a professional organization allows distribution of drafts to market participants, though Association Française des Etablissements de Credit et des Entreprises d’Investissement does not routinely distribute drafts to all members. - Assessment: Observed. *Source: IMF staff assessment as provided in the supplied content.* ### 7.1 Financial agencies should issue a periodic public report on the major developments of the ### 7.1 Financial agencies should issue a periodic public report on the major developments of the sector(s) of the financial system for which they carry designated responsibility. ### Public reporting and aggregate data - Practice: - The CB publishes: (i) an annual report describing major developments in the banking and financial sectors and information on the CB’s supervisory policy and actions; and (ii) a two-volume comparative analysis (Analyses Comparatives) containing comprehensive aggregate data on the activities and performance of credit institutions. - The CB also publishes a bi-annual Bulletin with information on new regulations and studies on developments in the banking sector. - The CECEI publishes an annual report and maintains the current list of credit and investment institutions published in the JORF. - The BdF provides reports on a quarterly and annual basis and a biannual financial stability report. All publications are available online on the website of the BdF. - Assessment: Observed. - Practice (aggregate disclosure continuity): - The CB’s annual report, Analyses Comparatives and Bulletin provide aggregate data for the banking and financial sectors. - The CECEI’s annual report provides data on the number of institutions by category, as does the BdF’s annual report. - Assessment: Observed. ### Agency balance sheets and emergency support transparency - Practice / Assessment: Not applicable. - Comments: - The three financial agencies engaged in banking supervision and regulation (CB, CECEI, and CCLRF) do not have separate balance sheets. Their staff and financial resources are provided by the BdF by formal agreement. The BdF’s annual report includes information on staff seconded to supervisory functions. - Transparency could be helped by the creation and publication of pro forma balance sheets of the different agencies within the BdF group. Such pro forma balance sheets could be published in the BdF’s annual report. - 7.3.1 (Aggregate information on emergency financial support): - Practice / Assessment: Not applicable. - Comments: - None of the three financial agencies engaged in banking supervision and regulation provide emergency financial support to supervised institutions, although support operations can be undertaken by the BdF (see COMOFI Art. L.141-3). In such cases this would be disclosed after the fact, through the periodic publications of the BdF. - The Deposit Guarantee Fund (FGD) has the option, at the request of the CB, to provide support to an ailing institution. ### Public information services and publications program - Practice: - The CB, CECEI, and CCLRF all use the BdF’s Communications Division to provide public information services. The CB and the CECEI also have public websites. - Services provided by the BdF’s Communications Division include dissemination of information on: (i) policy decisions and announcements; (ii) the operation of the financial agencies and their objectives; (iii) speeches by senior officials; (iv) quantitative data; (v) staff research; and (vi) jurisdictional decisions. They also include contact with news media representatives. - Assessment: Observed. - 7.4.1 Publications program: - Practice: - CB program includes: (i) an annual report; (ii) bi-annual bulletins; (iii) research studies; (iv) speeches by senior or top officials; and (v) a brief description of its role and functions. - CRBF/CCLRF program comprises its annual report and its Recueil. - The CECEI publishes its annual report and makes public any changes in its list of credit institutions and investment firms. - Annual reports, bulletins of the CB, and the Recueil are available online on the website of the BdF, and on the individual websites of the different agencies. - Assessment: Observed. - 7.4.2 Senior officials’ public engagement: - Practice: - The Governor of the BdF (who also chairs the CB and the CECEI) and senior officials of the CB's General Secretariat explain their agencies' objectives and performance at parliamentary/senate hearings, through speeches in public fora and before members of the industry, and articles in the news media. - Texts of such statements are generally released to the public, including through the websites of the BdF. - Assessment: Observed. ### Availability of regulatory texts and client protection information - 7.5 Availability of texts of regulations: - Practice: - Texts of regulations and any other generally applicable directives and guidelines issued by the agencies responsible for banking regulation and supervision in France are made readily available through different channels, including the website of the BdF; the official bulletin of the BdF; the Bulletin of the CB; the JORF; the Recueil des Textes Relatifs à l’Exercice des Activités Bancaires et Financières; and www.legifrance.gouv.fr. - Assessment: Observed. - 7.6 Client asset protection schemes: - Practice / Assessment: Not applicable. - Comments: - None of the agencies responsible for banking regulation and supervision is responsible for operating a client asset protection scheme. The transparency of the FGD is subject of a separate assessment. - 7.7 Consumer protection oversight: - Practice / Assessment: Not applicable. - Comments: - The banking regulatory and supervisory agencies have no oversight responsibilities for consumer protection arrangements. - The new Comité Consultatif du Secteur Financier (CCSF) will be in charge of relations between credit institutions, investment firms, insurance companies and their clients. - The Governor of the BdF leads the Comité de la Médiation Bancaire created at the end of 2002 which surveys the activities of each mediator or ombudsman designated by credit institutions in application of Art. L.312-1-3 of the COMOFI. ### Accountability and assurances of integrity - 8.1 Appearances before public authority: - Practice: - Art. L.143-1 of the COMOFI specifies that the Governor of the BdF may be heard by the Finance Commissions of the National Assembly or the Senate and may request to be heard by them. - Assessment: Observed. - 8.2 Audited financial statements: - Practice / Assessment: Not applicable. - Comments: - The CB and CECEI do not have balance sheets separate from that of the BdF (see 7.3 above). The audited financial statements of the BdF are published in the JORF and form part of the BdF’s annual report. - 8.2.1 Independent audit: - Practice / Assessment: Not applicable. - Comments: - The CB and CECEI do not have balance sheets separate from that of the BdF. Financial statements of the BdF are audited by two private sector firms of chartered accountants. Information on auditing and accounting policies as well as qualifications to the financial statements, are disclosed in the published statements. - 8.2.2 Internal governance and internal audit disclosure: - Practice: - The BdF provides the CB, CECEI and CCLRF all material support and staff they need for the performance of their functions (Art. L 613-6 and L 613-7 of the COMOFI). - Insurance of the integrity of operations rests with the internal audit office of the BdF (l’Inspection Générale). This internal office, together with the risk management unit, falls under the authority of the Contrôleur Général, and is responsible for the systematic monitoring of the BdF’s management procedures and internal control systems. - The existence (and mission) of the internal audit office is publicly disclosed in the BdF’s annual report and its organization chart. Developments in internal audit are discussed in the BdF’s annual report (for example, section 8.2.8 of the 2002 Annual Report). - Transparency could be further enhanced by posting an extensive description of the internal audit unit and other internal governance procedures on the website of the BdF, and on the websites of the other agencies covered by the same system. - Assessment: Observed. - 8.3 Operating expenses and revenues: - Practice / Assessment: Not applicable. - Comments: - Since the resources of the CB, CECEI and CCLRF are provided by the BdF, these agencies do not have their own separately identified operating expenses and revenues. - 8.4 Standards for conduct and conflicts of interest: - Practice: - Internal standards for the conduct of personal financial affairs are set out in the BdF’s Code de déontologie financière, which is published in the Official Bulletin of the BdF. - A recent internal rule (also published) relating to the implementation of the Code de déontologie financière focuses on good practices when officials and staff are offered gifts in the conduct of their official duties. - Assessment: Observed. - 8.4.1 Legal protections and disclosure: - Practice: - The CB enjoys a suitable level of protection within the framework of the general principles of administrative law laid down in case law in administrative courts in France. Conseil d’État jurisprudence indicates that the State may incur liability on the CB’s account mainly for gross negligence; the trend in case law seems to be moving toward the possibility of State liability for simple negligence which would diminish legal protection afforded to the CB if confirmed. - With respect to employee liability, CB staff is protected by general principles of administrative law applicable to persons in charge of a public function. Distinctions between administrative error, personal fault, and criminal liability are explained in practice. - Judicial rulings are widely publicized and discussed in the legal press and literature. - Transparency would benefit from publication in a more accessible medium of the specific legal status and liability limitations applicable to the BdF, CB, CECEI and CCLRF and their staff members and officials. - Assessment: Observed. ### Summary observance statistics - Table 31. Summary — Observance of IMF’s MFP Transparency Code—Banking Supervision - Assessment Grade: Observed — Count: 23 - Items: 5.1, 5.1.1, 5.1.2, 5.1.3, 5.1.4, 5.2, 6.1, 6.1.1, 6.1.2, 6.1.5, 6.2, 6.3, 6.4, 7.1, 7.2, 7.4, 7.4.1, 7.4.2, 7.5, 8.1, 8.2.2, 8.4, 8.4.1. - Assessment Grade: Largely observed — Count: 0 - Assessment Grade: Partly observed — Count: 0 - Assessment Grade: Not observed — Count: 0 - Assessment Grade: Not applicable — Count: 13 - Items: 5.3, 5.3.1, 5.4, 5.5, 6.1.3, 6.1.4, 7.3, 7.3.1, 7.6, 7.7, 8.2, 8.2.1, 8.3. ### Recommended action plan and authorities’ response - Recommended action plan: None. - Authorities’ response: The authorities are in broad agreement with the assessment. ### Deposit Guarantee Fund (FGD) — transparency highlights - Legal and governance framework: - The FGD was established by the Savings and Financial Security Act of June 25, 1999, transposed into the COMOFI (Articles L.312-4 through 18, Articles L.313-50 and 51, Articles L.322-1 through 4, and Art. L.352-1). - The FGD is a special purpose legal entity under private law; all credit institutions licensed in France must be members. It is overseen by a supervisory council composed of representatives of the member credit institutions and managed day-to-day by a board of three directors (one designated President). The nomination of the President is subject to approbation by the MoE. - The FGD covers bank deposits, certain securities, and a specific type of bank guarantees (cautions). The limit of its coverage is EUR 70,000 per individual per bank. - The FGD can preventatively intervene in a financial institution at the request of the CB. - The COMOFI sets out the FGD’s legal personality, activation, scope, governance, funding, intervention powers, its right to sue managers, and an enabling clause for the MoE to issue more detailed regulations. - Regulation 99-05 (CRBF) details functioning including cover extent, pay-out modalities, and depositor notification procedures. Regulation 99-06 regulates financial resources and contribution methodology. Regulation 99-07 covers claims on branches in France of institutions outside the EEA and authority to conclude agreements with foreign schemes. - Practice-by-practice assessment (selected): - 5.1 The broad objectives and institutional framework: Assessment — Observed. - 5.1.1 Broad objectives publicly disclosed and explained: Assessment — Observed. Objectives include reimbursement of depositors in cases of unavailability (indisponibilité) of deposits (Art. L.312), reimbursement of securities instruments (Art. L.322-2), honoring cautions (Art. L.313-50), and preventive action (Art. L.312-5). Objectives are further explained on the FGD’s informative website. - 5.1.2 Responsibilities and authority publicly disclosed: Assessment — Observed. - 5.1.3 Modalities of accountability publicly disclosed: Assessment — Observed. - COMOFI Art. L.312-10: FGD submits an annual financial statement to the MoE every year, after external audit and approval by the supervisory council. - Art. L.312-13: Minister in charge of economic affairs, Governor of the BdF, President of the Commission Bancaire and President of the AMF may be heard by the FGD at their request. - Art. L.312-10: Decisions by the FGD on management and use of the guarantee fund need to be ratified by the Minister in charge of economic affairs. - Art. L.312-5: Decisions taken by the FGD are subject to administrative review by administrative judicial authorities; those decisions are publicly disclosed. - Transparency could be further improved by provisions for the FGD to regularly report on its activities to the public and to a designated public body. - 5.1.4 Appointment, terms of office and removal procedures disclosed: Assessment — Observed. - Articles L.312-9 to L.312-12: Supervisory council of 12 members (plus 2 for Securities Guarantee) and a directorate of three members; terms of office are 4 years. - Voting and representation rules described, including that the four largest contributors each have one voting representative; banks that are members of a central body together provide two voting representatives; other credit institutions supply six; investment firms that are not credit institutions provide 2 representatives. - The president of the directorate must be confirmed by the Minister of Economics, Finance and Industry. - Additional procedures are disclosed in CRBF regulation 99-06 and internal rules (Règlement intérieur) posted on the CDG website. *Source: IMF staff assessment text from the provided content unit.* ### 5.2 The relationship between financial agencies should be publicly disclosed. ### 5.2 The relationship between financial agencies should be publicly disclosed. ### Relationship between the FGD and other financial agencies (Practice and assessment) - Practice: - The FGD has relations with the CB, the AMF, the CECEI and the MINEFI. - The relationship between the CB and the FGD is regulated in COMOFI Articles L.312-5, L.313-50, and L.322-1, on the activation of the FGD by the CB with regard to the insurance of deposits, “cautions” and claims on investment companies. - Art. L.312-5 contains provisions on the authority of the CB to request intervention by the FGD, as well as the authority of the FGD to refuse intervention, respectively to set the conditions for its intervention. - Other rules on the relation between the CB and the FGD are disclosed to the public in a range of regulations and instructions. - Exchange of information with the relevant supervisory bodies is regulated in COMOFI Art. L.631-1. - Assessment: Observed. ### Payment systems oversight (5.3–5.5) - Practice & Assessments: - 5.3 The FGD has no responsibility in the area of payment systems oversight. - Assessment: Not applicable. - 5.3.1 Agencies overseeing payment systems promoting public disclosure: Not applicable. - Assessment: Not applicable. - 5.4 Relationship between financial agencies and self-regulatory organizations: FGD has no oversight responsibilities for self-regulatory organizations. - Assessment: Not applicable. - 5.5 Self-regulatory organizations guided by same transparency practices: Not applicable. - Assessment: Not applicable. ### Open process for formulating and reporting financial policies (Section VI) - 6.1 Transparency of conduct of policies: - Practice: - The FGD only reports on its financial condition, in an annual report issued to the MoE. - Information on its actions and policies are not disclosed through specific publications or other forms of disclosure. - Assessment: Not observed. - 6.1.1 Regulatory framework and operating procedures publicly disclosed: - Practice: - FGD’s regulatory framework and operating procedures are laid down in the COMOFI, as well as in associated regulations and instructions, all of which are publicly disclosed. - The FGD maintains a public website providing this information, useful links, references and applicable regulations. - Assessment: Partly observed. - Comments: - There is no transparency toward depositors that branches and subsidiaries of foreign banks in France may not have the same level of coverage (EUR 70,000) as domestic institutions. - The EU Directive on deposit insurance requires a minimum coverage of only EUR 20,000. - 6.1.2 Financial reporting regulations by financial institutions to financial agencies: - Practice: — - Assessment: Not applicable. - Comments: The FGD does not itself receive reports from its member institutions; those report to relevant supervisory agencies. - 6.1.3 Regulations for operation of organized financial markets: - Practice: — - Assessment: Not applicable. - Comments: The FGD is not responsible for the operation of organized financial markets. - 6.1.4 Fee structures publicly disclosed: - Practice: - Art. L.312-7 of the COMOFI authorizes the FGD to levy contributions from covered credit institutions. - Overall amount of member banks’ annual contributions is set in Regulation 2002-11. - Individual banks’ contributions toward this overall amount are calculated by the CB according to rules in Regulation 99-06 and its Annex C. - Calculation is done twice a year, based on information reported to the CB concerning the levels of deposits and credits, and on the risks of each member institution calculated as a composite indicator. - The formula of risk calculation is disclosed but the amounts levied upon individual banks are not. - Once determined, the CB informs the individual members of the FGD of the amount of their contributions to be paid to the FGD. - Similar arrangements for securities and “cautions” funding are outlined in CRBF regulation 99-15 and 2000-06 respectively. - Assessment: Observed. - 6.1.5 Formal procedures for information sharing and consultation publicly disclosed: - Practice: - COMOFI Art. L.631-1 authorizes information sharing between the FGD and relevant financial sector supervisory authorities, the BdF, the CECEI, the CB, the CCAMIP, the CCA, the CEA, the AMF, the Fonds de Garantie des Assurances Obligatoires de Dommages and the Fonds de Garantie des Assurés Contre la Défaillance des Sociétés d’Assurance. - Information sharing is subject to mutual application of professional secrecy. - Art. L.312-13 provides possibility for the Minister in charge of economic affairs, the Governor of the BdF, and the President of the Commission Bancaire and the President of the AMF to be heard by the FGD at their request. - COMOFI Art. L.631-2 stipulates creation of the Collège des Autorités de Contrôle des Entreprises du Secteur Financier (CACESF); the FGD is not represented but the body enhances circulation of information received from the FGD. - CRBF regulation 99-07 allows cooperation with foreign deposit insurance agencies but provides no guidance on handling of information exchanges. - According to the FGD, no cooperation agreements have been agreed with foreign agencies; negotiations are ongoing with a number of European counterparts. These agreements will cover exchange of information on changes in applicable regulations and in cases of interventions in insured financial institutions with cross-border activities. It is not clear whether such agreements will be published. - Assessment: Broadly observed. - Comments: Disclosure in greater detail of formal procedures for information sharing and a policy of publicly disclosing international cooperation agreements are required for an “observed” rating. - 6.2 Public announcement of significant changes in financial policies: - Practice: - The system for the protection of deposits, claims on securities forms and beneficiaries of cautions is well explained and disclosed in relevant laws, regulations and on the FGD’s website. - Changes in these laws and regulations are subject to the same information and consultation procedures as other laws and regulations. - Assessment: Observed. - 6.3 Periodic public reports on policy objectives: - Practice: - The FGD does not publicly disclose its financial statements, nor does it prepare or disclose other reports on its policies and activities. - In case the FGD is activated, claim holders and institutions would be informed as outlined in the relevant regulations. - If activated and/or intervening at the request of the CB, it is to be assumed the CB would mention this in its report. - Assessment: Not observed. - Comment: For an “observed” rating, the FGD needs to issue a periodic public report updating how its policy objectives are being pursued. - 6.4 Public consultations for substantive technical changes: - Practice: - Members of the CECEI are consulted before each change to regulations regarding the FGD. - COMOFI Art. L.614-1 created the CCLRF to be consulted on any change in regulations with regard to the FGD; representatives of financial firms and depositors will be members. - Assessment: Observed. ### Public availability of information on financial policies (Section VII) - 7.1 Periodic public report on major sector developments: - Practice: — - Assessment: Not applicable. - Comments: - The FGD’s mandate does not include following sector developments. - The BdF, CB and the CECEI follow banking sector developments and publish periodic reports and bulletins. - 7.2 Public reporting of aggregate data related to jurisdictional responsibilities: - Practice: - The FGD does not disclose aggregate data related to its jurisdictional responsibilities. - Specifically, it does not publicly disclose data on collected contributions, investments and other forms of finance, nor on pay-outs. - The BdF, CB and the CECEI publish aggregate data on the banking sector. - Assessment: Partly observed. - Comment: For an observed rating, the FGD should periodically publish aggregate data on its operations. - 7.3 Public disclosure of balance sheets and aggregate market transactions: - Practice: - The FGD prepares audited annual financial statements, presented to the MoE. Public disclosure does not take place. - There is an internal reporting system on its investments and market transactions, but no public disclosure. - Assessment: Not observed. - Comment: For an “observed” rating, the FGD would need to publicly disclose its balance sheet on a pre-announced schedule and report on its aggregate market transactions. - 7.3.1 Aggregate information on emergency financial support: - Practice: There is no established practice of this type of disclosure by the FGD. - Assessment: Not observed. - Comments: For an “observed” rating, aggregate information on any emergency financial support by the FGD to a credit institution should be publicly disclosed through an appropriate statement, after a sufficient delay to avoid market disruption. - 7.4 Public information services: - Practice: - The FGD has a website: www.garantiedesdepots.fr providing information on functioning and coverage of guarantee mechanisms, institutional information, updates (e.g., election of president and vice-president of the supervisory council), and lists of applicable laws and regulations. - No other public information services or publications program exists. - Assessment: Partly observed. - Comments: For an observed rating, the FGD should establish a publications program and a more proactive policy for public communication by senior officials. - 7.4.1 Publications program and periodic public report: - Practice: The FGD has no publications program other than periodic website updates. - Assessment: Partly observed. - Comments: For an “observed” rating, the FGD should establish a publications program that includes a periodic report on its principal activities issued at least once a year. - 7.4.2 Senior officials explaining objectives and performance to the public: - Practice: - Senior officials have the authority to explain policies, objectives and performance to the public, but this has not occurred in practice except through the website. - There have been no public statements of high FGD officials to date. - Assessment: Partly observed. - Comments: A more proactive approach, a formal policy on public communications by senior officials and a track record would contribute to an “observed” rating. - 7.5 Availability of texts of regulations and directives: - Practice: - All legal provisions, regulations and instructions relative to the FGD are readily available through the Recueil de Textes Réglementaires of the CRBF, the JORF, the websites of the FGD and the BdF (www.banque-france.fr), and www.legifrance.gouv.fr. - Assessment: Observed. - 7.6 Disclosure of deposit insurance and client asset protection scheme information: - Practice: - Website and publications provide necessary information. - Law and regulations state insured deposits will be paid out promptly, two months after a request by the CB. Depositors are notified by mail. - The ceiling of coverage is set at EUR 70,000 per depositor. - Funding mechanisms are disclosed in COMOFI Art. L.312-7, and in Regulations 99-06 and 99-07 (depositors), 99-15 and 99-17 (securities) and 99-12 (cautions). - If necessary, contributors to the FGD must provide additional funds to meet all of the FGD’s obligations. - Assessment: Observed. - 7.7 Oversight of consumer protection arrangements: - Practice: — - Assessment: Not applicable. - Comments: The FGD does not oversee consumer protection arrangements. ### Accountability and assurances of integrity (Section VIII) - 8.1 Officials available to appear before designated public authority: - Practice: - Art. L.312-10 of the COMOFI states the Conseil de Surveillance oversees the FGD’s management, and that an annual financial report is issued to the MoE. - No specific rule requires appearance of FGD officials before designated authorities to publicly report on activities, objectives and performance, though no rule prohibits it. - No occasions have arisen to create a perceived need for such appearances, given the FGD’s limited mandate and lack of discretion except when asked by the CB to intervene. - Decisions of the FGD can be challenged before an administrative judicial authority. - The BdF, CB and the CECEI disclose information on the state of the financial system and are available for debate on these issues. - Assessment: Partly observed. - Comments: For an “observed” rating, a stated policy and/or track record regarding appearances before a designated public authority (e.g., parliament or a parliamentary commission) is needed, especially relevant in case of FGD intervention or disagreement with the CB. - 8.2 Public disclosure of audited financial statements on a pre-announced schedule: - Practice: - COMOFI Art. L.312-10 states the FGD prepares an audited annual financial report, sent to the MoE. - The FGD is subject to controls by the Inspection Générale des Finances. - The FGD has not yet published audited statements. - Assessment: Not observed. - Comments: For an “observed” rating, the FGD’s audited accounts should be publicly disclosed on a pre-announced schedule. - 8.2.1 Independent audit and disclosure of accounting policies: - Practice: - The FGD’s annual financial statements must be audited by virtue of the FGD’s status as a commercial firm. - The auditor is appointed by the Conseil de Surveillance. - The report is transmitted to the MoE but not published. - Based on regular rules on annual accounts, information on accounting policies and any qualifications would be disclosed in the annual financial statement if published. - Assessment: Observed. - 8.2.2 Internal governance procedures and internal audit arrangements publicly disclosed: - Practice: - COMOFI Art. L.312-10 determines the Conseil de Surveillance exercises oversight over the FGD’s management and sets the internal rules of the FGD, after agreement of the MoE. - These internal rules are published on the FGD’s website. - Assessment: Observed. *Source: _cr05186 - 5.2 The relationship between financial agencies should be publicly disclosed.* ### 8.3 Where applicable, information on the operating expenses and revenues of financial ### _cr05186 - 8.3 Where applicable, information on the operating expenses and revenues of financial ### 8.3 Disclosure of operating expenses and revenues of financial agencies - Practice: The financial report of the FGD is not publicly disclosed. - Assessment: Not observed. - Comments: For an “observed” rating, the FGD’s financial statements should be published annually, and should include the FGD’s operating expenses and revenues. ### 8.4 Standards for conduct of personal financial affairs; conflict of interest rules - Practice: - There are no specific rules of conduct on separation of private financial matters from those of the FGD, nor on avoidance of conflict of interest, abuse of insider information and similar rules. - Officials of the FGD Conseil de Surveillance, management and staff are bound to professional secrecy rules. Breach of the secrecy rules is a criminal offense. - Based on COMOFI Art. L.312-19, members of the directorate and of the supervisory board must be fit and proper as defined in the regulations for bank licensing. - Members of the directorate cannot receive funds from any contributor to the Fund. - All these rules are publicly disclosed. - Assessment: Observed. ### 8.4.1 Legal protections for officials and staff - Practice: - There is no specific legal protection for officials of the FGD personally. - Under French administrative law, suits must be brought against the legal entity, not against individual managers or officials. - Standard jurisprudence on the liability of public bodies and their officials is routinely published in legal journals. - The applicability of this administrative legislation and jurisprudence to the officials of the FGD is not disclosed in a readily accessible way. - Assessment: Partly observed. - Comment: For an “observed” rating, the existing legal arrangements governing the protection of officials and staff of the FGD need to be clarified and publicly disclosed. ### Summary of overall observance (Table 34) - Observed: 14 — 5.1, 5.1.1, 5.1.2, 5.1.3, 5.1.4, 5.2, 6.1.4, 6.2, 6.4, 7.5, 7.6, 8.2.1, 8.2.2, 8.4. - Broadly observed: 1 — 6.1.5. - Partly observed: 7 — 6.1.1, 7.2, 7.4, 7.4.1, 7.4.2, 8.1, 8.4.1. - Not observed: 6 — 6.1, 6.3, 7.3, 7.3.1, 8.2, 8.3. - Not applicable: 8 — 5.3, 5.3.1, 5.4, 5.5, 6.1.2, 6.1.3, 7.1, 7.7. ### Recommended action plan (selected items from Table 35) - VI. Open Process for Formulating and Reporting of Financial Policies - 6.1.1: Increase transparency on the fact that deposits in branches and subsidiaries of foreign banks in France may not have the same level of coverage as domestic institutions. - 6.1.5: Disclose the formal procedures for information sharing between the FGD and domestic and international financial agencies in greater detail. - 6.3: The FGD should issue a periodic public report that provides an update on how its policy objectives are being pursued. - VII. Public Availability of Information on Financial Policies - 7.2: Periodically publish aggregate data on the FGD’s operations. - 7.3 and 7.3.1: Publicly disclose the FGD’s balance sheet on a pre-announced schedule, as well as a report on its market operations and, after an appropriate delay, aggregate information on any emergency financial support by the FGD to financial institutions. - 7.4, 7.4.1 and 7.4.2: The FGD should establish a publications program and a more proactive policy for public communication by its senior officials. - VIII. Accountability and Assurance of Integrity by Financial Agencies - 8.1: Establish a policy or practice on the appearance of FGD officials before a designated public authority to report on the conduct of the FGD’s policies, explain its policy objectives and describe its performance. - 8.2 and 8.3: Publicly disclose the FGD’s audited accounts, including its operating expenses and revenues, on a pre-announced schedule and at least annually. - 8.4.1: Clarify and publicly disclose the existing legal arrangements governing the protection of officials and staff of the FGD. ### Authorities’ response - The authorities are broadly in agreement with the assessment. ### Transparency of Insurance Supervision — context and selected practice assessments - Context: - Insurance regulation and supervision in France was significantly reformed by the August 2003 Financial Security Law (Loi de sécurité financière–LSF). The LSF merged two agencies into a single autonomous insurance supervisor, the CCAMIP. Insurance regulation remains the responsibility of the Ministry of Finance. - Insurance regulation and supervision are governed by the Insurance Code, the Mutuality Code (Code de la Mutualité) and the Social Security Code (Code de la Sécurité Sociale), as amended by the Financial Security Law, and by accompanying regulations. - Selected practice assessments (Table 36 highlights): - 5.1: Observed. The broad objectives and institutional framework of the insurance supervisory agency are set in the Code des Assurances. Public access to legislation, regulations and arrêtés is provided through written publications and public websites. - 5.1.1: Observed. The broad objectives of the supervisory authority are (i) the protection of policy holders and (ii) the enforcement of relevant laws and regulations; these objectives are set out in the Code des Assurances and presented on websites. - 5.1.2: Observed. Responsibilities and enforcement powers are set out in Art. L.310–12 and Articles L.310–12 through L.310–25, and in Articles L.321–1 of the Code des Assurances. The CCAMIP is not in charge of producing regulation; competence falls within the scope of the MoE. The MINEFI prepares draft legislation in close and informal cooperation with CCAMIP staff. The CCLRF examines drafts and issues opinions; its terms and organization are established by decree. - 5.1.3: Observed. Accountability modalities are set out in the Code des Assurances (Art. L.310-12-1, Articles L.310-18 and L.310-18-1, Art. R.310-12). The CCAMIP publishes an annual report disclosing nonconfidential material; practice of publishing an annual report is publicly disclosed on the CCAMIP’s website. - 5.1.4: Observed. Appointment procedures for the nine members of the CCAMIP are set out in Art. L.310–12–1; appointments and terms (five years for several members) and revocation conditions are described; public disclosure proceeds through official publications. - 5.2: Observed. Relationships with other financial agencies are publicly disclosed in laws, the CCAMIP’s annual report, and other publications. Articles L.310–20, L.310-20-1, and L.310-21 allow information sharing subject to confidentiality. Art. 60 of the Savings and Financial Security Act establishes a committee comprising chairpersons of CCAMIP, CB, AMF and a MINEFI representative. Supervisors have generally met monthly on an informal basis. CCAMIP’s 2000-01 report discussed relationships with CB and foreign counterparts. - 5.3 / 5.3.1 / 5.4 / 5.5: Not applicable. The CCAMIP has no responsibility for payment systems oversight and there are no self-regulatory organizations in the French insurance market. - 6.1: Observed. The supervisory procedures of the CCAMIP are transparent; the agency publishes an annual report and aggregated economic figures (Tableaux de synthèse). Board members and staff are subject to strict confidentiality obligations on- and off-duty. - 6.1.1: Observed. The regulatory framework and operating procedures are set out in the Code des Assurances and explained through official publications and the CCAMIP’s annual report. - 6.1.2: Observed. The Code des Assurances authorizes reporting requirements (e.g. Articles L.310-14, L.322-2-4 and L.341 and subsequent); detailed regulations and arrêtés (e.g., Art. R 341-1 and A.341-1) are publicly disclosed. - 6.1.3: Not applicable. The CCAMIP has no responsibility for oversight of organized financial markets. - 6.1.4: Observed. The CCAMIP is financed through a specific contribution it levies; the contribution regime is detailed in Art. L.310-12-4 of the Code des Assurances. - 6.1.5: Partly observed. Law permits information sharing; some formal procedures are publicly available on the CCAMIP’s website (example agreement referenced), but no detailed information on formal procedures is published. - 6.2: Observed. The MINEFI and CCAMIP publicly announce and explain significant changes in regulations and supervisory policies via annual reports, websites and circulars. - 6.3: Broadly observed. The CCAMIP issues an annual report setting out how its overall policy objectives are being pursued. - Comment on 6.3: The annual report should be published every year, on schedule. *Source: _cr05186 - 8.3 Where applicable, information on the operating expenses and revenues of financial* ### 6.4 For proposed substantive technical changes to the structure of financial regulations, there ### _cr05186 - 6.4 For proposed substantive technical changes to the structure of financial regulations, there ### VI. Open Process for Formulating and Reporting of Financial Policies — Principle 6.4 - Description: Proposed substantive technical changes to the structure of insurance regulations are always subjected to two main rounds of consultations. - First (informal) round: the MINEFI consults with professional organizations. - Second (more formal) round: consultations are held through the CCLRF (see 5.1.2 ), which reunites all interested parties, including consumer organizations as representatives of the general public. - Insurance companies and other relevant parties are always consulted prior to any significant change in insurance policies. - Assessment: Observed. ### VII. Public Availability of Information on Financial Policies — Summary of Findings and Assessments - 7.1 Periodic public report on major sector developments - Description: The CCAMIP reports major developments in the insurance business in its annual report; summary available and annual report posted on website. - Implementation note: While the annual report is in principle published within six months of the end of each year, the CCAMIP issued only two reports during the last four years, covering two years each (2000–2001 and 2002–2003). Transition problems are blamed; CCAMIP expects to publish annually in the future. - Assessment: Broadly observed. - Comment: The annual report should be published each year, on schedule. - 7.2 Public reporting of aggregate data - Description: The CCAMIP provides aggregate data from the accounts of the economically significant insurers in quarterly and annual reports (see Tableau de Synthèse des entreprises d’assurance et de réassurance). - Assessment: Observed. - 7.3 Disclosure of balance sheets and aggregate market transactions - Description: CCAMIP has budgetary autonomy and establishes its own budget; budget transmitted to and reviewed by the Cour des comptes. New insurance law requires CCAMIP to publish its accounts, but decrees specifying practical modalities, including publication schedule (if any), have not yet been issued. CCAMIP does not conduct market transactions. - Assessment: Broadly observed. - Comment: For an “observed” rating, the publication of the CCAMIP’s accounts will need to happen on a pre-announced schedule. - 7.3.1 Aggregate information on emergency financial support - Description: (No description provided.) - Assessment: Not applicable. - Comment: The CCAMIP does not provide emergency financial support. - 7.4 Public information services - Description: CCAMIP has its own public information service disseminating: (i) policy decisions and announcements; (ii) information on operating framework, targets and objectives; (iii) quantitative data; and (iv) staff public research. Web access to some basic information via a locus on the MINEFI site. - Assessment: Observed. - 7.4.1 Publications program, including annual report - Description: Publications program comprises: (i) the annual report; (ii) occasional research publications; and (iii) statistical publications. Most items available free or at nominal charge. Annual reports currently issued with delays; over last four years only two reports covering two years each (2000-2001 and 2002-2003). Reforms expected to allow publication within six months of year-end. - Assessment: Broadly observed. - Comment: For an observed rating, the publications program, in particular the schedule for the publication of the annual report, should be implemented strictly. - 7.4.2 Senior officials’ communication and release of statements - Description: Senior CCAMIP officials explain objectives and performance through: (i) public hearings before parliamentary committees; (ii) speeches in public and professional forums; (iii) interviews with the media; (iv) articles in business publications; and (v) official publications like the annual report. Texts of public statements are systematically released to the media. - Assessment: Observed. - 7.5 Availability of texts of regulations and guidelines - Description: Texts available through official publications, the CCAMIP annual report and the Code des Assurances. The Code des Assurances is published in updated form by private sector publishers several times annually, and is accessible in its currently applicable state through a public website. - Assessment: Observed. - 7.6 Public disclosure of policy-holder guarantees and client asset protection schemes - Description: Two guarantee schemes exist: - Fonds de garantie des assurances obligatoires de dommages–FGAO: protects policyholders/beneficiaries from winding up of companies involved in compulsory insurance. - Fonds de garantie des assurés contre la défaillance des sociétés d'assurance de personnes: protects policyholders/beneficiaries from winding up of companies involved in life, provident and medical insurance. - Information disseminated through mention on contracts, by the MINEFI and/or the CCAMIP (Bureau des relations avec le public) on request; disclosure via official publications by the MINEFI and the CCAMIP. - Assessment: Observed. - 7.7 Disclosure of consumer protection arrangements - Description: Each insurance contract informs the policyholder of the possibility to transmit information requests or claims to the CCAMIP (Bureau des relations avec le public). Further information on consumer’s rights is available on the CCAMIP’s website. - Assessment: Observed. ### VIII. Accountability and Assurances of Integrity by Financial Agencies — Summary of Findings and Assessments - 8.1 Officials’ availability before designated public authority - Description: Under French administrative law, senior CCAMIP officials stand ready to appear before parliament—on an “as required” basis—to report on supervisory policies, explain objectives, describe performance, and exchange views on the state of the financial system. - Assessment: Observed. - 8.2 Public disclosure of audited financial statements on a pre-announced schedule - Description: Historically, CCAMIP did not have financial autonomy and thus no track record of financial reporting. CCAMIP intends to publish its accounts. Accounting and financial reporting framework specified in Art. R. 310-12 of the Code des Assurance, effective July 2004. The new text specifies CCAMIP's financial accounts are to be established according to general accounting rules, by an accounting agent independent from the CCAMIP. These financial accounts are verified by the Cour des Comptes at its discretion. Art. R.310-12 does not prescribe a publication schedule. Suggestion that a second independent party audit the accountant on a regular basis would be useful. - Assessment: Partly observed. - Comment: For an “observed” rating, the accounting and reporting framework must be implemented, CCAMIP’s financial statements must be published on a pre-announced schedule, and the statements must be audited on a regular basis by an auditor independent from the accountant. - 8.2.1 Independent audit and disclosure of accounting policies - Description: Art. R. 310-12 specifies accounts are to be audited by the Cour des Comptes, which is an independent government agency. Full audits will happen at the discretion of the Cour des comptes, and therefore, not necessarily every year. CCAMIP intends to publish its financial statements, but practical modalities and contents remain to be determined. - Assessment: Partly observed. - Comment: For an “observed” rating, financial statements will have to be audited on a regular basis and include information on accounting policies and any qualification. - 8.2.2 Disclosure of internal governance procedures and internal audit arrangements - Description: There is no such disclosure. - Assessment: Not observed. - Comment: For an observed rating, CCAMIP’s internal governance procedures and internal audit arrangements should be publicly disclosed. - 8.3 Disclosure of operating expenses and revenues annually - Description: CCAMIP intends to publish operating expenses and revenues as part of financial statements, but modalities remain to be determined. - Assessment: Partly observed. - Comment: Publication of operating expenses and revenues on an annual basis, as part of the financial statements, will warrant an “observed” rating. - 8.4 Standards for conduct of personal financial affairs and conflict-of-interest rules - Description: CCAMIP's staff and board members are civil servants or staff under a public law contract and subject to general rules of ethics of French civil service. Art. L.310-12-1 tasks CCAMIP with setting specific rules of conduct. A Code of Conduct (Code de Déontologie) was prepared, approved by the new Commission in July 2004, and is publicly disclosed on the CCAMIP’s website. - Assessment: Observed. - 8.4.1 Legal protections for officials and staff - Description: By law, board members and staff of the CCAMIP do not incur liability for consequences of their professional activity, except for personal faulty behavior (faute détachable). In criminal matters, liability is personal. - Assessment: Observed. ### Table 37 — Summary of Observance (counts and lists preserved) - Assessment Grade — Count — List - Observed 21 — 5.1, 5.1.1, 5.1.2, 5.1.3, 5.1.4, 5.2, 6.1, 6.1.1, 6.1.2, 6.1.4, 6.2, 6.4, 7.2, 7.4, 7.4.2, 7.5, 7.6, 7.7, 8.1, 8.4, 8.4.1. - Broadly observed 4 — 6.3, 7.1, 7.3, 7.4.1. - Partly observed 4 — 6.1.5, 8.2, 8.2.1, 8.3. - Not observed 1 — 8.2.2. - Not applicable 6 — 5.3, 5.3.1, 5.4, 5.5, 6.1.3, 7.3.1. ### Recommended Action Plan — Key Recommendations (Table 38 excerpts) - VI. Open Process for Formulating and Reporting of Financial Policies - 6.3: The annual report should be published every year, on schedule. - VII. Public Availability of Information on Financial Policies - 7.1 and 7.4.1: The publications program, in particular the schedule for the publication of the annual report, should be strictly implemented. - 7.3: The publication of the CCAMIP’s accounts should happen on a pre-announced schedule. - VIII. Accountability and Assurance of Integrity by Financial Agencies - 8.2: Publication of the CCAMIP’s financial statements will need to occur on a pre-announced schedule and the statements will need to be audited on a regular basis by an auditor independent from the accountant. - 8.2.1: The financial statements to be published by the CCAMIP should be audited on a regular basis, and should include information on accounting policies as well as any qualification of the statements. - 8.2.2: The CCAMIP’s internal governance procedures and its internal audit arrangements should be publicly disclosed. - 8.3: The operating expenses and revenues of the CCAMIP should be published on an annual basis, preferably as part of the financial statements. ### Authorities’ response to the assessment (preserved items 134–136 and E summary) - 134: The CCAMIP’s report for the years 2002 and 2003 has been endorsed by the board, and is to be published. - 135: 8.2.2. The respective roles of the board and the Secretary General are defined by the law (L.310-12-1). More detailed rules will be specified in the decrees establishing the CCAMIP, to be published soon. - 136: The CCAMIP’s financial accounts will be established according to general accounting rules, by an accounting agent, who will not have any hierarchical link with the CCAMIP staff and cannot be given any order by the CCAMIP management. These financial accounts will be verified by the Cour des Comptes according to rules that are applicable to all administrative institutions. - E. Transparency of Payment and Settlement Systems Oversight: Oversight in France is based on a legal and regulatory framework established at the European level by the ECB and the ESCB, as well as on the French Monetary and Financial Code. It encompasses oversight of pan-European systems (TARGET, Clearnet, Euroclear group) and domestic systems (PNS and SIT), for which the BdF bears sole responsibility. *Content derived from: _cr05186 - 6.4 For proposed substantive technical changes to the structure of financial regulations, there* ### 5.2 The relationship between financial agencies should be publicly disclosed. ### 5.2 The relationship between financial agencies should be publicly disclosed. ### Relationships and legal basis - Practice: Relationships between the BdF and other domestic and foreign agencies are defined and disclosed in legislation, treaties and other publications. - Legal and institutional references: - Art. L.6321-1 of the Financial and Monetary Code permits the BdF, the CB, the CCAMIP, AMF, CECEI, and the FGD to exchange information for achievement of their respective objectives. - Art. 12.1 and Art. 14.3 of the ESCB/ECB statute: - Art. 12.1: “The Governing Council shall adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the ESCB under this Treaty and this statute [...] To the extent deemed possible and appropriate [...], the ECB shall have recourse to the national to the national central banks to carry out operations which form part of the tasks of the ESCB” - Art. 14.3: “The national central banks are an integral part of the ESCB and shall take the necessary steps to ensure compliance with the Guidelines and instructions of the ECB and shall require that any necessary information be given to it.” - Operational practice: - By custom, the agencies generally meet monthly. - Meetings between the BdF and the AMF are of particular importance for SCSS; a representative from the BdF sits on the AMF executive board. ### Memoranda of Understanding and cooperation arrangements - Cross-border MoUs: - January 2001: Relevant authorities of Belgium, France and the Netherlands adopted an MoU for coordinated regulation/oversight of the Euronext Group; first part signed for France by the COB and the CMF; second part signed by the CMF, the CB and the BdF addressing coordination of Euronext’s clearing activities (Clearnet). The MoU was extended to relevant Portuguese authorities after Portugal’s exchanges merged with Euronext and Clearnet’s activities extended to Portugal. - 22 October 2001: MoU signed by Belgian and French authorities (Belgian National Bank, Financial and Banking Commission for Belgium; the BdF and the CMF for France) to organize prudential supervision of Euroclear Group’s current membership (Euroclear Bank-Euroclear France) and oversight of its securities settlement systems. - 2002: New MoU signed by Dutch, Belgian and French authorities to organize cooperation on oversight of settlement services of Euroclear Group used for trades executed in Euronext markets. - Disclosure practice for MoUs: - The content of these MoUs is not public because the legal context in some partner countries does not allow publication. - Their existence, objectives and main aspects have been made known to the public (e.g., in the BdF’s annual report and on its website). - All relevant parties have been informed of the substance of the MoUs relevant to their work. - The BdF examines any request for access to the MoUs; requests have only come from other authorities and disclosure was never refused. - Assessment: Observed. ### Assessment summary for 5.2 - Assessment: Observed. --- ### 5.3–5.5: Oversight roles, disclosure of policy principles, and relationships with self-regulatory organizations ### Role disclosure for payment systems and SCSS (5.3) - Practice: The role of the BdF regarding oversight of payment systems, payment instruments, and SCSS is defined and disclosed in legislation and known through the BdF’s official publications (annual report, monthly bulletin, FSR). - Assessment: Observed. ### Promotion of timely public disclosure of policy principles (5.3.1) - Practice and channels: - BdF promotes public disclosure through published reports (FSR, Bulletin de la BdF, annual report, BdF website), promulgation of domestic or international standards, and participation in interbank working groups. - Entire chapters on oversight of payment systems and SCSS appeared in the BdF’s 2002 and 2003 annual reports. - Decree n° 2003-195 of 7 March 2003: BdF must disclose on request the list and address of payment systems and Securities Settlement Systems notified to the EU Commission under the Settlement Finality Directive, and the list of direct and indirect participants in the systems, following information from their operators. These data are available on the BdF website. - BdF’s website provides system overviews, links to operators, and risk management policy information; includes papers on safety and relevant European and international standards. - BdF uses international standards as the basis of oversight policy and aims for full observance by systems. Standards require transparency about general policy principles and risk management policies. - Identified gap: - The BdF could more directly and specifically promote the transparency of the payment systems it oversees. - Assessment: Observed. ### Self-regulatory organizations (5.4 and 5.5) - Practice/Assessment: - 5.4 Assessment: Not applicable. Comment: The payment systems the BdF oversees are not self-regulatory organizations. - 5.5 Assessment: Not applicable. Comment: The payment systems the BdF oversees are not self-regulatory organizations. --- ### VI. Open process for formulating and reporting of financial policies (Sections 6.1–6.4) ### General transparency principle (6.1) - Practice reference: See 6.1.1 to 6.1.5. ### Regulatory framework and operating procedures (6.1.1) - Practice: - Regulatory framework for payment systems oversight is based on international standards and mostly set at the European level by the ECB and ESCB, publicly disclosed by ECB and ESCB. - European framework is complemented in France by legislation, decrees and ordinances. - The BdF has no regulatory powers in the area of payment systems. - BdF discloses and explains the framework through FSR, BdF Bulletin, annual report, website (http://www.banque-france.fr/gb/infobafi/main.htm), and interbank working groups. - Identified shortcomings: - Need for BdF to be more proactive in explaining how international standards and European regulations are to be implemented in the French context and to clarify areas where standards lack specificity. - No overall set of operating procedures is publicly available governing the conduct of payment systems oversight; operational aspects are governed by internal BdF documents and bilateral agreements with individual operators, which are not published. - Assessment: Partly observed. - Comments for upgrade to “observed”: - BdF should specify, publicly disclose and explain the operating procedures governing its payment systems oversight function. - Improve explanation and clarification of international standards and their implementation in the French context. ### Financial reporting regulations to agencies (6.1.2) - Assessment: Not applicable. - Comments: - No regulations govern financial reporting of payment systems and SCSS to the BdF; no special reporting on systems’ financial situation is required. - BdF requests some reporting (e.g., statistics) from system operators as provided in law; reporting arranged through specific agreements tailored to each system, not through universal regulations. - Formalization and disclosure of reporting requirements would increase transparency. ### Regulations for organized financial markets (6.1.3) - Assessment: Not applicable. - Comments: The BdF, as payment systems overseer, is not responsible for regulating operation of organized financial markets. - Note: For Securities Settlement Systems, AMF is entitled to define regulations and approve Rulebooks; these regulations are published by the AMF. ### Fee disclosure (6.1.4) - Assessment: Not applicable. - Comments: - BdF does not charge fees related to payment systems oversight. - Fees charged as operator of the TBF payment system have been publicly disclosed in the TBF procedures. ### Information sharing and consultation procedures (6.1.5) - Practice: - Formal procedures for information sharing and consultation exist between the BdF and other agencies (ECB, other Eurozone central banks, domestic financial agencies). - Existence of these procedures and general cooperation information disclosed in BdF annual report (e.g., coordinated oversight of Euronext and Euroclear in section 6.1.3 of the 2001 Annual Report), BdF website, and publications/websites of the ECB and ESCB. - Substantive summaries of MoUs disclosed in BdF papers; MoUs not fully disclosed because of legal constraints in some partner countries. - BdF examines requests for access to MoUs; requests have come only from other authorities and disclosure was never refused. - Detailed formal procedures are only partially disclosed; disclosure mostly limited to general principles and identification of counterparties unless specified in law. - Assessment: Broadly observed. - Comments: Greater detail disclosure of formal procedures needed for “observed” rating. ### Announcement and explanation of significant changes (6.2) - Practice: - Significant changes in policy (e.g., ECB Governing Council decisions regarding payment systems) are released on the BdF’s website and, when applicable, on the ECB website immediately after the decision, usually as a press release. - Announcements usually include an explanation and can be recirculated by the French Banking Federation or the media. - BdF communicates and explains such changes directly to payment system operators it oversees. - Assessment: Observed. ### Periodic reporting on pursuit of policy objectives (6.3) - Practice: - Reports issued quarterly and annually (and more frequently when necessary) via written reports to the legislature, official bulletin, annual report, and BdF website. - Chapter 6 of BdF’s annual report is dedicated to oversight of payment and securities settlement systems and is comprehensive. - BdF launched a Financial Stability Review in June 2002 to report on policy objectives; example: article on Protection of deferred net payment and SSS in France published in the November 2003 issue. - Assessment: Observed. ### Public consultations for substantive technical changes (6.4) - Practice: - Structure of payment systems regulations determined by G10 standards, ESCB level, or BdF level for uncovered fields. - Public consultation is systematically organized in case of substantive changes. - A link to ongoing public consultations on payment system issues is provided on the BdF’s website. - Assessment: Observed. --- ### VII. Public availability of information on financial policies (Sections 7.1–7.4) ### Periodic public reports on sector developments (7.1) - Practice: - BdF reports on developments in payment and settlement systems in its annual report (e.g., Chapter 6 of the 2002 and 2003 annual reports). - Payment system statistics published continuously on the BdF website and monthly in the BdF’s bulletin. - Occasional articles on important payment systems developments included in BdF publications (monthly bulletin, FSR). - Assessment: Observed. ### Public reporting of aggregate data (7.2) - Practice: Aggregate data on payment systems published in BdF’s annual report, monthly bulletin, and BdF website. - Assessment: Observed. ### Disclosure of balance sheets and market transactions (7.3) - Assessment: Not applicable. - Comments: - Payment systems department of the BdF does not have a separate balance sheet. - BdF balance sheet published monthly in the Monthly bulletin; audited financial statements including balance sheet published in the BdF’s annual report. Both are available on BdF’s website. ### Aggregate disclosure of emergency financial support (7.3.1) - Assessment: Not applicable. - Comments: - BdF does not provide emergency financial support to payment systems operators. - Emergency liquidity support is provided only to participants in payment systems and is outside BdF’s oversight responsibilities. ### Public information services and publications program (7.4 / 7.4.1) - Practice: - BdF’s Communications Division provides public information services and disseminates policy decisions and announcements; information on operating framework, targets, and objectives; texts of speeches by senior officials; quantitative data; and staff research. It maintains the website and contributes to quarterly and annual publications. Website has a dedicated part on payment system, instruments and SCSS oversight issues. - Publications program includes: (i) the annual report; (ii) the official bulletin; (iii) the Financial Stability Review; (iv) research and statistical publications; and (v) speeches of senior officials. These are available free or at nominal cost and most downloadable from BdF’s website. - Reports on BdF’s principal activities are published quarterly and annually (monthly bulletin and FSR address aspects on a nonperiodic basis), approximately one quarter after the end of the period to which they refer. - Legislative requirement: Art. 113 of the Treaty and Art. 15 of the Statute of the ESCB and the ECB require a periodic report. - COMOFI Art. L.143-1 requires a report be made on the BdF’s principal activities, including payment system, instruments and SCSS oversight issues, to the President of the Republic and to Parliament at least once annually. - Assessment: Observed. ### Senior officials’ communication (7.4.2) - Practice: - The Governor explains BdF objectives and performance, including payment systems oversight, at parliamentary hearings. - Governor and other officials explain objectives and performance through public speeches (texts published on website), industry forums, and media; prior internal clearance is required for officials other than the Governor. - Assessment: Observed. *Source: _cr05186 - 5.2 The relationship between financial agencies should be publicly disclosed.* ### 7.5 Texts of regulations and any other generally applicable directives and guidelines issued ### _cr05186 - 7.5 Texts of regulations and any other generally applicable directives and guidelines issued ### Availability of regulations and directives (Payment and Settlement Systems) - Practice: The texts of regulations and other generally applicable directives and guidelines are made available free or at nominal charge through the JORF, France’s official legislative website (www.legifrance.gouv.fr), and on the BdF’s website. - Assessment: Observed. ### Deposit insurance, client asset protection, and consumer protection (Payment and Settlement Systems) - 7.6 Assessment: Not applicable. - Comments: The BdF does not oversee any client asset protection scheme as part of its responsibilities for payment systems oversight. - 7.7 Assessment: Not applicable. - Comments: The BdF does not oversee any consumer protection arrangements as part of its responsibilities for payment systems oversight. ### Accountability and assurances of integrity by financial agencies (Payment and Settlement Systems) - 8.1 Officials appearing before public authority - Practice: COMOFI Art. L.143-1 provides that the Governor may be heard by the Finance Commission of the National Assembly or the Senate if they so desire, or may request to be heard by them (see also Art. 107 of the EC Treaty and the confidentiality rules of the ECB). These arrangements cover payment systems oversight as well as the other areas of the BdF’s responsibilities. There is no possibility for parliament to demand that BdF officials more directly involved in payment systems oversight appear before it, except in the context of a commission of inquiry. - Assessment: Observed. - 8.2 Public disclosure of audited financial statements - Assessment: Not applicable. - Comments: The BdF’s department responsible for payment systems oversight does not have a separate balance sheet. The BdF’s financial statements are of little relevance to the transparency of payment systems oversight, since they are largely determined by the BdF’s monetary policy and other functions, while payment systems oversight constitutes only a small part of its operations. - Additional practice: The audited financial statements of the BdF are published in the JORF and form part of the annual report. Pursuant to the COMOFI, the audited financial statements are to be laid before the Finance Commissions of the two chambers of Parliament. - 8.2.1 Independent audit of financial statements - Assessment: Not applicable. - Comments: The BdF’s department responsible for payment systems oversight does not have a separate balance sheet. - Practice: Two private sector firms, approved by the European Council of Ministers on the recommendation of the ECB’s Governing Council and appointed by the General Council of the BdF, audit the BdF’s financial statements. Information on accounting policies used and any qualifications to the accountants’ opinion appear with the financial statements. - 8.2.2 Internal governance and internal audit - Practice: Internal integrity rests with the internal audit office of the BdF (l’Inspection Générale). This internal office, together with the risk management unit, falls under the authority of the Contrôleur Générale, and is responsible for the systematic monitoring of the BdF’s management procedures and internal control systems. The existence (and mission) of the internal audit office is publicly disclosed in the annual report and on the organization chart of the BdF. Developments in the area of internal audit are also discussed in the annual report (for example, section 8.2.8 of the 2002 Annual Report). Transparency could be further enhanced by posting an extensive description of the internal audit unit and other internal governance procedures on the website of the BdF. - Assessment: Observed. - 8.3 Disclosure of operating expenses and revenues - Assessment: Not applicable. - Comments: The BdF’s department responsible for payment systems does not have its own accounts, and hence, the operating expenses and revenues of the BdF related to its role as overseer of payment and settlement systems cannot be isolated. Disclosure on the BdF’s overall operating expenses and revenues are made in the audited financial statements, which are published annually. - 8.4 Standards for personal financial conduct and conflict-of-interest rules - Practice: Internal standards for the conduct of personal financial affairs are set out in the BdF’s Code de déontologie financière, which is publicly available in paper form. A recent internal rule (also published) relating to the implementation of the Code de déontologie financière focuses more specifically on good practices to be applied by officials and staff when they are offered gifts in the conduct of their official duties. - Assessment: Observed. - 8.4.1 Legal protections for officials and staff - Practice: Officials and staff of the BdF benefit from the standard legal protection granted to civil servants in the good faith execution of their duties. This protection is outlined in, and publicly disclosed through, the relevant legislation (see COMOFI Articles L.144-2 and 144-3). - Assessment: Observed. ### Summary observance (Table 40) - Assessment Grade counts: - Observed: 21 - List: 5.1, 5.1.1, 5.1.2, 5.1.3, 5.1.4, 5.2, 5.3, 5.3.1, 6.2, 6.3, 6.4, 7.1, 7.2, 7.4, 7.4.1, 7.4.2, 7.5, 8.1, 8.2.2, 8.4, 8.4.1. - Broadly observed: 1 - List: 6.1.5. - Partly observed: 1 - List: 6.1.1. - Not observed: 0 - List: --. - Not applicable: 12 - List: 5.4, 5.5, 6.1.2, 6.1.3, 6.1.4, 7.3, 7.3.1, 7.6, 7.7, 8.2, 8.2.1, 8.3. ### Recommended action plan and authorities’ response - Recommended actions (excerpted) - 6.1.1: Clearly specify, publicly disclose and explain the operating procedures governing the conduct of the BdF’s payment systems oversight function. - Improve efforts to explain and clarify international standards and the way they should be implemented in the French context by the different payment systems operators. - 6.1.5: Disclose the formal procedures for information sharing and consultation in greater detail. - Authorities’ response: - 138. The BdF welcomes the IMF assessment that it reaches a very high level of transparency in its payment systems oversight function and takes note of the IMF recommendations. ### Transparency of Securities Regulation and Supervision (Section F) - Legal framework and institutional changes - Practice: Securities regulation and supervision in France is governed by the Monetary and Financial Code (COMOFI), as modified by the Loi de Sécurité Financière (Financial Security Law–LSF) of August 1, 2003. The law gives the Autorité des Marchés Financiers (AMF) responsibility for ensuring the protection of public savings invested in financial instruments and gives it the authority to issue regulations and to supervise issuers and markets. The CB, the CECEI, and the BdF are also involved in securities oversight, although to a lesser extent than the AMF. The LSF of August 2003 significantly reformed the framework for securities regulation and supervision in France, in part by merging three existing agencies, the Commission des Opérations en Bourse (COB), the Conseil des Marchés Financiers (CMF), and the Conseil de Discipline de la Gestion Financière (CDGF) into a single new agency, the AMF. The implementation of this merger was still ongoing at the time of the FSAP missions. For this assessment, where there was an insufficiently long track record of practices at the AMF, it was assumed that good transparency practices of the former agencies would be maintained to the extent the changed legal and regulatory framework allowed so. ### Practice-by-practice assessment highlights (Transparency of Securities Regulation) - 5.1 Clarity of objectives and institutional framework - Practice: The broad objectives and institutional framework of the AMF are defined by the LSF No. 2003-706 of 1st August 2003 providing for the merger of the COB, established by the Ordinance (Executive Order) No. 67–833 of September 28, 1967, the CMF instituted by the Act No. 96-597 of July 2, 1996 (Financial Activity Modernization Act) and the CDGF, and integrated in the COMOFI and certain appurtenant Decrees, in particular Decree No. 1109, dated November 21, 2003. - Assessment: Observed. - 5.1.1 Public disclosure and explanation of objectives - Practice: The LSF, codified into the COMOFI, describes the broad objectives of the French financial agencies for the banking, insurance and securities sectors. The provisions concerning the AMF are found under its Book VI, Title II “L’Autorité des marchés financiers.” The general purpose and mission of the AMF is stated clearly in Art. L.621-1 of the COMOFI (as amended by the LSF): the AMF ensures the protection of public savings invested in financial instruments and all other investment leading to a public offering, supervises financial information conveyed to investors and the proper functioning of financial markets. It contributes to the regulation of these markets at the European and international level. The scope of the mission of the AMF is stated under Section 4 “Powers”: Sub section 1 “Regulations and Decisions.” This section states that the AMF adopts a General Regulation (Règlement général) published in the JORF, which determines, among other things, the provisions applicable to issuers, public offerings, take over bids, conduct of business rules, providers of investment services, market undertakings, regulated markets, clearing houses, portfolio management on behalf of third parties, collective investment schemes, depositaries and financial analysts. The functions of the CB, the CECEI, and the BdF, respectively, pertaining to the oversight of investment services providers, clearing and settlement systems, and custodians also are articulated in the COMOFI. - Assessment: Observed. - 5.1.2 Responsibilities and authority to conduct financial policies - Practice: The responsibilities of the agencies involved in supervising and regulating financial markets are publicly disclosed through the publication of the relevant laws and regulations in the JORF, on the French public service website www.legifrance.gouv.fr and on the website of relevant financial agencies, such as www.amf-france.org. Summaries and relevant links are also available on the websites of the agencies involved. - Assessment: Observed. - 5.1.3 Modalities of accountability - Practice: Modalities of accountability of the AMF are found in the LSF as codified into the COMOFI. As other public administrations, the AMF is subject to the audit of the Cour des comptes which acts as the French Comptroller’s office. Annual reports are submitted by the President of the AMF both to the legislature and to the President of the Republic (Art. L.621-19 § 3). In addition, the President of the AMF is heard by the commissions of finance of both assemblies upon their request, and can request to be heard by them (Art. L.621-19 § 4). Decisions of the AMF are subject to a review procedure. Depending on the nature of the decision considered (whether individual or general), an appeal undertaken by the person affected by the decision may be introduced before the Court of Appeal of Paris in the case of nonregulated persons or entities or the Conseil d’Etat in the case of regulated entities. Procedures related to the sanctioning process as defined in the LSF are meant to be consistent with the European Convention on Human Rights and relevant national law requirements (L.621-2 IV; 621-3 II). A Decree of the Conseil d’Etat fixes the rules applicable to the deliberations of the institutions of the AMF and the AMF determines the modalities of putting these procedures into operation in its General Regulation. - Assessment: Observed. - 5.1.4 Appointment, terms, and removal procedures - Practice: Responsibility for the appointment of the members of the AMF’s Board and of its Commission of sanctions (Commission des Sanctions) rests with a number of specific agencies and authorities, each of which chooses its own representatives. This arrangement is defined in the LSF and hence publicly disclosed. Book VI, Title II, “The AMF” Section 2 “Composition” specifies the terms of office and rotation of the heads and members of the board and the Commission of sanctions in which there can be no cross-membership except by the Commissaire du Gouvernement. The President serves for one term of five years; other Members may serve two terms. The conditions for renewal of the members of the board are defined in a Decree of the Conseil d’Etat. Removal is restricted to a consecutive period of nonattendance or by action of a special investigation committee constituted by Parliament. The procedure for convening a special committee is specified by Art. 6 of the November 17, 1958 ordinance.(i.e., Executive Order). - Assessment: Observed. - 5.2 Relationship between financial agencies - Practice: The relationships between financial agencies are publicly disclosed in legislation and in official bulletins and, in the case of clearing and settlement activities, specific protocols. Chief among the main features providing for a close cooperation between national financial agencies is the “cross membership rule” according to which one representative of a financial institution sits as a member on another regulatory body so as to constitute a permanent mechanism for exchange of information. Book VI, Title II “Exchange of information,” Chapter I, “Exchange of information on the national territory” explicitly provides arrangements for “Cross membership.” Art. L.631-1 states the general capacity of national regulators to exchange information free from requirements of professional secrecy. Art. L.631-2. creates a Board of Financial sector supervisory agencies composed of the Governor of the BdF, the president of the CB, the president of the CCAMIP, and of the President of the AMF, or their representatives. It is chaired by the Minister of Finance or his representative. The various functions of each of the financial agencies are clearly spelled out in the Code, and the website of the AMF contains a diagram of the changes in functions effectuated by the LSF. - Assessment: Observed. - 5.3 Role of oversight agencies regarding payment systems - Practice: The role of the AMF as regards to payments and settlements systems is provided for under Art. L.621-7 of the COMOFI which states that “The general regulations of the AMF determine the following: [...] 2°) the conditions of activities of the members of the clearing houses mentioned under Art. L.442-2; [...] [and] 7°) the conditions in which, in accordance to Art. L.442-1, the AMF approves the rules of the clearing houses, without prejudice to the competences conferred to the BdF under Art. L.141.4. - Assessment: Observed. - 5.3.1 Promotion of timely public disclosure of general policy principles (payment systems) - Assessment: Not applicable. - Comments: This task is a responsibility of the BdF. - 5.4 and 5.5 (self-regulatory organizations) - Assessments: Not applicable. - Comments: The French securities regulatory system does not make use of self-regulatory organizations. ### Open process for formulating and reporting of financial policies (selected practices) - 6.1 General transparency of policy conduct - Practice: The AMF has to state the grounds for its decisions in writing. Different types of Appeal procedures apply according to the nature of a contested decision. There is regular consultation with the industry, although this is not required by law. The Board of the AMF can make use of specialist advisory and consultative committees of experts. Art. L.621-2III. - Assessment: Observed. - 6.1.1 Regulatory framework and operating procedures disclosure - Practice: The regulatory framework and operating procedures governing the conduct of the AMF’s regulatory and supervisory program are disclosed and explained in legislation, existing guidance and regulations, in the monthly reviews of the regulator, and on the AMF’s official website. Certain internal procedures are to be updated and included in the general regulations. Written procedures exist for granting visas, granting licenses to investment services providers within the competence of the AMF, and for conducting investigations. These procedures are publicly disclosed and explained in the LSF, in decrees, on the AMF website and in publicly available documents and forms. The new Commission of Sanctions is governed by the LSF, the COMOFI, the EUROPEAN Convention on Human Rights, and general law. The Annual Report addresses how regulatory policies are being developed. Nevertheless, it would be helpful if the rules and procedures related to policy-making and the exercise of regulatory and oversight responsibilities in a given area, such as securities, could be brought together in a single (composite) text, which could be published as a whole. Ideally, procedures for conducting sanction proceedings and seeking regulatory relief would be made as accessible as possible to participants and intermediaries in French markets. - Assessment: Observed. - 6.1.2–6.1.4 Assessments: Observed (reporting regulations, market operation regulations, fee structures). - 6.1.5 Information sharing and consultation procedures - Practice: Formal procedures providing for information sharing mechanisms are publicly disclosed in legislation and published in official bulletins. Art L.631.1 provides for domestic mechanisms for cooperation and information sharing, while Art L.632.1 provides for exchange of information to foreign counterparts under the condition that the competent counterpart to the AMF, the market undertakings, or clearing houses of the regulated markets is submitted to professional secrecy requirements in a legislative framework that provides equivalent guarantees to those applicable in France and that reciprocity can be observed. Memoranda of understanding are public documents and are available on the AMF website. - Assessment: Observed. *Source: _cr05186 - 7.5 Texts of regulations and any other generally applicable directives and guidelines issued (PDF chapter/section).* ### 6.2 Significant changes in financial policies should be publicly announced and explained in a ### 6.2 Significant changes in financial policies should be publicly announced and explained in a timely manner. ### Transparency of regulatory change and public communication - Practice: Significant changes in financial market regulation and supervision are announced and explained through the AMF’s monthly review, its annual reports, its website and the media. - Legal requirement: Rules must be made public as a matter of law for them to be applied to market participants and regulated entities. - Outcome: Changes are timely announced and explained to the public. - Assessment: Observed. ### Periodic reporting on policy objectives (6.3) - Practice: The AMF reports on how its overall policy objectives are being pursued on a monthly basis in the AMF Review (Formerly COB and CMF monthly reviews), as well as in its annual reports, in the media, and on an ongoing basis on its website. - Example: Specific guidance was provided on certain issues after the Parmalat crisis. - Assessment: Observed. ### Public consultations on substantive technical changes (6.4) - Practice: - Consultations take place with market participants and working groups of experts. - Some consultations include posting draft documents on the website with a call for comments from the public. - The AMF works through the Committee of European Securities Regulators (CESR), which has a comprehensive consultation process. - COMOFI provisions: Comité Consultatif du Secteur Financier (CCSF) (Art. L.614-1) studies relations between banks, investment firms, and insurance companies and may act on Ministry request, client organizations, professional organizations, or on its own initiative. - Comité Consultatif de la Législation et de la Réglementation Financières (CCLRF) (Art. L.614-2 &3) is convened with respect to every rule or general directive except texts within the sole competence of the AMF; texts will not be adopted without an opinion of the CCLRF. The CCLRF’s composition is set by decree and includes industry representatives. - AMF Board can constitute specialist committees and consultative committees of experts (Art. L.621-2III). - Gap: The AMF has not publicly committed to seeking consultations for all substantive technical changes to the structure of its regulations in a publicly available policy statement, regulation or law. - Assessment: Observed. ### Public availability of information on financial policies (Sections 7.1–7.7) - 7.1 Practice: AMF reports extensively on financial market developments in its annual report and publishes quarterly statistical publications on its website. - Assessment: Observed. - 7.2 Practice: Aggregate data are published on a monthly and annual basis; information on certain sanctions and status of authorized institutions is available on the AMF or CECEI websites (AMF updated monthly). - Assessment: Observed. - 7.3 Practice: COB and CMF used to publish financial statements annually. Art 32 of Decree 2003-1119 of 21 November 2003 provides for AMF annual financial statement publication; the balance sheet is disclosed in the Annual Report. Further details on publication arrangements remain to be specified. The AMF does not engage in market transactions. - Assessment: Observed. - 7.3.1 Practice/Assessment: Not applicable. Comment: The AMF does not provide emergency financial support. - 7.4 Practice: - The AMF has a regularly updated website: www.amf-france.org, containing an organization chart, policy announcements, descriptions of its operating framework, data and speeches. - Online databases: GECO (Gestion collective) provides information on Collective Investment Schemes, including Net Asset Valuations available daily for the majority of funds and on a required schedule for the remainder. “Décisions et informations financières (DIF)” provides information on new issues, listed securities and issuers supervised. - Assessment: Observed. - 7.4.1 Practice: By law, the AMF must publish an Annual Report; it also publishes an official monthly bulletin, research publications, speeches, nontechnical descriptions, newsletters and free educational pamphlets; maintains a public document room. - Assessment: Observed. - 7.4.2 Practice: Senior officials explain AMF actions, objectives and performance via conferences, speeches, public meetings and media interviews; texts are released in the review, the media, and on the website. - Assessment: Observed. - 7.5 Practice: Regulatory texts are available on the website, organized by type and theme with a special search facility; retrieval of old but still applicable law can be difficult. Other guidance is available in the Monthly Bulletin and BALO. - Assessment: Observed. - 7.6 Practice: - Fonds de Garantie des Titres (FGT–Securities Guarantee Fund, also called Fonds de Garantie des dépôts – Mécanisme de Garantie des Titres or Deposit Guarantee Fund–Securities Guarantee Mechanism) established by the Act dated 25 June 1999 on savings and financial security; managed by the FGD. - FGD is a legal entity under private law governing three guarantee mechanisms: bank deposits, securities, and warranties; governed by a Management Board under a Supervisory Board. - Guaranteed securities defined under Art. L.211-1 of the COMOFI. - Guarantees are in the process of being consolidated. - Amounts collected and managed by each Guarantee Mechanism are determined by CRBF Regulations n°99-06 and 99-07 (for depositors), 99-15 and 99-17 (for securities) and 99-12 (warranties). - Contributors to the FGD must provide enough funds if necessary to meet obligations. - Maximum guarantee per individual is EUR 70,000 per institution (irrespective of number of accounts, assets contained, or type of currency). - Information publicly available (see www.banque-france.fr/fr/infobafi/regles/11.htm) and Art. L.312-2 to 18 referenced. - Note: The CRBF no longer exists; succeeded by the CCLRF (Article L.614-1 to 3) responsible for developing prudential regulation, subject to AMF competences with respect to asset management. - Assessment: Observed. - 7.7 Practice: The AMF ombudsman assists in out-of-court settlement of disputes between retail investors and professionals; AMF plays a role in recognition of minority shareholders’ rights and minority shareholders’ association (January 5, 1988 Company Law); mediating role is publicly disclosed on the website and summaries are reported in the Annual Report. - Assessment: Observed. ### Accountability and assurances of integrity (Sections 8.1–8.4.1) - 8.1 Practice: Officials are available to appear before designated public agencies; main accountability to the President of the Republic, Commissions of finance of both parliamentary assemblies, and the Cour des comptes. The President may request to be heard or may be called at any time. - Assessment: Observed. - 8.2 Practice: - Financial statements are prepared by the Agent Comptable (public accountant) serving at the Ministry’s discretion; independent from the AMF and personally liable. - Statements are approved by the AMF Board and transmitted to the Cour des comptes, which may audit the accounts. - Balance sheet, statement of operations, and summary information published in the Annual Report; exceptions published in Cour des comptes or AMF reports. - Financial statements are not audited on a specified periodic basis, and audited statements are not published on a pre-announced schedule. - Articles 33 and 34 of the 2003 Decree establish accounting rules: accounts established and validated by a public civil servant; transmitted to the Secretary General for presentation to, and approval by, the board; accounting figures sent to the Cour des comptes (dépôt sur chiffres) and all justifying documents kept at their disposal for ten years by the AMF. - The accounts are not audited every year (but at random) by the Cour des comptes. - Suggestion: A second independent party audit of the Agent Comptable on a regular basis would be useful. - Treatment of financial statements for the new organization of the AMF may evolve. - Assessment: Partly observed. - Comments: For “observed”, financial statements should be audited on a regular basis, fully publicly disclosed, and the annual report published on a pre-announced schedule. - 8.2.1 Practice: Financial statements are audited, but not systematically, by the Cour des comptes. The AMF is determining what will be disclosed on accounting policies and qualifications under the new structure. - Assessment: Broadly observed. - Comments: For “observed”, audits should be done annually and accounting policies and qualifications published as part of publicly disclosed statements. - 8.2.2 Practice: - Organigram and main governance procedures posted on the website. - AMF is creating an internal audit division reporting directly to the Chair; internal audit division is marked on the organizational chart and expected to be led by two staff to be appointed "this summer" (context indicates Summer of 2004). - Division heads oversee operations and report to the Secretary General. - AMF staff must comply with securities ownership and transaction reporting requirements; these requirements are publicly available. - Internal by-laws (Statut des personnels) are obtainable on request. - Information to the AMF Officer of Ethics (Déontologue) is accessible only to auditors and the president; in investigations forms are available to the judge. - President, members, and staff are subject to Penal Code rules concerning professional secrecy. - Financial controls audited in connection with financial statements. - Assessment: Broadly observed. - Comments: Practice will be “observed” when internal governance procedures are fully elaborated, operational, and publicly disclosed, including staffing and operation of the internal audit division (expected during the Summer of 2004). Suggested that review of operational efficiencies include review of operational integrity. - 8.3 Practice: The AMF publicly discloses and presents its budget in its annual report. - Assessment: Observed. - 8.4 Practice: - Standards for conduct of personal financial affairs are set by law and apply to the President, commission members and staff. - By law, the president and members must disclose any other financial functions or interests. Art. L.621-4 provides specific rules for preventing conflicts of interests. - By AMF regulation adopted in March, Members are restricted with respect to holding and trading securities. - Assessment: Observed. - 8.4.1 Practice: Officials, Board members and staff are not personally liable in the bona fide discharge of functions; these protections are publicly disclosed. The AMF has legal personality and can sue and be sued. The scope of liability is established under the law; the principle does not apply to the regulator itself. - Assessment: Observed. ### Summary of observance (Table 43) - Observed: 29 (5.1, 5.1.1, 5.1.2, 5.1.3, 5.1.4, 5.2, 5.3, 6.1, 6.1.1, 6.1.2, 6.1.3, 6.1.4, 6.1.5, 6.2, 6.3, 6.4, 7.1, 7.2, 7.3, 7.4, 7.4.1, 7.4.2, 7.5, 7.6, 7.7, 8.1, 8.3, 8.4, 8.4.1) - Broadly observed: 2 (8.2.1, 8.2.2) - Partly observed: 1 (8.2) - Not observed: 0 - Not applicable: 4 (5.3.1, 5.4, 5.5, 7.3.1) ### Recommended action plan (Table 44) - Public disclosure of audited financial statements (8.2 and 8.2.1) - Have the AMF’s financial statements audited at least annually, rather than on an occasional basis. - Publish the audited financial statements fully, on a pre-announced schedule. - Include the accounting policies and any qualifications to the statements as an integral part of these publicly disclosed financial statements. - Disclosure of internal governance procedures (8.2.2) - Elaborate and publicly disclose the AMF’s internal governance procedures, and make them operational. *Document: _cr05186 - 6.2 Significant changes in financial policies should be publicly announced and explained in a timely manner.* ### 140. The AMF notes that its financial statements are subject to several statutory ### The AMF notes that its financial statements are subject to several statutory ### Internal governance and accountability - The AMF’s financial statements are subject to statutory accountability mechanisms to: - the President of the Republic; - the Parliament and its commissions of finance; - a special investigative committee that can be convened by the Parliament; - routine accountability to the Cour des Comptes. - Transmission of financial statements to the Cour des Comptes is made yearly and the justifying documents are kept at its disposal for ten years. - The Cour des Comptes can audit those documents at any time and any practice not compliant with the principle of good governance shall be made public in its annual report. - IOSCO principles and methodology define clear accountability and transparency criteria but do not require: - an external auditor to audit the regulator’s account annually; or - publication of the findings of such an audit on a pre-announced schedule. - Internal governance issues to consider include: - governance of staff and Board members on conflict of interests; - integrity of the decision making process as a whole; - integrity of internal procedures, mainly in operational areas. - AMF developments: - AMF is in the process of hiring an internal control officer and his deputy. - The new internal control division will add an independent level of control on procedures already set up by AMF management accountable to the Secretary General. ### AML/CFT assessment — information and methodology - A detailed assessment of France’s AML/CFT regime was prepared by a team including IMF staff and two experts under IMF supervision. - The team reviewed AML/CFT laws and regulations and supervisory/regulatory systems for: - prudentially regulated financial institutions; and - macro-relevant non-prudential sectors (funds transfer businesses, currency exchangers, La Poste, insurance brokers, direct marketers of financial services, non-financial businesses and professions). - The team also reviewed capacity and implementation of criminal law enforcement systems. - Team composition: - Mr. Richard Lalonde (MFD); - Mr. Nadim Kyriakos-Saad (LEG); - Mr. Philippe Fleury (Switzerland’s Autorité de contrôle en matière de lutte contre le blanchiment d’argent); - Mr. Ludovic D’Hoore (Belgium’s Cellule de Traitement des Informations Financières). - Mission visit: Paris from April 7 to April 22, 2004. - Meetings held with: MINEFI, Ministry of Justice, Ministry of Interior, Commission Bancaire, Commission de Contrôle des Assurances, Autorité des Marchés Financiers, Banque de France, licensing authorities, TRACFIN, Customs, Police, and private sector representatives. - Appreciation expressed to participants and MINEFI for organization and coordination. ### General situation of money laundering and terrorist financing in France - 1996 FATF mutual evaluation findings: - France attractive to money launderers due to stable economy, political situation, and strong currency. - Problem more of secondary laundering (layering) or third degree laundering (integration) than placement of cash. - Traditional laundering techniques remain in use, e.g., foreign exchange transactions via money changers. - Most laundering cases involved international networks and foreign nationals; few linked to local drug trafficking. - Common methods believed to include: - bank deposits; - foreign currency and gold bullion transactions; - corporate transactions; - purchases of real estate, hotels, and works of art. - Reports indicate foreign organized crime networks use the French Riviera to launder assets by buying real estate. - There are no statistics or empirical estimates to evaluate the volume of revenues to be laundered. - There are no statistics or estimates with regard to terrorist financing activities. ### Overview of measures to prevent money laundering and terrorism financing - France’s AML/CFT history and developments: - Active FATF member; contributed to FATF 40+8 Recommendations. - 1987: first criminalized money laundering. - 1990: established TRACFIN and enacted a law on preventive measures introducing suspicious transaction reporting. - 1993: extended STR scope to funds/transactions suspected of being related to organized crime. - 1996: extended predicate offences for ML to all crimes and misdemeanors. - 1998 and 2001: broadened sectoral coverage to certain non-financial professions and added transaction reporting requirements. - 2003: extended coverage to portfolio management firms, direct marketers, investment advisers; clarified and strengthened authorities of financial sector supervisors. - 2004: extended STR scope to funds/transactions suspected of being related to corruption and fraud against the financial interests of the European Communities; broadened coverage to legal and accountancy professions; strengthened customer identification requirements. - Work underway following the 2003 revision of the FATF 40+8 Recommendations. - Assessment of the framework: - Overall framework comprehensive; France maintains a high level of compliance with the FATF 40+8 Recommendations. - In many respects the regime goes beyond the standard, notably sectoral coverage of preventive measures and reporting requirements. - Identified areas for improvement: - implementation of UN Security Council Special Resolutions on terrorism financing within the EU regulatory framework; - overall quality of STRs; - AML/CFT regulation, supervision and enforcement for sectors other than credit institutions and certain investment firms; - requirements for increased diligence and internal controls. ### Main findings — Criminal justice measures and international cooperation - International conventions and criminalization: - France has ratified the Vienna Convention, the UN International Convention for the Suppression of the Financing of Terrorism, the Palermo Convention, and is party to the Strasbourg Convention. - Legal provisions criminalize money laundering and terrorist financing; scope of predicate offences for ML covers all crimes and misdemeanors, including FT and fiscal fraud. - FT is criminalized comprehensively. - Seizure and confiscation: - French law provides broad possibilities to seize assets during investigations by judicial police officers or on judiciary instruction. - In practice, confiscation measures generally apply to assets seized in the judicial procedure. - Alternatively, fines can be increased to half the level of the laundered funds. - Implementation of UN Security Council Resolutions: - France implements UNSC Resolutions 1267, 1269, 1333, 1373, and 1390 through directly applicable EU legislation. - France is currently unable to comply fully with UNSC Resolution 1373 regarding terrorists/groups from within the EU because they are not covered by EU Council Regulations. - The Constitutional Treaty established by the European Convention includes provisions that would lift this distinction. - A draft bill has been prepared to enable the government to impose financial sanctions and administratively freeze assets of terrorists or terrorist groups based within the EU in compliance with UNSC Resolution 1373; the draft bill must undergo a consultative process and the timeframe for adoption is uncertain. - TRACFIN (France’s FIU): - TRACFIN is an Egmont member and operational since 1991. - TRACFIN can issue blocking or freezing instructions valid for 12 hours where suspicious transactions are reported prior to execution. - This blocking procedure was used only on seven occasions since TRACFIN became operational and has produced minimal results. - TRACFIN can cooperate with foreign FIUs and has concluded cooperation agreements with 24 foreign counterparts. - STRs and investigative outcomes: - Number of STRs increased rapidly since 2000 but remains rather low relative to financial/economic activity. - Recent increase in reporting has not been accompanied by a significant increase in overall STR quality. - Number of files forwarded by TRACFIN to judicial authorities remains relatively limited; TRACFIN attributes this mainly to poor quality of many STRs. - A Liaison Committee working group is establishing an electronic reporting form to enhance analytical capabilities, improve STR quality, increase quantity and quality of transmissions by TRACFIN, and assist in compiling more detailed statistics. - Law enforcement and judiciary: - ML and FT investigations are carried out by law enforcement under judiciary supervision. - Judiciary Police, Préfecture de Police, Gendarmerie and Customs have divisions specialized in economic and financial crime, including ML, with specific training programs. - A large number of cases are not pursued due to insufficient financial and human resources. - Law of March 9, 2004, entering into force on October 1, 2004, introduced specialized jurisdictions expected to enhance judicial capacity to combat financial crime. - Number of convictions for ML is increasing, but ML offence is not used as frequently due to difficulty establishing illegal origin of funds; courts sometimes pursue alternative offences (abus de biens sociaux, association de malfaiteurs). - A recent case indicates a conviction for general ML can be pronounced without the predicate offence being specifically identified; further reflection needed on obstacles requiring proof of predicate offence. - Despite efforts, no significant results in FT convictions so far, due mainly to recent incrimination of FT and complex enquiries; pragmatic qualification as association de malfaiteurs is used. - International cooperation: - France pursues active international cooperation with an extensive set of bilateral and multilateral treaties for MLA and extradition in ML and FT cases. - France provides timely and effective follow-up to mutual legal assistance requests. - French law: confiscation of assets on French territory operates as transfer of property to the state unless otherwise agreed with requesting state; sharing of assets may be provided in a bilateral treaty. ### Main findings — Preventive measures for financial institutions - Institutional framework: - Sectoral organization of regulation, supervision and licensing. - Regulation-making authority largely rests with the Minister of the Economy as a result of the Law on Financial Security of 2003. - Licensing authorities: - CECEI licenses credit institutions and investment firms other than portfolio management firms (“credit institutions and investment firms”); - CEA licenses insurance companies; - AMF licenses portfolio management firms, direct marketers of financial products (“démarcheurs) and investment advisers. - Licensing requirements include “fit and proper” testing of managers and significant shareholders. - Other financial entities subject to registration requirements: insurance brokers, currency exchangers, direct marketers and investment advisors, with varying degrees of “fit and proper” testing. - In general, AML/CFT internal controls policies and procedures are not taken into account for licensing purposes. - Supervisory responsibilities: - CB supervises credit institutions and investment firms for AML/CFT compliance. - CCA supervises insurance companies and brokers. - AMF supervises portfolio management firms, direct marketers and investment advisers. - IGF is responsible for AML/CFT supervision of La Poste’s financial services. - Enforcement and resources: - Enforcement and sanction powers of supervisory authorities are generally appropriate. - AML/CFT supervisory efforts and corresponding resources are relatively low for life insurance companies and brokers, individual and collective portfolio management firms, direct marketers and La Poste. - Number of on-site inspections and staff resources for these sectors is relatively low and few sanctions have been imposed. - Historically low rate of STR reporting from these sectors makes it difficult to assess effective implementation. - Regulatory quality and gaps: - Legal framework for AML/CFT preventive measures is comprehensive; regulation and supervision of credit institutions and investment firms (other than portfolio management firms) is of a high standard. - Regulatory framework remains a work in progress for insurance companies and brokers, individual and collective portfolio management firms, direct marketers and currency exchangers. - Regulatory initiatives underway in connection with implementation of revised FATF standards. - Customer due diligence and monitoring: - CMF and Decree 91-160 of February 13, 1991 provide an adequate framework for customer identification. - Insufficient guidance generally on adequate customer acceptance policies/procedures and reasonable steps to identify beneficial owners of accounts and transactions. - Ongoing monitoring of accounts and transactions requirements need to be broadened. - Minister of the Economy regularly informs financial entities of countries without adequate AML/CFT systems, but there is no specific legal requirement for financial entities to give special attention to business relations/transactions with persons in such countries. - Personnel and training: - Financial entities required to have screening procedures for hiring employees; requirements focus largely on competency and are silent on integrity. - Employee training appears effectively implemented for credit institutions, investment firms, insurance companies and La Poste. - Suspicious transaction reporting: - STR requirement has evolved/expanded over the past decade. - Scope of reporting requirement is narrower than scope of predicate offences for ML (which covers all crimes and misdemeanors, including fiscal fraud); this misalignment may cause confusion and reduce effectiveness. - Additional reporting requirements (notably related to trusts) have unclear benefits and could divert resources from detection of suspicious transactions. - Internal controls: - Legal framework for AML/CFT internal controls supplemented by comprehensive regulations for credit institutions and investment firms. - For insurance companies and portfolio management firms, reliance is on supervisory and professional recommendations that are not as comprehensive. *Italic: IMF staff and assessors’ findings as presented in the assessed chapter.* ### 171. Financial entities are required to ensure that their branches and subsidiaries that are ### _cr05186 - 171. Financial entities are required to ensure that their branches and subsidiaries that are ### Findings - Financial entities are required to ensure that their branches and subsidiaries that are located abroad comply with the requirement to pay special attention to certain transactions. - Other than for credit institutions and currency exchangers, there appears to be no specific requirements for financial entities to ensure the comprehensive application of AML/CFT requirements to branches and majority owned subsidiaries located abroad. ### Detailed Assessment - The text identifies a gap in regulatory requirements: specific obligations for comprehensive application of AML/CFT measures to overseas branches and majority owned subsidiaries are present only for credit institutions and currency exchangers. - Implication: oversight and mandated application of AML/CFT standards for other types of financial entities’ foreign operations are not explicitly required by the existing framework described. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05186.pdf* ### 172. The following detailed assessment was conducted using the October 11, 2002 ### Detailed Assessment — Criminal Justice Measures and International Cooperation (sections I–III) ### I — Criminalization of ML and FT (criteria 1–6) - International conventions and UNSCRs: - France ratified the Vienna Convention on October 31, 1990. - France ratified the UN International Convention for the Suppression of the Financing of Terrorism on January 7, 2002. - France ratified the Palermo Convention on February 21, 2002. - France ratified the Strasbourg Convention on October 8, 1996. - France implements UNSCRs 1267, 1269, 1333, 1373, and 1390 mainly through EU legislation, including Council Regulation (EC) 2580/2001 (27 December 2001) and Council Regulation (EC) No 881/2002 (27 May 2002) and subsequent amendments. - Limitation: France is currently unable to comply fully with UN Security Council Resolution 1373 with regard to terrorists or terrorist groups from within the European Union as they are not covered by EU Council Regulations. - Criminalization of money laundering: - Primary provisions: Articles 222-38 and 324-1 of the Criminal Code; Article 415 of the Customs Code. - Article 324-1 defines ML as: - (i) facilitating, by any means, the false justification of the source of property or income of the perpetrator of a crime or misdemeanor, from which the latter derived a direct or indirect profit; and - (ii) assisting in the investment, concealment, or conversion of the direct or indirect proceeds of a crime or misdemeanor. - Article 222-38 (drug trafficking ML) has constitutive elements identical to Article 324-1. - Article 415 (Customs Code) criminalizes cross-border financial operations known to originate from offences in the Customs Code or drug law violations. - Article 222-39-1 (1996) created non-justification of resources in connection with drug trafficking; similar offence created in 2001 for resources connected to association de malfaiteurs, trafficking in human beings and terrorism. - Court of Cassation ruling (Abdellaoui case) on January 14, 2004: Article 324-1, second paragraph, can apply to a person having laundered proceeds of a predicate offence he committed himself. - French law does not require conviction for the predicate offence as a precondition for a ML conviction. - Scope of predicate offences: "very extensive" — covers all crimes and misdemeanors, including FT and fiscal fraud. - Offence of ML extends to any type of property that directly or indirectly represents proceeds of crime. - Extraterritoriality: conduct in another jurisdiction may constitute a predicate offence provided it would have been incriminated had it taken place in France (not explicitly in codes but indicated by authorities). - Criminalization of FT: - FT criminalized comprehensively in Article 421-2-2 of the Criminal Code, covering an extensive list of acts (Articles 421-1, 421-2, 421-2-1) and applying under certain conditions when terrorists/organizations are located in another jurisdiction or when acts take place elsewhere. - Scope and mens rea: - ML and FT offences apply to individuals and legal entities (Article 324-9 Criminal Code; Article 422-5). - Law of May 13, 1996 introduces objectivity re: knowledge element for general ML under Article 324-1: does not require establishment that suspect knew precisely the offence giving rise to laundered proceeds. - Knowledge of predicate offence still required for laundering of drug proceeds (Article 222-38) and for aggravated laundering (Article 324-4). - Intent and purpose can be inferred from objective factual circumstances. - Sanctions: - Laws provide an adequate range of criminal sanctions for ML and FT. - Sanctions for drug ML are twice as much as for general ML; mechanisms (Article 324-4) may permit applying higher imprisonment sanction corresponding to the underlying offence if higher than the 5 or 10 years in Articles 324-1 and 324-2; Article 222-38 second paragraph results in much higher sanctions for drug-related ML. - Adequacy of legal means and resources: - Specialized courts: Law 75-701 (6 August 1975) established courts specializing in economic and financial matters; 1998 creation of economic and financial divisions (pôles économiques et financiers); October 2004 law creates interregional courts specializing in highly complex organized crime and economic and financial crime. - Anti-terrorism/FT proceedings centralized in tribunal de grande instance of Paris with concurrent jurisdiction principle. - Investigative agencies: OCRGDF, Gendarmerie Nationale, DNRED, SNDJ. - Analysis of effectiveness: - Legal framework comprehensive. - Main limitation: inability to fully comply with UNSCR 1373 regarding EU-based terrorists/groups not covered by EU Council Regulations. - Recommendations and compliance status: - Authorities encouraged to take necessary measures to ensure full compliance with UNCSR 1373. - Implications for FATF: R.1, R.4, R.5, SR.I, and SR.II: Compliant. ### II — Confiscation of proceeds of crime or property used to finance terrorism (criteria 7–16) - Legal framework enabling seizure, confiscation, tracing: - Temporary seizure measures: Code of Criminal Procedure Articles 54, 56, 76, 97. - Article 706-30 (Code of Criminal Procedure): juge des libertés et de la détention, at prosecutor’s request, may seize any assets of person under judicial investigation to safeguard confiscation orders; currently restricted to confiscation in drug trafficking or money laundering cases. - Similar mechanisms exist for trafficking in human beings/exploitation of prostitution (Article 706-36-1) and terrorism (Article 706-24-2), but do not apply for enquiries based on money laundering linked with these predicate offences. - Act of 9 March 2004 (entered into force 1 October 2004) repeals prior provisions and inserts Article 706-103 providing extended seizure to safeguard confiscation for offences listed in Article 706-73, which includes drug trafficking, trafficking in human beings, terrorism, kidnapping, forgery and laundering of proceeds of any listed crimes; Article 706-103 applies to other forms of organized crime via Article 706-74. - Both movable goods and real estate can be seized. - Article 99-2 (Code of Criminal Procedure): State may put seized assets on public sale when not to be restituted and not needed for establishing truth; proceeds placed with Caisse des Dépôts et Consignations pending prosecution outcome. - Customs authorities seize assets for customs offences including customs ML. - Confiscation rules: - Confiscation is a complementary criminal sanction. Article 131-21 Penal Code sets basic principles: instrumentalities, proceeds and object of crime can be confiscated except restitution to third parties; mandatory confiscation for dangerously capable objects; value-confiscation if objects not seized or recovered. - No provision creating mandatory confiscation of proceeds of predicate offences or laundered funds — confiscation is optional. - Confiscation can cover all assets of the offender except certain exempt goods. - Article 324-7 Penal Code explicitly refers to confiscation of instrumentalities and proceeds for ML. - Article 415 Code of Customs: specific confiscation regime for cross-border operations involving drug trafficking funds — confiscation of funds (or equivalent amount), imprisonment between two and ten years, and fine between one and five times the amount of the transactions. - Article 459 Code of Customs: similar seizure/confiscation regime for financial embargos. - Legal persons: - Criminal liability of legal persons provided; confiscation regime principles do not distinguish between individuals and legal entities. - Civil forfeiture: - Confiscation limited to criminal proceedings only. - Power to identify and trace property: - Responsibility mainly with judiciary police under supervision of investigating judge; any agent with status of judiciary police can seize goods useful for establishing truth. - Reporting mechanism under Articles L. 561-1 ff of the CMF involves reporting entities and the FIU in detecting suspected assets. - Overall responsibility for seizure/confiscation lies with judicial authorities. - Identification and freezing of terrorist funds: - Treasury Department responsible for implementing UNSCRs imposing freezing of assets linked to terrorism. - UNSCR 1390 transposed by EU Council Regulation 881/2002; UNSCR 1373 transposed by EU Council Regulation 2580/2001. Regulations directly applicable. - When lists updated, Treasury communicates information to financial institutions; on a hit, Treasury checks with FIU and law enforcement; if confirmed, accounts are frozen. Treasury takes responsibility for freezing rather than financial institutions. - Limitation restated: France unable to comply fully with UNSCR 1373 for EU-based terrorists not covered by EU Regulations. - Freezing orders are administrative and challengeable before Conseil d’Etat; an example case pending. Treasury does not communicate information to the judiciary. - Obstacles faced by financial institutions implementing UN/EU lists: lack of identifying data, difficulty integrating lists into systems and running checks, period of uncertainty pending hit clarifications. - Funds and asset allocation: - Proceeds from drug trafficking and drug ML are affected to a special fund created by Decree of 17 March 1995 to improve equipment/functioning of authorities fighting drug trafficking. French Authorities did not inform the Mission about the amount transferred so far. - Statistics: convictions for drug trafficking show between 30 and 40 million FRF were seized every year from 1995 to 2000. - A similar fund for assisting victims of terrorist acts was created by law of 9 September 1986. - At time of assessment, four accounts frozen based on UN and EU lists amounting to about 30.000 EUR; no other assets such as real estate frozen. - Analysis of effectiveness: - Practical confiscation tends to apply almost exclusively to assets previously seized in the judicial procedure due to optional character of confiscation. - Difficulties noted in uncovering all assets; recovering all or most laundered funds is exceptional. - Alternative: fines can be increased to half the level of laundered funds (Articles 222-38 and 324-3 Penal Code). - No statistics available on amounts resulting from seizure and confiscation orders in general or for ML specifically; absence of information limits assessment of effectiveness. - Authorities considering establishment of a central body to manage seized/confiscated assets. - Judicial authorities somewhat reluctant to utilize available tools systematically; insufficient use of Article 706-30 procedure. - Ministry of Justice efforts since about two years to raise magistrates’ awareness illustrated by circular letter from Minister of Justice of 15 February 2002; efforts focused mainly on drug trafficking and drug ML to date. - Administrative freezing of terrorist-related funds limited by legal distinction preventing freezing of assets of EU-based terrorists; Constitutional Treaty provisions could lift distinction; draft bill prepared to enable government to impose financial sanctions and administratively freeze such assets in compliance with UNSCR 1373 — draft undergoing consultative process, timeframe uncertain. - Recommendations and compliance status: - Consider establishing mandatory deprivation of illegal profits of financial and economic criminality (via fine or confiscation). - Increase training and awareness for magistrates on asset-oriented approaches and tools. - Compile comprehensive statistics on seizures/confiscations; consider a central body for managing seized/confiscated assets. - Increase investigation/prosecution of legal entities created to facilitate ML; pursue confiscation measures systematically against legal persons. - Proceed with plan to adopt domestic act to enable full compliance with UNSCR 1373. - Implications for FATF: R.7, R.38: Compliant. SR.III: Materially non-compliant. ### III — The FIU (TRACFIN) and financial intelligence processes (criteria 17–24) - Mandate and status: - TRACFIN (Traitement du Renseignement et Action contre les Circuits Financiers Clandestins) created by Act n° 90-614 of 12 July 1990 (amended several times). - Placed within the Ministry of Economy, Finance and Industry. - Meets Egmont Group definition of an FIU; member of Egmont since June 1995. - Main tasks: receive, analyze and disseminate reports on suspicious transactions from reporting entities in metropolitan France and DOM-TOM. - Status ensures operational independence and confidentiality of information. - TRACFIN falls under Article 40 of the Code of Criminal Procedure (State employees must report to prosecutor any fact they know to constitute an offence). - Reporting obligations and scope: - Coverage extended progressively to financial enterprises and non-financial professions (Article L. 562-1 of the Financial and Monetary Code): banks, foreign exchange offices, insurance companies, investment enterprises; real estate intermediaries, casinos, dealers in precious stones/metals/antiques/works of art, auctioneers, accountancy and legal professions (including lawyers), gaming houses, lotteries and race gambling companies. - Reporting obligations apply in metropolitan France and DOM-TOM. - Reporting institutions/individuals required to disclose transactions/facts suspected to derive from drug trafficking, organized crime, defrauding EU financial interests, corruption, or linked to terrorism financing. - Lawyers’ disclosures addressed to president of bar association (Article L.562-2-1, §3) who communicates to TRACFIN unless he believes no basis for suspicion. - Obligation to communicate transactions where doubts exist as to client/beneficiary, transactions involving trusts or similar structures, and transactions involving NCCTs against which countermeasures decided. Specific threshold: transactions with Nauru and Myanmar amounting to 8.000 EUR or more. - Reporting mechanics: - Reports can be oral or written. - TRACFIN developing an electronic web-based reporting form via the Liaison Committee; pilot projects with Bank of France and insurance sector. - Opposition to execution of a transaction: - Reports should be made prior to execution if possible; TRACFIN can oppose execution for 12 hours (Article L. 562-5 CMF). - In practice majority of reports are made after transactions take place. - In prior reports, TRACFIN consults judicial authority to determine takeover; transaction frozen only when response affirmative. - Access to additional information: - TRACFIN obtains additional information from reporting parties, judiciary police (OCRGDF), Gendarmerie, supervisory authorities, administrative services including Customs, Social Security Services. - Professional secrecy does not apply regarding obligations to comply with TRACFIN requests. - TRACFIN has access to Central Register of Bank Accounts (FICOBA) and security habilitation for classified information. - Dissemination to domestic authorities: - TRACFIN must refer facts likely to constitute ML linked to drug trafficking or organized crime or related to FT to Public Prosecutor (Article L. 562-4 CMF). Forty percent of transmissions are on this basis. - The remaining 60 percent of transmissions are based on Article 40 Code of Criminal Procedure. - Resources and training: - Leadership: Secretary General of TRACFIN is also Director General of Customs Services; operational head is Deputy Secretary General. - Staff: total 48, with 33 in operational section. - Staff origins: public administration (Customs, Ministry of Economy, Finance and Industry), representatives from judiciary, OCRGDF, Gendarmerie. - Trend toward more diversified staff for legal, economic and financial expertise. - Training system internal, somewhat ad hoc; no well-defined training modules; occasional private sector training. - Issuance of guidelines and feedback: - TRACFIN produces an annual report with sanitized cases and typologies. - Provides typological information for training by supervisors and professionals, and contributes to FATF and Egmont initiatives. - Under new Article L. 562-6 CMF, TRACFIN informs reporting parties of every transmission of their initial suspicions to judicial authorities. - Law silent on position of reporting parties regarding ongoing business relationship when making a report; general tendency to end such relationships. - Reporting parties are not routinely informed of final judicial decisions; a recent amendment requires judicial authorities to inform TRACFIN of outcomes of judicial procedures. - IT and analytical capabilities: - All STRs stored in TRACFIN database; objective reports checked and stored only if useful. - Overall quality of reports is uneven. - Liaison Committee working to establish electronic reporting form to enhance analytical capabilities and quality/quantity of transmissions. - Sanctions for non-compliance: - Sanctions imposed by supervisory authorities (Commission Bancaire, Commission de Contrôle des Assurances, Autorité des Marchés Financiers): disciplinary sanctions include warning, fine, publication, withdrawal of license; do not exclude criminal liability. - Some reporting parties lack a supervisory authority competent to impose sanctions (gaming houses, racehorse gambling institutions, dealers in high value goods). - For casinos, Ministry of Interior supervises operational compliance but AML/CFT focus of such supervision appears underdeveloped. - Domestic cooperation: - Decree n° 2002-770 (3 May 2002) created a Liaison Committee on the fight against money laundering — meets twice a year; co-chaired by TRACFIN and Ministry of Justice; comprises 30 representatives (reporting parties, supervisors, State departments). - Interaction between TRACFIN and supervisors under Article L. 563-5 CMF appears efficient. TRACFIN reports deficiencies to supervisors to focus on-site controls and provides typologies. - International cooperation: - Article L. 564-2 CMF enables TRACFIN to cooperate with foreign counterpart FIUs on the basis of reciprocity and subject to similar professional secrecy in the foreign unit. - TRACFIN concluded cooperation agreements with 24 counterpart units. - TRACFIN actively involved in FIU.Net project and frequently uses this secure EU channel. - Statistics and implementation: - TRACFIN received 6.896 STRs in 2002 (3.598 in 2001; 2.537 in 2000). - Geographical concentration: more than half originate from Paris and Île-de-France region. - Reporting parties in 2002: banks > 60 percent; Public Financial Institutions 21,06 percent; changeurs manuels 9,85 percent. - Reports from insurance sector and other intermediaries (investment companies, casinos, dealers in high value goods) still very limited or nonexistent. - Analysis of effectiveness: - TRACFIN has long-standing experience processing financial intelligence to support law enforcement. - Broad legal basis to collect additional information and direct contacts enhance analysis. - Absence of a central contact point with basic data on individuals/legal entities impedes verification of identification data contained in STRs; recent amendment to Article L. 563-6 CMF granting access to Social Security registers should improve this. - International cooperation: TRACFIN can comply with foreign requests without specific formalities and treats such requests as domestic STRs; increasing use of requests to other FIUs; generally follows Egmont Best Practices. - Volume of STRs is growing steadily; TRACFIN received about 6.900 reports in [text ends here]. - Implications for compliance with FATF Recommendations: - (Implications discussed in earlier sections; TRACFIN meets Egmont definition and is operationally independent.) *Source: Detailed assessment conducted using the October 11, 2002 version of the FATF 40+8 Methodology (excerpts)._* ### 2002. Although this is twice as much as the previous year, it would seem that this was not accompanied by a ### 2002. Although this is twice as much as the previous year, it would seem that this was not accompanied by a ### Reporting activity, STR quality and sectoral coverage - The number of suspicious transaction reports (STRs) remains relatively low compared to the importance of financial and economic activity on the French market. - Operational results of TRACFIN: 269 cases were forwarded to the Prosecutor’s Office in 2003, representing only eight to ten percent of all the STRs received. - Possible causes for low prosecution referrals: poor quality of STRs and insufficient verifying information from other authorities. - Overseas departments and territories: Guyana did not make a single report after 2000 and raises serious concerns. - Sectoral STRs in 2002: - Real estate industry: 134 STRs received, of which only 5 originated from real estate agents and 126 from notaries. - Dealers in high value goods and commissaires-priseurs: no reports received (commissaires-priseurs are subject to STR requirements only since February 2004). - Casinos: the country’s 189 casinos made 9 reports, 6 of them after the authorities started an important information campaign in July 2003. - Deficiencies attributed to absence of a supervisory body for many parties and difficulty reaching these professions. ### Recommendations and guidance to improve reporting and oversight - Issue guidelines to help financial institutions and other reporting parties better implement AML/CFT requirements and improve detection and reporting of suspicious transaction patterns. - Consider establishment of an independent supervisory body for professions and industries not adequately supervised to oversee application of AML/CFT and other legal obligations. - TRACFIN and authorities like the Commission Bancaire play a key role; the Liaison Committee could be the forum to advance these measures. - Establishment of an electronic reporting form is recommended to improve inputs into the AML/CFT chain. - Improve statistical self-evaluation by keeping more detailed figures, including: - Nature of reports received. - Input from different sectors. - Type of transactions involved. - Suspected criminal nature of underlying facts. - Reasons for transmission to judicial authorities. - Nationality/country of residence of individuals involved. - Amounts involved. - Number of cases being processed. - The 12-hour legal possibility to oppose execution of a transaction has produced minimal results; recommendations include: - Increase awareness of the 12-hour tool among reporting parties. - Consider extension of the 12-hour delay to allow the FIU to collect complementary information to constitute a solid case for transmission to judicial authorities. - Intensify queries to foreign FIUs to collect additional intelligence in international cases. - TRACFIN should make urgent outreach and monitoring efforts in DOM-TOM, particularly Guyana. - Consider creation of additional working groups within the Liaison Committee and a more active involvement of the judiciary. - Authorities may wish to assess whether current staffing of TRACFIN is adequate given increasing STR volumes and outreach needs. ### Implications for FATF Recommendations (preventive measures) - R.14: Largely compliant because the legislative requirements are narrower in scope than the FATF standard. - R.28: Largely compliant, as additional efforts are needed to provide guidance to reporting entities, notably outside the banking sector. - R.32: Compliant. ### Law enforcement, prosecution authorities, powers and duties - ML and FT investigations are carried out by law enforcement under supervision of the judiciary; specialized divisions exist within the Judiciary Police, the Préfecture de Police, the Gendarmerie and Customs. - Customs (DGDDI): - Declarative obligation under Article 464 of the Code of Customs: every transfer of funds by an individual amounting to 7.600 EUR or more across the French national border must be declared; non-compliance is criminally liable. - DGDDI can seize funds suspected of being related to FT in a number of cases. - SNDJ (Service national de douane judiciaire) should be up and running by the end of the year and will have similar powers and duties as the judiciary police for Code of Customs offences. - Customs competence to control exchange agents under Article L. 520-4 of the CMF; an average of 40 on-site visits are scheduled every year. - Judiciary Police (OCRGDF): - General competence for judicial enquiries and investigations by delegation of a magistrate in ML, FT and defrauding the EU financial interests. - 25 investigators specialized in ML and FT and 15 staff to assist them. - Cooperates with Gendarmerie, tax inspection service and TRACFIN. - Gendarmerie: - Operates in suburban and rural areas; any local unit can start investigating ML cases. - Specialized sections at the level of the Court of Appeal consist of 25 to 80 people. - Judicial Authorities: - ML and FT cases are handled by the Tribunal de Grande Instance. - Paris Prosecutor’s Office: two of its five divisions prosecute ML cases (financial division primarily receives TRACFIN transmissions; division on serious organized crime is competent for FT). - Prosecutor or Juge d’Instruction heads enquiries carried out by the Préfecture de Police de Paris or the OCRGDF. - Since the late 1990s: - About 4 so-called “assistants spécialisés" work in the financial divisions of Paris, Marseille, Lyon and Bastia to support investigating judges; similar function created for deciding judges. - Assistants en justice, mainly students, coordinate investigations. - Ministry of Justice: provides training material, guidelines, awareness-raising and communicates governmental prosecution priorities. ### Analysis of law enforcement effectiveness and recommendations - Capacity constraints and other priorities have prevented many cases from being dealt with; assistants de justice have not yet produced anticipated results. - Legal reform: Law of March 9, 2004 entered into force on October 1, 2004 introducing specialized jurisdictions expected to enhance capacity through human resources and specialized training. - Case flow and outcomes: - About seventy percent of ML cases in Paris originate from TRACFIN and about ten percent from the Customs Department. - Of sixty cases communicated by TRACFIN in 2003 dealt with by the financial division of the Paris Prosecutor’s Office, almost half were new cases; half are being further investigated (preliminary enquiry or judicial investigation) and four have been closed. - Convictions: - Number of convictions for money laundering (including non-justification of resources) increased to forty-seven in 2001 against twenty-one in each of the two previous years. - These results are limited relative to the time the reporting mechanism has been in place and the volume of reports sent by TRACFIN and other authorities. - Prosecution challenges: - Difficulty proving the predicate offence, especially when committed in a foreign country. - Some prosecutors still operate on assumption they must prove the specific underlying offence, despite jurisprudence indicating conviction for general money laundering can be pronounced without identifying the predicate offence. - International cases pose additional problems due to need for information from other jurisdictions and tendency to re-qualify facts. - Terrorism financing (FT): - None of the FT cases under investigation lead to judicial results so far. - Main difficulties: linking suspicious financial movements with terrorist activities and absence of an investigating body combining specialization in both financial and terrorism aspects. - Most FT cases initiated following terrorist attacks. - Recommendations: - Continue to monitor challenges posed by serious economic crime and required financial means at different stages. - Creation of specialized sections within OCRGDF, brigade de recherche et d’investigation financière de la préfecture de police, Gendarmerie and judiciary is commendable. - Further consider pooling expertise in financial and terrorism issues in one specialized service for FT investigations. - Reduce reliance on requiring proof of the underlying crime for ML prosecutions; encourage openness to approaches where illegal origin of funds can be deduced from circumstances without specific predicate identification. - Draw experience from jurisprudence in other jurisdictions on deducing illegal origin without establishing a specific predicate offence. ### Implications for FATF Recommendation on law enforcement - R.37: Compliant. ### International cooperation: treaties, MLA, confiscation and effectiveness - France maintains an impressive set of bilateral and multilateral treaties for MLA and extradition in ML and FT cases. - Principle: France does not condition mutual legal assistance to dual criminality as a general rule; however, some treaties include such a condition, particularly for coercive measures. - Where a multilateral treaty covers an offence for which assistance is requested and both countries are parties, the dual criminality condition is considered met. - Absent a treaty, assistance is available on a case-by-case basis and subject to reciprocity. - Code of Criminal Procedure permits action on MLA requests as close as possible to procedures of the requesting state. - Property seizure and confiscation: - Articles 10-16 of Law No. 96-392 of May 13, 1996 apply to requests under Chapter III of the Council of Europe Convention on Laundering, Search, Seizure and Confiscation. - Requests may involve searching for proceeds, items used or intended for the offence, property equivalent to proceeds, conservation measures, or confiscation. - Grounds for refusal of mutual assistance are specifically listed. - Statistics and record-keeping: - France provides timely and effective follow-up to MLA requests and maintains statistics on all MLA and other requests made or received relating to ML, predicate offences, and FT, and on outcomes. - Current statistics quantify flows (active/inactive cases, country, date of receipt/dispatch, date of action/rejection) but do not reflect the nature of requests. - Recommendation: include details on nature and result of MLA requests in statistics for a clearer picture of efforts. - Information exchange arrangements: - Arrangements exist for law enforcement authorities to exchange information with international counterparts, including liaison magistrates, European Judicial Network and Eurojust. - No recorded statistics on number, source and purpose of information exchange requests and their resolution. - Confiscation and asset sharing: - Confiscation on French territory operates a transfer of property to the state unless otherwise agreed with the requesting state. - Sharing of assets may be provided in bilateral treaties. - France currently has one bilateral treaty providing for transfer or sharing of assets when confiscation results from coordinated law enforcement actions. - Authorities are encouraged to consider similar arrangements with additional countries to incentivize coordination and cooperation. - Analysis of effectiveness: France provides timely follow-up and maintains statistics, but the nature of MLA requests is not reflected in those statistics. - Recommendation: include details on nature and results of MLA requests in statistics to obtain a better understanding of France’s efforts. ### Implications for FATF Recommendations (international cooperation) - R.3, 32, 33, 34, 37, 38, 40, and SRV: Compliant. - SR.I: Materially non-compliant. *Source: _cr05186 - 2002. Although this is twice as much as the previous year, it would seem that this was not accompanied by a* ### 173. The assessment sought to confirm that : (a) the legal and institutional ### _cr05186 - 173. The assessment sought to confirm that : (a) the legal and institutional ### I—General Framework (compliance with criteria 43 and 44) - Description: - The legal framework for the prevention of money laundering and financing of terrorism in the financial sector is based on: - Law No. 90-614 of July 12, 1990 (codified in Title VI of Book V of the Code Monétaire et Financier (CMF)) and Decree No. 91-160 setting out main AML/CFT preventive measures and scope of application. - Successive legal developments: - Law No. 93-122 of January 29, 1993: extended suspicious transaction reporting to funds/transactions suspected of being related to organized crime in addition to drug trafficking. - Law No. 96-392: broadened application to insurance and reinsurance brokers. - Law No. 98-546 of July 2, 1998: extended coverage to certain non-financial businesses and professions, i.e., real estate intermediaries, including brokers and notaries. - Law No. 2001-420 of May 15 2001: refined suspicious transaction reporting, added reporting for transactions involving trusts and non-cooperating countries and territories as identified by the FATF; broadened application to legal representatives and officers of casinos and dealers in certain high-value goods. - Law No. 2003-706 of August 1, 2003: broadened application to individual and collective portfolio management firms, direct marketers of financial services, investment advisers and dealers in miscellaneous goods; clarified and strengthened powers of financial sector supervisors. - Law No. 2004-130 of February 11, 2004 (implementing European Directive 2001/97/CE of December 4, 2001): extended suspicious transaction reporting to funds/transactions suspected of being related to corruption and fraud against the financial interests of the European Communities; broadened coverage to legal and accountancy professions; strengthened customer identification requirements. - Law 2004-204 of March 9, 2004 (coming into effect October 1, 2004): amended suspicious transaction reporting to explicitly cover funds/transactions suspected of being related to the financing of terrorism; extended application to other sectors of the gaming industry. - Article L. 562.1 of the CMF sets out financial entities to which preventive measures apply, including: - La Poste; Caisse des Dépôts et Consignations/Caisses d’Epargne and other entities governed by Title I of Book V of the CMF; - The Banque de France; - credit institutions; - investment firms, individual and collective portfolio management firms, intermediaries in miscellaneous assets, direct marketers and investment advisers; - insurance companies (including mutual insurance companies), and insurance and reinsurance agents and brokers; - currency exchangers; - persons who carry out, monitor, or advise on transactions relating to the purchase, sale, transfer, or rental of real estate; - the legal representatives and managers of casinos, as well as groups, associations and legal entities engaged in games of chance, lotteries, betting, and sports and horse-racing odds-making; - persons customarily trading in or organizing the sale of precious metals and stones, antiquities, and works of art; - accountants and auditors; - notaries, lawyers and other independent legal professionals when carrying out certain activities; - state-appointed liquidators and auction houses. - Regulatory and supervisory measures: - Few regulations or binding instructions supplementing the legal framework have been issued other than for credit institutions and investment firms other than portfolio management firms. - Supervisory and professional recommendations complement the framework though they are neither binding nor enforceable. - There are no enforceable guidelines issued by financial sector supervisors. ### Competent authorities - Licensing and registration authorities: - Three authorities responsible for authorizing/licensing financial entities: - Comité des Établissements de Crédit et des Entreprises d’Investissement (CECEI): licenses credit institutions and investment firms other than portfolio management firms. - Comité des Entreprises d’Assurance (CEA): issues licenses to insurance companies. - Autorité des Marchés Financiers (AMF): licenses individual and collective portfolio management firms. - Insurance brokers: do not require business authorization but must register with the Registre du Commerce et des Sociétés; strongly encouraged to register with the French insurance and reinsurance brokers federation (FCA). - Currency exchangers: must register with the Corporations Register and submit a declaration of activity to the Banque de France before commencing business. - Direct marketers (“démarcheurs”): to be registered jointly with the AMF, the CECEI and the CEA, as of January 1, 2005. - Financial advisers: required to join/register with a professional association, authorized by the AMF, as of January 1, 2005. - Intermediaries in miscellaneous assets: not subject to any registration requirement. - Supervisory authorities: - Commission Bancaire (CB): responsible for AML/CFT compliance by credit institutions, investment firms other than portfolio management firms and currency exchangers; authority to conduct on-site examinations and off-site surveillance/monitoring; some supervision of currency exchangers partly delegated to Customs under Article L. 320-3 of the Financial and Monetary Code. - Commission de Contrôle des Assurances (CCA): responsible for AML/CFT compliance by insurance companies (life and non-life, including mutual insurance companies); discretion to supervise insurance and reinsurance brokers; authority to impose sanctions on brokers for non-compliance. - Autorité des Marchés Financiers (AMF): responsible for AML/CFT compliance by: - Individual or collective portfolio management firms; - Direct marketers (“démarcheurs”) that work for or on behalf licensed financial entities; - Financial investment advisers; - Intermediaries in miscellaneous assets. - AMF also ensures compliance with market conduct rules by these entities and all firms providing investment services. - Inspection Générale des Finances (IGF): broad oversight/audit responsibilities with respect to state entities; responsible for AML/CFT supervision of the Caisse des Dépôts et Consignations and La Poste’s financial services; does not have authority to impose sanctions but reports findings to the Minister of Economy, Finance and Industry. ### Professional secrecy - Legal basis and limitations: - Article 34 of the Constitution of October 4, 1958 provides legislative authority to establish arrangements applicable to professional secrecy. - Article 226-13 of the Criminal Code: disclosure of confidential information by a person entrusted with such information is punishable by imprisonment for one year and a fine of € 15,000. - Article 226-14 of the Criminal Code: Article 226-13 does not apply where the law requires or authorizes disclosure. - Professional secrecy poses no obstacle to judicial proceedings so long as the law provides modalities for lifting it; modalities may vary by profession, notably attorneys. - TRACFIN and supervisory exceptions: - Law No. 90-614 of July 12, 1990 (incorporated into the CMF) effectively waives professional secrecy by requiring financial institutions to report to TRACFIN funds or transactions they know or suspect are related to proceeds of drug trafficking or organized criminal activity. - Financial institutions supervised by CB, CCA and AMF may not invoke professional secrecy vis-à-vis the supervisory authority (Article L.511-33, L.533-2 and L.520-2 of the CMF for the CB; articles L-310-21 and L-310-22 of the Insurance Code for the CCA; and article L-621-9 section 3 for the AMF). ### Analysis of Effectiveness (General Framework) - Findings: - Legal framework is comprehensive in coverage of financial entities and has a broad range of due diligence and reporting requirements that go beyond the FATF standard. - Regulatory framework is incomplete and remains a work in progress, notably for sectors other than credit institutions and investment firms other than portfolio management firms, where greater reliance exists on supervisory and professional recommendations rather than on binding regulation. - Industry associations in banking, insurance and securities sectors have been proactive in developing guidance for members. - Missions and powers of competent authorities for AML/CFT supervision are generally clear and appropriate. - Regulatory and supervisory framework for non-financial businesses and professions is incomplete. - Duty of professional secrecy does not appear to pose any obstacle to implementation of the FATF standard. - Recommendations and Comments: - Authorities should continue to develop and implement detailed regulations in support of underlying laws. - Authorities should review options for regulation and supervision of non-financial businesses and professions and designate competent supervisory authorities. - Implications for compliance with FATF Recommendation 2: - R.2: Compliant ### II—Customer identification (compliance with criteria 45-48 and sector-specific criteria) - Description: - Article L.563-1 of the CMF (recently amended) and Article 3 of Decree No. 91-160 require financial entities subject to transaction reporting to identify customers and verify identity via presentation of a reliable document bearing a photograph before entering into contractual relations or assisting a customer in preparation or carrying out of a transaction. - Prior to amendment, requirement focused on account rather than contractual relationships, creating ambiguity in some ongoing relationship contexts. - Occasional customers: must be identified and verified for transactions above €8000 (€1500 for casinos and other gaming) or rental of a safe-deposit box in a similar manner. - Legal entities: original or certified true copy of instrument or extract from an official registry verifying name, legal form, head office, and powers of persons acting on behalf required. - Beneficial ownership: financial entities must obtain information about true identity of persons on whose behalf an account is opened or a transaction conducted if doubts exist that customer acts on own behalf; Article 3 of Decree No. 91-160 exempts this obligation when the person requesting the opening of an account or conducting a transaction is itself a financial entity. - Article L.563-1 requires financial entities to take appropriate measures, in circumstances prescribed by decree, to mitigate risks when customer is not physically present for identification; no decree has been issued. - Numbered accounts: French legislation does not forbid use, but there is no waiver of identification and control requirements. Capitalization bonds and contracts distributed by insurance companies allow the bearer to remain anonymous only vis-à-vis tax authorities and can only be transferred by physical transmission. - Additional sector-specific measures: - Credit institutions and investment firms other than portfolio management firms: - Article 33 of Decree No. 92-456 of May 22, 1992: a credit institution must verify domicile of applicant prior to opening an account. - Form QLB 3 (Annex III to CB Instruction No. 2000-09): Line 126-136 recommend measures addressing non-face-to-face customer identification, assessing expected account activity, and measures against structuring by occasional customers. - AFEI professional recommendations provide additional guidance. - Insurance companies: - Articles A-310-5, A-310-6, A-310-7 of the Code des Assurances supplement CMF and Decree No. 91-160: verify identity whenever establishment of a mathematical reserve arises; verify beneficiary identity when life insurance benefit is paid; verify identity of person requesting redemption of a capitalization bond or contract. - CCA Recommendations of June 2001 and FFSA Professional Recommendations: recommend verifying identity of insured, subscriber, possible principal/originator, non-revocable beneficiaries, person paying premium or seeking redemption/advance/repurchase; address non-face-to-face transactions. - Portfolio management firms: - Article 18 of COB Regulation No. 96-03: requires portfolio management firms to establish organization and procedures to comply with AML requirements; COB has not prescribed specific measures. - Article 19 requires service provider to inquire about goals, investment experience, and financial situation of principal. - AFG-ASFFI recommendations: suggest information to obtain and maintain when entering business relationship: - The identity and nature of the activity carried out; - Net worth of the client and the origin of the funds entrusted; - The client’s investment objectives and experience; - Information pertaining to how relations were initiated. - AFG-ASFFI recommends vigilance in riskier circumstances and contractual assurances that third-party distributors implement CDD requirements. - Currency exchangers: - CRBF Regulation 91-11 of July 1, 1991: currency exchangers must enter customer identification data in a transactions register they must maintain. - Other sectors: - No additional regulatory requirements or supervisory/industry recommendations specifically related to customer identification. - Wire transfers: - No legislative requirements for financial entities to include complete originator information (name, address and account number or unique reference number) in message or payment forms accompanying wire transfers. - Reliance on rules of the Centrale des Règlements Interbancaires and conduct standards of the Association Française des Banques requiring certain originator information (name, address, identifying code where originator is a business entity) be included in message forms. - Rules and standards apply to banks and do not extend to non-bank financial institutions, notably La Poste. - Unclear requirements when originator is a physical person. ### Analysis of Effectiveness (Customer identification and Wire transfers) - Findings: - Laws are clear and complete. - Questionnaire QLB 3 pursuant to CB Instruction No. 2000-09 provides a detailed checklist and reminder to have customer acceptance policies and procedures but offers little additional guidance. - CCA recommendations and AFG-ASFFI recommendations provide useful detailed guidance but are neither binding nor enforceable and do not extend to insurance/reinsurance brokers or direct marketers. - No further rules or guidance apply to currency exchangers. - Financial industry representatives indicated strong interest in obtaining additional guidance from authorities. - Commission Bancaire (CB) has exercised broad authority to ensure compliance with professional rules and standards for wire transfers; contacts with profession and random on-site inspections indicate credit institutions are including information necessary to identify originators of transfers they issue. - Uncertainties remain: - Unclear whether full implementation exists for domestic transfers. - Professional rules do not specifically require inclusion of originator’s account number. - Rules/standards do not extend to non-bank financial institutions. - Measures in place do not sufficiently implement the relevant FATF standard for wire transfers. - Work is underway at EU level on implementing the relevant FATF standard; authorities intend to set out requirements in legislation. ### Recommendations and Comments (Customer identification and Wire transfers) - Authorities should introduce more detailed requirements through regulation or enforceable guidance clarifying: - What constitutes adequate customer acceptance policies and procedures. - Reasonable steps to be taken to identify beneficial owners of accounts and transactions. - Authorities should review ML/FT risks associated with capitalization bonds/contracts and take corrective measures, as appropriate. - Authorities should proceed with plans to introduce legislation to comply fully with SR VII. ### Implications for compliance with FATF Recommendations 10, 11, SR VII - R. 10 & R. 11: Compliant. - SR VII: According to the FATF Interpretive Note to Special Recommendation VII, countries will have up to February 2005 to comply with SR VII and as such France is not rated against this recommendation. Work is proceeding on a EU regulation that will directly apply in member states. *Source: _cr05186 - 173. The assessment sought to confirm that : (a) the legal and institutional framework are in place and (b) there are effective supervisory/regulatory measures in force...* ### 1. Increased diligence of financial entities ### 1. Increased diligence of financial entities ### Legal requirements and sectoral rules - Article L. 563-3 of the CMF together with Article 4 of Decree 91-160 of February 13, 1991 requires financial entities to closely examine any large transaction in single or total amount that exceeds €150,000 (when the customer’s transactions are not usually above this amount) and which, without falling into the category of transactions to be reported as a STR to the TRACFIN, are unusually complex and do not appear to have any economic or lawful purpose. - In such cases the financial institution must: - obtain information from the customer regarding the source and destination of the amounts, the purpose of the transaction and the identity of the beneficiary; - record the details of the transaction in writing and keep them in accordance with Article L. 563-4 of the CMF for five years from the date of completion of the transaction; - make such information available to TRACFIN and the relevant supervisory authority and take organizational steps to be able to forward this information expeditiously. - Financial entities must ensure foreign branches and subsidiaries comply unless local law prohibits it; if so, they must inform TRACFIN. - Credit institutions and investment firms (other than portfolio management firms): - Article 2 of Regulation 91-07 of the CRBF requires written internal rules describing due diligence, indicating amounts and types of transactions requiring particular due diligence. - Article 4 of Regulation 91-07 and CB Instruction No. 2000-09 list information to be collected and recorded for such transactions. - CB Instruction 2000-09 requires internal procedures for assessing clientele using customer profiles to flag unusual financial transactions. - Insurance companies and brokers: - No additional regulations beyond Article L. 563-3 of the CMF, but CCA Recommendations and FFSA professional recommendations set measures for transactions above the €150 000 threshold and examples of unusual circumstances where enhanced vigilance should be exercised. ### Analysis of effectiveness — Increased diligence - Article L. 563-3 of the CMF and Article 4 of Decree 91-160 set the main legislative requirements but apply only to transactions above €150 000 when the customer’s transactions are not usually above this amount and the transactions are unusually complex and lack apparent economic purpose. - This threshold formulation suggests customers whose transactions typically exceed €150 000 might not trigger enhanced vigilance even if transactions are complex or unusual, whereas the FATF standard requires special attention to all complex or unusual transactions without a monetary threshold. - Authorities indicate that, based on Article 2 of CRBF Regulation 91-07 and interpretations of Articles L. 562-2 and L. 563-3, financial entities are required to exercise enhanced diligence with respect to any transaction that is complex, unusual and has no apparent economic purpose, regardless of threshold. Decisions of the CB (some upheld by the Conseil d’Etat) support this, but: - CB decisions concern chiefly credit institutions and entities under its supervision and often focus on inadequate KYC and large transactions. - CB decisions do not specifically address FATF Recommendation 14's requirements to examine background and purpose and to establish findings in writing irrespective of amount or degree of suspicion. - Conclusion: the explicit text of L. 563-3 with its threshold and the broader expectations of authorities argue for reviewing, clarifying and broadening legislative requirements. ### Recommendations (increased diligence) - Authorities should review and broaden requirements to pay special attention to certain transactions, aligning statutory language with the FATF standard on complex and unusual transactions. --- ### 2. Measures to cope with countries with no or insufficient AML measures (NCCTs) ### Regulatory framework and sector application - Credit institutions and investment firms other than portfolio management firms have regulatory requirements to give special attention to business relations and transactions with persons in jurisdictions lacking adequate AML/CFT systems. - There are no laws or regulations specifically requiring other financial entities to do so, although the Minister of the Economy, Finance and Industry periodically informs financial entities (via professional associations) of FATF’s list of NCCTs and supervisory authorities’ role in ensuring enhanced due diligence. - Article L. 563-3 and Article 4 of Decree 91-160 require special attention to any large transaction exceeding €150,000 (when customer’s transactions are not usually above this amount) that is unusually complex and lacks economic purpose. - Decrees pursuant to Article L. 562-2 require reporting transactions above €8 000 with respect to Nauru and Myanmar (Decree No 2002-145 and Decree No 2003-1195). - CRBF Regulation 2002-01 of April 18, 2002 (Articles 8 and 9) requires credit institutions to exercise increased scrutiny on checks received from foreign financial institutions in jurisdictions identified by the FATF as NCCTs; the NCCT list is annexed and updated by the Ministry of Finance. - Article 2 of CRBF Regulation 91-07 requires credit institutions and currency exchangers to include in internal procedures a list of transactions subject to enhanced scrutiny (not explicitly limited to NCCTs). - CB Instruction 2000-09 (QLB 3, lines 110-113) requires particular care regarding transactions with NCCTs and annual reporting to the CB of branches/subsidiaries in FATF non-cooperative jurisdictions and total exposures per NCCT. - Portfolio management firms: AFG-ASFFI recommendations provide guidance on mitigating ML risks when doing business with offshore financial centers or NCCTs and examples where enhanced vigilance is needed. ### Analysis of effectiveness — NCCT measures - Regulatory provisions for transactions linked to NCCTs are largely restricted to credit institutions and investment firms other than portfolio management firms. - Authorities indicate that in practice financial entities generally comply with Ministerial advisories. - For credit institutions and affected investment firms, compliance is verified via QLB questionnaire responses and on-site examinations; annual reporting to the CB on the number of intelligence files created and the largest amount involved is required. - On-site examinations examine transactions with non-cooperative jurisdictions in depth; supervisors ask standardized questions on enhanced customer due diligence measures taken. - Insurance companies are reminded frequently via outreach and Audit Department contacts; compliance is confirmed in on-site examinations and follow-up. ### Recommendation (NCCTs) - Introduce a requirement for financial entities other than credit institutions and investment firms (other than portfolio management firms) to pay special attention to business relations and transactions with persons and legal entities in jurisdictions that do not have adequate systems in place to prevent and deter ML or FT. ### Implications for FATF compliance - R.14: Largely compliant because legislative requirements are narrower in scope than the FATF standard. - R.21: Largely compliant because there is no specific law, regulation or other enforceable means to ensure compliance by financial entities other than credit institutions and investment firms other than portfolio management firms. - R.28: Largely compliant, as additional efforts are needed to provide guidance to reporting entities, notably outside the banking sector. - SR VII: France will not be rated against SR VII as countries have up to February 2005 to comply; work is proceeding on an EU regulation that will directly apply in member states. --- ### 3. Wire transfers ### Legal and supervisory position - No specific provisions require financial institutions to adopt procedures to identify and handle wire transfers that lack complete originator information. - Pending implementation of future European regulation on strengthening scrutiny of transfers, supervisory authorities have asked financial sector representatives (notably via the Money Laundering Liaison Committee established pursuant to Article L562-10 of the CMF) to be especially vigilant when funds transfers lack complete originator information. --- ### 4. Record keeping ### Legal requirements - Article L. 563-4 of the CMF requires financial entities to retain for five years, beginning with the closing of accounts or the termination of business relations, all documents relating to the identity of regular and occasional customers. - Article 3 of Decree 91-160 states financial institutions must keep references or a copy of identification documents submitted to them. - Article L. 563-4 requires retention of documents pertaining to transactions for five years from the date of completion. - TRACFIN and supervisory authorities may request documents to reconstruct all transactions connected with an STR; supervisory authorities may access documents necessary for their duties and for informing counterparts in other countries. - Powers of supervisory authorities derive from various CMF and sectoral articles (e.g., articles L. 613-8 and L. 520-2 for the CB; articles L. 310-14 and L. 310-28 Insurance Code for the CCA; Articles L. 621-9-3 and L. 621-10 of the CMF for the AMF). - Professional secrecy may not be invoked against the CB, the CCA or the AMF, or against a legal authority acting in criminal proceedings (Article L. 511-33 of the CMF). ### Analysis of effectiveness — Record keeping - Legislative and regulatory provisions are comprehensive and appear to be effectively implemented. ### Implications for FATF compliance - R.12: Compliant. --- ### 5. Suspicious transactions reporting (STRs) ### Legal framework and obligations - Article L. 562-2 of the CMF requires financial entities to report to TRACFIN funds or transactions they suspect are related to proceeds of drug trafficking, fraud against the financial interests of the European Communities, corruption or organized criminal activity or which they suspect are related to the financing of terrorism. - Article L-561.1 requires persons (other than those in L-562.1) who carry out, supervise or advise on transactions resulting in capital movements to report to the Public Prosecutor’s Office any transaction involving funds they know to be proceeds of crime mentioned in Article L. 562-2. - Article 562-5 requires STRs be submitted before the transaction is completed unless impossible to delay or when suspicion arises only after completion; new information must be brought to TRACFIN immediately. - Article L. 562-2-1 requires STRs to be forwarded to TRACFIN, except lawyers and other legal professionals who must forward to their law society or bar association, which forwards to TRACFIN unless it does not consider the transaction suspicious (in which case it must inform the person who made the STR); sanitized cases are forwarded to the Minister of Justice and then to TRACFIN. - Article 6 of Decree 91-160 requires financial entities to adopt written internal rules defining procedures for implementing Title VI of the CMF and Decree 91-160, ensure AML staff are kept informed and trained. - Regulation 91-07 of the CRBF requires credit institutions, investment firms other than portfolio management firms and currency exchangers to establish internal controls and procedures for AML compliance, including an audit system. No similar regulatory requirements for other financial entities. - TRACFIN provides guidance via typologies appended to annual reports; additional guidance from other competent authorities has been limited. - Article L. 562-8 protects financial entities from criminal and civil liability for reporting in good faith. - Article L.574-1 provides for a fine of €22,500 for any executive or employee who informs an owner or originator of funds that a report pursuant to Article L. 562-2 has been made or provides information on follow-up. - Article L. 562-2 also requires reporting where the identity of the order-giver or beneficiary remains in doubt despite due diligence; reporting of transactions involving trusts or similar arrangements where identities of settlor, trustee or beneficiaries are not known is required. - Article L. 562-2 authorizes decrees to require reporting of transactions above a certain threshold with persons domiciled in countries where AML laws are deficient; Decree No 2002-145 requires reporting of transactions above €8 000 with respect to Nauru and Decree No 2003-1195 applies to Myanmar. ### Analysis of effectiveness — STRs - Scope of reporting requirements is narrower than the comprehensive scope of predicate offences for money laundering (which covers all crimes and misdemeanors, including the financing of terrorism and fiscal fraud); suspicion that funds stem from a fiscal misdemeanor is not required to be reported, creating potential confusion and compliance risks. - TRACFIN and supervisory authorities have provided some guidance but more is needed given generally poor quality of many STRs; greater efforts are needed to improve reporting from the DOM-TOM. - Additional reporting requirements (e.g., trusts) have increased compliance burden while benefits are unclear and could divert resources from detection of suspicious transactions. ### Recommendations and comments — STRs - Authorities are examining the misalignment between the scope of STR requirements and the scope of predicate offences for money laundering. - TRACFIN and supervisory authorities should provide further guidance and ML typologies to reporting entities to improve detection, reporting quality and overall AML/CFT implementation, especially outside the banking sector. - Authorities should reach out to the DOM-TOM and monitor their compliance with AML/CFT obligations. - The usefulness of additional reporting requirements should be reviewed. ### Implications for FATF compliance - R.15 and SR IV: Compliant. - R.16: Compliant. - R.17: Compliant. - R.28: Largely compliant, as additional efforts are needed to provide guidance to reporting entities, notably outside the banking sector. --- ### 6. Internal controls, compliance and audit (introductory points) - Article 6 of Decree 91-160 of February 13, 1991 requires financial entities to adopt written internal rules defining procedures for implementing legal and regulatory AML provisions (Title VI of the CMF and Decree 91-160) and to ensure staff involved in AML are informed and trained. - Regulation 91-07 of the CRBF requires credit institutions, investment firms other than portfolio management firms and currency exchangers to establish internal controls and procedures including an audit system to verify compliance. - (Further detailed analysis of internal controls, compliance and audit appears in subsequent sections of the source text.) *Source: _cr05186 - 1. Increased diligence of financial entities* ### 160. They must ensure that all staff involved in AML are kept informed and receive training. ### _cr05186 - 160. They must ensure that all staff involved in AML are kept informed and receive training. ### Internal controls, audit and regulatory requirements - Regulation 91-07 of the CRBF requires credit institutions, investment firms other than portfolio management firms and currency exchangers to establish internal controls and procedures to ensure compliance with the AML provisions of the CMF and the Décret 91-160, including an audit system to verify compliance with the above-mentioned procedures. - Regulation 97-02 of the CRBF requires credit institutions and investment firms other than portfolio management firms to establish an internal control mechanism specifically including: - a system for auditing transactions and internal procedures; - a means of monitoring flows of cash and securities; - organization to ensure proper execution of transactions and observance of internal risk-management policies; - an independent internal audit of the effectiveness of these controls. - Article 4 of Regulation 2002-01 of the CRBF requires credit institutions to establish and carry out an annual control program for checks as part of their due diligence obligations, with selection criteria defined by the institution and taking into account changes in ML typologies and public information (including FATF and TRACFIN). - CB Instruction 2000-09 (October 18, 2000) provides guidance on the content of internal procedures for credit institutions and investment firms other than portfolio management firms. ### Gaps across other financial sectors - No similar comprehensive regulatory requirements exist for other financial entities. - Insurance Code contains few provisions regarding internal controls; these focus mainly on investment policy and preparation of a solvency report. - For asset management companies, the AMF has procedures to review appropriate internal controls, but regulations do not provide significant guidance and there is no requirement that the assessment of controls be independent. - Except for COB Regulation 96-03, there are no specific requirements to appoint an AML officer with responsibility for AML compliance; Recommendations of the CCA and of the AFG-ASFFI suggest appointment of AML/CFT compliance officers and the former recommends periodic audit and testing. - No guidance provided for currency exchangers, insurance brokers and direct marketers. ### Employee screening - Few requirements for financial entities to have adequate screening procedures to ensure high standards when hiring employees; existing requirements focus largely on competency rather than integrity. - Recommendations of the CCA suggest that insurance companies screen prospective employees for integrity and monitor employees in sensitive positions on an ongoing basis. ### Training - CB Instruction 2000-09 provides guidance including: - any new employee of a credit institution or investment enterprise must receive AML training when hired or in the following weeks; - all concerned employees should be kept regularly informed on AML topics; - credit institutions and investment enterprises must report annually to the CB: - the number of employees who received AML training in the preceding fiscal year; - the date of the last AML investigation conducted by the internal control department; - the date of the last update of the AML procedures manual. - The Fédération Bancaire Française has developed extensive employee audio-visual training tools customized by activity type. - Decree of October 1, 2002 amended minimum training programs for insurance company personnel to introduce a special AML/CFT module; modules for ongoing AML/CFT training developed by the FFSA and disseminated to members. - AFG-ASFFI recommends portfolio management firms establish formal employee training programs under the responsibility of the AML/CFT compliance officer and make up-to-date laws, regulations and internal policies available to employees. ### Application to foreign branches and subsidiaries - Article 5 of Regulation No 91-07 of the CRBF requires credit institutions and currency exchangers headquartered in France to “make all necessary recommendations” to their foreign branches and subsidiaries to protect against the risk of being used for ML purposes; branches/subs must inform headquarters of any local laws preventing implementation and headquarters must notify TRACFIN. - These “recommendations” are not prescribed in the regulation. - Credit institutions and investment firms other than portfolio management firms must report annually to the CB a list of branches and subsidiaries located in countries where laws prohibit implementation of these recommendations. - No similar requirements apply to other financial entities. ### Analysis of effectiveness (as described in source) - Framework with required internal rules and procedures is comprehensive and supplemented by regulations for credit institutions and investment firms other than portfolio management firms. - For insurance companies and portfolio management firms, reliance is on supervisory and professional recommendations which are neither binding nor enforceable. - No apparent guidance for other sectors, although La Poste representatives described a relatively robust system of internal controls. - Few requirements to screen employees for integrity; focus is on competency. - Employee training appears effectively implemented for credit institutions, investment firms other than portfolio management firms, insurance companies and La Poste. - Other than for credit institutions and currency exchangers, no specific requirements ensure comprehensive application of AML/CFT requirements to branches and majority-owned subsidiaries located abroad. ### Disciplinary actions and supervisory enforcement (selected figures) - In 2002: - 34 disciplinary decisions rendered, of which 18 involved breaches relating to AML/CFT requirements. - Sanctions ranged from a warning to removal from the register; most frequent sanction was a warning plus a fine, amounting to as much as €228,000. - In 2003: - 28 disciplinary decisions issued, of which 20 involved breaches relating to AML/CFT requirements. - A warning plus a fine was the most frequently imposed sanction. - CB imposed 11 sanctions on currency exchangers for failure to comply with AML/CFT requirements and initiated 29 inquiries. - Since 1986, eight currency exchangers have been barred from operating their business. - For the AMF: to date, no sanctions have been imposed for non-compliance with AML/CFT requirements. - For the CCA: to date, only two sanctions have been imposed for failure to comply with AML/CFT requirements. ### Recommendations and comments (from source) - Regulatory framework for internal controls needs to be strengthened for all sectors other than credit institutions and investment firms other than portfolio management firms. - Financial entities should be required to take integrity into account when hiring employees, notably for sensitive positions. - Other than for credit institutions and currency exchangers, establish a requirement for financial entities to ensure AML/CFT requirements are applied to branches and majority-owned subsidiaries located abroad. - Authorities should further assist financial entities in developing employee training programs. - AML/CFT internal controls should be required to be taken into account in the licensing of financial entities. - Authorities should consider introducing an explicit “fit and proper” test for currency exchangers. ### Implications for FATF Recommendations (as stated) - R.19: Largely compliant, as the regulatory framework for internal controls other than for credit institutions and investment firms other than portfolio management firms is incomplete and there are no requirements for taking into account integrity when hiring employees. - R.20: Largely compliant, owing to the absence of legal requirements other than for credit institutions and currency exchangers. - R.29: Compliant (in context of fit and proper licensing and supervisory arrangements described). - R.26: Largely compliant, as a result of the relatively low supervisory efforts and resources other than for the CB. *Source: _cr05186 - 160. They must ensure that all staff involved in AML are kept informed and receive training.* ### references both in France and abroad. ### _cr05186 - references both in France and abroad. ### Customs declarations, cash controls, and smuggling risks - Some 25,000 declarations are made annually, representing some €1 billion. - There are some 1,800 cases of failure to declare annually, representing some €150-230 million. - About 40 of such cases are forwarded to judicial authorities for prosecution of money laundering offences each year. - The declaration/seizure mechanism has notably led to the seizure of considerable sums of money suspected of being destined to finance terrorism. - Recommendation: - Authorities should consider the possibility of extending the requirement to declare to importations and exportations effected through the mail and courier companies in order to address the possible displacement of smuggling activities through these means. - Observations: - The mission noted concerns by authorities regarding an EU initiative to establish an EU-wide declaration requirement vis-à-vis third countries and stressed the importance of allowing EU members the flexibility to establish or maintain their own regime vis-à-vis EU members. ### FATF Recommendation 23 (Description) - Legal basis: - Article L. 562-2 provides the authority to issue a decree to require financial entities to report transactions above a certain threshold, on their own account or for the account of others with natural or legal persons domiciled, registered or established in countries or territories where the AML laws are recognized as deficient or where practices impede the fight against money laundering. - Decrees issued pursuant to Article L. 562-2: - Decree No 2002-145 requires financial entities to report transactions above €8 000 with respect to Nauru. - Decree No 2003-1195 was issued in respect of Myanmar. ### Interpretative Note to FATF Recommendation 22 (Description) - The Code des Douanes requires persons to declare all importations and exportations of cash and monetary instruments above a threshold of €7600. ### Ratings of Compliance with FATF Recommendations Requiring Specific Action (selected items) - Presented ratings (Based on Criteria / Rating): - 1 – Ratification and implementation of the Vienna Convention: 1 / Compliant - 2 – Secrecy laws consistent with the 40 Recommendations: 43 / Compliant - 3 – Multilateral cooperation and mutual legal assistance in combating ML: 34, 36, 38, 40 / Compliant - 4 – ML a criminal offense (Vienna Convention) based on drug ML and other serious offenses: 2 / Compliant - 5 – Knowing ML activity a criminal offense (Vienna Convention): 4 / Compliant - 7 – Legal and administrative conditions for provisional measures, such as freezing, seizing, and confiscation (Vienna Convention): 7, 7.3, 8, 9, 10, 11 / Compliant - 8 – FATF Recommendations 10 to 29 applied to non-bank financial institutions: See answers to 10 to 29 - 10 – Prohibition of anonymous accounts and implementation of customer identification policies: 45, 46, 46.1 / Compliant - 11 – Obligation to take reasonable measures to obtain information about customer identity: 46.1, 47 / Compliant - 12 – Comprehensive record keeping for five years of transactions, accounts, correspondence, and customer identification documents: 52, 53, 54 / Compliant - 14 – Detection and analysis of unusual large or otherwise suspicious transactions: 17.2, 49 / Largely compliant - 15 – If financial institutions suspect that funds stem from a criminal activity, they should be required to report promptly their suspicions to the FIU: 55 / Compliant - 16 – Legal protection for financial institutions, their directors and staff if they report their suspicions in good faith to the FIU: 56 / Compliant - 17 – Directors, officers and employees, should not warn customers when information relating to them is reported to the FIU: 57 / Compliant - 18 – Compliance with instructions for suspicious transactions reporting: 57 / Compliant - 19 – Internal policies, procedures, controls, audit, and training programs: 58, 58.1, 59, 60 / Largely compliant - 20 – AML rules and procedures applied to branches and subsidiaries located abroad: 61 / Largely compliant - 21 – Special attention given to transactions with higher risk countries: 50, 50.1 / Largely compliant - 26 – Adequate AML programs in supervised banks, financial institutions or intermediaries; authority to cooperate with judicial and law enforcement: 66 / Largely compliant - 28 – Guidelines for suspicious transactions’ detection: 17.2, 50.1, 55.2 / Largely compliant - 29 – Preventing control of, or significant participation in financial institutions by criminals: 62 / Compliant - 32 – International exchange of information relating to suspicious transactions, and to persons or corporations involved: 22, 22.1, 34 / Compliant - 33 – Bilateral or multilateral agreement on information exchange when legal standards are different should not affect willingness to provide mutual assistance: 34.2, 35.1 / Compliant - 34 – Bilateral and multilateral agreements and arrangements for widest possible range of mutual assistance: 34, 34.1, 36, 37 / Compliant - 37 – Existence of procedures for mutual assistance in criminal matters for production of records, search of persons and premises, seizure and obtaining of evidence for ML investigations and prosecution: 27, 34, 34.1, 35.2 / Compliant - 38 – Authority to take expeditious actions in response to foreign countries’ requests to identify, freeze, seize and confiscate proceeds or other property: 11, 15, 16, 34, 34.1, 35.2, 39 / Compliant - 40 – ML an extraditable offense: 34, 40 / Compliant - SR I – Take steps to ratify and implement relevant United Nations instruments: 1, 34 / Compliant - SR II – Criminalize the FT and terrorist organizations: 2.3, 3, 3.1 / Compliant - SR III – Freeze and confiscate terrorist assets: 7, 7.3, 8, 13 / Materially non-compliant - SR IV – Report suspicious transactions linked to terrorism: 55 / Compliant - SR V – provide assistance to other countries’ FT investigations: 34, 34.1, 37, 40, 41 / Compliant - SR VI – impose AML requirements on alternative remittance systems: 45, 46, 46.1, 47, 49, 50, 50.1, 52, 53, 54, 55, 56, 57, 58, 58.1, 59, 60, 61, 62 / Compliant - SR VII – Strengthen customer identification measures for wire transfers: 48, 51 / Not rated ### Summary of Effectiveness of AML/CFT Efforts — Criminal Justice Measures and International Cooperation - I — Criminalization of ML and FT - The legal framework relating to the criminalization of ML and FT is comprehensive. - Main limitation: France is currently unable to comply fully with UN Security Council Resolution 1373 with regard to terrorists or terrorist groups from within the European Union as they are not covered by EU Council Regulations. - II — Confiscation of proceeds of crime or property used to finance terrorism - Judicial seizure and confiscation: - Though in theory a conviction can result in the confiscation of all the assets of the offender, in practice confiscation will almost exclusively apply to the assets that have been previously seized in the course of the judicial procedure. - This results mainly from the optional character of confiscation measures. - The judge will appreciate these sanctions in view of the available elements of the case, such as the offender’s property that can be identified. - Several authorities mentioned problems in uncovering these assets. - In money laundering cases, it is rather exceptional that all or most of the laundered funds can be recovered in this manner. - As an alternative, the fine can be increased to half the level of the laundered funds (Articles 222-38 and 324-3 of the Penal Code). - Data gaps and implementation issues: - There are no statistics available on the amounts resulting from the seizure and confiscation orders, neither in general terms, nor as regards ML specifically. - In the absence of such information, it is difficult to assess the effectiveness of the provisions governing the asset related aspects of the fight against serious crimes including ML and FT. - Judicial authorities appear reluctant to utilize systematically the tools at their disposal. - Insufficient use is made of the procedure of Article 706-30 of the Code of Criminal Procedure due to the absence of a mandatory confiscation regime for financial and economic crimes. - Additional efforts by the Ministry of Justice to raise awareness of magistrates continue to focus mainly on drug trafficking and drug money laundering. - Administrative freezing of terrorist related funds: - The Constitutional Treaty established by the European Convention includes provisions that would lift the distinction preventing authorities from administratively freezing assets of terrorists or terrorist groups based within the European Union. - Pending its adoption, a draft bill has been prepared to enable the government to impose financial sanctions and administratively freeze such assets in compliance with UN Security Council Resolution 1373; the draft bill has to undergo a consultative process and the timeframe for its adoption is uncertain. - Four accounts were frozen on the basis of the UN and EU lists at the time of the assessment visit, amounting to about 30.000 EUR. - No other assets, such as real estate, have been frozen, mainly due to the lack of definition of which assets and what measures should be targeted and the need of ad hoc instruments to trace them. - III — The FIU (TRACFIN) and processes for receiving, analyzing, and disseminating financial information and other intelligence - Access to additional information: - In the absence of a central contact point with basic data on individuals and legal entities, it can prove difficult for TRACFIN to verify the identification data contained in the STRs. - The access to registers held by the Social Security services, as provided for by a recent amendment of Article L. 563-6 of the CMF, should improve this process. - International cooperation: - TRACFIN provides assistance to comply with foreign requests for information without requiring specific formalities. - Such requests are considered as domestic STRs in the sense that they enable the FIU to query other domestic sources of information. - TRACFIN is intensifying input from other FIUs by sending out requests more frequently than before, though not systematically yet. - TRACFIN takes into account the Best Practices of the Egmont Group regarding the exchange of information. - Volume and quality of STRs: - The volume of STRs received by TRACFIN is growing steadily. - This growth is not accompanied by a significant increase in the overall quality of reports. - The number of reports produced by the reporting parties is still relatively low compared to the importance of the financial and economic activity on the French market. - Operational outputs: only a rather limited number of cases are being forwarded to the Prosecutor’s Office (269 in 2003, representing only eight to ten percent of all the STRs received). - Possible causes: poor quality of STRs or insufficient verifying information from other authorities. - Geographic and sectoral gaps: - Difficulties arise with overseas departments and territories; in particular, Guyana did not make a single report after 2000. - Non-compliance by reporting entities evident in sectoral statistics: - From the 134 STRs received from the real estate industry in 2002, only 5 originated from the real estate agents, the remaining 126 being from notaries. - No reports were received from dealers in high value goods and commissaires-priseurs so far. - The country’s 189 casinos made 9 reports, 6 of them after an information campaign in July 2003. - These deficiencies are mainly due to the absence of a supervisory body for most of the parties concerned and the difficulty to reach out to these professions. - IV — Law enforcement and prosecution authorities, powers and duties - Resource and capacity constraints: - A large number of cases could not be dealt with due to insufficient resources and the need to pursue other priorities. - The innovative aspects introduced by the institution of the assistants de justice do not seem to have yet produced the anticipated results. - A recent reform by the Law of March 9, 2004 that entered into force on October 1, 2004 introduces specialized jurisdictions and should enhance capacity to combat financial crime in terms of human resources and specialized training. - Case flows and outcomes: - About seventy percent of the ML cases in Paris originate from TRACFIN and about ten percent from the Customs Department. - Almost half of the sixty cases communicated by TRACFIN in 2003 that were dealt with by the financial division of the Paris Prosecutor’s Office were new cases; the remaining complemented already existing files. - Half of them are being further investigated (preliminary enquiry or judicial investigation) and four of them have been closed. - The number of convictions for money laundering (including non-justification of resources) increased to forty-seven in 2001 against twenty-one in each of the two previous years. - These conviction results are limited given the time the reporting mechanism has been in place and the volume of reports sent by TRACFIN and other authorities to the judiciary. - Causes include time-consuming judicial procedures and difficulties encountered by prosecution services to establish the money laundering offence. - Some prosecutors still operate on the assumption they must prove the existence of the specific underlying offence, although jurisprudence allows conviction for general money laundering without the predicate offence being specifically identified. - International dimensions complicate prosecutions due to the need to obtain information from other jurisdictions, leading to tendencies to re-qualify facts and prosecute on a different basis. - Terrorist financing prosecutions: - None of the FT cases under investigation led to judicial results so far. - Main difficulties: linking suspicious or irregular financial movements with terrorist activities and the absence of an investigating body combining specialization in both financial and terrorism aspects. - Most FT cases were initiated following terrorist attacks. - V — International cooperation - France provides timely and effective follow-up to mutual legal assistance requests. - France maintains statistics on all mutual legal assistance and other requests made or received, relating to ML, the predicate offences, and FT, as well as the outcome of such requests. - The nature of MLA requests is not reflected in the statistics, which are devoted solely to quantifying flows. ### Legal and Institutional Framework for All Financial Institutions — Key assessments - I — General framework - The legal framework for AML/CFT preventive measures is characterized by comprehensive coverage of financial entities and a broad range of due diligence and reporting requirements that go beyond the FATF standard. - The regulatory framework is incomplete and remains a work in progress, notably for sectors other than credit institutions and investment firms other than portfolio management firms. - Greater reliance exists on supervisory and professional recommendations rather than on regulation or other enforceable means for certain sectors. - Industry associations in banking, insurance and securities have been proactive in developing guidance. - Missions and powers of competent authorities for AML/CFT supervision are generally clear and appropriate. - The regulatory and supervisory framework for non-financial businesses and professions is incomplete. - The duty of professional secrecy does not appear to pose any obstacle to implementation of the FATF standard. - II — Customer identification - Laws are clear and complete. - Questionnaire QLB 3 pursuant to CB Instruction No. 2000-09 provides a detailed checklist of legal requirements and a reminder of the need for customer acceptance policies and procedures but offers little additional guidance. - The CCA recommendations and AFG-ASFFI recommendations provide additional useful detailed guidance but they are neither binding nor enforceable and do not extend to insurance and reinsurance brokers or direct marketers. - No further rules or guidance apply to currency exchangers. - Financial industry representatives indicated strong interest in obtaining additional guidance from the authorities. - Wire transfers: - Indications that the CB has exercised broad authority to ensure compliance with professional rules and standards. - Contacts and random checks indicate credit institutions are including information necessary to identify originators of transfers they issue. - Unclear whether this has been fully implemented for domestic transfers. - Professional rules and standards do not specifically require inclusion of the originator’s account number. - Rules and standards apply to banks and do not extend to non-bank financial institutions. - Measures in place do not sufficiently implement the relevant FATF standard, though EU-level work is underway and authorities intend to set out requirements in legislation. - III — Ongoing monitoring of accounts and transactions (Increased diligence) - Article L. 563-3 of the CMF and Article 4 of Decree 91-160 set out the main legislative requirements with respect to enhanced vigilance. - The requirements apply only to transactions above €150 000 when the customer’s transactions are not usually above this amount; transactions must also be unusually complex and have no apparent economic purpose. - This formulation suggests that if a customer’s transactions typically exceed this threshold, there would be no obligation to exercise enhanced vigilance, even though such transactions might be complex or display unusual patterns. - The FATF standard does not contemplate any threshold with respect to “complex” transactions or “unusual patterns of transactions”; the standard calls for special attention to be paid to all such transactions. - Authorities indicate that, based on Article 2 of CRBF Regulation 91-07 and interpretation of Articles L. 562-2 and L. 563-3 of the CMF, financial entities are required to exercise enhanced diligence with respect to any transaction that is complex, unusual and has no apparent economic purpose, regardless of threshold. - Authorities cited CB decisions upholding this interpretation, some reviewed and upheld by the Conseil d’Etat; however: - Article L. 563-3 of the CMF together with Article 4 of Decree 91-160 remain the clearest expressions of FATF Recommendation 14 and contain the threshold language. - CB decisions concern credit institutions and entities under its supervision and mainly instances involving inadequate KYC account-opening procedures/records and large transactions. - These decisions do not specifically address the requirement to examine the background and purpose of such transactions and to establish findings in writing, irrespective of amount or degree of suspicion. - Recommended action: - Review, clarify and broaden existing legislative requirements to align explicit statutory language with the broader expectations of FATF Recommendation 14. *Source: _cr05186 - references both in France and abroad.* ### 2. Measures to cope with the problem of countries ### 2. Measures to cope with the problem of countries with no or insufficient anti-money laundering measures ### Implementation and supervision of special measures - Regulatory provisions require financial entities to give special attention to business relations and transactions with persons in jurisdictions that do not have adequate AML/CFT systems; application is essentially restricted to credit institutions and investment firms other than portfolio management firms. - In practice, financial entities generally comply with advisories issued by the Minister of the Economy, Finance and Industry. - Compliance verification mechanisms for credit institutions and investment firms (other than portfolio management firms): - Responses to the QLB questionnaire. - On-site examinations, including in-depth review of financial transactions with non-cooperative jurisdictions. - Annual reporting to the CB on the number of intelligence files created in the preceding fiscal year, and the largest amount involved. - Systematic and standardized questions on enhanced customer due diligence measures taken with respect to such jurisdictions as part of ongoing supervision. - Insurance companies: - Reminded of obligations through outreach and Audit Department relationships. - Compliance confirmed via on-site examinations and follow-up. - La Poste: representatives described a relatively robust system of internal controls. - Gaps: - Application outside credit institutions and some investment firms is weaker. - Few requirements for screening procedures focused on integrity in hiring; existing screening focuses largely on competency. - No specific requirements (other than for credit institutions and currency exchangers) to ensure comprehensive application of AML/CFT to branches and majority-owned subsidiaries located abroad. ### Record keeping - Legislative and regulatory provisions are comprehensive and appear to be effectively implemented. ### Suspicious transactions reporting (STRs) - Scope mismatch: - Scope of reporting requirements is not aligned with and is narrower than the scope of predicate offences for money laundering. - Predicate offences cover all crimes and misdemeanors, including the financing of terrorism and fiscal fraud. - A suspicion that funds stem from a fiscal misdemeanor is not required to be reported, creating potential confusion and compliance risks. - Quality and coverage concerns: - Acknowledged generally poor quality of a large number of STRs. - Greater efforts needed to improve reporting from the DOM-TOM. - Additional reports (notably those related to trusts) have raised compliance burden while benefits are unclear and could divert resources from detection of suspicious transactions. - TRACFIN and supervisory authorities have issued guidance but more is needed. ### Internal controls, compliance and audit - Framework requires establishment of internal rules defining procedures for implementing AML/CFT requirements; comprehensive regulations apply to credit institutions and investment firms other than portfolio management firms. - Insurance companies and portfolio management firms rely on supervisory and professional recommendations that are not binding or enforceable. - Employee training: - Appears effectively implemented for credit institutions, investment firms other than portfolio management firms, insurance companies, and La Poste. - Shortcomings: - Few integrity-focused hiring screening requirements. - Limited guidance to non-banking sectors. - Lack of requirement for applying AML/CFT to foreign branches/majority-owned subsidiaries except for credit institutions and currency exchangers. ### Integrity standards - Measures in place are comprehensive and effectively implemented. - Good cooperation exists between supervisory authorities. ### Enforcement powers and sanctions - Supervisory enforcement powers generally appropriate. - CB: - Has a good range of enforcement actions against credit institutions, investment firms other than portfolio management firms, and currency exchangers. - Has taken a broad range of enforcement actions and routinely publishes results. - Limited experience taking enforcement action against unlicensed funds transfer businesses; authorities have not systematically sought to identify unlicensed businesses nor conducted outreach/awareness raising. - CCA: - Has a good range of enforcement actions against insurance companies and brokers; number of sanctions imposed is relatively low. - AMF: - Has a good range of enforcement actions against portfolio management firms; has not imposed any sanctions for non-compliance with AML/CFT requirements. - La Poste: - Too much reliance on La Poste’s internal controls and too little on programmed independent examinations by the IGF. - Unclear what sanctions are available or have been levied for non-compliance. ### Co-operation between supervisors and other competent authorities - Supervision: - All supervisory authorities are appropriately structured. - CB has a robust program of examinations and sufficient human and financial resources. - AML/CFT supervisory efforts and resources are relatively low for life insurance companies and brokers, individual and collective portfolio management firms, direct marketers, and La Poste; few on-site inspections and few sanctions in these sectors. - Cooperation: - Long history of cooperation among domestic supervisory, licensing authorities and TRACFIN. - CB has concluded a number of bilateral agreements with foreign counterparts; in 2001 information provided by foreign authorities led to two AML/CFT sanctions decisions. - COB has concluded more than thirty bilateral agreements and two multilateral agreements. - CCA maintains general contact with foreign supervisory authorities and through the IAIS but does not routinely exchange case information and has no formal agreements. ### Recommended Action Plan — Criminal Justice Measures and International Cooperation - I — Criminalization of ML and FT - Authorities encouraged to take necessary measures to ensure full compliance with UNCSR 1373. - II — Confiscation of proceeds of crime or property used to finance terrorism - Consider establishing mandatory deprivation of illegal profits of financial and economic criminality (by fine or confiscation). - Train magistrates and raise awareness of asset-oriented approaches. - Improve compilation of relevant statistics; consider establishing a central body to manage seized and confiscated assets. - Increase attention to investigating and prosecuting legal entities created to facilitate money laundering; apply confiscation measures systematically. - Proceed with plan to adopt a domestic act to enable France to comply fully with UNSCR 1373. - III — The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence - Issue guidelines to help financial institutions and reporting parties improve detection and reporting of suspicious transactions. - Consider establishment of an independent body to supervise application of AML/CFT and other legal obligations for inadequately supervised professions and industries. - Use the Liaison Committee to increase number and quality of reports to the FIU. - Establish an electronic reporting form to improve input into the AML/CFT chain. - TRACFIN should keep more detailed statistics on: - Nature of reports received, input from different sectors, type of transactions, suspected criminal nature, reasons for transmission to judicial authorities, nationality/country of residence of individuals involved, amounts involved, number of cases processed. - Review and consider extension of the 12 hours opposition to execution of a transaction (very minimal results to date); increase awareness of this tool among reporting parties and consider extending the 12 hours delay to collect complementary information. - Intensify queries of foreign FIUs for international cases. - Prioritize outreach and monitoring of DOM-TOM (in particular Guyana). - Consider more active involvement of the judiciary in the Liaison Committee. - Consider whether current staffing level of TRACFIN is adequate given increasing STR volumes and outreach needs. - IV — Law enforcement and prosecution authorities, powers and duties - Continue to monitor challenges posed by serious economic crime and required financial means. - Consider pooling expertise in financial and terrorism issues into one specialized service, particularly for FT investigations. - Reduce reliance on establishing the underlying crime for ML investigations; adopt new approaches and mentalities. - V — International cooperation - Consider including details on nature and results of MLA requests in statistics to better understand France’s efforts. ### Recommended Action Plan — Legal and Institutional Framework for Financial Institutions - I — General framework - Continue to develop and implement detailed regulations supporting underlying laws. - Review options for regulation and supervision of non-financial businesses and professions; designate competent supervisory authorities. - II — Customer identification - Introduce more detailed requirements (regulation or enforceable guidance) on adequate customer acceptance policies and reasonable steps to identify beneficial owners. - Review ML/FT risks associated with capitalization bonds/contracts and take corrective measures as appropriate. - Proceed with plans to introduce legislation to comply fully with SR VII. - III — Ongoing monitoring of accounts and transactions - Review and broaden requirements to pay special attention to certain transactions. - Introduce a requirement for financial entities other than credit institutions and investment firms (other than portfolio management firms) to pay special attention to business relations and transactions with persons and legal entities in jurisdictions without adequate systems to prevent/deter ML or FT. - IV — Record keeping - (No additional recommended text provided in source beyond indication of adequacy.) - V — Suspicious transactions reporting - Align scope of STR requirement with scope of predicate offences for money laundering. - TRACFIN and supervisory authorities should provide further guidance and ML typologies to improve detection, reporting quality, and overall AML/CFT implementation—especially outside the banking sector. - Reach out to DOM-TOM and monitor their compliance. - Review usefulness of additional reporting requirements. - VI — Internal controls, compliance and audit - Strengthen regulatory framework for internal controls for all sectors other than credit institutions and investment firms other than portfolio management firms. - Require financial entities to take integrity into account when hiring employees, notably for sensitive positions. - Establish a requirement (other than for credit institutions and currency exchangers) that AML/CFT requirements are applied to branches and majority-owned subsidiaries located abroad. - Authorities should assist in developing employee training programs. - VII — Integrity standards - Require AML/CFT internal controls to be taken into account in licensing of financial entities. - Consider introducing an explicit “fit and proper” test for currency exchangers. - VIII — Enforcement powers and sanctions - Increase supervisory and enforcement efforts of the CCA, the AMF and with respect to La Poste. - Review and monitor adequacy of enforcement efforts regarding unlicensed informal funds transfer businesses; develop complementary public outreach/awareness raising activities. - IX — Co-operation between supervisors and other competent authorities - Increase supervisory resources of the CCA and the AMF and formalize training of supervisory staff. - Shift responsibility for AML/CFT supervision and enforcement of La Poste’s financial services to the CB or, at minimum, increase IGF supervisory efforts and resources. - Where possible, supervisors should issue enforceable guidelines in support of the legal and regulatory framework. ### Authorities’ response to the assessment - The French authorities: - Thank the IMF assessment team and welcome the assessment that France maintains a high level of compliance with the FATF 40+8 Recommendations. - Note that some FSAP suggestions should be implemented soon, notably via the future decree transposing the second European directive AML/CFT. - Do not share the IMF opinion that France is “materially non compliant” with FATF Special Recommendation III (SR III); IMF rated France “materially non compliant” because France would be unable to comply fully with UN Security Council Resolution 1373 with regard to terrorists or terrorist groups from within European Union not linked to Al Qaida and the Talibans, as they are not covered by EU Council Regulations. - French legal position and ongoing measures: - France does not have a genuine national framework of asset freezing and relies on the UN Sanctions Committee and EU decisions; however, France’s legal framework related to financial relationships with foreign countries allows, in certain cases, freezing assets of persons not targeted by the UN Sanctions Committee. - A recent decision of the French administrative High Court confirmed the possibility for France to freeze European residents’ assets on the basis of its legal framework.38 - The French government is elaborating a specific national framework to allow freezing assets of all terrorists without conditions of nationality or residence. *Source: _cr05186 - 2. Measures to cope with the problem of countries* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05186.pdf_