If you believe what you read, you will shudder in fear at the mention of this legislation that serves to threaten your investments with blockage, removing all access, leaving you to endure a slow and painful death in abject poverty.
There is an oft-used sales technique known as ‘disturbance’: create as much fear as possible, then magically provide the solution in the form of your product, offering enough relief that the poor ‘target’ will agree to anything. ‘Sapin 2’ has been used for this and this article is designed to separate fact from fiction.
So, what is ‘Sapin 2’, what does it do and is there cause for concern?
As is often the case, the truth is between two extremes. Part of the ‘Sapin 2’ (Loi n° 2016-1691) is designed to provide stability to the financial system in the event of a “serious threat” to it. This may potentially affect savers in investment structures such as ‘assurance vie’, limiting access during exceptional economic turmoil. It is this restriction that is being publicised and has people worried.
The fact is, legislating to control investor access to capital during economic turmoil is not new.
‘Sapin 2’ is controlled by the High Council for Financial Stability (HCSF), authorised by the Banque de France, which has existed since mid-2013. Before ‘Sapin 2’, investment and banking stability was controlled by the prudential control authority ACPR, part of the Banque de France, whose powers were arguably more invasive.
The new law actually restricts the powers, as it merely seeks to ‘limit’ access and not block it, which was previously possible.
What is the point? Why limit access?
Michel Sapin, the then economy minister, said during a public session 12 months ago, that his aim was to “protect” normal investors from corporate and super-wealthy investors, who may sway the markets with huge movements at sensitive times, leaving the average investor to count their losses.
The concern is markets can be corrupted by those with too much power (ie lots of money) and this is to prevent that. The law (article 49) seeks merely to ‘limit’ access and not prohibit it, with powers applied for three months at a time and for no longer than six months in total.
Previous powers allowed for the total blocking of funds with no time limits, meaning ‘Sapin 2’ is actually less restrictive and worrying than before. It is designed to ‘protect’ the investor, while allowing reasonable access. Previous powers were never used, being only for extreme circumstances.
Many countries / financial jurisdictions have similar laws and powers and even investment firms have internal rules, which are outlined in their contracts (the small print you never read).
Ask yourself this: What government / financial jurisdiction / investment firm would not have protection in place for themselves and investors?
You might say “that’s right, they only want to protect themselves”, but if the company holding your money disappears, you, as the investor, are at the mercy of whatever protection scheme is in place, which may not fully compensate you.
Financial stability for all is in everyone’s interest and protective legislation is just common sense and not something to fear.
We have seen people who were advised to pull all their money out of long-standing French-based assurance vie investments, based on fear of ‘Sapin 2’. The money is often moved to a jurisdiction with similar or even more restrictive rules. The move then potentially triggers:
- a significant income tax bill and a loss of significant built-up income tax advantages
- a huge loss of inheritance tax advantages,
- inflated set-up costs for the new investment.
We have seen money invested abroad, with a French company, in a French contract, and investors told ‘Sapin 2’ would not apply as the structure was not in France. As a French (legal) contract, albeit set up abroad, it will certainly have to obey French law. Consequently, the individuals suffered huge costs for no change.
Sadly, the advice is often given by an advisor not qualified or regulated in France, so these investors have no recourse of any kind.
So, what is the sensible approach to ‘Sapin 2’ and rules like it, which exist all over the world?
Ensure you have a reasonable emergency fund. For those who live off their investments, it is logical to hold at least six months’ income need in an instant access account. This may seem a lot, but people who have fully funded their LDD and Livret A accounts may already hold sufficient.
For those who top up their income from their investments, the same strategy applies. Those who take nothing, should just have provision for the significant emergencies.
Sensible planning is having a full understanding of the facts and acting on certainty as far as possible, so be sure to take advice from those who are qualified and regulated in France, who are fully accountable and professionally insured for the advice they give.
This column was written by Robert Kent of Kentingtons financial advisers.