Freeform Writing Exercise B1
Not sure that I understand your frustration.
The guy has started to smile at people he was passing in the street but he wasn't doing this before. So the first conjugation is correct -- completed action. and the second is also correct habitual past action (every time he passes people in the street)
Sorry if I'm missing your point, but this is how I see it.
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Test your French to the CEFR standard