New requirements in governance policy and product distribution policy for credit institutions, investment firms, insurance an…

Two sets of EU regulations coming into force shortly impact investment firms and credit institutions subject to MiFID (the "Entities") and insurance companies, reinsurance companies and insurance intermediaries.

Regarding the banking sector

The Delegated Regulation 2021/1253 which relates to the integration of sustainability factors and sustainability risks and preferences into certain organisational requirements and operating conditions applicable to Entities will apply from 2 August 2022.

Entities are required to take into account sustainability risks notably (i) when establishing and implementing decision-making procedures, risk management, internal control mechanisms, internal reporting and (ii) when recording details of their activities and internal organisation.

Entities also ensure that that they understand the nature and characteristics of the investment services and financial instruments selected for their clients, including any sustainability factors as the case may be.

Furthermore, when providing investment advice Entities must provide certain information to the client including, if relevant, the sustainability factors considered in the selection process of the financial instruments.

Entities which provide investment advice or portfolio management services ensure that the transaction to be recommended or carried out notably are in compliance with the client’s.  possible sustainability preferences. They furthermore refrain from recommending or deciding to trade in financial instruments that do not match the sustainability preferences of the client or potential client. when none of the financial instruments correspond to the sustainability preferences of the client or potential client and the client decides to amend its preferences, the Entities keep a record of the client’s decision and the reasons for such decision.

In addition, Delegated Directive 2021/1269, which pertains to the integration of sustainability factors into product governance obligations, shall be implemented under national law by 21 August 2022 and applies from 22 November 2022. A draft Grand-Ducal Regulation in this respect has just been reviewed by the State Council on 15 July 2022.

Entities manufacturing financial instruments should consider sustainability related objectives of financial instruments when defining their potential target market and present it in a clear manner to the distributors of these financial instruments. Entities which intend to offer or recommend products and services verify that such products and services are notably compatible with the sustainability objectives of the defined target market.

Regarding the insurance sector

Delegated Regulations 2021/1256 and 2021/1257 which relates to the integration of sustainability risks in (i) the governance of insurance and reinsurance undertakings and (ii) the product governance policy applicable to insurance undertakings and distributors of insurance products, including investment advice applicable to insurance-based investment products will apply from 2 August 2022.

As regards corporate governance, the risk management and actuarial functions take sustainability risks into account, notably underwriting and reserving risks (risk of loss, adverse change in the value of insurance or reinsurance liabilities) and investment risks. When identifying, measuring, monitoring, managing, controlling, reporting, and assessing risks arising from investments, insurance and reinsurance undertakings take into account sustainability risks and the potential long-term impact of their investment strategy and decisions on sustainability factors. Where relevant, such strategy and decisions of insurance undertakings shall reflect the sustainability preferences of their clients in the product approval process.

The remuneration policy shall include information on how insurance undertaking considers the integration of sustainability risks in the risk management system.

As regards product governance, the product manufacturers should include in the approval process of insurance products the client's sustainability objectives, both in the definition of the target market and in the distribution arrangement. Products should be tested, monitored, and reviewed regularly accordingly.

Intermediaries identify a possible conflict of interest between the insurance undertaking and clients in the case of insurance distribution of insurance-based investment products that may conflict with the client's sustainability preferences.

Any sustainability preferences of the client or potential client are included in the information to be obtained in the suitability’s assessment. For instance, an insurance intermediary or insurance undertaking shall refrain from recommending to a client (or potential client) insurance-based investment products that do not correspond to his/her sustainability preferences. The intermediary or undertaking will explain to the client the reasons for not recommending such products and keep a record thereof. If the client decides to change those preferences, the intermediary or insurance undertaking will keep a record of the client's decision and the reasons in relation thereto.

Finally, when providing advice on the suitability of an insurance-based investment product, the suitability statement provided to the client indicates inter alia whether the client's objectives are met, while taking into account the client's sustainability preferences.

Should you have any questions on the above, please do not hesitate to contact one of our experts of the regulatory and insurance teams.

Vivian Walry - Partner | Avocat à la Cour

Benjamin Bada - Partner | Avocat à la Cour

Aurélia Viémont - Partner | Avocat à la Cour

Sarah Hantscher - Managing Associate | Avocat à la Cour

Mélanie Poirrier - Managing Associate

Anne Picot-Guillot - Professional Support Lawyer, Luxembourg