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. -------------- -------------- GOF's Plans to Deepen Financial Culture and Awareness -------------- -------------- ¶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. -------------- -------------- AMF Recommends Creating a Financial Training Institute -------------- -------------- ¶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. -------------- -------------- The French Public Lacks Expertise in Financial Markets -------------- -------------- ¶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. -------------- Shareholders are Still Cautious -------------- ¶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. -------------- -------------- IRA-like Accounts PERPs a Year After: Success is Limited -------------- -------------- ¶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. -------------- -------------- The GOF Wants to Encourage Regular Holdings of Equities -------------- -------------- ¶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. -------------- Comment -------------- ¶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