Identifier
Created
Classification
Origin
05PARIS2721
2005-04-21 15:51:00
UNCLASSIFIED
Embassy Paris
Cable title:  

FRANCE ENCOURAGES A NEW FINANCIAL CULTURE

Tags:  EFIN ECON PGOV FR 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 PARIS 002721 

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: FRANCE ENCOURAGES A NEW FINANCIAL CULTURE

UNCLAS SECTION 01 OF 03 PARIS 002721

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: FRANCE ENCOURAGES A NEW FINANCIAL CULTURE


1. SUMMARY. The GOF is taking steps to cultivate a stronger
financial culture in France. Even though the number of
individual shareholders has dramatically increased in the
last twenty years, the French currently lack enough
knowledge of financial markets to invest in equities or
other sophisticated assets. The government wants to
encourage financial investments, notably regular holdings of
equities. Developing a more sophisticated financial culture
will take time, but may help finance the economy (notably
public debt, pensions, and companies),and also prepare the
ground for further liberalization of the economy. END
SUMMARY.

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GOF's Plans to Deepen Financial Culture and Awareness
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2. The number of individual French shareholders
participating directly in the equities markets has
dramatically increased over the last twenty years, from 1.7
million in 1982 to about 7 million in 2005. Investing
accelerated when the government launched its first
privatization program in 1986. Since then, the French have
diversified their portfolios as new financial products were
proposed. The government expects financial markets to
expand further in the future, notably because of the 2003
pension reform, which should increase household demand for
financial assets. This would favor economic growth and
employment, if households make responsible decisions and
exploit information provided by financial institutions and
market authorities. In a recent speech before parliamentary
deputies on insurance issues, Finance Minister Thierry
Breton stressed that efforts must be concentrated on
individuals' information and education. Breton stated, "The
objective is to provide savers a reference system to help
them ask the right questions, given their objectives and
their financial situations." Breton gave his full support
to the recommendation of a working group for the AMF
("Autorites des Marches Financiers," the SEC counterpart) to
create a financial training institute. He also commissioned
AMF's member Jacques Delmas-Marsalet to examine solutions to

enhance the consistency of marketing intelligence, including
transparent information on fees and responsibilities of
managers and distributors of financial products. Delmas-
Marsalet has until September 2005 to prepare his report.

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AMF Recommends Creating a Financial Training Institute
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3. Since June 2004, AMF has been mulling over ways to
develop neutral financial information and educate the French
public on investment opportunities. The AMF's working
group, headed by Jean-Claude Mothie and Claire Favre,
recently completed its draft report. The AMF group's main
recommendation is to create a financial training institute,
"a light structure to federate and introduce existing
training initiatives through mass communication, and
organize partnerships between units already providing
financial training." The institute should adapt information
and training to specific requests.


4. AMF favors providing the institute the legal status of
association (versus foundation),proposing to combine
activities of a school, the Euronext-sponsored "Ecole de
Bourse" and that of the National Association of French
Holders of Stocks ("Association Nationale des Porteurs de
Valeurs Mobilieres - ANPVFM"),which both created the "Ecole
de Bourse" in 1997. The school already offers training in
50 French cities, and manages and updates a web site.
Regarding governance, the AMF wishes to have an "eminent
position" in the new institute, and the Finance Minister to
have "significant involvement." The AMF desires the
participation of private and state-owned institutions,
finance specialists, consumers and savers associations, and
investment clubs. The new institute could be funded by the
central government budget or by a portion of AMF's
resources. If the budget solution is selected, AMF hopes
for provisions to be included in the 2006 budget to get the
new institute operational as soon as 2006.

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The French Public Lacks Expertise in Financial Markets
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5. AMF commissioned the TNT Sofres institute to conduct a
poll about individuals' financial awareness including
knowledge, information sources and expectations. Based on
the poll, 3 French out of 4 admitted they did not have
sufficient knowledge of financial markets. They deemed
financial products as too sophisticated, and reserved for
experts. A large majority confessed they have difficulty
reading the financial press or booklets describing financial
products, complaining that the presentation is too legal,
and not understandable. This makes it hard to select and
invest in appropriate financial products or services, as
well as to assess the profitability of an investment. For
these reasons, the French largely follow the advice of their
bankers (which would in part explain the popularity of
regular bank savings accounts). A minority of the populace
consults consumers' associations, academics or specialized
web sites. A majority favors financial training. Around
80% suggested that financial courses should be given in high
schools.

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Shareholders are Still Cautious
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6. Based on another TNS Sofres' survey commissioned by the
Bank of France and Euronext, 11.2 million French held stocks
in 2004, compared with 10.2 million in 2003, accounting for
25 percent of adult population (compared with 20% in 2000
and 22.6% in 2003). The increase is mainly due to the
development of corporate savings plans ("Plans d'Epargne
Entreprise - PEE.") PEE's are invested in mutual funds
composed of French equities ("Fonds Commun de Placement en
Entreprise - FCPE").


7. The number of bondholders (1.3 million) has continued to
decrease in the last ten years as individuals have invested
in equities and/or long-term insurance savings contracts:

-- Individual shareholders (6.7 million, down from 7.2
million in 2003) have not totally recovered from the 2002-
2003 50% drop in equity prices, and have been discouraged by
a slow recovery in the equity market in 2004 and early 2005.
According to specialists, most shareholders invest for the
long term, selecting equities of companies expanding either
in France or abroad, but with a strong preference for
European equities. French finance sector employees have a
different approach, frequently buying and selling stocks,
and frequently speculating in the hope of short-term gains.

-- In 2004, around 11 million French people held insurance
savings contracts. Insurance savings contracts became
highly popular because of considerable advantages (e.g., no
capital gains tax if the holder maintains his or her
investment for 8 years; tax-free transmission to heirs).
The GOF provided these advantages to insurance savings
contracts in the early 1980s, and again in the early 1990s,
since the government had to find funds from capital markets
to finance a spiraling government debt.

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IRA-like Accounts PERPs a Year After: Success is Limited
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8. As part of the 2003 pension reform, the government
created IRA-like accounts ("Plan d'Epargne Retraite
Populaire - PERP") in 2004. Advantages are smaller compared
with insurance-savings contracts (e.g., a portion of the
investment is deducted from annual taxable incomes; incomes
are paid at retirement age, and are subject to annual income
taxes). About 1.4 million PERPs have been opened (worth 620
million euros). The success is limited compared with the
target of attracting 9.2 million private-sector employees to
reduce government funding of pensions by 18 billion euros by

2020. Nonetheless, banks and insurance companies are not
yet worried. According to bankers, the number of PERP
holders will increase to 2.5 million in 2005.

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The GOF Wants to Encourage Regular Holdings of Equities
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9. Prime Minister Raffarin commissioned the Economic
Analysis Council ("Conseil d'Analyse Economique") to study a
new version of the "Plan d'Epargne en Actions - PEA" created
by former socialist Prime Minister Pierre Beregovoy in 1992.
The idea of the new PEA would be to allow investors to save
for retirement, and to encourage the French to buy equities.
Based on preliminary information, collected funds would be
invested in equities in the proportion of 50-60%, but also
in bonds to make the investment safer and to reduce its
volatility. The duration of the new PEA investment would be
longer, 10 or 15 years versus 5 years for the PEA.
Advantages compared with regular PEAs would be to provide
tax exemptions on interests and capital gains to non-income
taxpayers, and increased tax deduction to income taxpayers.

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Comment
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10. The Government's objective is to encourage the French
to increase their financial investment rate (6.3% of
disposable income),not to increase the savings rate, which
is one of the highest in industrialized countries (15.4% of
disposable income). The Government has a strong interest in
developing the financial culture in France to continue to
fund the public debt, to develop French-style pension funds,
and to re-orientate a portion of savings towards "active"
savings in favor of companies, notably toward small-and-
medium sized companies, which cannot be created or survive
without capital. Improving the financial culture may take
years, but is necessary to help the government finance the
economy, and prepare the French to further liberalization of
the economy.
WOLFF