Lessons from More than a Decade-Long History of Sanction in France

Since its creation in 2003, the Enforcement Committee of the French Financial Market Authority (AMF) has sanctioned market players which violate the set of rules to which they are subject. Four main regulatory breaches are targeted by the AMF: 1) any violation of the Monetary and Financial Code and the AMF General Regulation (i.e. a failure to comply with professional obligations by regulated professions); 2) breaches of insider dealing regulations (use and/or divulgence of insider information for investment decisions); 3) price manipulations (deliberate misconduct to influence securities prices and fair price formation); and 4) breaches of public disclosure requirements (failure to comply with financial reporting laws and regulations).

More than 300 decisions were made and published on the AMF website from 2004 to 2016. During this period, on four occasions, the AMF’s sanction powers were reformed, broadened and reinforced. The two latest reforms were introduced in August and December 2016, and started to impact sanction and settlement procedures in 2017. Therefore, it is particularly interesting to analyze the main features of the sanctions until 2016. It is also noteworthy that the timespan of the sample of sanctions reviewed includes the Global Financial Crisis, and the subsequent regulatory tightening.

The objective of my paper is, firstly, to describe how the French sanction procedure works and how it was amended, what is the scope of the AMF’s powers, and how the powers were reinforced during its history. Secondly, I describe how such evolutions in the legal framework have translated (or not) into the sanctions imposed. Finally, I aim to undertake an assessment of the 13-year long history of sanctions, before a new set of rules starts to apply. To do so, a unique dataset has been built, mostly based on the publicly available sanction decisions published on the AMF website.

My paper demonstrates that the procedures are long (close to three years), leading usually to a sanction (i.e. 90% of guilty verdicts), generally with a cash fine (94%) and/or with disciplinary sanctions (30%). Fines nearly tripled over the period reviewed, but remained limited when compared to the maximum legal threshold, or to the rest of the world (the USA and the UK in particular). Half of the decisions were anonymized. Listed and asset management companies are the most frequently sanctioned legal entities. The top management of the firms is frequently involved in the regulatory breaches. Half of the sanctioned entities appeal the decision, despite the length of such procedures (1.8 years), and the high rate of confirmation of the initial verdict. The sanctions are frequently reported in the financial press. From 2012 onwards, the sample under review was broadened, due to the introduction of a new settlement procedure (used 32 times between 2012 and 2016). The latter does not require the offender to plead guilty. Such procedures are quicker, target less severe regulatory breaches - mostly committed by asset management firms - and consequently result in less severe sanctions.

Finally, the paper addresses questions related to the academic literature, in particular regarding the potential impact of sanctions on the behavior of market participants, on market efficiency, on the reputational loss caused by the imposition of a sanction and recidivism, on the impact of media coverage of sanctions on investors, and, more generally, on the optimal supervision and regulation. The next steps of this research will consist of challenging the financial markets efficiency hypothesis (see Fama et al., 1969), in the sense that all the available information, and in particular sanctions, should be reflected immediately by the market (stock prices/returns and shares of funds/assets under management respectively for listed and asset management companies). Otherwise, financial misconduct may pay, in the sense that the profits consecutive to the regulatory breach(es) could exceed the costs of a sanction (monetary (fines) and non-monetary (reputation) costs). If a potential sanction stands for a credible threat to a market player, the mere existence of such sanctions complements financial regulation by providing incentives to comply with the set of rules. Finally, to what extent does the AMF cope with the three greatest challenges of regulators, as stated by Carvajal and Elliott (2007): 1) the lack of independence from the government and political process; 2) the lack of legal authority; and 3) limited resources?

Laure de Batz is a PhD candidate at the Institute of Economic Studies, University Paris 1 Pantheon Sorbonne.