The New Luxembourg SFDR and Taxonomy Regulation Implementing Law

The Luxembourg law of 25 February 2022 implementing the Regulation (EU) 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector, as amended (the SFDR) and the Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation or TR) (hereafter the SFDR/TR Implementing Law) explicitly confirms that the Commission de surveillance du secteur financier (CSSF) and the Commissariat aux Assurances (CAA) are the competent authorities responsible in the Grand Duchy of Luxembourg (Luxembourg) for the supervision of the proper implementation of the SFDR and the Taxonomy Regulation by all financial market participants¹ (FMPs) and financial advisers² (FAs).

The SFDR/TR Implementing Law introduces specific legal bases regarding the powers of the CSSF and the CAA in relation to the control of the implementation of the SFDR and the Taxonomy Regulation in Luxembourg and their administrative sanctioning powers in case of non-compliance by in-scope firms. The SFDR/TR Implementing Law is only available in French and can be consulted here (see Article 2 introducing a new Chapter 4ter on the implementation of the SFDR and TR in the catch-all law of 16 July 2019 implementing notably the EU Regulations EuVECA³, EuSEF⁴, MMF⁵, ELTIF⁶ and SECR⁷, as amended).

1. New Dedicated Supervisory and Investigation Powers of the CSSF and the CAA

First of all, the SFDR/TR Implementing Law grants to the CSSF and the CAA the following supervisory and investigation powers in order to ensure that all FMPs and FAs under their supervision apply SFDR and TR requirements:

• access and receive or take a copy of any document or data in any form;
• require an FMP or FA to provide information without delay;
• require information from any person connected with the business of an FMP or FA;
• to carry out on-site inspections of the persons subject to their respective supervision;
• take appropriate measures to ensure that an FMP or FA continues to comply with the provisions of the SFDR, the TR and the measures taken to implement them;
• order an FMP or FA to comply with the provisions of the SFDR, the TR and their implementing measures, and to refrain from repeating any conduct that constitutes a breach of those provisions;
• order an FMP or FA to publish information required to be published under the SFDR and the TR on their website, in pre-contractual information or in periodic reports, or to amend or remove published false or misleading information in order to bring it into conformity with the criteria laid down in the SFDR and TR, and the measures taken to implement them, and to require the publication of a corrective statement;
• communicate information to the State Prosecutor for criminal prosecution;
• instruct approved statutory auditors (réviseurs d’entreprises agréés) or experts to carry out audits or investigations.

2. New Dedicated Sanctioning Powers of the CSSF and the CAA 

Furthermore, in the event of a breach of:

• Article 3 SFDR (website disclosures on sustainability risk policies), Article 4 SFDR (website disclosures on the consideration (or not) of principal adverse impacts (PAI) of investment decisions/investment advice on sustainability factors), Article 5 SFDR (website disclosures on the integration of sustainability risk in remuneration policies), Article 6 SFDR (pre-contractual disclosures for all types of financial products on the integration of sustainability risks), 
  Article 7 SFDR (pre-contractual disclosures on the consideration (or not) of PAI at financial product level), Article 8 SFDR (pre-contractual disclosures for financial products promoting environmental and/or social characteristics), Article 9 SFDR (pre-contractual disclosures for financial products with a sustainable investment objective), Article 10 SFDR (website disclosures on ESG objectives or characteristics promoted at financial product level, methodologies used to measure the impact of the products, and Articles 8, 9 and 11 SFDR information), Article 11 SFDR (periodic reports), Article 12 SFDR (regular review of website disclosures) and Article 13 SFDR (consistency of marketing communications); and/or
• Article 5 TR (additional Taxonomy disclosures for financial products that promote environmental characteristics in pre-contractual disclosures and in periodic reports), Article 6 TR (additional Taxonomy disclosures for environmentally sustainable investments in pre-contractual disclosures and in periodic reports), and Article 7 TR (transparency of other financial products in pre-contractual disclosures and in periodic reports); and/or
• against those who obstruct the exercise of the CSSF and CAA supervisory and investigation powers, who fail to comply with their injunctions, or who knowingly give them incorrect or incomplete information in response to requests based on the SFDR/TR Implementing Law,

that law empowers the CSSF and the CAA to pronounce against the firms/persons subject to their respective supervision, against the members of their management bodies, and/or against any other person responsible for a breach:

• a public statement specifying the identity of the person responsible and the nature of the violation; and/or
• the temporary prohibition of a person exercising managerial functions or of any natural person responsible for such a violation from exercising managerial functions; and/or
• an administrative fine of between EUR 250 and EUR 250,000.

In terms of compliance timelines, it may be recalled that the above-mentioned SFDR/TR provisions’ application dates are mainly the following:

• as from 10 March 2021, in-scope entities have to publish website disclosures in accordance with Articles 3, 4, 5 and 10 SFDR and pre-contractual disclosures in accordance with Articles 6, 8 and 9 SFDR;
• as from 1 January 2022, in-scope entities will have to provide periodic reports in relation to Article 9 and Article 8 SFDR products to their clients in accordance with Article 11 SFDR; and
• for Article 9 and/or Article 8 SFDR products, extra disclosure requirements related to the Taxonomy Regulation will be applicable (i) as from 1 January 2022 for projects related to climate change mitigation or adaptation, and (ii) as from 1 January 2023 for projects related to sustainable use and protection of water and maritime resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems (in accordance with Article 8(2a) SFDR / Article 6 TR and Article 9(4a) SFDR / Article 5 TR).

Such regulatory deadlines and the publication of the SFDR/TR Implementing Law should therefore be duly taken into account by Luxembourg-based FMPs and FAs.

3. Concluding Remarks

Such supervision and sanction powers are similar to those granted to the CSSF and the CAA under the law of 5 April 1993 on the financial sector, as amended and the law on the insurance sector of 5 December 2015, as amended, in relation to their general supervisory powers. Nevertheless, the SFDR/TR Implementing Law provides specific legal bases concerning the control of the proper implementation of the SFDR/TR requirements by the persons subject to their respective supervision.

In that respect, it should be noted that any non-compliance situation would need to be assessed in concreto, on a case-by-case basis, and for each relevant sector. It also remains to be seen how the CSSF and the CAA will control the implementation of the SFDR and the Taxonomy Regulation over time, and the case may be, sanction non-compliant in-scope firms especially in the context of the delayed adoption of the SFDR regulatory technical standards due to apply as from 1 January 2023 (assuming they are adopted in the course of 2022). 

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Footnotes:

¹ Such as e.g. credit institutions and investment firms providing discretionary portfolio management services, management companies of undertakings for collective investment in transferable securities (UCITS ManCos), alternative investment funds managers (AIFMs), and insurance undertakings making available insurance-based investment products (IBIPs).

² Such as e.g. credit institutions, investment firms, UCITS ManCos, AIFMs providing investment advice, and insurance intermediaries providing insurance advice with regard to IBIPs.

³ The Regulation (EU) No 345/2013 of 17 April 2013 on European venture capital funds, as amended.

⁴ The Regulation (EU) No 346/2013 on European social entrepreneurship funds, as amended.

⁵ The Regulation (EU) No 2017/1131 of 14 June 2017 on money market funds, as amended.

⁶ The Regulation (EU) No 2015/760 of 29 April 2015 on European long-term investment funds.

⁷ The Regulation (EU) No 2017/2402 of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, as amended.