Vive la Différence!
France and the UK are developing extremely close economic and commercial ties. France is the UK’s third largest export market – at nearly €30bn in 2004 – and the French export even more to the UK (around US$42bn in 2006), making this one of the most intense cross-border trading relationships in the world. Such volumes mean that companies from both countries have established representatives, sales operations, branches and subsidiaries across the Channel. And in the case of many of our clients, this has been almost always successful.
Yet the successes have come from an acute understanding of the key differences in treasury and legal practices between the two economies – and from adapting and embracing those differences.
Indeed, from talking to UK corporate treasurers, I understand that the differences can – at first inspection – seem frustrating. Yet with a good local partner – and an understanding of the rationale behind the differences – the frustrations can be easily and favourably resolved. Many practices that UK treasurers thought arcane or unfathomable, on explanation become logical and favourable to their aims.
A good local partner means a good local bank. Certainly, French banks have globalised as well and many have established themselves as major corporate bankers in cross-border disciplines, such as project finance, trade and commodity finance, and securitization. Yet all the major European countries remain dominated by their domestic banks following their own local banking practices. France is no exception, making a local bank an essential relationship for UK treasurers expanding into France.
But there are key differences that need to be understood. One is the fact that even small French companies maintain accounts with a large number of both national and regional banks. They also spend a great deal of time and effort maintaining these relationships. Meanwhile, UK treasurers tend to assume that multiple accounts mean multiple reconciliations, which makes them immediately want to streamline what looks like overcomplicated banking arrangements for their French subsidiaries – a move that normally meets resistance in France.
The reason for the resistance is that French companies tend to see their banks as commodity service providers, which limits their loyalty to a single provider. Thus they maintain relationships with all the larger French banks and divide the business quite thinly – usually on the basis of price. To the French, the UK system of building core partnerships with just one or two banks is too favourable to the banks. They would rather have them competing furiously for every aspect of the business.
The UK treasurer’s preference of building deep reciprocal banking relationships stems from the desire for support when trading conditions deteriorate, or during an event driven challenge, such as an acquisition, and may have something to do with our creditor-favoured insolvency regime (see below). Yet the insolvency regime in France is more favourable to the debtor – and thus the corporate – perhaps shifting the balance of power and reducing loyalties.
UK treasurers also need to be aware of technical differences with the bank clearing system and cash management structure. Three core issues are prevalent in this respect. First, historically, the French bank clearing system has not allowed notional pooling of balances in the same way as jurisdictions, such as the UK, Belgium, the Netherlands and Spain. This was a legal point – French law prevented the payment of interest on credit balances. However, since March 2005 the law has changed to allow interest on credit balances – bringing the notional pooling in France into line with other European jurisdictions.
Second, some UK treasurers that I have spoken to have shown concern at the lack of certainty regarding value dates in France. Some have stated that funds payments can be erratic and delayed payments are value-dated for date of arrival unless challenged. Some more cynical UK treasurers have even suggested that this was the means by which the banks ensure their relationships stay profitable – given the climate of competitively thin pricing for banking products.
Yet this is simply a misunderstanding between UK and French common practice. French regulators impose very strict controls on their domestic banks. Certainly, within Natixis, detailed tariffs and conditions – including a specific value-dating scheme – are agreed with customers prior to account opening. And, in practice, most basic banking transactions are processed free of charge. This means that, while the approach to value dating with respect to remunerating French banks is certainly different to the UK, the intent is neither malicious nor underhand.
The third difference to bear in mind remains with the value dates. While the UK system is ‘cash same day, others T+2’, the French system operates on a ‘backdated T+1 system’, which is retrospectively calculated quarterly. In fact, this offsets any criticism with respect to value dates; as at the end of the quarter things tend to balance out. Yet many UK treasurers – especially in the retail sector – feel that the loss of a day’s value on cash, coupled with the uncertainty of value dates on the larger payments, makes balancing the overall cash position of the group more difficult.
Our view is that the most successful UK treasurers operating in France are those running a zero balancing or notional pooling system in France, while at the same time putting modest operating facilities in place at a local level with the central cash pooling bank. Via the daily SWIFT 940 link into the central cash management system (usually their UK clearer), treasurers are able to tap into their French balances through their home electronic banking system. They can then work with their French colleagues to establish what is available for transferring back to the UK and what is needed for cover. Then, when necessary, they can use SWIFT payments with guaranteed value dating to send these back and forth.
French law is largely statute-based (dating back to the Napoleonic code) whereas much of English law is case-based common law. In practice, this often means that French legal documentation is much easier and shorter as it relies on the common code, while English legal documents have to deal with every eventuality.
In respect to commercial law, a key difference in emphasis is reflected in insolvency law. While English law leans towards the creditor, French law leans towards the debtor – a possible explanation for those weaker corporate-bank relationships. Indeed, changes to the insolvency law from January 2006 somewhat strengthened the hand of the corporate – allowing them to borrow as part of a recovery plan with the new loans considered in preference to existing bank debt.
Recent research undertaken by Standard & Poor’s comparing European insolvency regimes ranks France as the weakest of the studied regimes (France, UK, Germany, Italy, Spain and the Netherlands) with respect to enforceable security rights for lenders. This makes the French regime the most favourable to corporate borrowers. The most striking ‘problem’ outlined by Standard & Poor’s was the right of French commercial courts to make virtually all of the crucial decisions without any creditor input, although the new law has somewhat improved the situation for bank lenders (though not bondholders).
Employment law is certainly tighter than in the UK – not least the introduction of the 35-hour week and the fact that French employees can be costly and sometimes difficult to remove. Certainly, there is not the ‘hire and fire’ culture of the Anglo-Saxon countries. Indeed, to Anglo-Saxon investors this is perhaps the biggest barrier to investing in France.
From speaking to UK treasurers, the 35-hour week also raises some practical issues. Most French managers find it difficult to comply with this legal stipulation and instead bank the time for lengthier summer holidays – usually in August. This fits in with the continental culture of taking annual holidays in one lengthy block, rather than the frequent but shorter breaks of the Anglo-Saxon countries. With an awareness of this cultural difference, however – and with good planning – UK treasurers should be able to prevent the suspension of progress on key projects over these periods.
A further employment difference concerns profit sharing. Any company with more than 50 employees is obliged to set up a scheme to pay a set proportion of annual profits back to staff. Although many British firms have similar schemes (e.g. SAYE) in France it is a compulsory legal requirement, and can come as a shock to UK companies. Yet, in practice, the profit sharing issue is relatively easy to overcome. But solutions are available to help with complying with regulations, dealing with tax issues and administrating the individual staff funds.
Doing business in France certainly involves more form filling than in the UK and land registration is one example. The process entails nine separate forms and procedures compared to the UK’s two and takes on average 183 days compared to 21 days in the UK – a process that can cause difficulties for small businesses relying on property as security for bank borrowing.
Indeed, the French attitude to bureaucracy is perhaps the aspect of French business life that the Anglo-Saxons find most mystifying. Yet, as a South African working for a French bank in London, I think I have gained some insight into both the French and British attitude in this respect. The French have a strong sense of formality and a deep respect for academic credentials and due process. They also understand and respect hierarchies. And this aspect of French business culture can provide practical benefits. One UK treasurer made the point that, although the debating and consultation process does take longer in France than elsewhere, the quality of the decisions are better, and the subsequent buy-in to execution stronger, which makes for a smoother process in the long run.
This fits well with the French culture of being extremely logical and methodical in their thinking. French business people respond well to a thought through and well-argued point. Meanwhile, the British tend to be less formal in many ways – having increasingly adopted the US style of open management. In the UK, the focus is on solving problems quickly and this outweighs the niceties of using the normal chains of command or, in many cases, making the best long-term decision.
Interestingly, what used to be one of the greatest barriers to doing business in France – language – is rapidly disappearing. French business is adapting well to the emergence of English as the global business language. Most people at management level speak English to a highly proficient level, and for companies that are subsidiaries of British companies; there is an expectation that English is the common language.
Yet the French remain understandably passionate about their language – making the use of a few inexpert phrases from your school GCSEs can be a way of building rapport and winning the approval of French business colleagues.
A final practical point – and one perhaps universally applicable – is that more is achieved in a one-hour round table discussion face-to-face than in a series of lengthy telephone calls and e-mail chains. So my advice to all UK treasurers with French operations, or who are thinking of investing or expanding in France, is to get on the train or plane and go in person. It is closer than you imagine.