The enforcers: Autorité des Marchés Financiers
Luxembourg, Ireland, the Channel Islands, the Netherlands perhaps, but not France. Quiz UK GPs in private over relocation and domiciling trips after Brexit and Paris is not a name likely to crop up. Historically, the country and its financial watchdog Autorité des Marchés Financiers (AMF) have been viewed, respectively, as a tough home and landlord for GPs. Surveys carried out under former president François Hollande placed the country as the sixth preferred EU destination for global fund managers, with scores trailing far behind those of Ireland, Luxembourg, the UK and even Germany.
Have France’s prospects improved in recent years? Emmanuel Macron’s rise to power in 2017 has sparked a revival of local financial players, including a distinctly more bullish private equity industry. The centrist president is not only boosting Parisian activity, he is also openly lobbying to attract foreign names to the capital, particularly UK firms anticipating a no-deal scenario.
Conversations just months ahead of the Brexit deadline of March 2019 indicate the charm offensive extends to the AMF. The watchdog is going “out of its way” to lure UK-authorised firms, say Leith Moghli and Adrian Brown, both partners at law firm Reed Smith. “We would describe it as aggressively pursuing new business,” they say. Historically, France has been a jurisdiction foreign GPs avoided at all costs, with AMF seen as a challenging interlocutor, often providing convoluted responses to fundamental questions. “We’ve been quite taken aback by the attitude change, quite a thing to see in modern politics,” the lawyers comment. “It’s a very joined-up move with Macron’s government – look at his decision to cut wealth tax, for instance.”
According to the Reed Smith lawyers, the cooling attitude is best illustrated through AMF’s adoption of a “fast-track” process for foreign managers looking for a new home. FCA-regulated GPs can now apply for pre-authorisation in just two weeks, with the final go-ahead turned around within two months. Pre-authorised firms are assigned English-speaking coaches, who walk them through France’s regulatory framework. “If you’re looking for a backstop Brexit hedge, France’s scheme looks fairly compelling,” says a source from a placement agent. “The scheme has been available for a year or so now and I thought other European regulators – in particular, Luxembourg’s CSSF – would follow suit, but they haven’t. At the moment, it’s just France going out on a limb.”
My house, my rules
Regardless of the attitude shift, there is no denying AMF continues to be viewed as a strict supervisor. “They’re not necessarily more difficult than other EU regulators but they can still be very tough,” a back-office professional at a French GP tells The Drawdown. They speak of exhaustive, meticulous visits by the AMF, which can come knocking with just a few days’ warning or, in some cases, none whatsoever. “They require that you stick to the rules, not interpret them,” they say. They do acknowledge, however, a certain softening. “They’ve become more professional, they now really try to help and speak directly to GPs.”
Whether AMF’s new mindset will help strengthen France’s domiciling appeal remains uncertain. The country placed 12th this summer in a State Street survey on top fund domiciles worldwide, with predictions it will remain stuck in that position in five years’ time. In 2015, the country created the Anglosaxon-style SLP fund structure to internationalise its offering but – recent stats show– appetite for the formula remains muted.
The placement agent source claims “not one” of the GPs they have met in recent years has sought to domicile funds in France. For their part, the Reed Smith’s Moghli and Brown report having seen “no attempt” by foreign GPs to embrace the SLP or other French structures. According to them, even local players typically opt for a dual structure, combining a France-domiciled element with a Luxembourg-domiciled presence, driven by tax reasons or to meet LP demands. When a vehicle goes down the one-country route, it tends to be Luxembourg, they add.
A separate question is whether – fast-track process or not – foreign GPs are ready to take their management companies, not just their funds, to Paris. Despite Macron’s efforts to charm UK financial players, Reed Smith’s lawyers report a “wait-and-see” attitude among private equity clients. “We’re having discussions with GPs contemplating a full relocation or a French subsidiary but we think most will wait to see how things develop,” they say. “Many managers enjoy having London as base and are probably thinking that regardless of the nature of the Brexit we end up with, there should be workarounds to ensure firms can continue functioning out of London.”
A seat at the table
The AMF might be busy working to boost the French financial services industry but its influence could, ultimately, carry over beyond the country’s borders. The potential departure of the UK’s FCA from the EU negotiations table could mark the loss of a voice the industry says it will miss. Quizzed over which regulator might fill the expertise gap, sources wonder whether Germany’s recent political instability clears the way for France, its fellow Eurozone leader, to take a more active role in EU affairs. The placement agent source suggests it is an “inevitability” that if the UK leaves the negotiating table, the other four major EU states are going to “pick up the slack and increase their influence.”
While the AMF did not respond to questions from this publication, the watchdog’s vision for a post-Brexit EU is apparent in speeches by chair Robert Ophèle. “No powerful economic zone can be dependent on an offshore financial centre,” he said last November, as he stressed London cannot remain the EU’s financial “lung” after Brexit. Instead, he urged the EU to replace the UK with a “real” Capital Markets Union of closely linked EU financial hubs. “This, of course, is only conceivable if financial supervision is exercised by or at least under the co-ordination of a European authority. This is one of the reasons why there is a burning need to strengthen the role of ESMA,” he added, voicing his “support” for proposals tabled to that effect by the European Commission last year.
The AMF could struggle, however, to turn its belief in centralised supervision into hard policy. The Commission’s proposal for a beefed-up ESMA was rejected last year by no fewer than 20 countries, which slammed it as disproportionate and legally unsound. AMF’s counterparts in Luxembourg (CSSF) and Germany (BaFin) are seen by some as France’s potential counterweights in the EU debate. A source recently interacting with both confirms they continue to oppose the reinforcement of ESMA. “It couldn’t be clearer they don’t want it and why would they? They would be voting for their own demise,” they remark.
Although a staunch proponent of centralisation, AMF’s stance on other key fronts appears to be relaxing. The delegation model GPs use to split functions across countries may be facing an EU probe but despite expectations to the contrary, AMF confirmed this year it will not challenge arrangements. According to Reed Smith’s Moghli and Brown, the French regulator has also been more accepting of the concept of pre-marketing. “The country used to be closed to marketing full stop,” they say. “Although still difficult, it has become less so as the country eased GPs’ restrictions to market to certain sophisticated investors, typically funds-of-funds.”
AMF’s thawing is not just visible across the regulatory sphere; it also extends to its day-to-day interactions with local private equity houses. “In the early 2000s, we would have never seen them at industry events yet for years now, there has been so much more dialogue with managers and associations,” says the back-office professional at the French GP. They have several ideas on how the conversation could further improve in the post-Brexit era. “It would be useful to create a working group around special topics, such as cross-border distribution of French funds or meeting AML requirements,” they say. “As a regulator, you can write articles on implementation but the focus should be on directly asking firms about the challenges they face every day. Today, that element is still missing.”