France’s Financial Crackdown Is Falling Flat

Banks are finding ways around new taxes and regulations | “Paris, whether we like it or not, isn’t a financial hub any more”

Carol Matlack, with Hélène Fouquet and Adria Cimino


François Hollande began his presidential campaign in January by declaring, “My enemy is the world of finance.” Since he took office in May, France has unleashed a barrage of taxes and regulations on bankers and financial firms. So far, his enemy appears largely unscathed.

Consider the 0.2 percent tax on share purchases that France started collecting this month. The first in Europe, the transaction tax was supposed to rein in hedge funds and other market speculators. Yet brokers can escape the tax by selling so-called contracts for difference, which let clients bet on a stock’s gain or loss without actually owning it. That leaves less sophisticated individual shareholders more likely to pay, says Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris. “The target was supposed to be finance with a capital F,” Porta says. “Instead, we are punishing small investors who aren’t to blame and already are frightened off by losses in the market.” The government initially estimated the tax would raise €530 million ($688 million) this year and €1.6 billion in 2013, but the finance ministry now says it’s too early to tell whether those targets will be reached. At a Nov. 13 press conference, Hollande himself said the effect on financiers is likely to be “modest.”

Hollande’s plan to limit speculative trading by French banks also could fall short of expectations. Finance Minister Pierre Moscovici said at a Nov. 15 press conference that legislation to be presented to Parliament this month will require banks to place their riskiest activities in subsidiaries subject to much higher capital requirements than their more traditional businesses. The restriction would apply only to banks’ proprietary trading, not market-making activities. France’s largest bank, BNP Paribas, says it expects less than 2 percent of its corporate and investment banking sales to be affected by the change. (Third-quarter revenue for its corporate and investment banking division was €2.38 billion; 2 percent of that would be about €48 million.) “We have few proprietary activities that can be called speculative in a strict sense,” Alain Papiasse, head of BNP’s corporate and investment bank, told reporters on Nov. 21. “If we have to put a little piece into a specialized unit and capitalize it more, we’ll see if it makes sense, as one says, and we will adapt to the law.”

While the restrictions won’t do much damage to major banks, the crackdown could hasten the exodus of finance talent from the country, says Jérémie Le Febvre, founder of the Blacksmith Group, a financial holding company in Paris that’s moved many of its investment-related activities outside the country. “Paris, whether we like it or not, isn’t a financial hub any more,” he says. “People will go and work for Anglo-Saxon banks who don’t have similar problems.”

Many finance professionals may emigrate to escape new taxes, including a 75 percent top marginal rate on incomes more than €1 million, and a 45 percent rate on those greater than €150,000. Together, the government says, the higher levies will raise €530 million euros next year — if the taxpayers remain in France. “These people are flexible, their businesses are flexible. They can be based in London and go back and forth,” says Michel Collet, a tax lawyer at the Paris firm of CMS Bureau Francis Lefebvre. Big French companies are complaining that the tax hurts their ability to attract and retain highly paid executives whose operational duties make it difficult to live outside France.

In addition to France’s unique existing wealth tax, which takes as much as 1.5 percent of assets greater than $1.7 million, the new income taxes have “changed the profile of people who are looking to emigrate,” Collet says. As recently as five or six years ago, only a handful of France’s superrich left the country for tax reasons, he says. Now his clients seeking tax advice on relocation include young entrepreneurs, established business people, and business owners nearing retirement. “It’s not an easy decision to take,” he says. “But some of them are saying, ‘Enough is enough.’”

The bottom line France’s new financial reforms have had the unintended consequence of hurting small investors and discouraging entrepreneurs.


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