Are we nearing the end of the French credit monopoly?

28th April 2016

The decree implementing Article 167 of law no. 2015-990 of 6 August 2015 (“Act”) has finally been adopted and published,[1] 6 months behind schedule. Better late than never? The decree (“Decree”) puts the finishing touches to the new exemption from the not so-widely known monopoly[2] on the extension of “credit”,[3] applicable regardless of whether the borrower is a mere consumer or a business, an individual or a legal entity. Large lending structurers and non-EU institutional investors are generally well aware of the monopoly and have structured their offer accordingly, by booking credit transactions outside France and keeping or moving relevant teams outside France. However, smaller or more occasional lenders may not be as well informed, unless they are facing criminal charges or enforcement difficulties in France.

The Decree is indeed another breakthrough into the French credit monopoly, yet it is not its end. The sole purpose of the new framework is to facilitate short term intercompany lending out of cash flow surpluses on an ancillary basis, under a quite dense set of rules which, in addition to being complex, are silent on the quite important question of cross-border lending towards France.

Surprisingly, as this is not what the legislator gave the government authority for, the Decree widens the scope of the new exemption from an intercompany exemption to an intergroup exemption,[4] which, unfortunately, brings about inconsistency and complexity to the whole scheme. Why make things simple if one can make them complicated? That is the question.

In fact, what was mainly expected of the Decree was a more tangible definition of the rather vague (and, may I say, quite politically tainted) concept of “justified economic links” required by the Act.  Thankfully, the government has come up with a down-to-earth list of eligible “economic links”, among which one exemption stands out as being generally available, where a threshold of client-supplier relationship has been reached, of either EUR 500 K of sales or 5% of turnover. However, complexity reaches its peak where the method for applying the threshold and the surrounding conditions are set out by the Decree. Indeed, why make things simple where one can make them complicated?

Surprisingly, as the legislator only gave the government authority to set out the conditions and limits under which eligible companies may lend money to micro-enterprises or small, medium and intermediate size companies, the Decree does not further define eligible borrowers according to their size. Instead, the Decree goes the opposite direction by prohibiting lenders from lending more than EUR 10 million, EUR 50 million or EUR 100 million if they are, respectively, (i) small or medium size companies, (ii) intermediate size companies or (iii) large companies (or, if lower, more than 50% of their own net cash flow or 10% of the net cash flow calculated on a group consolidation basis as the case may be).

Other prudential requirements apply including general own fund and EBITDA requirements, as well as specific caps on loans per borrower.

Furthermore, auditors will be responsible for ensuring that the conditions for the new exemption to apply are met, under a certificate to be issued annually and appended to the lender’s management report.

It goes without saying (but the government found it useful to confirm) that the other exemptions from the French credit monopoly remain available, e.g. the client-supplier and intra-group exemptions, although these two old exemptions share a same scope of application as the new exemption to a quite noticeable extent. Luckily, the old exemptions are less complex and burdensome than the new exemption, and their validity and enforceability have long been tested before courts. In this respect, it is worth noting that the attractiveness of the new exemption is further dampened by the rather surprising and unexplained prohibition to securitise the receivables arising from the loans made under the new exemption.

With the new exemption, the scope of French credit monopoly is indeed reduced, but the regime applicable to the new exemption leaves room for a great deal of uncertainty and, sooner or later, legal challenges as well as clarification amendments. Making things simple in the first instance will then be seen in hindsight as the best option, undoubtedly.

[1]      Decree no. 2016-501 dated 22 April 2016, published on 24 April 2016.

[2]      Pursuant to the Financial and Monetary Code, it is prohibited for a person other than a credit or a finance institution to extend credit on a “regular” basis and for consideration (à titre onéreux).

[3]      In its broadest meaning including all types of credit commitments, loan refinancing/restructuring schemes, guarantees as well as the acquisition of unmatured receivables.

[4]      Subject to the group(s) involved meeting consolidation and cash centralisation conditions as set out by the Decree.

This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Bruno Fatier on 020 7955 1478