France
Financial Sector Assessment Program—Detailed Assessments of Observance of Standards and Codes including Banking Supervision, Insurance Regulation, Securities Legislation, Monetary and Financial Policy Transparency, Payments Systems, Securities Settlement, and Anti-Money Laundering and Combating the Financing of Terrorism
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The Detailed Assessments of the Observance of Standards and Codes on France reviews compliance with Basel Core Principles for effective banking supervision. The French insurance market is notable for its broad range of distribution channels, which include tied agents, insurance brokers, salaried sales forces, direct writing mutuals, and financial institutions. France fulfills all prerequisites for effective payment clearing and settlement systems. Capital markets are large and sophisticated, with a range of equity, debt, derivative, and mutual fund products available to investors.

Abstract

The Detailed Assessments of the Observance of Standards and Codes on France reviews compliance with Basel Core Principles for effective banking supervision. The French insurance market is notable for its broad range of distribution channels, which include tied agents, insurance brokers, salaried sales forces, direct writing mutuals, and financial institutions. France fulfills all prerequisites for effective payment clearing and settlement systems. Capital markets are large and sophisticated, with a range of equity, debt, derivative, and mutual fund products available to investors.

I. Compliance with the Basel Core PRinciples for Effective Banking Supervision

General

1. This update of the 2001 MAE1 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 the Banque de France (BdF), the Commission Bancaire (CB), the Comité des établissements de Crédit et des Entreprises d’Investissement (CECEI), and the 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

2. 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 how the recommendations of the 2001 assessment had been addressed, and the response to the pre-FSAP questionnaire. Furthermore, 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.

3. The mission also 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 on the government’s intervention in the financial sector crisis, 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. In addition, the authorities provided information notes on specific topics, for instance compliance of the French accounting system with IAS, and the institutional structure of the system for financial sector regulation and supervision.

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 overview2

5. The French banking system, which has been modernized and restructured over the past two decades, 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

6. 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 and, except for a few large companies, corporate leverage is generally low. Likewise, households’ debt levels relative to incomes and assets are comparatively low (albeit rising), and savings rates are high. However, 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

7. 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 also 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.

8. The legal framework to conduct banking business is also well developed, with clear and concise legislation. The legal profession and the judiciary are well trained and have a strong understanding of financial and banking issues. Supervisory staff are well versed in the application of financial sector legislation. Rules on contracts and contract enforcement, as well as establishment and foreclosure of security interests are well developed, although legal procedures are lengthy. The accounting and auditing professions are well regulated, and subject to rigorous training and entry requirements. They are 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).

9. France has separate supervisory institutions for the main financial sectors: banking, insurance and securities. Arrangements have been put in place to ensure adequate coordination between these authorities. The CB, the CRBF, the CECEI, the Commission de Contrôle des Assurances, Mutuelles et Institutions de Prévoyance (CCAMIP) and the AMF are the supervisory and regulatory agencies for, respectively, the banking system, insurance, and securities industries, this far latter including banks’ asset management for third parties. 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).

10. Thus, financial sector oversight is fundamentally set up as a matrix, with a separate column for each of the main financial sectors of banking, securities and insurance, each with separate layers for regulatory, licensing and supervisory functions. The three columns are coordinated through joint bodies for cooperation, coordination and exchange of information and cross–membership in the oversight boards of the supervisory authorities. The legal provisions on financial sector regulation and supervision are incorporated in the COMOFI, except those for the insurance sector, which are laid down in the Code des Assurances.

11. This structure, while it may be seen as complex, is internally consistent and effective on a day-to-day basis. The following are examples of how coordination and cooperation are structured between the agencies:

  • a) Joint working groups of the CB and the Commission des Opérations de Bourse (COB) (precursor of the AMF) have 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;

  • b) The CB and the COB (AMF) have jointly prepared restrictions on the use of credit derivatives by unit trusts, rules on large exposures for unit trusts, and have cooperated on many practical issues;

  • c) 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);

12. Cooperation and coordination between the BdF, CB, the AMF and CCAMIP also takes place through their membership in the CACESF, chaired by the MoE.

13. 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 has been strengthened through the Financial Security Act of August 2003. Joint meetings between the CCAMIP and the CB take place as needed, but at least twice a year. The CB chair is member of the CCAMIP and vice versa.

14. Coordination between the CB and the AMF is supported by BdF membership in both bodies. Off-site supervisors of both bodies meet on a monthly basis, on-site staff bi-monthly. Information is also exchanged ad-hoc. Participation of CB inspectors in AMF inspection teams is based on a 1999 agreement between the CB and the CMF (which was merged with the COB in the AMF). The AMF retains responsibility for the follow-up to these inspections.

15. The BdF remains the pivotal institution in the general governance and day-to-day operations of the CB and the CECEI. It provides their staff and other resources. The two institutions meet on a monthly basis to discuss individual cases. The CB, CECEI and AMF also meet with the same frequency to discuss general as well as institution-specific issues. The staffs of the three bodies are in day-to-day contact on for instance licensing issues, changes in shareholdings, and assessment of business plans. Cooperation between the insurance and banking supervisory agencies takes place through dedicated working groups, joint on-site inspections and regular meetings.

16. The authorities stress that the CB is the responsible agency in a crisis involving an individual banking institution. Nevertheless, in view of the 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.

17. 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. Furthermore, the presence of industry representatives on the Boards of the CECEI and the AMF raises the issue of a potential conflict of interest for these members when issues are discussed that are relevant to their business interests. The authorities stress however, that (i) the rules of procedure require that industry representatives recuse themselves when a potential conflict of interest arises; (ii) members are under strict secrecy obligations; (iii) industry representatives can provide valuable input; and (iv) this structure promotes acceptance of the supervisors’ work by the industry.

18. The CB and the CECEI are clearly not independent from the BdF, which controls its resources and whose governor chairs its board. However, given (i) the independence of the BdF itself; (ii) the absence of obvious conflicts of interest with the 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 between the BdF and the CB 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. The 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

19. 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, the authorities have taken a number of actions to enhance convergence between IAS and French accounting standards (See also description of BCP 21). Important reforms have already been 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. The 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

20. The good record of the French supervisory system for early detection of troubled institutions is based, in part, on effective analytical and micro-monitoring capabilities (Principle 16). Particularly impressive are the CB’s early warning system (SAABA) and the 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.

21. 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.

22. Appeals against the 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.

23. Bank governance needs to be kept under close review, especially with regard to the large mutualist organizations, which are seen to be lesser or greater degree expanding their activities and changing their corporate structures in order to make better use of their accumulated cooperative capital bases. They are embarking on a path of change and will need to carefully manage that process.

Safety net

24. The FGD was established by the SFSA of June 25, 1999, which is 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 also 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.

25. Furthermore, banks have access on their own initiative to the Eurosystem marginal lending facility to obtain overnight liquidity against collateral of eligible assets.

Principle-by-principle assessment

Table 1.

Detailed Assessment of Compliance of the Basel Core Principles

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Table 2.

Summary Compliance of the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially non-compliant.

NC: Non-compliant.

NA: Not applicable.

Recommended action plan and authorities’ response to the assessment

Recommended action plan

26. The system in France for banking regulation and supervision is of high quality, and only one BCP has been assessed largely compliant and not fully compliant. However, notwithstanding this conclusion, the authorities might usefully consider taking additional steps to address two issues which the mission wishes to bring to the attention of the authorities.

Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

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Authorities’ response to the assessment

27. The authorities are broadly in agreement with the assessment.

II. Observance of the Iais Insurance Core Principles

General

28. This assessment examines France’s observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP) on the effective supervision of the insurance sector. The assessment was performed according to the new October 2003 ICP methodology by a two person team as part of the IMF FSAP.3

Information and methodology used for assessment

29. The assessment of observance of the IAIS Core Principles involved the review of: (i) an extensive self-assessment prepared in 2000 prepared by the former Commission de Contrôle des Assurances (CCA) based on the old methodology; (ii) comparison with the Core Principles and the Core Principles Methodology; and (iii) a review of the relevant laws governing the insurance sector in France. The legal basis regulating insurance is the Code des Assurances (as amended), which is supported by numerous decrees and implementation regulations, and the recent Loi de sécurité financière (Financial Security Law, LSF).

30. In addition, through the period of January 29–February 11, 2004, a series of meetings and discussions were held in France with officials from the insurance supervisory authority,4 the MINEFI, the BdF, the CB, the insurance industry associations (Fédération francaise des sociétés d’assurance–FFSA and the Groupement des Entreprises Mutuelles d’Assurances–GEMA), the actuaries association (Institut des Actuaires), private insurance companies, associations of intermediaries, auditors (the Compagnie Nationale des Comm issaires aux Comptes–CNCC), and other financial institutions. On this basis, the assessors attempted as far as possible to evaluate whether the legal framework is implemented faithfully and effectively.

31. The supervisory staff at the insurance supervisory authority and other concerned agencies cooperated fully with the assessment, providing answers to an extensive questionnaire, preparing the self assessments against the IAIS Core Principles, meeting additional requests for information, and being available for a wide variety of meetings. In addition, the insurance supervisory authority and MINEFI staff assisted with logistical arrangements for the meetings with industry bodies and companies, for which the mission expresses its gratitude.

32. The assessment was undertaken during a period of transition. On the one hand, the ICP are relatively new. The old version dating from 2000 was revised in 2003.

33. On the other hand, the French supervisory environment has been significantly modified by the Financial Security Law of August 1, 2003. This legislation created the joint insurance supervision body, called Commission de Contrôle des Assurances, des Mutuelles et des Institutions de Prévoyance (CCAMIP), as the result of the merger of the CCA, responsible for the supervision of companies regulated by the old insurance code, and the Commission de Contrôle des Mutuelles et des Institutions de Prévoyance (CCMIP), responsible for the supervision of certain mutual insurers. The provisions of the law also gave financial independence to the CCAMIP, strengthened coordination with the banking sector supervisors, and extended the powers of the supervisory authorities to request and receive information from supervised entities and auditors. The implementation orders (décrets d’application) for the new law were under review by the Conseil d’Etat at the time of the assessment; the transition period ended as of July 2004 with the publication of outstanding orders.

Institutional and macro prudential setting—overview

34. The French insurance sector is large and of systemic importance. With a 5 percent market share of gross premiums in the OECD in 2001, France’s insurance sector was ranked the fifth largest in the world and the third largest in Europe.5 In terms of density (premiums per capita), France ranks slightly lower at the tenth position in the OECD. With an insurance penetration ratio (premiums as a percentage of GDP) slightly over 10 percent, France ranks eighth in the OECD.

35. The French insurance industry includes a variety of insurance companies, including life, and health and accident (henceforth referred to as “mixed”) (126), nonlife (295) and reinsurance (33).6 In 2002, the French insurance sector was largely dominated by the life and mixed sectors, accounting for over 80 percent of total assets (30 percent for life and 53 percent for mixed). Non-life insurance represented only 14 percent of total assets. Reinsurance plays only a minor role, accounting for 4 percent of total insurance assets.7 By legal form, stock companies accounted for 80 percent of premium income, mutual insurance companies 11 percent, public-owned institutions 9 percent, and the branches of foreign companies (outside the EEA) less than 0.1 percent.8

36. The insurance industry seems to be supported by a healthy level of competition. Market concentration is higher in the life insurance sector, where at end 2002 the three (10) largest insurance companies represented 29 percent (60 percent) of total assets. In nonlife, the three (10) largest companies represented 22 percent (45 percent) of total assets. A notable feature of the industry is the prevalence of bancassurance: a large minority (by assets) of insurance companies are subsidiaries of banks, which also offer policies from nonsubsidiaries. The French insurance market is notable for its broad range of distribution channels, which include tied agents, insurance brokers, salaried sales forces (as in the case of bancassurance), direct writing mutuals, and financial institutions.

37. In life sector, the most common product is a type of savings product (assurance à capital différé avec contre-assurance en cas de décès or “mixed capital insurance” product), accounting for almost 65 percent of total life premium income. This product is subsequently paid out in the form of a lump-sum benefit or multiple payment if the insured dies or outlives the term of the policy. This product can be taken out directly by the individuals or through an employer or association (group policies account for 7 percent of pure endowment premium income). Such policies have a guaranteed rate of return which is used to calculate technical provisions. The second largest type of life insurance policies (representing 15 percent of total life premium income) is a unit-linked contract. This type of policy is expressed in the units of an investment vehicle, such as shares of a mutual fund or a real-estate partnership. Since the contract benefits fluctuate with the market values of the underlying investment instruments, the investment risk is entirely borne by the policyholders, unless there are linked to some minimum guarantees.

38. The regulatory framework for life insurance companies relies on three pillars: (i) solvency requirements (approximately 4 percent of total mathematical provisions for endowment products and 1 percent for unit-linked contracts);9(ii) regulations on the measurement of liabilities (i.e., technical provisions); and (iii) regulations governing investment policies (including conservative accounting principles applied to asset valuation). At end-2002, the solvency margin (including unrealized capital gains) was estimated at 9.3 percent of provisions, or 2.4 times the required minimum. Non-life insurance companies are required to have a 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 amount is higher.10 At end-2002, the solvency margin (including unrealized capital gains) was estimated at 39.3 percent of provisions, or 4.8 times the required minimum.11 In addition, the CCAMIP is promoting a sound level of asset-liability management expertise on the industry-wide basis. Since 2001, insurers are required to conduct periodically a series of stress tests, aimed at monitoring the ability of insurance companies to model and anticipate the consequences of various financial market shocks (such as movements in interest rates, or equity or real estate prices) on their asset-liability match.

39. Overall, the condition of the French insurance industry suggests that systemic vulnerabilities are well contained. The sector seems to have demonstrated its resilience in the face of a number of significant shocks in recent years (including, among others, a significant fall in international equity prices in 2001–2003, historically low interest rates, and international and national natural catastrophes, including September 2001 and major storms or flooding in France in 1999 and 2000).

40. Sources of stability include: (i) the ability of the life sector to reduce progressively the level of guaranteed interest rates (to zero percent for most new contracts) and shorten the contract duration, in an effort to reduce interest rate risks borne by the insurers; (ii) greater product mix diversification with unit-linked products, where the investment risk is fully borne by the policyholders (even after the recent poor equity market performance, unit-linked products continue to represent 18 percent of life and mixed insurance premiums); (iii) a conservative investment portfolio, with over three quarter of total assets invested in fixed-income instruments (in life, equity represents only 12 percent of total assets and real estate less than 5 percent, leaving the remaining 84 percent invested in fixed-term instruments; this asset composition has helped shield the French insurance sector from the consequences of the recent fall in international equity prices); (iv) despite the presence of large bancassurance groups, limited risk transfer between the banking and insurance sectors; and (v) a relatively small reinsurance activity, accounting for only 3 percent of total assets in the French insurance sector.

41. The insurance industry is facing a number of challenges. These include: (i) the demographic trend (longer life expectancy and decline in working population), which creates concerns about financial sustainability of the currently fully state-funded pension and medical plans; (ii) the up-coming implementation of the new International Accounting Standards (IAS) norms in 2005, which expose the insurance industry to vulnerable accounting risks; and (iii) a possible sharp and sustained increase in interest rates, which could generate a wave of contract repurchases, which in turn would force insurance companies to sell some of their assets (fixed-income instruments) at loss-making values in order to pay out the surrender values. However, the authorities seem aware of these challenges and are considering how to take preemptive measures, including the promotion of a new generation of private retirement products or ensuring a sound and sophisticated system of asset-liability management at the industry-wide level.

General preconditions for effective insurance supervision

42. The supervision of insurance companies in France is based on the EU Directives and French insurance law, ordinances, codes and circulars. The legal requirements governing insurance companies originate in both company law and insurance law. In France, the regulation of insurance falls under the jurisdiction of the MoE, while the supervision is under the responsibility of the CCAMIP and the CEA.

43. The legal system in France operates effectively. The auditing and accounting professions in France are well developed and follow best international practices. In the case of large companies, the accuracy of the financial statements must be confirmed simultaneously by two sets of external auditors. The auditing and accounting rules applicable to insurance companies generally comply with international standards. Further harmonization will be achieved in 2005 when the whole EU area will implement IAS. The actuarial profession is large and well-developed in France.

44. The French economy is well large, well diversified, and generally relatively stable in both real and nominal terms. These conditions not only contribute to the growth of the insurance sector, but also facilitate effective supervision.

Principle-by-principle assessment

45. The legal, regulatory and supervisory framework observes a large majority of the essential criteria of the IAIS Principles Methodology. The assessment reveals that most of the 28 ICP of the IAIS are observed. ICP 9, 10, 17 and 18 are largely observed, and ICP 3, 24 and 28 are partly observed.

46. The level of observance for each principle reflects the assessments of the essential criteria established by the IAIS. A principle is considered “observed” whenever all the essential criteria are considered to be observed or when all the essential criteria are observed except for a number that are considered not applicable. For a criterion to be considered “observed,” it is usually necessary that the authority has the legal authority to perform its tasks and that it exercises this authority to a satisfactory standard and ensures that requirements are implemented. The existence of a power in the law is insufficient for full observance to be recorded against a criterion except where the criterion is specifically limited in this respect. In the event that the supervisor has a history of using a practice for which it has no explicit legal authority, the assessment may be considered as “observed” if the practice is substantiated as common and undisputed.

47. A principle is considered to be “not applicable” when the essential criteria are considered to be “not applicable.” A criterion would be considered ‘not applicable’ whenever the criterion does not apply given the structural, legal and institutional features of a jurisdiction.

48. For a principle to be considered “largely observed,” it is necessary that only minor shortcomings exist which do not raise any concerns about the authority’s ability to achieve full observance with the principle. A principle will be considered “partly observed” whenever, despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve observance. A principle will be considered “not observed” whenever no substantive progress toward observance has been achieved.

Table 4.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

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Table 5.

Summary Observance of IAIS Insurance Core Principles

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Recommended action plan and authorities’ response to the assessment

Recommended action plan

49. The recommendations are summarized in the following table.

Table 6.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

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Authorities’ response to the assessment

Regarding ICP 3 comments

Essential Criterion b: “The legislation gives the supervisory authorities the power to issue and enforce rules by administrative means.”

First, the French supervisory and regulatory framework distinguishes, on one hand, the Treasury, which sets out the legal framework for insurance supervision, and on the other hand, the Insurance Control Commission, which implements it. This framework is explicitly allowed by Insurance Core Principle n°3. 16

Second, the Financial Security Law, that was passed on August 1, 2003, harmonizes the bank and insurance regulatory framework. Both the insurance supervisory authority and the Commission Bancaire will participate to the newly created financial regulation advisory council, which issues an opinion before any law or decree is passed. The law also creates the CCAMIP, as the only insurance companies and mutuals supervisory authority. The CCAMIP is enabled to recruit staff and to invest in any equipment judged necessary to reinforce its expertise and its control.

Lastly, the Financial security law transferred the responsibility for licensing insurance companies from the Minister of Finance to an independent and collegial body (the CEA), which limits even more the concentration of powers by the Ministry of Finance.

Essential Criterion g: “The supervisory authority and its staff are free from undue political, governmental and industry interference in the performance of supervisory responsibilities.”

The question that is raised by the mission deals only with CEA (participation of the industry in this body). Or, CEA members are retired professionals, who are tied by strict deontology and secrecy rules.

As far as the CCAMIP is concerned, it is entirely free of undue interference.

Therefore, we would request that the observance of this criterion be considered as “largely observed.”

Essential Criterion o: “The supervisory authority has its own budget sufficient to enable it to conduct effective supervision. The supervisory authority is able to attract and retain highly skilled staff, hire outside experts as necessary, provide training, and rely upon an adequate supervisory infrastructure and tools..”

Although the merging of CCA and CCMIP may lead to temporary shortage of staff, the financial independence of the CCAMIP will enable it to manage its own budget (this budget will be funded by a levy from the industry) and, therefore, to hire sufficient staff in a near future.

Therefore, we consider that this criterion is “largely observed.”

Other comments:

50. In the third paragraph of the comments, it is stated that “Four different administrations are responsible…the CCAMIP for sanctions; and the secretariat of the CCAMIP for other on-going supervision.” In fact 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. According to the Art. 6 of European Convention of Human rights, when a body is entitled to take sanctions it is absolutely necessary that preliminary investigations would be separated from the decision. It is the reason why clear distinction is made between the board and the staff of the Secretariat Général.

Regarding ICP 28

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).

As far as the supervision of brokers is concerned, it should be noted that the Financial security law authorized the supervisory authority to impose sanctions on brokers. Moreover, the directive on insurance intermediates, which should be implemented in France very soon, creates a national registry of all intermediates, comply them to have a financial guarantee and a professional civil responsibility insurance police, centralize the control on fit and proper conditions, and enables the CCA to withdraw a broker’s registration on grounds of regulation infringement.

Finally, the CEA is considering regulatory measures, so that the quality of insurers’ AML/CFT internal controls be considered when licensing insurance companies.

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.

III. Observance of the CPSS Core Principles for Systemically Important Payment Systems

General

51. This part of the report contains the assessments of the compliance of the three systemically important payment systems in France with the Core Principles developed by the Basel-based CPSS. The systems covered are: Transferts Banque de France (TBF) (a public sector Real-Time Gross Settlement system–RTGS), Paris Net Settlement (PNS) (a private sector large-value payment system) and Système Interbancaire de Télécompensation (SIT) (a private sector retail payment system). The assessments were conducted during the two missions in February and May 2004 in the framework of the IMF/World Bank Financial Sector Assessment Program (FSAP) and prepared by Daniel Heller of the Swiss National Bank and Jan Woltjer of the IMF (MFD).

Information and methodology used for assessment

52. The methodology for the assessments was 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. Prior to the mission the BdF made self assessments for all the relevant systems and filled in the Questionnaire on Payments and Securities Settlement Systems. In addition, the assessors studied laws, articles, brochures, guidelines, data and presentations provided by the BdF, and used information published in the CPSS publication on “Payment and Settlement Systems of Selected Countries.”

53. The assessments involved discussions with directors and senior officials from several departments of the BdF. In addition, several meetings with the private sector operators (Centrale des Réglements Interbancaire, CRI, and Groupement pour un Système Interbancaire de Télécompensation, GSIT), the Bankers’ Association and commercial banks took place.

Institutional and market structure—Overview

54. The French banking law gives a broad definition of means of payments, referring to “all instruments which, irrespective of the medium or technical procedure used, enables any person to transfer funds.” The issuance and the management of means of payments are defined as banking operations that 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.

55. Following the merger and consolidation process within the financial sector, roughly 1,000 credit institutions conduct business in France (compared to 1,608 in 1994). The Post Office’s financial arm plays a significant role in the French financial system as it holds a significant number of demand accounts and time accounts.

56. Payment system oversight forms an integral part of the BdF’s statutory tasks. It performs its duties of ensuring the smooth functioning and the security of payment systems within the framework of the tasks of the European systems of Central Banks (ESCB), as mentioned in the Art. 105 (2) of the Treaty of Maastricht and in Articles 3 and 22 of the Statute of the ESCB. The responsibilities and powers of the BdF with respect to payment system oversight are laid down in the COMOFI. The oversight task also explicitly cover the oversight of Securities Settlements systems (SSSs) and Central Counter Parties (CCPs). The BdF is also entitled to monitor the security level of the different payment media and to make recommendations about it.

57. In addition to cash, the check is still widely used in France. However, the relative share of checks in cashless payments has been declining since 1993. Direct debits have been very successful ever since their introduction in 1967. They are generally used for recurrent payments such as electricity, gas, phone and water bill payments. The use of the interbank order Titre Interbancaire de Paiement (TIP) has been growing steadily. A TIP works in the same way as a direct debit, except the payer is required to consent to each payment by signing the TIP form, which is sent with the corresponding invoice.

58. Credit transfers are also widely used in the retail area, for instance, for payments made by companies, government agencies and local authorities. The interbank exchange of all credit transfers takes place in paperless form. Ordinary transfers are settled on the day of presentation while credit transfers for payment on a future due date are presented two or three days in advance of the settlement.

59. Bank cards are mostly debit cards which can be used for both payments and cash withdrawals through a nationwide network of Point of Sale (POS) terminals and Automated Teller Machines (ATM). Since several years, cards have been equipped with a computer chip which resulted in a decline of fraudulent transactions to a very low level. A specific network is used for the transmission and authorization for withdrawals and payments. This network enables an ATM or a POS terminal to obtain authorization from the issuing bank. This authorization also means that the payment is guaranteed for the beneficiary. At the end of 2001, 32,500 ATMs and 750,000 POS terminals were installed nationwide. As in other EU countries, the circulation of electronic money is still fairly limited. Three consortiums are currently providing their e-money schemes.

60. The interbank payments area is dominated by three systems, each of which is considered systemically important by the French authorities. Large-value operations are processed in two systems: the RTGS system TBF which is the French component of the TARGET. TBF is managed and operated by the BdF. The hybrid system PNS is managed and operated by the CRI, an interbank body owned by 10 banks and the central bank.

61. Retail transactions are processed in the French Automated Clearing House SIT. SIT is a deferred net settlement system and is managed and operated by GSIT, a group of 12 founding members (banks).

62. The banking industry and the BdF are continuing their efforts to improve the safety and efficiency of the payment infrastructure. At the BdF, a separate oversight unit has been established within the payment department in order to deepen the quality and independence of this activity. Both TBF and PNS, while technologically still modern systems, are approaching the end of their life cycles since they will be obsolete with the introduction of TARGET 2 in 2007. The clearing of an increasing number of retail payment instruments in SIT has led to the appraisal of the BdF that SIT is of systemic importance. Hence, SIT is one of the very few retail payment systems that has to comply with the Core Principles. One of the challenges for SIT will be the still unclear effects of the Single European Payments Area (SEPA) on the landscape for the clearing and settlement of retail payments.

Payment systems infrastructure

63. France fulfills all prerequisites for effective payment clearing and settlement systems. Historically, the private sector has been playing an important role both in the provision of payment instruments and in payment clearing services. The BdF, in turn, is also an established player in the area of payment services. In the field of payments, the relationship between the BdF and the banking sector is well established and co-operative. The needs of the users are accounted for in the development of the payment infrastructure.

64. The oversight of payment systems is three-tiered: defining the principles or standards underpinning their conception and operation, monitoring their implementation and lastly overseeing actual conditions of operation and use. The oversight activities are embedded into the framework which was developed by the Eurosystem.

65. 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

Table 7.

Detailed Assessment of Observance by the TBF of CPSS Core Principles for SIPS

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Table 8.

Summary Observance of TBF of the CPSS Core Principles

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Recommended action plan for the TBF

Table 9.

Recommended Actions to Improve Observance of TBF of the CPSS Core Principles

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Assessment of observance of the CPs by the PNS

Table 10.

Detailed Assessment of Observance of Paris Net Settlement System (PNS) of the CPSS Core Principles for SIPS

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Table 11.

Summary Observance of PNS of the CPSS Core Principles

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Recommended action plan for the PNS

Table 12.

Recommended Actions to Improve Observance of PNS of the CPSS Core Principles

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Assessment of observance of the CPs by the SIT

Table 13.

Detailed Assessment of Observance of Système Interbancaire de Télécompensation (SIT) of CPSS Core Principles for SIPS

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Table 14.

Summary Observance by SIT of the CPSS Core Principles

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Recommended action plan for the SIT

Table 15.

Recommended Actions to Improve Observance by SIT of the CPSS Core Principles

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Assessment central bank responsibilities in applying the CPs

Table 16.

Detailed Assessment of the Responsibilities of BdF in Applying the Core Principles

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Table 17.

Summary Observance of the Central Bank Responsibilities in Applying the CPs

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Recommended action plan on central bank responsibilities

Table 18.

Recommended Actions to Improve Observance of the Central Bank Responsibilities in Applying the CPs

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Authorities’ response to the assessment

66. The BdF takes note that the IMF largely endorses its own findings regarding both 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.

67. The BdF would also like to mention that it has already taken several steps to urge payment systems to achieve full observance with the Core Principles, in the few remaining areas where some improvement is still needed. In particular, compliance of SIT with CP5 is planned to be achieved no later than 2008, in line with the policy stance endorsed by the Eurosystem.

IV. Implementation of the IOSCO Objectives and Principles of Securities Regulation

General

68. This assessment addresses the securities regulatory framework in France. France modernized the legal structure for financial services by the Financial Security Act of August 1, 2003 (Loi N°. 2003-706, de Sécurité financière or LSF). The new law simplifies and consolidates the law affecting financial market institutions, products and professionals. The compilation of the statutory provisions is known as the Code Monétaire et Financier (COMOFI). The revised regulatory framework can be described as a sophisticated, so-called, “twin peaks” model, which separates the performance of prudential and conduct of business regulation, although insurance providers are treated separately and not comprehensively integrated.

69. A twin peaks model was chosen to:

  • Take account of the different cultures (and expertise) related to the supervision of banking and trading firms;

  • Acknowledge the differences in techniques between prudential and conduct of business oversight and enforcement techniques;

  • Provide separate lines of decision making that may reduce the potential for conflicts of interest in addressing particular regulated institutions; and

  • Provide coverage of all relevant financial intermediaries, including for example managers of portfolios for third parties and financial analysts.

70. This model, as articulated in the LSF, is fairly complex, albeit simpler than the previous structure. 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. It also shares certain licensing powers with the prudential authorities. This new framework reflects the evolution of financial market regulation in France and in the European community. In particular, it reflects the devolution of market oversight from a shared supervisory activity between a professional body, the CMF, a successor to the Conseil des Marchés à Terme (CMT), and an independent administrative authority, the COB, effected in l996 by the Financial Modernization Act (Loi MAF) (which also integrated cash and derivatives oversight) to today’s new model, where these oversight powers are concentrated in the independent regulatory authority that is the AMF. The new French framework also maximizes the protections that implicate the process of imposing regulatory sanctions and setting regulatory standards, by creating an independent structure for imposing sanctions.

71. As a consequence of this complex structure, this assessment focuses on the remit of the AMF, while also taking account of the activities of several other institutions in so far as the competences of those institutions have responsibilities with respect to investment services providers, markets, clearing and settlement and thus can affect implementation of the IOSCO Objectives and Principles of Securities Regulation (Principles). It also must particularly assess the efficacy of the arrangements whereby such institutions interact and cooperate in the performance of their regulatory, supervisory and enforcement functions. In this regard, the discussion below and in Principle One describes in some detail the various institutional components of the regulatory structure.

72. This assessment is being performed by a securities expert designated to the IMF in accordance with an IOSCO Protocol for the designation of securities experts. 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, is conducting the assessment. It is understood that the conclusions in this assessment are provided in her personal capacity as an expert under contract to the IMF and not in her capacity as an employee of the US government or in her capacity as a representative of IOSCO. It is also understood that such assessments are intended generally to test the legal and regulatory framework—and the application in fact of that framework—to securities regulation against the standards set by IOSCO but 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.” Understanding of the details behind this assessment will be enhanced by review of the working papers, in particular any answers provided to the IOSCO Assessment Methodology.

Information and methodology used for assessment

73. In making this Assessment, the following guidance with respect to application of the IOSCO Principles was used: the Principles themselves, the Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (Assessment Methodology), to the extent applicable, the Assessment methodology for “Recommendations for Securities Settlement Systems” (RSSS Assessment), the consultation draft of the CPSS/IOSCO Recommendations for Central Counterparties released in March, 2004, IMF Guidance Notes and Templates, and, as relevant, the IOSCO reports referenced in the Assessment Methodology and the Principles.

74. The assessment also is based on meetings with the MINEFI; interviews with senior staff of the AMF responsible for each of the functional areas addressed by the Principles and the Chairman and Secretary General; sessions with knowledgeable staff of the Commission Bancaire (CB), the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI), the BdF (with respect to their respective roles in the securities framework), and the Agence des participations de l’Etat (APE) (in connection with market structure); discussions with Euronext, NV (Paris operations) (regarding cash and derivatives markets), Euroclear (regarding payments and settlement), LCH-Clearnet, SA (regarding clearing); meetings with selected asset management and investment firms (and the related professional associations) representing different scales and complexity of financial services activity; selective review of the websites of the foregoing; annual reports; the COMOFI, existing regulations and published guidance, instructions, and recommendations; statistics on operations; systems for publishing information on issuers; the combined database composing the registry of licensing information; the regulatory and other official mechanisms for publication of regulatory actions; exchange operational oversight and regulatory surveillance systems; AMF responses to the IOSCO “high level” questionnaire and IMF questionnaires on Mutual Funds and Market Structure; the draft AMF responses to the Methodology; reference to the predecessor to the AMF, the COB, responses to detailed questionnaires used by IOSCO to explicate functional aspects of Member programs; information, charts and demonstrations of programmatic elements requested and delivered during the course of the on-site portion of the assessment; and multiple conference calls to address matters of detail. The assessment also reflects the sharing of views of the mission team at mission meetings in which participants briefed each other on findings in their particular areas of emphasis.

75. The AMF and the other institutions and entities and their representatives with securities competences were well-prepared, expert in their areas of focus, consistently helpful and the management of the assessment was well-organized while still sufficiently flexible to accommodate further exploration of particular nuances. The AMF provided a draft answer to the Assessment Methodology for Assessing the Implementation of the IOSCO Objectives and Principles of Securities Regulation. The IMF, however, did not require the AMF to submit its response using the Methodology. Responses to the Assessment Methodology, suggested by IOSCO, have benefited the development of this detailed report.

Institutional and macroprudential setting, market structure

Structure of the securities industry in France

76. Capital markets in France are large and sophisticated, with a range of equity, debt, derivative, and mutual fund products available to investors. As a percentage of household savings in France, investments in securities and mutual funds20 comprise roughly 7.9 percent of disposable income (savings/disposable income of 16.7 percent in 2002), with life insurance products and savings accounts21 comprising 6.4 and 2.7 percent respectively.

77. Mutual funds of various types, including the so-called UCITS, are an important investment vehicle in France. Among industrialized countries, only the U.S. had a larger mutual fund asset to GDP ratio (68 percent) than France (64 percent) in 2003. A large proportion of the mutual fund products held by investors are created and sold for the account of life insurance firms. The reason for this is that there are substantial tax benefits to households holding life insurance saving products, including those in the form of mutual funds.

78. The financial sector as a whole is dominated by universal banks—in large part by the six major domestic banks. There are 90 licensed investment/broker firms, 346 commercial banks (1011 credit institutions) and roughly 500 asset management firms. The largest domestic broker/dealers (i.e., investment firms) are part of the same six largest financial institutions. Also, an important portion of assets under management in France (41.5 percent) is managed by the big six banks’ asset management companies22.

Equity and risk shifting markets

79. France’s only stock exchange, Euronext Paris, which is a subsidiary of Euronext, NV, operates a fully electronic equity exchange. In terms of stock market capitalization, France ranked fourth in the world after the U.S., U.K., and Japan in 2003 (Table 19).

Table 19.

Stock Market Capitalization

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80. Euronext Paris was formed as a result of the partial consolidation of European stock markets that took place in 2000. The stock exchanges in Paris, Amsterdam, Brussels and, later on, Lisbon (and Porto) joined forces under the umbrella holding company Euronext NV, a demutualized, public company based in the Netherlands, whose shares are listed on the Premier Marché of Euronext Paris. The shareholders of these European bourses received shares in the new company in exchange for their original holdings. For regulatory oversight and other legal reasons, Euronext NV consists of a set of subsidiaries in each participating country, with each subsidiary holding the local stock market license. The subsidiaries then offer issuers, intermediaries and investors in each country local portals to what is now a unified trading structure. This means that there exists a single quote and a common cross-border order book for the listed securities emanating from each jurisdiction, creating a broader liquidity pool and greater transparency than would have been available before the consolidation. Moreover, there also is a single clearing system, LCH-Clearnet, SA, and a single settlement system, Euroclear France, for all equity securities traded on Euronext markets.23 However, as noted above, the local markets are not merged, and hence they continue to be regulated by their respective local authorities. For Euronext Paris, this means that it is overseen by the AMF. The cross-jurisdictional nature of Euronext Paris, LCH-Clearnet SA, and Euroclear France has lead to the implementation by the French authorities of innovative cooperative cross-border arrangements with the authorities in the other jurisdictions in which these firms are active.

81. The internal market structure of Euronext Paris remains as it was for the Bourse de Paris, with three segments: the Premier Marché, the Second Marché, and the Nouveau Marché. Euronext also offers companies the option to trade its overlapping Next Prime and Next Economy market segments, which encompass stock listed in four Euronext stock markets. The Marché Libre is an unregulated market in which 258 issues are traded.

82. The total transaction value in equities (per the Electronic order book, counted on one side) was EUR 877.7 billion in 2003, with an average daily turnover of EUR 3,442 million. In 2003, the number of trades was 101 million with an average daily turnover of 396,288,24 and the five most actively traded shares accounted for 30 percent of turnover. In 2002, the nine most actively traded shares accounted for 30 percent of the total number of trades. According to BdF statistics, equities are primarily traded by institutions and foreign investors.

83. The exchange traded futures and options markets in Paris (MATIF and MONEP respectively) are now also part of Euronext. The Paris derivatives markets have been integrated into the Euronext-liffe trading structure, thus taking advantage of the added liquidity and transparency offered by the common cross-jurisdictional platform. As is the case with the stock exchange, activity in the various derivative instruments that are traded in the Paris segment of Euronext-liffe are regulated by the French authorities. The CAC 40 is the most active contract; most financial futures are traded through the London portal.

Bond markets

84. The current structure of the government bond market includes long-term debt instruments (7 to 30 year initial maturities; OATs, OATis, OAT€is, and TEC10 OATs), medium term debt instruments (2 and 5 year initial maturities; BTANs) and short-term debt instruments (1 year or less; BTFs). OATs comprise of 65 percent of the marketable government debt outstanding, BTANs 20 percent, and BTFs the remainder. Inflation-linked OAT issuances have grown, particularly with the recent 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). The introduction of large, liquid 10 and 30-year bonds linked to European inflation is said by investment banks to have helped trigger the issuance of other (nonsovereign) inflation-linked (IL) debt instruments (mainly, IL medium term notes) by European institutions as well as the creation of an inflation-linked swaps market.25 The main investors are insurance companies, international pension funds, asset managers and alternative traders. These IL debt instruments provide a natural hedge against their inflation-linked obligations.

85. The nonfinancial corporate bond market in France has grown substantially with the introduction of the Euro. At the end of 1998, the corporate bond market comprised 12 percent of outstanding French bonds, while it now stands at 22 percent. Most of this (20 percent) is issued by credit institutions. By comparison, however, this market share is still below that in the U.S., where corporate bonds represent roughly 40 percent of outstanding bonds.

86. Inter-dealer trading for the French government bond market, and to a lesser extent the nongovernment bond market, has almost completely migrated to the MTS electronic trading platform. By significantly improving the market liquidity conditions faced by dealers, the MTS systems generated a significant reduction in trading cost. Although the dealers (banks and investment firms) who trade on the system gain directly from the improved liquidity, the whole of the sovereign bond market also realizes reduced trading costs as competitive forces cause the intermediaries to pass on some of the savings in more transparent and liquid bond trading to their clients, mainly institutional investors.

87. There is also Powernext, a commercial energy exchange owned by Euronext in which nonintermediated trading occurs.

Description of regulatory structure and practices

88. The AMF is an independent public authority with legal personality and ‘taxing’ authority, comprised of a 16–member Board26 (College), chaired by a full time Chairman and a separate 12-member Commission des Sanctions, and 5 consultative commissions, each with its own Chairman and Vice Chairman as follows: (1) Organisation et fonctionnement du marché, in regard to transposition and implementation of the new investment services directive and market abuse directive; (2) Activités de compensation, de conservation et de règlement-livraison, in regard to international work on clearing and settlement; (3) Activités de gestion individuelle et collective, in regard to 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 the new transparency and prospectus directives; and (5) Epargnants et actionnaires minoritaires, with regard to minority shareholders and savings.

89. As such, in describing the advent of the AMF, the French press characterized the new institution as enjoying a sui generis legal status.

90. The AMF licenses and prudentially supervises operators of publicly offered collective investment schemes, and portfolio (asset) managers for third parties; regulates the public offer and reporting of financial information with respect to issues, and marketing generally, and also the flow of information relative to takeover bids. The AMF also has responsibility for custodians for securities and assets of collective investment schemes, and for clearing and settlement systems and related custodians, without prejudice to the functions of the BdF and its specific role with respect to payments. The AMF has broad sanctioning powers which must be exercised through its separately constituted Commission des Sanctions.

91. Proceedings before this panel can be commenced against any person, whether or not that person is a regulated person. The Secretary General of the AMF opens investigations, which remain under his authority until referred to the rapporteur designated by the Commission des Sanctions. 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.

92. They can also be referred by the AMF board, upon review of a file submitted by the Governor of the BdF, or the Chairman of either of the CB or the CCAMIP (L.621-15).

93. Licensing (except for insurance companies engaging in insurance activities) is committed to the CECEI (in consultation with the AMF in the case of 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 by such firms). 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. The BdF commits staff to the licensing and prudential supervisors, and provides leadership through its Governor’s participation as Chair of both the CB and the CECEI (L.613-3; 612-3). The BdF also has competence over payment system functions, and as a consequence certain aspects of securities settlement.

94. Coordination with the prudential authorities and the AMF is organized, in the case of day-to-day operations, through inter-staff contacts, information sharing, certain combined databases, and regular monthly meetings. In the case of general policy and matters of particular cross-market or common interest, such coordination is accomplished through an inter-institutional, statutorily-prescribed board composed of the heads of the financial services agencies (the Collège des autorités de contrôle des entreprises du secteur financier, henceforth the College (L. 631-2), which must meet at least three times a year, and is presided over by the Minister of Finance or his representative. Cross membership of the regulatory/supervisory authorities also fosters cooperation, for example, through the statutory participation of the AMF Chair as a participant on the Board of the CECEI (L.612-3), and participation of the governor of the BdF on the AMF Board.

95. In the case of regulated markets and related clearing arrangements, the AMF may delegate (license specified individuals to perform) certain investigative activities and compliance activities as to their members, including with respect to the transmission of orders by financial services providers (L.621-9-2), in accordance with procedures specified by regulation and subject to conditions of exercise defined by decree of the Conseil d’Etat (the highest administrative court) (Art. 11, 12 and 13 of the Decree).

96. In general, the exchanges and clearing and settlement organizations control/monitor their operations through rules adopted subject to review of the competent authority and those rules (and any powers or actions with respect to their infringement) are regarded as founded in contract and not in public law.

97. Protocols exist among the national regulators and markets within the Euronext, NV group, and the related clearing and settlement institutions in the various jurisdictions which comprise Euronext, Euroclear and Clearnet, that determine how those institutions are operated and supervised. In this respect, Euronext France; LCH-Clearnet, Ltd., the British-based holding company for the clearing organization; and LCH-Clearnet, SA are credit institutions with consequent implications for how supervision and regulation of these entities is organized—that is, the CB and the BdF as well as the AMF have specific responsibilities.

98. The law applicable to securities is largely contained in the COMOFI and in the precursor instructions, recommendations, and regulations that are in the process of being revised in a to-be-proposed Règlement Général of the AMF. The Règlement Général, when complete, will consolidate, streamline and update previous guidance and fully enforceable regulations of the COB and CMF, respectively, as well as bring the French regulatory framework, which currently implements existing directives, fully into line with new European directives.

99. Pending the conclusion of this project, the rules of the CMF and the COB remain in full force and effect. Applicable law is also found in certain related legislation, such as company law, bankruptcy law, commercial law, property law, penal law, and administrative codes or human rights doctrines that apply to the substance or application of securities laws within France. Indeed, many fundamental protections are referred to as dating from 1789. As part of the EU, France also recognizes credit institutions and investment firms, including market undertakings, that passport into France from other European Economic Area jurisdictions in which they are authorized either by exercising a right of establishment or a right to provide cross border services. France does not automatically recognize remote clearing members, although this conservative approach is not uniformly followed throughout Europe.

100. French financial law also mandates two specific and different forms of consultation, which inform governmental decision-making: (1) the Comité Consultatif du Secteur Financier (CCSF) (composed of representatives of financial professionals representing each of the sectors including insurance agents and their clients) concerning relations between the financial sector and its clients and (2) the Comité Consultatif de la Législation et de la Règlementation Financières (CCLRF) (L.614-1-2), yet to be formed at the time of writing, (concerning all legislation and rules except for those within sole competence of the AMF (L.621-7V), prior to approval by the Ministry). Membership for these bodies is required for each financial services provider. Each investment services provider and market also must adhere to an association of its choice charged with representing the collective rights and interests of members (L.531-8). This organization will be affiliated with the Association Française des Etablissements de Crédit et des Enterprises d’Investissement (L.511-29), which is the related association for credit institutions.

General preconditions for effective securities regulation

101. In general, the preconditions for an effective regulatory framework for capital markets and the provision of financial services assume the existence of a legal framework that supports the integrity of contract and property rights, a legal structure that recognizes the instruments traded in the market and the rules that facilitate their trading, a commercial and insolvency regime that facilitates the taking of collateral, the use of clearing services, and the enforcement of guarantees, sound company law that protects direct investors, laws which support the ability to identify and protect client assets, reliable and consistent accounting standards, and the confidence of the marketplace that the rules will be consistently and equitably enforced and that the rules of the marketplace can be applied notwithstanding the bankruptcy of particular market participants. These assumptions are further premised on the assumption that the judicial, administrative, and regulatory authorities will reliably honor and equitably apply the rule of law. Certainty as to the application of the law, and confidence in its equity, is fundamental to the reliable functioning of markets and market confidence. There is no evidence that these preconditions are not met in France. Also of particular importance is the ability of the regulatory system to respond to new issues, such as those raised by the problems of sell-side analysts.

102. As for the openness of its markets, the market regulators in France historically have been open to cross-border arrangements within the EU—and beyond—and they have been creative in addressing these arrangements, putting in place the regulatory and legal supports necessary for their functioning. The French authorities also are interested in increasing the ability of national jurisdictions in Europe to address events and to implement the new European directives that are pending in a timely way. In particular they indicated support for maximizing the use of the Lamfalussy process, which would more perfectly harmonize the national approaches among various jurisdictions within the single European market, specifically by broader use of the mechanisms for regulatory development and consultation of the Committee of European Securities Regulators (CESR).27

103. Based on anecdotal interview evidence, there is some indication that the fiscal treatment of various instruments may (1) induce the market to favor insurance products that may not be the most value-based investment for the retail public or may (2) predispose high wealth individuals to offshore investment. In connection with the foregoing, it should be noted that IOSCO has not comprehensively treated the preconditions for effective regulation and effective securities markets other than by exposition of the Principles themselves. Many issues related to the functioning of markets, such as the stability of the governmental and legal system, and the macroeconomic situation, are beyond the remit of the IOSCO Principles and while applicable in all cases, are most relevant in less mature or sophisticated systems.

104. The twin peaks structure as applied in France is intended to permit that system to focus contemporaneously on high priority customer protection and prudential issues, such as finality of netting.28 At the same time, the ability of the system to respond to general and specific problems in the market depends on effective and consistent cooperation as necessary and appropriate among authorities with different functional competences on a day-to-day basis and in the event of a crisis. Although the new framework for securities regulation in France builds upon the preceding high quality structure and preceding interdependent relationships between sectoral authorities and is explicitly designed to meet international standards, the functionality of the framework should be tested after there has been some experience with the changes effectuated by the LSF.

105. Also, while the design of the regulatory framework is intended to take account of the different cultures of securities conduct of business and prudential regulation, to maximize functional expertise and to avoid conflicts of interest related to protecting customers from misconduct and protecting institutions and markets from systemic risk, the design could valuably be kept under review to determine if further efficiencies and streamlining are possible and whether essential cooperation continues to occur.

106. Finally, the AMF, although continuing the tradition of its predecessors, just commenced operations November 24, 2003 and announced its new organizational structure, February 12, 2004. Further review of the tentative ratings in this document after some period of operations would more correctly reflect the implementation of changes currently in progress.

Principle-by-principle assessment

Table 20.

Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation

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Table 21.

Summary Implementation of the IOSCO Objectives and Principles of Securities Regulation

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Recommended actions and authorities’ response to the assessment

Recommended Actions

Table 22.

Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation

The AMF, together with the other agencies responsible for securities regulation in France, administer a regulatory framework that clearly has been designed with international standards well in mind. The following are some general suggestions to continue pursuing planned improvements and encouragement to make the innovative and well-designed cooperative arrangements for surveillance of its cross border markets effective.

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Authorities’ response to the assessment

107. The AMF contends that within the French system, AMF’s structure has been designed explicitly to be as independent as possible. While the AMF disputes that its current structure is in any way susceptible to political interference, the AMF understands that the issues raised with respect to structure are issues that could be of relevance to outside observers and appearances and indicates that it expects to continue its record of assuring that no improper interference in individual cases occurs.

108. The AMF also notes that its enforcement system, which the assessor has found to have appropriate powers and authorities and to have produced significant cases, is currently effective and that the processes for working with the Public Prosecutor with respect to 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, which are not required as a matter of international standards, but which may constitute enhancements. The AMF (and its predecessor authorities) has always kept its programs under review and may consider further enhancing its existing enforcement powers over time. Where the judiciary has potentially put certain powers into question, the AMF has acted aggressively to contest the adverse judicial interpretation.

109. Although the AMF has contested some characterizations of the regulatory structure with respect to independence and transparency, has indicated that despite lack of a specific requirement to cooperate, in all cases domestic regulators do so in fact, and provided substantial comment addressing the detail and fact of application of their regulatory framework, 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.

110. In particular it supports assuring human resources are sufficient to execute its expanded powers, among other things, with respect to depositories and having sufficient authority to effect the outcomes with respect to audit oversight of the Haut Conseil.

V. Observance of the CPSS/IOSCO Recommendations for Securities Settlement Systems

General

111. As part of the Financial Sector Assessment Program, an assessment of the observance of the infrastructure for clearing, settlement and custody of securities of the 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 the securities settlement systems of Euroclear France, which was used as basis for the assessment.

Scope of the assessment

112. The assessment covers Euroclear France as Central Securities Depository (CSD) for a broad range of securities, such as 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.

113. Euroclear France operates two systems for the settlement of the aforementioned securities:

(i) Relit+ ensures delivery versus payments on a gross-net basis (model 2 DvP). The 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 the transactions on the stock exchange;

(ii) RGV2 irrevocable channel (further on called RGV2-TFT) clears all transactions on a trade for trade basis with intraday finality (model 1 DvP). The cash leg is settled on dedicated cash accounts opened with the BdF and is directly operated by Euroclear France. A so-called liquidity bridge enables participants to transfer cash between these dedicated cash accounts in RGV2 and their cash account held in TBF and vice versa to optimize liquidity management. RGV2-TFT is, among other things, used for the executions of monetary transactions and the collateralization of intraday credit operations.

Institutional and market structure

114. Capital markets in France are large and sophisticated. In terms of stock market capitalization (in dollar value terms) and debt securities market capitalization, France ranks fourth in the world and the value of all listed securities amounted slightly above 200 percent of GDP at end-2003.

115. The stock exchange in Paris has been managed by Euronext-Paris, which since September 2000 is a wholly owned subsidiary of Euronext NV, a holding company incorporated under Dutch law. Euronext is the result of a merger between the stock exchanges of Belgium, France and the Netherlands. However, to meet regulatory requirements, the stock exchanges in the different countries retained a separate identity. Euronext Holding also operates the stock exchange in Portugal (Euronext Lisbon) and, since the beginning of 2002, the international futures and options exchange in London (Euronext Liffe).

116. Both securities and derivatives are traded on Euronext Paris platforms. In the secondary market for securities, 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).

117. All stock exchange transactions are cleared via Clearnet, a central counterparty. Clearnet is the single clearing house of the Euronext group and clears transactions in Belgium, France, the Netherlands and Portugal; it also clears over-the-counter (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.

118. The settlement of securities transactions on the French markets takes place via the securities settlement systems of Euroclear France. Euroclear France is fully owned by the Belgian Euroclear Bank, which also possesses CSDs in Belgium, the Netherlands and the U.K.

119. The total value of all trades settled in Euroclear France’s securities settlement systems amounted to EUR 52,996 billion in 2002.

Table 23.

Trades Settled in Euroclear France’s Securities Settlement Systems

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Source: Euroclear France.

Description of regulatory structure and practices

120. In France, the Autorité des Marchés Financiers (AMF) and the BdF are the competent authorities for the 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. It also has to approve the operating rules of these systems. Furthermore, the AMF regulates the activities of custodians. Without any prejudice to the competencies of the AMF, the BdF is charged with the oversight of SCSS. There is a close cooperation between the AMF as securities regulator and the BdF as overseer. Representatives of the BdF have consultative roles on the Board of the AMF and in some committees and the activities with respect to the regulations and oversight of SSS are clearly coordinated.

121. Being a credit institution, LCH-Clearnet SA is not only supervised/overseen by the AMF and BdF but also by the CB.

122. The cross-jurisdictional nature of the Euronext group, LCH-Clearnet and the Euroclear group has led to the implementation of rather innovative cooperative cross-border arrangements between the French authorities and the supervisors/overseers in the other jurisdictions in which these firms are active. These arrangements for cooperative oversight/regulations for the individual institutions are codified in MoUs signed by all relevant authorities in the different countries.

Information and methodology used for the assessment

123. The assessment was based on the self-assessment conducted by the BdF using the CPSS/IOSCO assessment methodology for the Recommendations for Securities Settlement Systems. Discussions were held with the BdF, the AMF, Euroclear France and market participants. Relevant rules and regulations, audit reports, Memoranda of Understanding (MoU), business plans, and discussion papers between Euroclear and market participants on the development of the infrastructure for cross-border clearing and settlement and custody services were made available.

124. Although the self-assessment of the BdF of the systems of Euroclear France contained an assessment of risk management in the context of recommendation 4, in consultation with the authorities, it was decided to postpone the assessment of LCH-Clearnet SA until the new CPSS/IOSCO recommendations for central counterparties are finalized in order to take into account all relevant activities, governance structures, etc. This complete assessment of LCH-Clearnet will be conducted in the framework of an Art. IV Consultation based on a self-assessment carried out by the French authorities.

Assessment against the CPSS/IOSCO recommendations for securities settlement systems

Table 24.

Detailed Assessment of Euroclear France as a Central Securities Depository and the RGV2-Irrevocable Trade for Trade Settlement System operated by Euroclear France of CPSS/IOSCO Recommendations for Securities Settlement Systems

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Table 25.

Summary Observance of Euroclear France as a Central Securities Depository and of the RGV2 irrevocable Trade for Trade channel operated by Euroclear France of the CPSS/IOSCO recommendation for Securities Settlement Systems

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Recommended actions

Table 26.

Recommended Actions to Improve Observance of Euroclear France and the RGV2 of CPSS/IOSCO Recommendations for Securities Settlement Systems

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Table 27.

Detailed Assessment of Relit+, the Multilateral Netting Scheme for the Clearing and Settlement of Stock Exchange and OTC Securities Transactions of the CPSS/IOSCO Recommendations for Securities Settlement Systems

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Table 28.

Summary Observance of Relit+ of the CPSS/IOSCO Recommendations for Securities Settlement Systems

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Recommended action plan and authorities’ response to the assessment

Recommended action plan

Table 29.

Recommended Actions to Improve Observance of Relit+ of the CPSS/IOSCO Recommendations for Securities Settlement Systems

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Authorities’ response to the assessment

125. The recommendations of the IMF are in line with the findings of the BdF and the AMF, the relevant overseers/regulators of Euroclear France.

VI. Observance of the IMF Code of Good Practices on Transparency in Monetary and Financial Policies

A. Introduction

126. This assessment of observance of the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies (MFP) assesses the transparency of France’s policies and practices in the areas of (i) banking regulation and supervision; (ii) deposit insurance; (iii) insurance regulation and supervision; (iv) payment and settlement systems oversight; and (v) securities regulation. Being a member of the euro area, France’s monetary policy is covered by the assessment of transparency in monetary policy of the European System of Central Banks (see IMF Country Report No. 01/195). The assessments were carried out by Mr. Wim Fonteyne (IMF/MFD), with Ms. Andrea Corcoran (US Commodity Futures Trading Commission) and Mr. Toni Gravelle (IMF/ICM) for securities regulation and supervision, 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 regulation and supervision, and Messrs. Jan Woltjer (IMF/MFD) and Daniel Heller (Swiss National Bank) for payment and settlement systems oversight.

127. The assessments are based on discussions held during the FSAP missions of January-February and May 2004, with representatives of the relevant regulatory and supervisory agencies as well as representatives of major banks, rating agencies and the accounting and auditing profession. It was further based on pre-mission self-assessments prepared by the authorities; study of the relevant laws and regulations; a review of the annual reports, other publications and websites of the relevant agencies; and earlier assessments made by an IMF team in the context of the 2000 Art. IV consultation (see www.imf.org).

B. Transparency of Banking Supervision

128. The legal framework for banking regulation and supervision in France is defined by the Code Monétaire et Financier (Monetary and Financial Code, COMOFI). This code allocates different responsibilities to three main players: the CB for supervision, the CECEI for licensing, and the Minister in charge of the economy for regulation. In the current government set-up, the MINEFI handles regulation. Until earlier this year, this last function was performed by the CRBF. The CRBF has now been transformed in an advisory body, the CCLRF, advising the MoE in drawing up bank legislation and regulations. The CB, CECEI, and CCLRF are set up as specialized agencies within the group. They draw on the BdF for their staff and other resources and the Governor of the BdF is also president of the CB and the CECEI.

Practice-by-practice assessment

Table 30.

Detailed Assessment of Observance of IMF’s MFP Transparency Code—Banking Supervision

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Table 31.

Summary Observance of IMF’s MFP Transparency Code—Banking Supervision

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Recommended action plan and authorities’ response to the assessment

Recommended action plan
Table 32.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code Practices—Banking Supervision

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Authorities’ response to the assessment

129. The authorities are in broad agreement with the assessment.

C. Transparency of Deposit Insurance

130. The FGD was established by the Savings and Financial Security Act of June 25, 1999, which was subsequently transposed into the COMOFI. This basic legal framework is complemented by two decrees, as well as by a series of regulations issued by the CRBF. The FGD is set up as a special purpose legal entity under private law, of which all credit institutions licensed in France must be members. It is overseen by a supervisory council composed of representatives of the member credit institutions. On a day-to-day basis, the FGD is managed by a board consisting of three directors, one of which is designated President. The directors and President are nominated by the supervisory council, but 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) that some professions in France must obtain. The limit of its coverage is set at EUR 70,000 per individual per bank. In addition, it can preventatively intervene in a financial institution at the request of the CB.

Practice-by-practice assessment

Table 33.

Detailed Assessment of Observance of IMF’s MFP Transparency Code—Deposit Insurance Supervision

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Table 34.

Summary Observance of IMF’s MFP Transparency Code—Deposit Insurance Supervision

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Recommended action plan and authorities’ response to the assessment

Recommended action plan
Table 35.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code Practices—Deposit Insurance Supervision

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Authorities’ response to the assessment

131. The authorities are broadly in agreement with the assessment.

D. Transparency of Insurance Supervision

132. Insurance regulation and supervision in France was significantly reformed by the August 2003 Financial Security Law (Loi de sécurité financière–LSF). Formerly, insurance supervision was divided between two agencies—the CCAMIP for insurers governed by the Code des Assurances (Insurance Code), and the Commission de Contrôle des Mutuelles et des Institutions de Prévoyance (CCMIP) for mutual and provident insurers, dependent respectively from the Ministry of Finance and the Ministry of Social Affairs. The LSF merged those two agencies into a single autonomous insurance supervisor, the CCAMIP. Insurance regulation remains the responsibility of the Ministry of Finance.

133. Insurance regulation and supervision in France is 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. These three codes contain the same provisions on prudential matters, applied to different types of institutions.

Practice-by-practice assessment

Table 36.

Detailed Assessment of Observance of IMF’s MFP Transparency Code—Insurance Supervision

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Table 37.

Summary Observance of IMF’s MFP Transparency Code—Insurance Supervision

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Recommended action plan and authorities’ response to the assessment

Recommended action plan
Table 38.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code Practices—Insurance Supervision

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Authorities’ response to the assessment

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

137. Payment systems oversight and the oversight of securities settlement systems in France are based on a legal and regulatory framework established at the European level, by the European Central Bank (ECB) and the European System of Central Banks (ESCB), as well as on the French Monetary and Financial Code. It encompasses France’s contribution to the oversight of pan-European systems such as the Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET), Clearnet and the Euroclear group, as well as the oversight of purely domestic systems such as Paris Net Settlement System (PNS) and Système Interbancaire de Télécommunications (SIT), for which the BdF bears sole responsibility.

Practice-by-practice assessment

Table 39.

Detailed assessment of Observance of IMF’s MFP Transparency Code Practices—Payment and Settlement Systems (November 2003 update)

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Table 40.

Summary Observance of IMF’s MFP Transparency Code Practices—Payment and Settlement Systems

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Recommended action plan and authorities’ response to the assessment

Recommended action plan
Table 41.

Recommended Actions to Improve Observance of IMF’s MFP Transparency Code Practices-Payment and Settlement Systems

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Authorities’ response to the assessment

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.

F. Transparency of Securities Regulation and Supervision

139. 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

Table 42.

Detailed Assessment of Observance of IMF’s MFP Transparency Code Practices—Transparency of Securities Regulation

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Table 43.

Summary Observance of IMF’s MFP Transparency Code-Securities Regulation

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Recommended action plan and authorities’ response to the assessment

Recommended action plan
Table 44.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code Practices-Securities Regulation

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Authorities’ response to the assessment

140. The AMF notes that its financial statements are subject to several statutory mechanisms of accountability to the President of the Republic, to the Parliament and its commissions of finance, a special investigative committee that can be convened by the Parliament, and a routine basis accountability to the Cour des Comptes. The transmission of the financial statements to the latter is made yearly and the justifying documents are kept at its disposal for ten years. Those can be audited at any time by the Cour des Comptes and any practice that is not compliant with the principle of good governance shall be made public in its annual report. Moreover, it should be noted that the IOSCO principles and methodology, although defining clear accountability and transparency criteria, do not go as far as to require an external auditor to audit the regulator’s account annually and to publish the findings of this audit on a pre-announced schedule.

141. The AMF notes that under this principle relating to internal governance, several interrelating issues seem to have to be taken into consideration. These include provisions on the governance of staff and members of the Board on conflict of interests, but might also encompass questions related to the integrity of the decision making process as a whole and the integrity of the internal procedure mainly of operational areas. In this regard, as noted by the experts in their conclusion, the AMF is in the process of hiring an internal control officer and his deputy and will therefore soon be able to comply with the requirements set forth under this principle, although it is worth noting that this new internal control division will only add an independent level of control on procedures already set up by the management of the AMF accountable to the Secretary General.

VII. Compliance with the FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

A. General

Information and methodology used for the assessment

142. A detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime of France was prepared by a team of assessors that included staff of the International Monetary Fund (IMF), and two experts under the supervision of IMF staff. The team reviewed the relevant AML/CFT laws and regulations, and supervisory and regulatory systems in place to deter money laundering (ML) and financing of terrorism (FT) among prudentially regulated financial institutions as well as the regulatory systems in place for non-prudentially regulated sectors that are macro-relevant, specifically funds transfer businesses, currency exchangers, La Poste, insurance brokers, direct marketers of financial services and non-financial businesses and professions. The team staff reviewed the regulatory systems in place for the capacity and implementation of criminal law enforcement systems.

143. The team consisted of 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), and Mr. Ludovic D’Hoore (Belgium’s Cellule de Traitement des Informations Financières).

144. To conduct the assessment, the team visited Paris from April 7 to April 22, 2004. The mission team held extensive discussions with representatives from the Ministry of Economy, Finance and Industry (MINEFI), the Ministry of Justice, the Ministry of Interior, the Commission Bancaire, the Commission de Contrôle des Assurances, the Autorité des Marchés Financiers, the Banque de France, licensing authorities, TRACFIN (Traitement du Renseignement et Action contre les Circuits Financiers Clandestins, France’s FIU), Customs, and the Police. The assessment team also met with representatives from individual banks, la Poste, insurance companies, securities firms and financial sector associations.

145. The assessment team is appreciative of the time and cooperation received from all participants and would like to thank in particular the MINEFI for the organization of meetings and the coordination of inputs.

General situation of money laundering and financing of terrorism

146. France’s FATF mutual evaluation report of 1996 stated that because of its stable economy and political situation and its strong currency, France was attractive to money launderers. The report also stated that while in France the problem was less one of placement of cash than of secondary laundering (layering) or third degree laundering (integration), traditional laundering techniques were still being used, including the simplest ones, such as foreign exchange transactions via money changers. France’s mutual evaluation report noted that most laundering cases involved international networks and foreign nationals and that few such cases were linked to local drug trafficking. This would appear to remain the case today. It is believed that common methods of laundering money include the use of bank deposits, foreign currency and gold bullion transactions, corporate transactions, and purchases of real estate, hotels, and works of art. There are reports that foreign organized crime networks are using the French Riviera to launder assets (or invest those previously laundered) by buying up real estate. There are no statistics and no empirical estimates by which 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

147. As an active member of the FATF, France has played a leading role in the development and promotion of the FATF 40+8 Recommendations as an international standard. It has been equally and steadily active since 1987, when it first criminalized money laundering, in developing a comprehensive AML/CFT regime. It established TRACFIN in 1990, thus becoming one of the first countries to establish a financial intelligence unit. A law on preventive measures was also enacted in 1990, among other things introducing a requirement to report suspicious transactions. In 1993, the scope of the suspicious transaction reporting requirement was extended to funds or transactions suspected of being related to organized crime, in addition to drug trafficking. In 1996, the scope of the predicate offences for money laundering was extended to all crimes and misdemeanors. In 1998 and 2001, the sectoral coverage of preventive measures was extended beyond the financial sector to certain non-financial businesses and professions (notably real estate professional, casinos and dealers in high value goods) and additional transaction reporting requirements were introduced. In 2003, sectoral coverage was again broadened to include individual and collective portfolio management firms, direct marketers of financial services and investment advisers, and the authorities of financial sector supervisors were clarified and strengthened. In 2004, the scope of the suspicious transaction reporting requirement was extended to funds or transactions suspected of being related to corruption and fraud against the financial interests of the European Communities. The reform of 2004 also broadened the coverage of requirements to the legal and accountancy professions. It also strengthened customer identification requirements. Following the revision of the FATF 40+8 Recommendations in 2003, work is well underway on the further development of the legal and institutional framework, further evidence of France’s longstanding commitment to combating money laundering and terrorist financing.

148. The overall legal and institutional framework currently in place is comprehensive and France maintains a high level of compliance with the FATF 40+8 Recommendations. In many respects its regime has gone beyond the standard, including in the sectoral coverage of preventive measures and in the range of reporting requirements that apply to financial entities. That said, the assessment identified areas where further improvements could be achieved, mainly: the implementation of UN Security Council Special Resolution on terrorism financing, as in other European countries operating within the European Union regulatory framework; the overall quality of STRs; AML/CFT regulation, supervision and enforcement for sectors other than credit institutions and certain investment firms; and requirements for increased diligence and internal controls.

B. Main Findings

Criminal justice measures and international cooperation

149. France has ratified the United Nations Convention on Illicit Drugs and Psychotropic Substances (Vienna Convention), the UN International Convention for the Suppression of the Financing of Terrorism and the UN Convention Against Transnational Organized Crime 2000 (Palermo Convention). France is also a party to the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Strasbourg Convention). Legal provisions for the criminalization of money laundering and terrorist financing are in place. The scope of predicate offences for ML is very extensive and covers all crimes and misdemeanors, including FT and fiscal fraud. FT is criminalized comprehensively.

150. French legislation provides broad possibilities to seize any assets in the course of investigations, either by officers of judicial police or on instruction of the judiciary. Although, in theory, all assets of a convicted person can be confiscated, in practice, confiscation measures generally apply to the assets seized in the course of the judicial procedure. As an alternative, fines can be increased to half the level of the laundered funds.

151. France implements the United Nations Security Council Resolutions 1267, 1269, 1333, 1373, and 1390 through directly applicable European Union legislation. 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. The Constitutional Treaty established by the European Convention includes provisions that would lift this distinction. Pending its adoption, 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 European Union 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 at this stage.

152. TRACFIN, the FIU in France, is an Egmont member and has been operational since 1991. It can issue blocking or freezing instructions which are valid for 12 hours where suspicious transactions are reported prior to their execution. This procedure was used only on seven occasions since TRACFIN became operational and has produced minimal results.

153. The interaction between TRACFIN, the supervisory authorities and law enforcement has improved markedly recently and appears to be reasonably efficient. TRACFIN can cooperate with its foreign counterpart units to share intelligence information and data likely to be linked to ML or FT on the basis of the national legislation that is consistent with the Egmont Group principles and has concluded cooperation agreements with 24 foreign counterparts.

154. The number of STRs has increased rapidly since 2000, but still seems rather low compared to the financial and economic activity on the French market and the recent increase in reporting has not been accompanied by a significant increase in the overall quality of reports. Although it has increased, the number of files forwarded by TRACFIN to the judicial authorities is still relatively limited. TRACFIN indicates that this is mainly due to the poor quality of a large number of STRs.

155. A working group of the Liaison Committee is currently working on establishing an electronic reporting form that should enhance the analytical capabilities of both the reporting parties and TRACFIN, improve the overall quality of STRs and the quantity and quality of transmissions by TRACFIN, and assist in the compilation of more detailed statistics.

156. ML and FT investigations are carried out by law enforcement under supervision of the judiciary. The Judiciary Police, the Préfecture de Police, the Gendarmerie and Customs have established divisions specialized in economic and financial crime, including ML, that also benefit from specific training programs. Depending on the stage of the enquiries, they can use a wide range of investigative techniques but a large number of cases are not pursued due to insufficient financial and human resources. A recent reform by the Law of March 9, 2004 entering into force on October 1, 2004 and introducing specialized jurisdictions is expected to enhance the overall capacity of the judicial system to combat financial crime.

157. The number of convictions for ML is on the increase, although the ML offence does not appear to be used as frequently as it might be due mainly to the difficulty in establishing the illegal origin of the funds. Courts appear to have adopted a pragmatic solution to this difficulty that consists in qualifying the facts differently and pursuing cases under other offences than the ML offence (abus de biens sociaux, association de malfaiteurs, etc.). While a recent case indicates that a conviction for (general) ML can be pronounced without the predicate offence being specifically identified, additional reflection is needed on the obstacles that requiring proof of the predicate offence constitutes for an effective fight against ML.

158. Despite the efforts and determination of the authorities involved in fighting terrorism financing, no significant results in terms of convictions have been obtained so far, mainly due to the recent incrimination of FT and to the complicated and time consuming enquiries, in particular the difficulty of linking suspicious financial movements with terrorist activities. A pragmatic solution is to qualify the facts under investigation as association de malfaiteurs.

159. France pursues a policy of active international cooperation and has an impressive set of bilateral and multilateral treaties for MLA and extradition in ML and FT cases. It provides timely and effective follow-up to mutual legal assistance requests.

160. French law provides that the confiscation of assets on French territory operates as a transfer of property to the state unless otherwise agreed with the requesting state. In addition, the sharing of assets may be provided in a bilateral treaty.

Preventive measures for financial institutions

161. The institutional framework for financial sector regulation, supervision and licensing is organized sectorally. Regulation-making authority rests largely with the Minister of the Economy, as a result of the Law on Financial Security of 2003. The CECEI licenses credit institutions and investment firms other than portfolio management firms (“credit institutions and investment firms”), the CEA licenses insurance companies and the AMF licenses, inter alia, 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 are subject to registration requirements, notably 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.

162. The CB supervises credit institutions and investment firms for AML/CFT compliance, the CCA has similar responsibilities for insurance companies and brokers and the AMF for portfolio management firms, direct marketers and investment advisers. The IGF is responsible for AML/CFT supervision of La Poste’s financial services.

163. Enforcement and sanction powers of supervisory authorities are generally appropriate. However, AML/CFT supervisory efforts and corresponding resources are relatively low with respect to life insurance companies and brokers, individual and collective portfolio management firms, direct marketers and La Poste. The number of on-site inspections and corresponding staff resources for these sectors is relatively low and there have been few sanctions imposed for failure to comply with AML/CFT requirements. When looked at in the context of historically relatively low rate of reporting of suspicious transactions from these sectors, it is consequently difficult to assess whether AML/CFT requirements are being effectively implemented overall.

164. The legal framework for AML/CFT preventive measures is comprehensive and the regulation and supervision of credit institutions and investment firms other than portfolio management firms is of a high standard. The scope of sectoral application extends well beyond the standard. That said, the regulatory framework remains a work in progress, notably with respect to insurance companies and brokers, individual and collective portfolio management firms, direct marketers and currency exchangers. Regulatory initiatives are underway however, notably in connection with the implementation of the revised FATF standards.

165. The CMF and Decree 91–160 of February 13, 1991 provide an adequate framework for customer identification. Nonetheless, beyond some supervisory and industry recommendations, there is generally insufficient guidance as to what constitutes adequate customer acceptance policies and procedures and, in particular, what are the reasonable steps to be taken to identify beneficial owners of accounts and transactions. The ongoing monitoring of accounts and transactions requirements also need to be broadened.

166. While the Minister of the Economy, Finance and Industry regularly informs financial entities of countries that do not have adequate AML/CFT systems, there is no specific legal requirement for financial entities to give special attention to business relations and transactions with persons in such countries.

167. Financial entities are required to have screening procedures for hiring employees. The requirements focus largely on competency and are silent on the issue of integrity. Employee training appears to be implemented effectively with respect to credit institutions, investment firms, insurance companies and La Poste.

168. The requirement that financial entities report suspicious transactions has evolved/expanded over the past decade. However, the scope of the reporting requirement is not aligned with and is indeed narrower than that of the predicate offences for money laundering, which covers all crimes and misdemeanors, including fiscal fraud. This may be a source of confusion for reporting entities and could potentially reduce the effectiveness of the regime.

169. Additional reporting requirements have been introduced in recent years. However, the benefits of these (notably the one in relation to trusts) are unclear and could potentially draw away resources (i.e., of financial entities and TRACFIN) that might otherwise be used in the detection of suspicious transactions.

170. The legal framework for AML/CFT internal controls is supplemented by comprehensive regulations for credit institutions and investment firms. In the case of insurance companies and portfolio management firms, there is reliance instead on supervisory and professional recommendations that are not as comprehensive.

171. 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. However, 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.

C. Detailed Assessment

172. The following detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard, i.e., criteria issued by the Financial Action Task Force (FATF) 40+8 Recommendations (the Methodology).

Assessing Criminal Justice Measures and International Cooperation

Table 45.

Detailed Assessment of Criminal Justice Measures and International Cooperation

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Assessing Preventive Measures for Financial Institutions

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 that ensure that those criteria are being properly and effectively implemented by all financial institutions. Both aspects are of equal importance.

Table 46.

Detailed Assessment of the Legal and Institutional Framework for Financial Institutions and its Effective Implementation

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Description of the Controls and Monitoring of Cash and Cross Border Transactions

Table 47.

Description of the Controls and Monitoring of Cash and Cross Border Transactions

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D. Ratings of Compliance with FATF Recommendations, Summary of Effectiveness of AML/CFT Efforts and Recommended Action Plan

Table 48.

Ratings of Compliance with FATF Recommendations Requiring Specific Action

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Table 49.

Summary of Effectiveness of AML/CFT Efforts

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Table 50.

Recommended Action Plan to Improve the Legal and Institutional Framework and to Strengthen the Implementation of AML/CFT Measures

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E. Authorities’ Response to the Assessment

The French authorities wish to thank the members of the IMF assessment team for all the work that had to be done to produce this report. They welcome the assessment that France maintains a high level of compliance with the FATF 40+8 Recommendations. They are pleased with the fact that IMF recognized its regime has gone beyond the standard in many respects.

The authorities note that some of the suggestions in the FSAP for further improvements should be soon implemented, notably by the way of the future decree of transposition of the second European directive AML/CFT.

However, the French authorities do not share the IMF’s opinion concerning its rating related to the FATF Special Recommendation III. The IMF team rated France “materially non compliant” with SR III, because France would be currently 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.

Indeed, France does not have in place of a genuine national framework of assets freezing and rely on the Sanctions Committee of the UN Security Council and decisions taken at the UE level. However, our legal framework related to financial relationships with foreign countries allows us, in certain cases, to freeze assets of persons who are not targeted by the Sanctions Committee of the UN Security Council. In a recent decision, the French administrative High Court confirmed the possibility for France to freeze European resident’s assets on the base of our legal framework.38

Nevertheless, in order to secure and perfect our legal framework, the French government is currently elaborating a specific national framework which would allow freezing assets of all terrorists without any conditions of nationality or residence.

*

The CRBF no longer is in existence; it is succeeded by the Comité consultatif de la législation et de la réglementation financières (CCLRF), Article L.614-1 to 3. The CCLRF will be responsible for developing prudential regulation, subject to the particular competence s of the AMF with respect to asset management.

1

The Monetary and Exchange Affairs department (MAE) was changed to the Monetary and Financial Systems department (MFD) on September 2, 2003.

2

In FSAP/FSSA reports, this information will be contained in other parts of the FSAP report. Salient details, however, may be briefly restated for convenience.

3

The mission took place in February 2004. The team consisted of Andrea M. Maechler (IMF) and Helmut Müller (formerly German Bundesaufsichtsamt für das Versicherungswesen).

4

Legally, the insurance supervisory authority refers to the newly created CCAMIP, in accordance with the new Financial Security Law of August 1, 2003. In practice, however, the CCAMIP was not operational yet at the time of the assessment and the meetings were held with the CCA. While the new legislation was fully in effect, some areas, such as the operational set-up of the CCAMIP, needed the publication of additional implementation orders (décrets d’application) for the new law on financial security to come into force. The current assessment, however, is based on the new legislation and refers to the new supervisory agency CCAMIP.

5

OECD, 2003, Insurance Statistics Yearbook 1994–2001.

6

Unless indicated otherwise, the health and accidents sectors are lumped together with life sector.

7

In terms of total premium income, however, reinsurance accounts for a much higher market share, with 14.5 percent of total premium income.

8

There are approximately 80 small mutual companies not under the supervision of the CCAMIP and regulated by the code of social security. These companies provide social security related insurance (health, unemployment, maternity leave, etc.) and are under the control of the state.

9

In life insurance, this minimum requirement can be lowered up to 15 percent, depending on existing reinsurance agreements.

10

In non-life insurance, this minimum requirement can be lowered up to 50 percent, depending on existing reinsurance agreements.

11

Alternatively, at end-2002, the solvency margin (including unrealized gains) represented 72.4 percent of premiums.

12

The fact that in its introduction (para. 8), the ICP methodology acknowledges that the body that sets out the legal framework may be different from the body that implements it, is not inconsistent with the requirement in ICP3, essential criterion b, that the supervisory authority must have the administrative means to issue and enforce the regulatory framework. The legal framework in this case refers to the totality of the relevant laws, whereas the regulatory framework refers to the totality of the regulations, which must be under the responsibility of the insurance supervisory authority. Otherwise, ICP3, criterion b would not make any sense.

13

A similar argument applies also to ICP 10 and 18.

14

See also ICP 9 and 18, where a similar argument applies.

15

See also ICP 9 and 10, where a similar argument applies.

16

“Insurance supervision within an individual jurisdiction may be the responsibility of more than one authority. For example, the body that sets out the legal framework for insurance supervision may be different from the body that implements it. In this document, the expectation is that the core principles are applied within the jurisdiction rather than necessarily by one supervisory.”

17

One of the reasons not to take the cost of accepting collateral into account in the standardized TARGET Cost Analyzing methodology was that collateral is also used for monetary policy operations.

18

In TBF as well, smaller bank financial institutions clear and settle their payments via a settlement bank. The number of customer banks in this system and the amount/volume of payments executed on their behalf are not known, but are probably smaller than in PNS.

19

According to Article 5.1 of the Convention PNS all payments accepted by the system must be settled before the end of the day.

20

Negotiable debt securities, bonds, shares and equity, mutual funds shares, claims on insurance companies.

21

Currency and deposits (banknotes and coins, transferable deposits, contractual savings, …)

22

The top ten asset management companies are: CDC-Ixis AM, Crédit Agricole AM, AXA IM, SGAM, BNP Paribas AM, Crédit Lyonnais AM, AGF AM assurance, Natexis AM Banque Populaire Group, Groupama AM (assurance), AVIVA (assurance). The asset management functions of Crédit Agricole and Crédit Lyonnais will be merged on July 1, 2004.

23

Overall, European equity markets remain relatively fragmented compared to the U.S. and Japanese markets. There remain a large number of separate markets in Europe, with differing systems to settle cross-border trades. This increases overall settlement costs.

24

These figures include all domestic and foreign shares traded on Euronext Paris.

25

In an inflation-linked swap one party (periodically) pays a fixed rate on a notional amount and the other receives the inflation rate, typically the European inflation rate (known as HICP ex. tobacco).

26

The Board Members, like members of a typical business board, may engage in other professional activities in addition to their service on the College.

27

There are now CESR-like arrangements for insurance and banking as well.

28

This does not mean that such matters may not be well addressed by alternative regulatory structures.

29

The assessor’s comments for the first five principles, while the result of reviewing the regulatory system for securities overall, have focused on the AMF, with the CB and CECEI and BdF being more comprehensively treated in the Introduction from the perspective of the organizational structure of regulation and in each of the functional segments from the perspective of their specific functions. Nonetheless, the assessor sees no basis to change the ratings for the Regulator under the IOSCO Principles based on an analysis of those securities functions performed by the CB and the CECEI and by the BdF.

30

In the past the CMF and the CB had a protocol organizing cooperation between them. The COB was entitled to communicate with other authorities, in particular the CB.

31

But see the discussion with respect to the licensing of demarcheurs at Principle 21.

32

This professional association has rules of conduct, but the license is with the relevant authority.

33

Market undertakings are commercial enterprises which have as their principal activity operating a regulated market in financial instruments (L.441.1).

34

The RGV2-TFT cash settlement account is an account with the Banque de France. Euroclear France is allowed to operate these accounts within the framework of RGV2-TFT.

35

These “recommendations” are not prescribed in the regulation.

36

Whenever an examination is delegated to the CB’s inspectors or to external auditors, the AMF retains ownership and control of the examination and for instance writes up the final report.

37

Customer due diligence for banks, the Basel Committee, October 4, 2001.

38

Conseil d’Etat, 2 novembre 2004, SEMONDE

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France: Financial Sector Assessment Program—Detailed Assessments of Observance of Standards and Codes including Banking Supervision, Insurance Regulation, Securities Legislation, Monetary and Financial Policy Transparency, Payments Systems, Securities Settlement, and Anti-Money Laundering and Combating the Financing of Terrorism
Author:
International Monetary Fund