Transparency of the activity
A defined business purpose
Articles L.513-2: object of sociétés de crédit foncier
I. Sociétés de crédit foncier (SCFs) are credit institutions licensed as financial companies by the Autorité de Contrôle Prudentiel ,the exclusive purpose of which is:
- To grant or acquire secured loans, exposures to public entities and securities and instruments as defined in Articles L. 513-3 to L. 513-7;
- To finance the above categories of loans, exposures, securities and instruments, to issue bonds, called obligations foncières (covered bonds), which benefit from the statutory privilege defined in Article L. 513-11, and to raise other funds, whose contract or document to be used for public disclosure pursuant to Article L. 412-1 or any document required for admission for trading on a foreign regulated market refers to the same priority right of payment (privilège).
II. SCFs may also ensure financing for the activities referred to in I by contracting loans or raising funds which do not benefit from such privilege. They cannot issue the promissory notes referred to in Articles L. 313-42 to L. 313-48.
Notwithstanding any legal or contractual provisions to the contrary, SCFs may temporarily transfer their securities subject to the rules laid down in Articles L. 211-22 to L. 211-34, provide a guarantee in the form of a pledged security investment account as referred to in Article L. 211-20 and, pursuant to Articles L. 211-36 to L. 211-40, transfer all or part of the debts they hold pursuant to Articles L 211-36 to L 211-40 or within the meaning of Article L. 313-23 to L. 313-35, whether or not they are of a professional nature. In such a case, the information specified on the transfer deed referred to Article L. 313-23 is determined by decree.
The debts or securities thus assigned or transferred shall not be included in the basis of the priority right of payment (privilège) defined in Article 513-11 and shall not be recognised in the SCF’s accounts for the purposes of Article L. 513-12.
III. SCFs may acquire and own any real or personal property necessary for the accomplishment of their corporate purpose or which derives from the recovery of their debts.
IV. SCFs may not hold any equity investments.
A thoroughly defined perimeter for eligible assets
Articles L.513-3 to L.513-7: guaranteed residential mortgage loans
I. Secured loans are loans secured by:
- A first rank mortgage or a real estate security conferring at least an equivalent level of security
- Or, within the limitations and conditions determined in a State Council (Conseil d’Etat) decree and provided that the secured loan being exclusively allocated to the financing of a real property, a guarantee from a credit institution or an insurance company which does not fall under the scope of consolidation defined by Article L. 233-16 of the French Commercial Code applicable to the SCF.
II. Loans secured by a real estate security referred to in I, item 1 and guaranteed loans referred to in I, item 2 are eligible for privileged debt financing up to a portion of the financed or charged real estate’s value. This loan-to-value ratio is determined by a State Council decree.
Specific conditions of eligibility are determined by State Council decree for loans benefiting from the guarantee of the FGAS (Fonds de Garantie de l’Accession Sociale à la propriété, or Guarantee Fund for Social Home-ownership) referred to in Article L. 312-1 of the French Construction and Housing Code (Code de la construction et de l’habitation), or any other entity or person which would replace it or when such loans are covered, as regards the part exceeding the loan-to-value ratio and up to the limit of the value of the real estate to which the security relates, by a guarantee meeting the conditions referred to in I, item 2 above or by the guarantee of one or more of the public entities referred to in Article L.513-4.
III. The real estate asset which is either used as security or is financed by a guaranteed loan must be located in France, in another Member State of the European Community, or a State party to the agreement on the European Economic Area or a State benefiting from the highest level of credit quality determined by an external rating agency recognised by the Autorité de Contrôle Prudentiel in accordance with Article L.511-44. Its value shall be determined in a prudent manner excluding any element of speculation. The valuation procedures are determined by an order from the Minister for the Economy which specifies the cases in which an appraisal is required.
Article L.513-4 : expositions sur des personnes publiques
Article L.513-4: type of public entities
I. Exposures to public entities referred to in Article L. 513-2 include assets, such as loans, or off-balance sheet commitments to, or fully guaranteed by, the entities listed hereafter:
- Central governments, central banks, public sector entities, local authorities or groups thereof, of a Member State of the European Community or a State party to the agreement on the European Economic Area, of the United States of America, Switzerland, Japan, Canada, Australia or New Zealand;
- Central governments or central banks of States that are neither members of the European Community nor parties to the agreement on the European Economic Area, excluding the United States of America, Switzerland, Japan, Canada, Australia or New Zealand, benefiting from the highest level of credit quality as determined by an external credit rating agency recognised by the Autorité de Contrôle Prudentiel pursuant to Article L. 511-44;
- The European Community, the International Monetary Fund, the Bank for International Settlements, multilateral development banks listed in an order from the Minister for the Economy; other international organisations and multilateral development banks benefiting from the highest level of credit quality as determined by an external rating agency recognised by the Autorité de Contrôle Prudentiel in accordance with Article L. 511-44;
- Public sector institutions or local authorities or groups thereof, of States which do not belong to the European Community nor are parties to the agreement on the European Economic Area, excluding the United States of America, Switzerland, Japan, Canada, Australia or New Zealand, when the exposures to these entities are matched, for determining equity capital requirements, with the same weighting as that of loans granted to central governments, central banks or credit institutions, or fully guaranteed by these entities, and which benefit from the highest level of credit quality as determined by an external rating agency recognised by the Autorité de Contrôle Prudentiel in accordance with Article L. 511-44;
- Public institutions or local governments or groups thereof referred to in 4 above benefiting from the second highest level of credit quality as determined by an independent rating agency recognised by the Autorité de Contrôle Prudentiel in accordance with Article L. 511-44.
Article L.513-4-II: type of exposures
II. Exposures to public entities include, in particular:
- Debt securities issued by, or totally guaranteed by one or more of the public entities referred to in I, items 1 to 5;
- Monetary debts, including those resulting from a continuing contract, issued by public entities referred to in I, items 1 to 5 or fully guaranteed by one or several of these public entities;
- Debts resulting from leasing contracts or equivalent contracts to which public entities referred to in I, items 1 to 5 are parties as lessee or tenant, or debts resulting from leasing or equivalent contracts which are totally guaranteed by one or several of these public entities. SCFs that acquire debts resulting from a leasing contract may also acquire all or part of the debt that will result from the sale of the leased property.
III. A State Council (Conseil d’Etat) decree determines the conditions, and, where necessary, the limits for considering exposures referred to in I which are subject to a credit quality assessment by an external credit rating agency recognised by the Autorité de Contrôle Prudentiel pursuant to Article L. 511-44.
Article L.513-5: tranches and securities issued by securitisation entities
As set forth by a State Council (Conseil d’Etat) decree, loans and exposures referred to in Articles L.513-3 and L.513-4 include units and debt securities issued by securitisation undertakings (organismes de titrisation) as well as units or debt securities issued by similar entities subject to the laws of a Member State of the European Community or a State party to the agreement on the European Economic Area, of the United States of America, Switzerland, Japan, Canada, Australia or New Zealand, provided that:
- The assets of these securitisation undertakings or similar entities, excluding sums temporarily available and in pending allocation, guarantees, security or other privileges that they benefit from as well as securities held by these securitisation undertakings or similar entities in reserve or as guarantee pursuant to the provisions by which they are governed, consist, up to 90 % at least, of the same type of debt as the loans and exposures having the characteristics defined in I of Article L. 513-3 as well as in Article L.513-4, or of debts benefiting from guarantees equivalent to those of the loans and exposures referred to in Articles L.513-3 and L.513-4, excluding specific units or debt securities bearing the risk of default by their debtors;
- These units or securities shall benefit from the highest level of credit quality determined by an external rating agency recognised by the Autorité de Contrôle Prudentiel in accordance with Article L. 511-44;
- These similar entities must be governed by the law of a Member State of the European Community or a State party to the agreement on the European Economic Area, provided that the assets are constituted in whole or in part by loans or exposures as referred to in article L.513-3.
Article L.513-6: promissory notes
The promissory notes governed by Articles L.513-3 et seq. are considered as equivalent to the loans referred to in Article L.513-3, provided that the debts they refinance meet the conditions laid down in Article L.515-14. The outstanding amount of those promissory notes cannot exceed 10 % of the assets of a SCF.
Article L.513-6: replacement values
A State Council (Conseil d’Etat) decree specifies the conditions in which securities, instruments and deposits which are sufficiently secure and liquid may be held as replacement assets by SCFs. Such decree shall determine the maximum portion that such assets may represent.
Article L.513-8: cash requirements cover
Sociétés de crédit foncier shall at all times cover their cash requirements according to the terms and modalities laid down by decree.
Article L.513-9: quarterly report
Sociétés de crédit foncier shall publish information on the quality and term of loans, securities and assets to be financed each quarter.
Article L.513-10: forward financial instruments
In order to ensure the hedging of the management transactions of the loans and exposures referred to in Articles L. 513-3 to L. 513-7, covered bonds or other resources benefiting from the privilege defined in Article L. 513-11, SCFs may have recourse to forward financial instruments, as defined in Article L. 211-1.
However, the sums due under the forward financial instruments entered into by SCFs to hedge their assets and liabilities, if applicable after netting, benefit from the privilege referred to in Article L. 513-11 in the same way as the sums due under the forward financial instruments entered into by SCFs to manage or hedge the global risk on their assets, liabilities and off-balance-sheet items.
The sums due under the forward financial instruments used to hedge the transactions referred to in II of Article L. 513-2 do not benefit from this privilege.
The securities, sums and instruments received by a SCF as a guarantee for hedging transactions referred to in this article are not taken into account in the calculation of the maximum portion referred in Article L. 513-7.
Article L.513-12 : overcollateralisation
The total amount of the assets of the SCFs must be greater than the amount of their liabilities benefiting from the privilege referred to in Article L. 513-11. The Minister for the Economy determines the valuation procedures for such assets and liabilities.Investor protection
The privileged claim
Article L.513-11-1: priority rank
Notwithstanding any legislative provisions to the contrary, including those of Book VI of the French Commercial Code:
1. The sums resulting from the loans or similar debts, exposures, securities and instruments referred to in Articles L. 513-3 to L. 513-7, financial instruments referred to in Article L. 513-10, after netting if applicable, and debts resulting from deposits made with credit institutions by SCFs, are allocated with priority to servicing payment of the covered bonds and other privileged debt referred to in 2 of I of Article L. 513-2;
Article L.513-11-2: protection of obligations foncières holders from SCF bankruptcy
2. When a SCF is subject to safeguard, judicial reorganisation or liquidation proceedings (procédure de sauvegarde, redressement ou liquidation judiciaires) or conciliation proceedings, the debts duly resulting from the transactions referred to in item 2 of I of Article L. 513-2 are paid on their contractual due date and with priority over all other debts, regardless of whether the latter benefit from legal privilege or security interests, including interest resulting from contracts, of whatever duration. Until the holders of privileged debts within the meaning of the present article have been fully paid off, No. other creditor of the SCF may exercise any right over the property and rights of such company;
Article L.513-11-3: scheduled privileged debt repayments are maintained in case of bankruptcy
3. The judicial liquidation of an SCF does not result in the acceleration of the bonds and other privileged debts referred to in 1 of this present article.
The rules set out in 1 and 2 above apply to the expenses relating to the transactions referred to in items 1 and 2 of I of Article L. 513-2 as well as sums due, if any, under the contract provided for in Article L.513-15.
A guaranteed business continuity
Article L.513-15: management and recovery of the loans by the credit institution
The management or recovery of the loans, exposures, similar debts, securities and instruments, bonds or other resources referred to in Article L. 513-2 may only be carried out by a credit institution bound by contract to the SCF.
Article L.513-16: credit institution: acting for the SCF
The credit institution responsible for the management of the loans, exposures, similar debts, securities and instruments is entitled to take legal action, whether as plaintiff or defendant, and to exercise any enforcement procedures in the name and on behalf of the SCF.
Protection of the SCF against bankruptcy of its parent
Article L.513-18: by dispensation of Code de commerce dispositions
The provisions of Article L. 632-2 of the French Commercial Code are not applicable to contracts entered into by or with SCFs, or to legal transactions carried out by SCFs or on their behalf, provided that such contracts or such transactions are directly related to the transactions referred to in Article L. 513-2.
Article L.513-20: SCF is protected from its parent’s bankruptcy
Notwithstanding any provisions to the contrary, including those set out in titles II to IV of Book VI of the French Commercial Code, safeguard, judicial reorganisation or liquidation proceedings (procédure de sauvegarde, redressement ou liquidation judiciaires) of a company holding shares in a SCF cannot be extended to the SCF.
Article L.513-21: SCF’s right to terminate service contracts
In the event of safeguard, judicial reorganisation or liquidation proceedings (procédure de sauvegarde, redressement ou liquidation judiciaires) against a company responsible for management or recovery of loans, exposures, similar debts, securities and instruments, bonds or other resources referred to in Article L. 515-13 on behalf of a SCF, the contracts relating to such management or recovery may be immediately terminated, notwithstanding any provisions to the contrary, including those of titles II to IV of Book VI of the French Commercial Code.
The mechanism of affiliation
Article L.511-31 : Obligation for central bodies to provide a credit institution affiliate that is in difficulty with all of the support necessary to ensure its solvency.
The central bodies represent the credit institutions affiliated with them in relation to the Banque de France and the Autorité de Contrôle Prudentiel.
They are responsible for ensuring the cohesiveness of their network and the correct functioning of the institutions affiliated with them. To this end, they shall take all necessary measures to ensure the liquidity and solvency of each said institution and of the entire network. They may also decide to prohibit or limit the distribution of dividends to the shareholders or the remuneration of the shares of the credit institutions or investment firms affiliated with them.
Where directly or indirectly held by a central body within the meaning of Article L. 511-30, the securities referred to in the last paragraph of Article 19 tervicies of Act No. 47-1775 of 10 September 1947 on the cooperative charter shall not be taken into account for calculation of the threshold of 50% of the capital of the credit institutions affiliated with them referred to in the aforementioned Article 19 tervicies.
They oversee the application of the laws and regulations specific to said institutions and exercise administrative, technical and financial control over the organisation and management thereof. The on-the-spot inspections of the central bodies may be extended to their direct or indirect subsidiaries and also to those of the institutions affiliated with them.
Within the scope of said powers, they may apply the penalties provided for in the laws and regulations which are specific to them.
The central body shall notify any loss of affiliated-institution status to the Autorité de Contrôle Prudentiel and the latter shall make a decision concerning the institution in question’s approval.
For the purposes of Section 2 of Chapter V of Part II of Book II of the Commercial Code, each corporate remit held in the central body, within the meaning of Article L. 511-30 of this code, or in the credit institutions affiliated with it, shall be counted as a single remit.
After informing the Autorité de Contrôle Prudentiel thereof and without prejudice to the powers of the Autorité de Contrôle Prudentiel, the central bodies may, where the financial situation of the institutions concerned so warrants, and notwithstanding any legal or contractual provision to the contrary, decide to merge two or more of the legal entities affiliated with them, with a total or partial sale of their assets and their dissolution. The senior manager structures of the legal entities concerned must have been consulted by the central bodies beforehand. The latter shall be responsible for the liquidation of the credit institutions affiliated with them or the total or partial sale of their goodwill.
The central bodies notify any decision concerning affiliation or withdrawal of affiliation to the institution concerned and to the Autorité de Contrôle Prudentiel.Control and oversight
Control and oversight
Autorité de contrôle prudentiel et de résolution oversight
Order of 3 November 2014 regarding the internal control of the banking industry
At least once a year, companies subject to this regulation are required to prepare a report on internal control.
This report covers the different categories of risk mentioned in this order, namely:
- a description of the main actions carried out in relation to internal control, pursuant to Article 13, and the lessons drawn from these actions;
- an inventory of enquiries carried out pursuant to Article 17 and the main lessons to be drawn, especially the main shortcomings identified and follow-up on any corrective action taken;
- a description of significant changes made in relation to permanent and periodic controls during the period under review, in particular to take into account changes in the business and risks;
- a description of the conditions under which procedures are put in place for new activities;
- a section relating to the permanent and periodic controls of foreign branches;
- a description of the main initiatives planned in relation to internal control;
- an appendix detailing the transactions concluded with executive directors, members of the supervisory body and, where applicable, with the major shareholders as defined in Article 5 of the aforementioned order of 23 December 2013;
- an up-to-date description of the classification of money laundering and terrorism financing risks, and justification of this classification.
Companies subject to this regulation and financial holding companies, parent companies of financial institutions and mixed financial holding companies supervised on a consolidated basis or, as the case may be, on a sub-consolidated basis, shall also prepare a report on internal control at group level, at least once a year. Companies subject to this regulation shall include this group report in the report mentioned in Article 258.
At least once a year, companies subject to this regulation, financial holding companies, parent companies of financial institutions and mixed financial holding companies supervised on a consolidated basis or, as the case may be, on a sub-consolidated basis, shall prepare a report on risk assessment and monitoring that provides an overall picture of all the risks to which they are exposed, including the risks associated with banking and non-banking activities.[…]
For companies subject to this regulation, financial holding companies and mixed financial holding companies, this report shall include an appendix relating to the security of payment instruments. They shall describe the assessment, measurement and monitoring of the security of payment instruments they issue or manage with regard to their internal standards, if any, and to the recommendations that the Banque de France or the European System of Central Banks bring to their attention
The report referred to in Article 262 shall include an analysis of changes in cost-of-liquidity indicators over the period.
For investment service providers and the persons referred to in Article L.440-2 (3) and (4) of the French Monetary and Financial Code, this report shall include, among other things, the assumptions used with regard to the monitoring of liquidity.
The report referred to in Article 262 shall also include:
- an appendix containing the assumptions and methodological principles used as well as the results of stress tests performed by companies subject to this regulation […];
- an appendix indicating the methods, including stress tests, used for identifying the risks resulting from the use of credit risk mitigation techniques […], in particular the risk of concentration and residual risk.
This report may be included in the report provided for in Article 258.
The French Financial Market Authority’s control
Article L. 621-8-1: control and perimeter of intervention of the AMF
- Before issuing the approval referred to in Article L. 621-8, the Financial Markets Authority verifies that the document is complete and comprehensible, and that the information it contains is correctly presented. The Financial Markets Authority indicates any statements to be altered or additional information to be inserted.
The Financial Markets Authority may also request any explanation or proof, particularly in regard to the issuer’s situation, business and results and concerning any guarantors of the financial instruments to which the transaction relates
- The Financial Markets Authority may suspend the transaction for a period which shall not exceed a limit set by its General Regulations when it has reasonable grounds for suspecting that it is contrary to the laws or regulations applicable to it.
The Financial Markets Authority may prohibit the transaction:
- When it has reasonable grounds for suspecting that an issue or assignment is contrary to the laws or regulations applicable to it;
- When it notes that a proposed admission to trading on a regulated market is contrary to the laws or regulations applicable to it.
Article L.511-38: control of the credit institution by two independent statutory auditors
Auditing is carried out in each credit institution or investment firm by at least two auditors as provided for in Book VIII of the Commercial Code. The said auditors are appointed on the advice of the Banking Commission, as determined by decree. Moreover, the Banking Commission may appoint an additional auditor when the situation warrants it. The said auditors must not represent or belong to firms which have links between them of a legal, professional, shareholding or organisational nature. They perform their duties as determined in Book VIII of the Commercial Code and they certify the annual accounts. They verify the true and fair nature of the information intended for the public, and its conformity with the said accounts.
However, when the balance-sheet total of a credit institution or an investment firm is below a threshold set by the Regulatory Commission for Accounting after consultation with the Advisory Committee for Financial Legislation and Regulations, the certification referred to in the previous paragraph may be given by a single auditor. When this condition is met, and the institution is subject either to the rules of public accounting or to a specific approval scheme for its accounts which provides guarantees which the Banking Commission considers to be sufficient, the latter may decide to lift the certification requirement referred to in the previous paragraph.
The auditors must provide all necessary guarantees concerning their independence in relation to the credit institutions, investment firms or financial holding companies audited. The provisions of Book VII of the Commercial Code apply to the auditors of any credit institution, investment firm or financial holding company.
The Specific controller
Article L.515-30: the Specific controller ensures compliance with all regulations and legislation applicable to SCFs
In each SCF, a specific controller and a deputy specific controller, chosen among the persons appearing on the official list of auditors, shall be appointed by the managers of the company for a term of four years, subject to the approval of the Autorité de Contrôle Prudentiel. (…)
The controller shall supervise compliance by the SCF with Articles L. 515-13 to L. 515-20. He shall verify that the contributions made to a SCF are in accordance with its purpose as defined in Article L. 515-13 and meet the conditions laid down in Articles L. 515-14 to L. 515-17.
The controller shall certify the documents sent to the Autorité de Contrôle Prudentiel in regard to compliance with the foregoing provisions. He shall prepare an annual report on the performance of his mission for the attention of the executives and deliberative bodies of the company, a copy of which shall be sent to the Autorité de Contrôle Prudentiel.
He shall attend the shareholder meetings and at his request shall be heard by the Board of Directors or the Executive Board. (…)
The specific controller shall be responsible, both as regards the SCF and third parties, for damageable consequences caused by faults and negligence committed by him in the performance of his functions.
Article L.515-31: representation of the SCF by the Specific controller in case of bankruptcy
When a SCF is subject to safeguard, judicial reorganisation or liquidation proceedings (procédure de sauvegarde, redressement ou liquidation judiciaires), the specific controller shall make the representation stipulated in Article L. 622-24 of the French Commercial Code in the name and on behalf of the holders of the privileged debts referred to in Article L. 515-19.
The provisions of Articles L. 823-7, L. 823-13, L. 823-14, L. 823-18, L. 822-18, L. 820-4 to L. 820-7, L. 822-6, L. 822-7 and L. 822-10 to L. 822-13 of the French Commercial Code and Article L. 613-9 of this Code apply to the controller. The Autorité de Contrôle Prudentiel may exercise the action provided for in Article L. 823-7 of the French Commercial Code.
Notwithstanding the provisions of Article L. 823-14 of the French Commercial Code, the controller’s right to information may extend to communication of the contracts and other documents held by the company responsible for the management or recovery of the loans, exposures, similar debts, securities, instruments, bonds and other resources, pursuant to Article L. 515-22, provided that those contracts and documents are directly related to the transactions carried out by such company on behalf of the SCF.
Article R515-13 – Décret n°2005-1007: certification of the overcollateralisation by the Specific controller
The specific controller shall certify compliance with the rule provided for in Article L. 515-20 on the basis of a quarterly programme for the issue of resources which benefit from the privilege referred to in Article L. 515-19. He shall certify compliance with this same rule for any issue of resources which benefit from this privilege and of which the unit value is greater than or equal to 500 million euros, or its equivalent in the currency unit of the issue.Conformity to directive OPCVM 22(4)
Conformity to directive OPCVM 22(4)
Conformity to directive OPCVM 22(4)
The article 22-4 of the UCITS Directive contributes to the legal definition of covered bonds and delimits the investment ceilings which are dedicated to them. Indeed these limits are fixed at 25% for a bank and 40% for an insurance company.
It was transposed in the French legal framework at the article 4 of the decree n° 89-623 of September 6, 1989 modified by the decree n°99-1217 of December 30, 1999 and the decree n° 2000-664 of July 17, 2000.
This article founds an exemption to the applicable regulation of the UCITS by laying down the possibility of holding up to 25% of their assets o, securities by a same issuer if these securities are obligations foncières issued uniquely by societies de crédit foncier (as defined in article L. 515-13 of the French Monetary and Financial Code).
Article 4 of the decree n° 89-623 of September 6, 1989 modified by the decree n°99-1217 of December 30, 1999 and the decree n° 2000-664 of July 17, 2000: transposition of UCITS directive in the French legal framework
Excerpt from Decree 99-1217 of 30 December 1999
Section II – Article 3 “Provisions relating to investments in protected securities”
The following paragraph has been added to Article 4 of the aforementioned Decree of 6 September 1989:
By way of an exception to the provisions of the second paragraph of Article 25 of the aforementioned law of 23 December 1988, an undertaking for collective investment in transferable securities may invest up to 25% of its assets in securities issued by a single issuer, provided the value of these securities does not exceed 80% of the assets and the securities are real property bonds issued by a real property credit company pursuant to subsection 2, paragraph one of Article 93 of Act 99-532 of 25 June 1999, or bonds issued by a credit institution having its registered office in a member state of the European Economic Community or a member state of the European Economic Area that is subject, by law, to a specific public inspection process designed to protect holders of these bonds. Sums generated by the issue of such bonds must be invested, until maturity of the bonds, in assets that sufficiently cover the resulting commitments, which will be applied first and foremost for the reimbursement of the capital and the payment of accrued interest in the event of the issuer’s default.”
Risk ponderation – CRD/EU
Under the capital-adequacy requirements of the EU’s Capital Requirements Directive, investors benefit from a 10% risk-weighting on obligations foncières under the standardized method, roughly 4% under the IRBF approach and less than 7% under the IRBA approach.