A Quiet Revolution

Faster and more frequent: That is what French fund managers can expect in terms of enforcement from the country’s financial regulator the AMF going forward. At its annual forum for compliance officers held in March this year, the regulator confirmed it would aim to complete 60 inspections of firms in 2018 – double the number of the previous year.

About half of these would be new “spot inspections” or “contrôles courts”, an abridged inspection process that could in theory lead to rapid enforcement action if the regulator feels sanctions are warranted. Counterintuitively, that is good news for firms.

Although the new inspection regime could lead to enforcement against firms, that is not its primary function. Rather, the regulator is using these inspections to assess and understand current practice around certain key issues in the industry. Where it finds things working smoothly, it will move on. Where it identifies problems, there will be new guidance to clarify its expectations and inform the industry.

In this respect, the spot inspections are similar to the thematic reviews of the FCA in the UK. They are also part of a wider effort from the AMF to increase transparency, being clearer about both its priorities and requirements. It has also now committed to an annual statement outlining its enforcement priorities. This year these comprise five areas, including valuations, regulatory capital and practices around stock lending – areas where the spot inspections will focus.

Again, there are international precedents here; the SEC publishes similar guidance each year. For France, though, the commitment to this level of transparency on enforcement priorities is new, and perhaps overdue.

A question of clarity

Both the publication of priorities and clarification of regulatory requirements will help firms know where they stand on important issues, which has arguably not been the case in the past. Recent cases on performance fee calculations stand out as an example of this, one of which has already been decided by the AMF.

In that decision, the AMF determined the method to calculate the fees had disadvantaged investors, despite that it was one of a number of other methods that could reasonably have been used. This was not disputed, but the regulator effectively ruled that where a variety of calculation methods were possible, the firm should consider them all and apply the one which was in the best interests of the investor. Failure to do so constituted overcharging¹ – even though independent experts demonstrated that the impact on the performance fee of using another method was minimal.

Crucially, this specific requirement to consider other possible calculation methods was not stipulated anywhere in regulation or guidance.

It is arguable that the AMF’s position simply reflects the well-understood regulatory principle to act in the investor’s best interests. It is also perhaps right that, as in other areas, ignorance is no defense. Nevertheless, many firms in this jurisdiction will appreciate the increased insight that is now promised into the thinking of the regulator – and the increased opportunities to act accordingly to avoid enforcement action.

Sources:
¹ www.amf-france.org/technique/multimedia?docId=workspace://SpacesStore/14d5efac-a700-4c6a-a4c9-769e1c772848_fr_1.0_rendition