With Brexit day fast-approaching and the draft Withdrawal Agreement defeated in the UK Parliament on 15 January 2019, the French Government has undertaken to enact measures in key areas in order to mitigate against the consequences of a “no deal” Brexit in France.
The “French Brexit Act” (Act n°2019-30), which was laid before the French Parliament in October 2018 and has now been activated, addresses British nationals living and/or working in France as well as the circulation of goods between France and the UK. It also aims to preserve the attractiveness of France for UK businesses already present in the country and to facilitate their continuous operation. In the areas of banking, financial and insurance activities, the French Brexit Act authorises the Government to set out ordinances (within the next 12 months) that will:
- Safeguard the enforcement of settlements concluded via interbank and delivery systems of third countries, including the UK;
- Appoint authorities to supervise activities involving securitisation;
- Introduce specific rules for the management of collective investments whose assets comply with investment ratios in European entities; and
- Ensure the continued operation of major agreements in the financial sector and secure the completion of ongoing contracts before loss of recognition of existing British agreements in France.
Significantly, once the UK leaves the EU, British banks, financial and insurance companies will become third-parties and will lose their passporting rights, i.e. they will no longer be able to operate in Europe through their London base or a branch located in the EU, unless they obtain an EU license. The Act gives the French Government the ability to safeguard the performance of contracts entered into prior to the loss of passporting rights.
As the Haut Comité Juridique de la Place de Paris (a legal independent committee) points out in its latest report on the impact of Brexit on the banking and insurance sectors, Brexit does not pose a risk for the continuity of contracts the performance of which was started prior to Brexit, since in these contracts the parties were irrevocably committed before exit day. This would be the case for loan agreements where the money have already been advanced by the British bank to a French borrower, or an insurance contract which has already been entered into and the risk calculated before Brexit.
On the other hand, there is a risk for the continued operation of loan agreements with a number of conditions precedents, including the ones which are not met before Brexit, or uncommitted facilities where the absence of lender’s commitment pre-Brexit would not allow a British lender to lend without violating the French banking monopoly rules post-Brexit. The increase in the credit amount of the facility after Brexit could jeopardise the continuity of all or part of the stated contract when at least one of the lenders does not have a banking licence authorising it to carry out banking transactions on French territory. According to French case law, failure to comply with the required banking licence is not likely to result in the invalidity of loan contracts. However, under French law non-compliance with banking monopoly rules is a criminal offence.
A system that enables the institutions which no longer enjoy passporting rights to fulfil their existing obligations is welcomed as it will ensure a smooth transition to the post-Brexit status quo.
The same logic applies to insurance contracts. Automatic renewal of contracts with a British insurer and/or change to the covered risk will not be possible, unless the British insurer transfers the contract to an establishment or branch duly licensed in the EU. It will be up to the British insurer (under the supervision of authorities in the UK and the EU) to inform its clients and the insured parties to take the necessary steps to obtain post-Brexit coverage from a licensed insurer in the EU. It is worth noting that in contrast with the banking precedent mentioned above, the French Insurance Code stipulates that an insurance policy concluded with providers which do not have a valid EU licence is deemed invalid. Such outcome will not follow, if the insured parties and beneficiaries acted on good faith. However, failure to comply with the restrictions is punishable under French criminal law.
With the objective of ensuring the continuity of ongoing contracts, the French Parliament has deliberately provided the Government with broad powers in order to guarantee legal certainty in as many scenarios as possible. Nevertheless, the French Parliament has reserved its “right of information” on the measures which will be taken by the Government.
British establishments will still be able to participate in the syndication of loans granted to French business borrowers by lending institutions, finance companies, or AIF and UCITs duly authorised to conduct their business in and from France post-Brexit. They may also act indirectly as first original lenders to French business borrowers without an EU license by establishing a securitisation entity in France or a specialised financing entity (which may benefit from the European ELTIF label). Government order n°2017-1432 of 4 October 2017 modernising the legal framework for asset management and debt financing (now codified in article L.511-6, 4° of the Monetary and Financial Code) created two new loopholes in the restrictions on providing banking services in France. The aim was to encourage the inclusion of “institutions governed by foreign law (…) whose object or business is similar to that of [licensed] entities” in the circulation of unmatured loans and to enable securitisation vehicles to grant loans in France and in the EU without a banking license, which could prove to be useful in the current context.