Dechert On Reg

Country Edition: A Focus on France’s Unique Regulatory Landscape

• Dechert LLP • Episode 12

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In this episode Dechert On Reg, host Angelo Lercara kicks off the new Country Edition series: Together with his guests, he will focus on different jurisdictions and explore the unique regulatory landscape of the countries in discussion. This time it is all about France, one of the most robust economies in the world: What should asset managers—both domestic and international—be aware of when raising capital there? With partner Cyril Fiat from Dechert’s Paris office, Angelo discusses France's economic indicators, investment behaviors of French individuals and institutional investors and the role of regulatory bodies such as the Autorité des Marchés Financiers and the Autorité de Contrôle Prudentiel et de Résolution. The episode also covers common fund structures in France, key tax considerations, trends in the French asset management market and the impact of recent regulatory changes.

Show Notes

Autorité des marchés financiers (AMF) official website

Autorité de Contrôle Prudentiel et de Résolution (ACPR) – Banque de France official website

Dechert World Compass

Angelo Lercara:

Hello everyone, and welcome to Dechert On Reg, the Podcast where we explore the ever-changing landscape of financial regulations and the key issues that are shaping the future of asset management. I'm Angelo Lercara, partner at Dechert and co-head of our regulatory product line. And in each episode, we'll be joined by expert colleagues and guests to explore the most pressing issues in financial regulation. In today's episode, we're kicking off a new series where we dive deep into specific jurisdictions. From time to time, we'll focus on a different country, exploring its unique regulatory landscape and what asset managers need to know when raising capital there. Today, we're starting with France. So whether you're an industry insider or simply interested in the world of financial regulation, you don't want to miss this episode of Dechert On Reg. I'm excited to have an esteemed expert joining us to help us explore France's regulatory landscape. Cyril Fiat is here today to discuss what asset managers need to know when raising capital in France. Let's dive in. Bonjour, Cyril, it's great to have you on the show.

Cyril Fiat:

Hi, Angelo. Thanks for inviting me, and I'm very much delighted to participate in this first country episode. I truly appreciate the opportunity to join this conversation and am looking forward to having a great discussion together on the French regulatory landscape.

Angelo Lercara:

Absolutely. Before we start, with the recent Olympics have been wrapped up, I'm curious, have things calmed down a bit in Paris?

Cyril Fiat:

Yes, things have calmed down a bit in Paris since the end of the Olympics, although construction work started again, the city progressively returning to its rhythm. Although, to say the least, the recent political instabilities in France have added a unique dynamic to the atmosphere, to say the least.

Angelo Lercara:

Right. OK. So, look. To set the stage for our discussion, Cyril, France has a population of approximately 67 million people. It's the world's seventh-largest economy, known for its diverse industries, including finance, manufacturing, tourism and, of course, luxury. Can you give us a brief overview, please, of France, including its key economic indicators? Of

Cyril Fiat:

Of course. We all know that France is often associated with several cliches, some of which are based on cultural truth. But France is not just about romanticism, art, good food, fashion and protests. Our country can also be proud of having a robust economy. So, as you said, France is one of the largest economies in the world. At the end of 2023, the Gross Domestic Product, or GDP, amounted to approximately 2.82 trillion Euros. And the GPD per capita, which is for me, the most interesting figure, amounts to 38,000 Euros per inhabitant, which is above the EU average. Unemployment rate has been around 7-8% in recent years, which is a very good level. And the result that has not been seen since the early 80s. And France, like the other European countries, has experienced quite high inflation, but through various supporting measures, the inflation has been contained in France compared to other EU jurisdiction. But they contain that inflation through what they call in French, the “quoi qu'il en coûte," the "whatever it takes" policy. And that"whatever it takes" policy has increased the French's already high level of public debt, which represents now 112% of the GDP and the public deficit that is now at 5.5% of the GDP. So, in that context, where now French debt is more expensive than that of Spain, Portugal or Greece, those economic indicators are concerning and leading the newgovernment to discuss with the parliament large budgetary efforts and economic reforms that would boost competitiveness and growth. And we also reassure the rating agencies, because our debt has a cost, and if the rating is not as good as it is currently, this may cost much more for us.

Angelo Lercara:

Right. But, I mean, there are still, you know, assets to invest. The question is, how do French people typically invest their money? And what's the balance between domestic and international funds?

Cyril Fiat:

Yeah, in this context, there was an ad in the mid-70s during the first oil crisis that had a catchy phrase that said, in France, we do not have oil, but we have ideas. So, yes, there are resources in France, and we have a financial sector that is sophisticated and robust. So, to come back on your question, how do French people typically invest? To set the scene, a few figures. France is one of the countries with the highest savings rate, which is the share of gross disposable income that is not consumed by household. So, it is still below Germany, but it is now, despite the high inflation. above 17%. And what is the most important figure for that particular question is the financial savings rate, the portion of savings that are invested, then excluding the portion of savings that are used to repay the loans- for example, your real estate loan - that amounts to 8.5% for the first quarter of 2024. So, it's still below the Germans, but above most of the other European countries. So, now that the scene is set, where is this money invested? So, a small portion of this money remains in the bank account. On average, there are more than 17,000 Euros per French household that literally sleep on bank accounts producing no interest, which is a concern. Then, French are quite conservative, and they dispose of large precautionary savings. Those savings are invested in what we call Livret or savings accounts, which most of them are tax free. But this absence of taxation is the source of a strict regulatory requirements in terms of opening conditions. For some of those savings accounts, you need to have an income that is less a certain threshold, maximum deposited amounts - for some of them, it's 22K Euros, or for others it's 12,000 Euros. And the interest rate is decided by the French government, and in practice, it's usually little bit lower than the inflation. So, it's not the best investment that you can make, but of precautionary savings, that's enough. And more than 56 million French individuals have a Livret A, which is like the most common type of savings account. But the bulk of the money that's invested by French individuals is invested in unit-linked life insurance contracts, which is known to be the preferred type of investment of the French individual investors. Those types of contracts, they serve as a saving and an investment vehicle with a life insurance feature. And in case of death, there are advantages for the succession with your heirs. It is composed of one or more Euro funds where capital is guaranteed and what's returned is set each year by the insurance company, and units, hence the name of unit-linked life insurance contracts, which allow the policyholder to invest in a range of financial products, such as UCITS, listed shares, real estate investment trusts, bonds, and since recently, to a certain extent, alternative investment funds, including private funds. Going a little bit deeper, because we really want to know where this money is invested - because, I mean, the contract is invested in units. You can say that a third of the units are invested in investment grade bonds issued by private companies. Then, more or less 25% is invested in treasury bonds, around 24% in stocks of private companies, 7% approximately in real estate, and 3% in private equity. So, there is room for improvement for the private equity, and the rest is kept in cash management instruments.

Angelo Lercara:

Right. So, the underlying instruments are they also funds, domestic or international funds?

Cyril Fiat:

They are mostly domestic funds or EU funds, because. you see, as you may know, it's a European product. So, most of them are Luxembourg, Irish or French UCITS.

Angelo Lercara:

Okay, understood.

Cyril Fiat:

There is a domestic bias. And I think this is important to note that those life insurance contracts are mostly invested indirectly in France for 52% of the amount, rest of Europe for approximately 30% and the rest of the world for approximately 18%. So, there is an EU or French bias.

Angelo Lercara:

Interesting. Well, I guess it's the case also, it's similar in other European jurisdictions. Maybe that's a trend throughout Europe. I mean, these UCITS and the fund trends that you mentioned, they are heavily regulated. What are the key regulatory bodies in France that oversee the asset management and what should, maybe, foreign asset managers be aware of?

Cyril Fiat:

They must not be afraid of them. But we have two regulatory bodies that are overseeing the asset management in France - similar prerogatives, but they are targeting different actors. The first one is the Autorité des Marchés Financiers, so AMF, primary regulatory for financial markets in France. They regulate the financial products alternative investment funds and UCITS and their management companies, alternative investment fund managers and UCITS management companies. And then we also have theAutorité de contrôle prudentiel et de resolutio, in short, ACPR, which is responsible for, primarily, the supervision of banks, financial institutions, insurance companies. But applied to asset managers, the ACPR is the regulator of the firms that are subject to the Markets and Financial Insurance Directive, MiFID II, and therefore the ACPR will be regulating activities of those firms when they are doing individual portfolio management, investment advice and for the provision of investment services. Both regulators work hand in hand, and they consult each other, especially during the licensing processes of asset managers. For example, when an asset manager applies for an IFM license in France but wants to provide investment services such as investment advice or individual portfolio management and not collective portfolio management, the IMF will consult with the ACPR so that they can have a common view on the regulation of this manager. And, if necessary, they also conduct joint inspections and investigations. So, now we have presented those two regulators and, I mean, what is important for a foreign manager seems to be a no brainer, but asset management for third party is a regulated activity in France as well as in the European Union. The managers shall therefore comply with both national regulations and EU regulations such as MiFID II, UCITS, AIFMD. They both have, like in other European countries, because it's quite harmonized within the EU substance requirements, minimum and fund requirements, they need to implement robust internal control governance structures, effective systems, including IT to manage operational market credit liquidity risk and also implement stress testing.

Angelo Lercara:

Right? And so, what about the banks? Isn't there a central bank as well with the regulator?

Cyril Fiat:

The French Banque de France, I mean, is within the parent company of the ACPR, but the French bond defense will not be regulating asset managers. It will be a CPR specifically, right? But no, the Banque de France is not regulating asset management.

Angelo Lercara:

Right. And the two regulators, are they easy to deal with? So, are they open for discussion or for communication?

Cyril Fiat:

AMF, yes. It's quite easy to contact your AMF correspondent, who is the person in charge if you are an asset manager regulated in France, the person who is in charge of your application and the life of your application. And I can say that the doctrine of the AMF is very much available, quite readable, even if they have a tendency to gold plate. At least it's easy to find the doctrine through various instructions, positions that have a different legal value. ACPR, it's a different subject. Their doctrine is complicated to find. They do not publish very much, and if you have a look at the website, you will see the difference. So, we would say also that the ACPR, given that they are also regulating financial institutions and insurance companies, they may be more difficult to deal with than the AMF, with a rather more pragmatic and practical way of approaching issues.

Angelo Lercara:

Yeah. OK. Let's get back to the investors again. Who are the most important investor groups in France? Are there any, you know, unique characteristics or any preferences among these groups? What should we know?

Cyril Fiat:

I would say that the main category of investors are the institutional investors, who are very powerful in France. Those are insurance companies that manage large portfolios to meet their long-term liabilities. Pension funds such as thefonds de réserve pour les retraites, FRR. or the RFP, I will spare you the signification of this acronym, and both of them invest in a wide range of assets, bonds, equities, real estate and alternative investments. Sovereign wealth funds that are not as prominent in France as in other countries, but entities like the Caisse des Dépôts or Bpifrance play a huge role in the French economy and are also fueling a lot of French funds and asset managers in France with the money that they can deploy and banks and financial institutions, whether they are investing their own balance sheet through proprietary trading or they provide asset management services for clients. And we can also mention family offices that are managing wealth of high-net-worth families, but those are the main groups. So now coming back to your question, what do those players have in common? Insurance companies and pension funds typically have long-term liabilities, such as life insurance policies, annuities, retirement benefits that have to serve to their retirees or future retirees, then it requires a long-term investment approach as well as asset liability matching that would ensure that they can meet their future claims. So, they will invest differently. Insurance companies and banks, what they have in common is that they have to comply with very strict regulatory requirements, solvency for insurance company or Basel III for banks, which would dictate their capital adequacy and risk management standards, and thus their investments and the maturity of their investments. But all of them have in common that they manage their risk through diversification, and they invest in a mix of fixed income, securities, real estate, alternative investments, so they can balance risk and return within their own regulatory framework.

Angelo Lercara:

Right. The regulated investors that you've mentioned, I assume they have requirements in terms of, you know, eligibility of investment. So if I'm an asset manager, I would need to know whether my fund is a fund that they can invest in based on their restriction. Is that right?

Cyril Fiat:

Yes, yes, yes. For example, if you want to attract the money from Bpifrance, you will be required to have an investment policy by which, for some of the mandates of Bpifrance, will require you to invest at least 50% of the capital in France or in companies having their headquarters in France, or the principal business in France. Because Bpifrance, for example, will create their own funds that will be fueled by the French government money to invest in France. If you are the European Investment Fund, which is another institutional investor, but not at the French level, then they will also have the mandate, and they will only invest in funds that serves that mandates,

Angelo Lercara:

OK. So you would then likely have to structure your fund around these requirements if you want to specifically target this group of investors.

Cyril Fiat:

Yes, in terms of investment policy, but also in terms of structures. A French governmental entity will not invest in the Cayman fund, and for some of them, they may be reluctant to invest in the Luxembourg fund because of some kind of a French preference,

Angelo Lercara:

OK.

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Angelo Lercara:

Speaking of funds, what are the most common fund structures used in France, and how would they compare to those of other jurisdictions?

Cyril Fiat:

You have a dichotomy between retail products and professional products. Those types of funds are very much different. So, if we are talking about the retail products, then you have the UCITS - and the UCITS, I mean, it's harmonized at the EU level, so there is nothing specific to report at the level of France - you have now the ELTIFs that have been recently revived by the ELTIF II reform and in France, for ELTIF, the most common legal forms are the FPS or the SLP, which are forms of funds that have a very flexible, possible investment strategy and that are very modern in their approach, so that they can accommodate the ELTIF regulation's own requirements, because, given that you put the ELTIF label on the specific legal form, I mean, if the legal form conflicts with the ELTIF requirement, this would not work. So, SLP, FPS, are perfect for that, because they are quite like a blank page where you can write your own story, Then you have the FCPR, FIP, FCPI. So, I will also spare you the meaning of the acronyms, but they are French retail venture capital funds. Those types of funds carry some tax incentives for some of the products. It could be a deductibility of the investment from your income tax, or no taxation of the capital gains. It will depend on the product. And those types of funds for the FCPR, they have a legal quota of 50% invested in EU non-listed companies. FCPI, it's innovation. And then those vehicles, which is very interesting, and also why they are quite common in the portfolio of French individuals, is that they can be accessible through direct subscriptions, which will allow them to have some kind of tax incentive, but also through the unit-linked life insurance contracts since the end of 2019, which means that now the French life insurance contract can be a way to attract the capital of the retail investors that will be invested in retail venture capital funds. And then still for the retail investors, OPCI and SCPI, who are real estate investment funds, also accessible by direct subscription or through unique link life insurance contracts. Now, if we change clientele and we go to the professional investors or the institutional investors' clientele, then it will be FPCI, FPS or SLP. was a great shift for the French funds industry in 2015. It was created for foreign investors because it's very much similar in terms of structures and contractual freedom to UK Limited Partnerships, or Luxembourg SCS and last summer, the French legislator made a step forward by adding a new form of fund, the SLPS, like the SES{, where this fund will offer a structure without legal personality, such as the Luxembourg SCSP.

Angelo Lercara:

Yeah, so very close to the Luxembourg counterpart, interesting. So there's definitely a French touch on the whole fund structures. What are the main challenges and opportunities for asset managers from abroad, non-French asset managers, for raising capital in France? So is it crucial to have a French fund, for instance?

Cyril Fiat:

Some of the changes are not specific to France, such as the compliance with and the monitoring of the regulations such as MiFID II, AIFMD and UCITS. I mean, it's at the EU level. It's implemented in France. Sometimes it's also with direct application in France. This is not specific. And until recently, the French regulators had some kind of a tendency to gold plate EU regulations when they were implementing those EU regulations. This is about to change. So, talking about the challenges for asset managers that want to invest or wants to create funds in France or want to attract French investors, the first is, depending on the clientele, if you want to attract retail money, building relationships with intermediaries and having access to their distribution network is, I mean, crucial.

Angelo Lercara:

Yes.

Cyril Fiat:

From a more local point of view, French investors tend to be more conservative. They usually favor traditional investment products over more innovative and higher-risk options. And as I mentioned earlier, the political context and to a certain extent, some kind of tax uncertainty can impact their confidence and willingness to commit capital, especially in new or exotic products. Also, it may be crucial to create, sometimes, French funds. For French investors,French funds may be more attractive in terms of taxation because they can benefit from tax advantages if the fund complies with legal and tax quota, and then it can be much more interesting for a French investor to invest in the French fund, rather than in the Luxembourg or in a UK Limited Partnership.

Angelo Lercara:

Right, right. Speaking of tax, so, I mean, you alluded to it already. What are the maybe the key tax considerations for both, actually, domestic and foreign asset managers that operate France? Are there two, three key aspects that the audience should know?

Cyril Fiat:

The key tax consideration are at the level of the vehicle, whether it is tax transparent or not, at the level of the taxation of the managers, and whether, if they have carried interest, they can benefit from a favorable tax regime, and at the level of the investors. At the level of the investors, it's very much specific. We could have a whole podcast to discuss taxation at the level of investors, and because it's very specific, I will not enter into too much detail. But the first key consideration is the vehicle. Most of the French funds benefit from what we call tax transparency, whether the fund is set up as a contractual fund, which is an FCP, fonds commun de placement, and to a certain extent, the French limited partnerships, such as the SLP, they are outside the scope of the French corporate income tax. And French tax law has extended the tax regime of the contractual funds to the SLP, because the French contractual fund doesn't have a legal personality, they are not subject they are outside of the scope of the French corporate income tax. For some of the funds that are set up as a corporation, some of them are liable of the SIT, so they are taxed at their level, but most of them are exempted from it. The profits and gains realized by those funds are not taxable at their own level, but are taxed at the level of their respective investors when they receive the distribution. And then you have the taxation at the level of the managers. If we're talking about the manager as a company, the company will be subject to corporate income tax at 25% now, and if the managers receive carried interest, depending on whether they can comply with certain requirements, such as minimum investments, such as the minimum duration of their investment, they may benefit from a more favorable tax regime, which means that their capital gain will be taxed at the flat tax, currently 30%, instead of a taxation as employment income that will be subject to progressive income tax rates plus social charges.

Angelo Lercara:

OK, thanks. Let's take a look at the trends, maybe. What are the current trends in the French asset management market? Are there any emerging sectors or investment strategies that are particularly popular? Do you see anything?

Cyril Fiat:

Trends come and go, and it also depends on the political context or on the interest rate context. Now what we see is mostly thematic investing with thematic funds that will focus on sectors such as technology, healthcare, renewable energy, digital transformation, which have become more popular. Also, investments in what we call mega trends, such as aging populations, organizations that are now attracting interest, are the trends that are more shaping the assets managers, financial technologies, with automated investment platforms, robo-advisors that are gaining traction, especially for younger investors that are seeking low-cost, accessible investment solutions, and also demanded by the investors, because most of them are looking at digitization of the subscription process and being able to subscribe to funds through a click or a swipe of their finger on their phones, which also goes to the tape blockchain and the tokenization of the funds. So tokenization of funds is still emerging. Because even if the tech trim technology is here, and it's possible in France to tokenize funds, I mean, it has not really taken off, but we see a great interest of our clients and of the investors in those two technologies, and the remaining trends of ESG investing and sustainability we see decreasing in the recent months,

Angelo Lercara:

Yeah, like in other European countries. Have there been any recent regulatory changes in France that are worth discussing or managers should be aware of in any event?

Cyril Fiat:

France is part of the European Union, so there have been regulatory changes that have been the result of ELTIF 2.0 or will be the result of AIFMD 2.0. So, I will not discuss this because, I mean, it's not specific to France. What is specific to France is an ordinance that has been adopted during the summer, and an ordinance that has - we love that in France -a very fancy title, the Modernization of the Regime Governing Alternative Investment Funds. And this ordinance is very interesting because, first, it improves the, SLP the Société de Libre Partenariat, by creating an SLP without legal personality. And the main driver of adopting such legal form will certainly be a tax driver, because the absence of this legal personality should enable certain foreign investors to treat this vehicle as totally transparent under the rule applicable in their country of residence, for example, the Belgium investors, and this will help us find new ways of structuring the funds for our clients. And this SLP should be subject to the same tax regime as the classic SLP, the one that has the legal personality. And we hope that this would be confirmed in the next finance bill. And as you may have heard earlier, everything is around trying to be as competitive as Luxembourg in terms of fund structures. Another change of this ordinance is the possibility for some French funds that are professional funds, the possibility to issue debt securities, not only units or shares, so that they can represent credible alternatives to Luxembourg fund structures. And this new feature is expected to make it easier for FPS and SLP to accommodate certain institutional investors that have specific prudential constraints, where for them an investment in debt securities is more favorable in terms of impact on their capital adequacy ratio and the solvency too. Another interesting thing is a creation of tracking units, shares or debt securities, depending on which manager or depository you were talking to. Before, professional funds were allowed to create tracking stocks or tracking shares or tracking units. But this was not clarified, and there were some kind of uncertainty. So now it's written in the law, and we think that this will allow us to set up more complex structuring in line with what is currently practiced in other jurisdictions. The only concern is the IT system of the depositories, because we know that some of them may find it difficult to track the performance of a certain assets within a pool of assets, but I think that it will be resolved in the future.

Angelo Lercara:

OK, you're certainly an expert in what you're doing. What advice would you give to asset managers that look to enter the French market for the first time?

Cyril Fiat:

Call us and hire Dechert. More seriously, a few recommendations. First, understand the regulatory environment and the dichotomy between AMF and ACPR, who regulates who and ensure compliance with their regulation, including the specific local ones, because, although they are less gold plating now, the regulators have also their own reporting obligations, and some managers, especially those that are already established in the EU and want to leverage on the UCITS or AIFMD passports sometimes forget that the French regulator may have its own requirements that is kind of not gold plating, but adding to EU harmonized regulation. Also, know your markets and build relationships with local partners. It's important that you understand the local preferences and, for example, recognize the preference for Assurance Vie or unit-linked life insurance products and the behaviors of French investors and their risk appetite. So consider offering products that are specifically designed to meet their needs, such as tax-efficient vehicles like FCPR or FCPI for retail and also funds that will be eligible to unit-linked life insurance contracts, or those for professional investors that will comply with a specific tax quota. And then also build trust and partnership with local distributors and establish a local presence. I mean, even if, for example, for an EU manager that wants to provide its services in France, it is not obliged to set up a branch, and it can do it on a cross-border basis. I mean, it's always better. It improves credibility and trust with the local investors to have a branch and the physical presence in France, and also collaborate with private banks, financial advisors and distribution networks so that you can increase your reach, credibility and raise more capital, especially if you want to touch or target the retail clients.

Angelo Lercara:

Right, that's great advice. What do you see as the future outlook for the asset management industry in France?

Cyril Fiat:

Two levels, at the level of the investors, digitalization of the subscription process and tokenization. I mean adoption of FinTech, digital solution, will be transforming the asset management landscape in the future, and we see that wave coming, and so we prefer to ride the wave rather than being crushed by it. Also pensions, ongoing pensions reform in France will likely increase the need for private retirement savings solutions, what we call the PER, plan d'épargne retraite, which is a private retirement savings plan to huge success in France and research. Currently, the French government added a percentage of private funds in most of the managed accounts, so that will provide growth opportunities for asset managers. Although it will not be considered a professional product, it will be considered Very good. OK! Cyril, a big thank you for joining us and as a retail product, but there are opportunities in this space because of those, I would say, of private funds in those retirement savings plans that are by a sense, for the long term. And at the level of the managers, we see an increased interest in GP stakes. I mean, there is growing interest in investing in general partner stakes, where investors can acquire minority interest in asset management firms, and also, kind of, not mergers, but partnership between managers. We have recently seen in the market, BNP buying AXA IM, and also CAPZA being acquired by AXA IM. So they are some kinds of contraction of the market. Rising popularity of continuation fund. I mean, the need for liquidity and the requirement to extend the life of successful investments is creating the need for continuation funds and the growth of NAV financing, although there are some concerns, maybe, in the institutional limited partners community, net asset value financing is becoming more prevalent, and asset managers see that as a way to unlock the liquidity of their existing portfolio, so we will see more and more of that. sharing your thoughts with us. We really appreciated your expertise, and it's been great having you in this conversation. Thank you very much. Thank you.

Angelo Lercara:

As we wrap up today's episode, I'd like to extend my thanks to our incredible production team, since it's their dedication and hard work behind the scenes that make this podcast possible. So here's to our talented producers, sound engineers and everyone else involved in bringing this show to life. To our listeners, thank you for tuning in to our financial regulatory podcast. We hope that you found today's episode informative and engaging. If you enjoyed the show, please consider subscribing, rating and reviewing us on your favorite podcast platform. See you next time.