Alain Gauvin, Partner, Lefèvre Pelletier & associés, on legislative convergence and financial regulations

On October 13, 2008, Morocco became the first country in the Mediterranean region to be granted advanced status, marking a new phase of privileged relations with the EU. This reflects the shared willingness of Morocco and the EU to strengthen political dialogue and cooperation in the economic, social, parliamentary, judicial and security fields, as well as in other sectors such as agriculture, transport, energy and the environment. Advanced status is also intended to progressively integrate Morocco into the EU’s internal market, notably by aligning Morocco’s legal system with the EU acquis. Even though legislative and regulatory convergence is not yet complete, there are signs that this is the top priority for the Moroccan administration, at least in the financial sector.

ON TARGET: While the wave of legal reforms launched in 2010 indicate that legal convergence is on track, there are legal issues that need to be urgently addressed for Morocco to dispel doubts about the enforceability of financial mechanisms that correspond to international market practice and are intended to enhance legal certainty, predictability and flexibility. Finally, the convergence of legal regimes should not be implemented at the European level only; the finance industry can also serve as a source of legal convergence.

NEW CENTRE: From an offshore financial centre to an international, integrated financial marketplace, Law No. 44-10, enacted in December 2010, creates and regulates the Casablanca Finance City (CFC). The CFC aims to attract international operators to carry out business under favourable tax and foreign exchange regimes and targets credit institutions, insurers and consulting firms.

It is interesting that Draft CFC Law No. 68-12, the purpose of which is to amend the above-mentioned CFC Law No. 44-10, contributes to legal convergence in an unexpected way: it extends the list of operators likely to benefit from CFC status by including investment service providers (ISPs), which is a brand new status under Moroccan law. Neither Draft CFC Law No. 68-12 nor any other law or bill defines ISP status in Morocco. The Draft Banking Law No. 103-12, which amends Banking Law No. 34-03, provides for the concept of “investment services”, but does not refer to ISPs, since only banks will be authorised to provide investment services. Incidentally, the Draft Law relating to the stock exchange and abrogating Law No. 1-93-211, refers to, and governs, services, some of which are similar to the investment services specified in the Draft Banking Law. However, these will be offered by a new category of service provider called investment advisors. It is thus reasonable to assume that the ISPs governed by the Draft CFC Law will be defined by EU directives. If so, then this would indicate more than convergence, but the integration of Moroccan law and European law.

BANKING PRIVACY: Moroccan and French laws share the same concern with respect to banking secrecy. Article 79 of Banking Law No. 34-03 provides that “any individual who, in whatever capacity, participates in the administration or the management of a credit institution or who is employed by said credit institution ... shall be bound by professional secrecy,” the violation of which is “subject to the sanctions provided for by Article 446 of the Criminal Code.” This provision is no longer appropriate in modern banking, and doubt remains as to whether a Moroccan bank will have the right to ask clients to waive the protection of banking secrecy. Hence, bankers now run the risk of breaching their professional secrecy obligation to the extent that, in various day-to-day situations, they need to disclose confidential information governed by Article 79.

Therefore, Draft Banking Law No. 103-12 contains an express derogation from the banking secrecy applicable to the ordinary circumstances in which credit institutions have to disclose confidential information. For example, banks will be freed from their professional secrecy obligation when they provide the following third parties with information governed by professional secrecy in the following situations: rating firms, for the purpose of rating financial instruments and entities with which they negotiate, enter into or execute the transactions listed below, whenever such information is needed for these transactions. These include credit transactions, transactions on financial instruments and insurance operations; acquisition of an equity interest or a controlling interest in a credit institution, a financial advisory firm, an asset management company or an ISP; and assignments of assets or of goodwill, transfers of receivables or contracts.

It is of paramount importance to note that banks will have the right to disclose confidential information in the above-mentioned cases regardless of whether clients give their consent. Thus, one may wonder whether banks may disclose confidential information in circumstances that are not expressly referred to by the law. Hopefully, the Draft Banking Law will state that credit institutions may, in addition to the situations expressly cited, divulge information governed by professional secrecy on a case-by-case basis, provided that the entities concerned have expressly consented. This reform of banking secrecy strengthens the legal convergence with EU countries, especially France.

MATURE MARKET: The convergence between the Moroccan and EU legal systems is not only a goal to be achieved, but also a pillar for enhancing the legal certainty of transactions entered into with Moroccan entities. There is a justifiable concern that, despite the ambition to become an international financial centre, certain financial instruments or mechanisms are not yet expressly recognised by Moroccan law.

Surprisingly, over-the-counter financial derivatives (OTC derivatives) are not yet expressly provided for by the law, but are only referred to in regulations issued by Bank Al Maghrib and the Moroccan Office of Exchange. As a result, the legal validity of certain OTC derivatives is likely to be questioned in light of Articles 1092 or 1096 of the Moroccan law on obligations. Draft Law No. 42-12 is intended to govern derivatives that will be traded on a regulated market that is to be created and will also refer to OTC derivatives in order to allow these instruments to benefit from an express derogation from Articles 1092 and 109. This would be a huge step forward from a legal perspective.

However, ensuring the validity of OTC derivatives as a matter of principle is one thing, but legally recognising the mechanisms inherent to these instruments is quite another. At present, the close-out netting of OTC derivative transactions where the Moroccan party goes bankrupt seems to be prohibited. Moreover, uncertainty still remains as to the validity of sureties that transfer the ownership of assets posted as collateral to the beneficiary. The Moroccan administration involved in the financial reform is fully aware of this issue, and solutions are expected to be implemented shortly.

AFRICAN PASSPORT: It is often argued that Morocco would benefit from legal convergence with the EU. Yet, one must keep in mind that the EU is far from being a fully harmonised market, but is in fact, in certain areas of the economy, characterised by a multi-layered body of regulations. For instance, as a consequence of advanced status, Moroccan banks and financial institutions should be authorised to carry on their activities in the EU. However, being granted the right to undertake such activities in the EU does not necessarily imply that Moroccan banks and financial entities will be allowed to market their services in the EU, because this is regulated at the domestic and not EU level.

Second, CFC status is marketed as a way for domestic and international firms to expand into Africa. However, having CFC status does not necessarily imply that one is legally authorised to carry on activities in the African countries concerned. Therefore, one idea could be to create an African passport allowing CFC entities to freely do business within a designated free-trade area.

In light of King Mohammed VI’s African trip during which Morocco’s leadership in South-South cooperation was demonstrated, one can be optimistic about the ability of Morocco to initiate, build and operate this free-trade region. Ultimately, one may dream of a union between Europe and Africa that gives rise to a prosperous region, for which Morocco can serve as a hub.