15 December 2022 Guy Loesch  -  Katrien Baetens LinkingCollectiveRedress

The revised draft law on collective redress: a new dawn for international financial disputes in Luxembourg?

As we reported earlier, Luxembourg initially limited the scope of its draft act for the implementation of the EU Collective Redress Directive by excluding entities regulated by the financial sector supervisor (the CSSF), the ECB, and the insurance sector supervisor (the CAA). Since its initial proposal, the Luxembourg government has made important changes to its draft law, in particular by extending its scope to financial (and other regulated) actors. 

Inclusion of regulated financial entities

When a claim is brought against a trader other than entities regulated by the finance or insurance sector supervisors, consumers may claim damages for any type of (contractual) breach. The current draft (available here) also allows for claims against financial (and other regulated) actors where such claim is brought on the basis of an infringement of certain EU law instruments, which include a wide set of legislation ranging from data protection to the Insurance Distribution Directive and the rules with respect to ELTIF and PRIIPS.

Should this draft eventually be adopted, the new law will likely have an important impact on various actors on the Luxembourg market. As Luxembourg not only hosts the headquarters of some of the biggest (technology) companies in Europe but also has one of the most important finance industries in the world, collective redress may find fertile ground in Luxembourg. 

Financial aspects

The relatively low costs of litigation in Luxembourg could also contribute to this effect, which is reinforced by the fact that, in principle, the individual consumer does not have to bear any costs of proceedings under the current draft. Also, in theory, claimants can opt for a court procedure where it is not necessary to engage legal counsel. 

Moreover, while third party funding is currently not prohibited in Luxembourg, it is not yet commonly used. This is likely to change with the introduction of collective actions. The draft bill introduces a legal framework with respect to the financial backing of collective redress, with an obligation for transparency with regard to such financing. The court shall ensure that where the funding for the class action comes from a private third party, the funder is prohibited from (i) influencing procedural decisions made by the plaintiff, and (ii) funding a class action in which the trader is a competitor of the funder or on which the funder is dependent. Retail investors – who currently may be reluctant to bring legal action – will thus have the possibility to easily join a collective action, backed by third party funders.

Further procedural elements of the bill

The draft also sets out several procedural measures to shape the representative action: 

  • The court will first rule on the admissibility of the claim, including on the standing to act and conflict of interest, to avoid abusive claims. If the claim is admissible, the judgement will be made public and will set out the procedure for consumers to join the class.
  • The parties will be encouraged to solve their conflict out of court through a mediation process, enabling parties to settle their dispute in a quicker and more cost-effective manner. If no out-of-court settlement can be reached, the court will have to rule on the merits of the case. It will be possible to have parallel proceedings by splitting the group in two, whereby one group agrees to pursue an out-of-court settlement and the other group asks for the court to rule on the merits of the case.
  • If the claim is successful, a trustee and supervising judge shall be appointed to execute and enforce the judgement.
  • The court will decide whether the opt-in or opt-out principle applies. The opt-in mechanism will apply by default if the action includes consumers who reside outside of Luxembourg.
  • The judgement will be applicable to every similar case, i.e. every consumer placed in a similar or identical situation who suffered damages due to a misconduct of the trader will benefit from the judgement (similar to English or German “test case” mechanisms).
  • The general limitation periods will apply. Where a representative action has been commenced, any applicable limitation periods in relation to individual actions will be suspended.

Outlook

While all member states must implement the Directive by 25 December 2022, with a further six months permitted for the new provisions to come into effect, it will likely take another few months before Luxembourg agrees on a final text.