Answer ... (a) Crowdfunding, peer-to-peer lending
Crowdfunding and crowdlending have been subject to a tailor-made regulatory framework since 2014. Issuers raising funds on a regulated crowdfunding platform are subject to lighter disclosure requirements under the Prospectus Regulation, up to an amount of €8 million.
Crowdlending also benefits from an exception to the banking monopoly, which normally prohibits entities other than licence banks from granting loans. Individuals are now allowed to grant loans on regulated crowdlending platforms, provided that certain caps are respected (regarding the duration of the loan, the amount lent per individual and the total amount of the loan). The PACTE Act also added another exemption which allows employees, managers, partners, clients and suppliers of a company to grant loans to each other in an amount of up to €30,000, in order to finance a personal project.
(b) Online lending and other forms of alternative finance
Generally speaking, online lending is subject to the same regulations as traditional lending: the entity granting the loans must obtain regulatory status that allows it to do so. On the other hand, alternative finance has developed significantly over the last few years and now offers additional options to individuals or companies that are willing to borrow. One of these options is crowdlending, which is described above. The others generally imply regulated alternative investment funds, which are increasingly allowed to purchase commercial loans or directly grant loans to companies (subject to various requirements). French law also facilitates the transfer of loans and receivables to dedicated investment funds (ie, pursuant to mechanisms related to securitisation).
(c) Payment services (including marketplaces that route payments from customers to suppliers (e.g., Uber and Airbnb)
Payment services are regulated in France pursuant to the transposition of the European directives on payment services, the last one being the Second Payment Services Directive (2015/2366) (PSD2). Under that regulation, the provision of payment services is a regulated activity which may be conducted only by a regulated payment institution, a bank or an electronic money institution. However, PSD2 allows companies to provide payment services without having to apply for regulated status in two situations:
- The payment instruments used by the company allow the holder to acquire goods and services only in the premises of the issuer or within a limited network of service providers (the ‘limited network exclusion’); or
- The payment instruments can be used only to acquire a very limited range of goods and services.
The emerging trend in payment services is without doubt open banking – that is, the ability for the clients of traditional banks to allow innovative companies to access their bank accounts and provide additional payment services.
Regarding marketplaces that route payments from customers to suppliers, these platforms are generally regarded as providing payment services and are thus required to obtain regulated status, unless they can benefit from one of the abovementioned exemptions, such as the limited network exclusion. These platforms generally partner with a regulated payment institution to handle the movement of cash or act as ‘agents’ of the payment service provider (a regulated status under which the agent uses the infrastructure of the regulated entity to provide payment services to its own clients). The largest marketplaces (eg, Airbnb) can afford to create an in-house licensed payment institution to manage their payments within the European Union.
Websites that allow individuals to trade in foreign currency have become popular during the last few years, which induced the Financial Markets Authority (AMF) and the legislature to update the relevant regulations.
First, while the spot purchase or sale of foreign currency is not subject to any regulation, derivatives based on a foreign currency qualify as financial instruments. Therefore, entities ‘selling’ such derivatives are theoretically required to be licensed investment firms or banks. Operating a trading platform for such derivatives also qualifies as a financial service which may be provided only by an investment firm or another regulated entity.
In addition, in 2016 the rules restricting the advertising of financial services or products were tightened for products where the risk of loss is not known in advance and may exceed the initial investment. Binary options and contracts for difference on foreign currencies are directly targeted by that measure.
The rules applicable to trading venues in France directly derive from the transposition of the Second Markets in Financial Instruments Directive (2014/65/EU) (MiFID 2). There are three categories of trading venues under the MiFID 2 framework: regulated markets, multilateral trading facilities (MTFs) and organised trading facilities (OTFs).
These three categories share a common definition: they are multilateral systems which bring together multiple third-party buying and selling interests in financial instruments in a way that results in a contract. The main differences between these categories are as follows:
- Regulated markets must be authorised by a government decree on a proposal from the AMF and are operated by a market operator, while MTFs and OTFs may be operated by an investment firm;
- Regulated markets and MTFs must apply non-discretionary rules, while OTFs are not subject to that requirement; and
- Shares may not be listed on OTFs, which can only list debt securities, structured finance products, greenhouse gas emission allowances, derivatives and physically settled wholesale energy products.
All regulated trading venues are subject to the same set of obligations, which includes organisational and transparency requirements, and prohibits proprietary trading. Additional rules also apply to regulated markets and MTFs. In addition, the Market Abuse Regulation – which prohibits the unlawful disclosure of inside information and market manipulation – applies to all financial instruments, whether they are traded on a regulated market, an MTF or an OTF.
(f) Investment and asset management
The regulation of investment funds and asset managers derives from the transposition of two European directives: the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive (2009/65/EC) and the Alternative Investment Fund Managers (AIFM) Directive (2011/61/EU). The UCITS Directive mainly applies to the management and sale of mutual funds, while the AIFM Directive regulates alternative investment funds. Managing a collective investment scheme or an alternative investment fund generally requires an asset manager licence, which is granted by the AMF. In addition, most funds also need to be licensed by the AMF before the asset manager can market them to potential subscribers.
Various fintech startups have launched business models relating to asset management. These startups generally apply for an asset manager licence or partner with a licensed asset manager.
Finally, MiFID 2 also regulates separately investment advice and portfolio management. Portfolio management may also be provided by a licensed investment firm. In addition, financial investment advisers (a specific category created by French law) may also provide regulated investment advices without having to obtain an investment firm licence.
(g) Risk management
Risk management is a function which most regulated financial institutions must have, which means that a dedicated team must be created to manage risks in accordance with regulatory requirements. Fintech startups may provide tools to help regulated companies manage their risks better. However, risk management as a specific business model is not subject to specific regulation and is generally handled internally by regulated companies.
Roboadvice covers various services provided by fintech and insurtech startups. Regarding financial services, some roboadvisers help clients with their investment decisions, while others directly manage investments. With respect to insurance, some roboadvisers act as insurance brokers. Therefore, the services provided by roboadvisers may qualify as investment advice or portfolio management (which are regulated investment services), and the company operating the roboadviser must therefore be licensed by the Prudential Supervision and Resolution Authority (ACPR) or the AMF. In addition, companies operating roboadvisers which provide insurance services must be registered as insurance intermediaries.
In 2017 the AMF reminded that entities offering automated tools which provide clients with estimations of the performance of financial instruments are subject to the obligation to deliver clear, accurate and non-misleading information.
The provision of insurance services is a regulated activity in France. Entities that provide these services must be licensed by the ACPR and are subject to a set of rules which depends on the type of insurance they provide (eg, life insurance, property insurance, annuities). Innovative actors in the insurance sector or ‘insurtechs’ are not subject to simplified regulatory supervision, although all regulators apply the proportionality principle.
There are two categories of insurtechs in France. First, the number of independent insurtech companies has increased over the last few years. Alan, which has been licensed by the ACPR since 2016, raised €50 million in April 2020, after having raised €75 million between 2016 and 2019. Alan mostly markets health insurance products to startups, freelancers and small and medium-sized enterprises. Another prominent French insurtech is Luko, a home insurance startup which raised €20 million in 2019. Luko is not licensed as an insurance undertaking by the ACPR and acts an intermediary for licensed insurers.
Second, most French insurers have launched internal insurtech projects. These projects generally focus on using technology and data to simplify the insurance process and make it more user friendly. For example, in 2017 Axa launched Fizzy, a flight delay insurance service built on the Ethereum blockchain (this project was discontinued in 2019). In 2019 Axa announced a partnership with US startup Assurely to launch CrowdProtector, an insurance product dedicated to equity crowdfunding and security tokens issuers and investors. Société Générale also launched Moonshot-Internet, an insurtech specialised in the insurance needs of internet retailers.