Product governance obligations now integrate sustainability factors

The Grand Ducal Regulation of 27 July 2022 amends the Grand Ducal Regulation of 30 May 2018 relating to the safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits (the “2018 GD Regulation”) for the purpose of transposing Delegated Directive 2021/1269 of 21 April 2021 amending Delegated Directive 2017/593 as regards the integration of sustainability factors into the product governance obligations.

In scope entities

The new product governance obligations concern both manufacturers (ie credit institutions and investments firms that create, develop, issue and/or design financial instruments, including when advising corporate issuers on the launch of new financial instruments) and distributors (ie credit institutions and investments firms offering or selling financial instruments and investment services).

Sustainability Factors

A new definition of “sustainability factors” is included in the 2018 GD Regulation by reference to the definition set out in Regulation 2019/2088 on sustainability‐related disclosures in the financial services sector (ie environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters).

New product governance obligations

When manufacturing financial instruments, credit institutions and investment firms will have to:

• take clients sustainability related objectives into account when identifying and specifying the potential target market for a financial instrument;
• examine the financial instrument’s sustainability factors to ensure that they are consistent with the target market’s identified needs, characteristics and objectives (and review such consistency on a regular basis); and
• provide distributors with the relevant information to duly consider any sustainability related objectives of the client or potential client and present the sustainability factors of the financial instrument in a transparent manner.

When distributing financial instruments or investment services, credit institutions and investment firms will have to:

• ensure that products and services they intend to offer or recommend (including the intended distribution strategy) are compatible with any sustainability related objectives of the target market; and
• review this compatibility on a regular basis.

These provisions will enter into force on 22 November 2022.

For more information, please contact our Luxembourg team.