The FCA and PRA have set out how the Senior Managers & Certification Regime (SM&CR) will be extended to insurers.
To help you navigate the changing regulatory landscape we have summarised the proposals.
All insurers and re-insurers regulated by the FCA and the PRA (collectively referred to as "the regulators") will be affected.
The aim is to improve the culture and governance within the industry, which in turn will promote consumer confidence. This will be achieved by developing a culture of accountability at all levels within insurers, with senior individuals being fully accountable for defined business activities and material risks.
The Senior Insurance Managers Regime (SIMR) and the revised Approved Persons Regime (APR) for insurers came into force in March 2016. This was, in essence, a "middle ground" between the SM&CR, which was introduced for the banking sector at the same time, and the pre-existing APR.
In 2018, it is proposed that the SIMR will be amended and the revised APR be replaced by the SM&CR for insurers. However, some elements of the SIMR and revised APR for insurers will remain, so that the new regime will not be an entirely new concept for all.
The new regime, described below, will apply to every insurer (although a streamlined version will apply to certain, smaller, firms).
The new regime consists of:
Senior Managers Regime
Senior Management Functions (SMF), designed to capture the most senior people performing key roles within a firm, will be defined by the regulators' rules. Some of the SMFs will be the same or similar to the PRA's Senior Insurance Management Functions and the FCA's Significant Influence Functions that were introduced in March 2016.
Anyone carrying out an SMF will be a Senior Manager and will need approval by the regulators. Firms will also be responsible for annually assessing the fitness and propriety of Senior Managers to perform their roles.
Firms will be required to allocate Prescribed Responsibilities to their Senior Managers. These are in addition to those that were introduced as part of the SIMR. Each Senior Manager will need a Statement of Responsibilities setting out what they are responsible and accountable for. This is identical in substance to the existing Scope of Responsibilities document that many insurers will be familiar with.
All Senior Managers will have a "duty of responsibility", meaning that if something goes wrong in an area they are responsible for they can be held accountable. This is a new obligation for insurers, which was not introduced in the March 2016 changes. In determining whether to take action, the regulators will consider whether the Senior Manager took reasonable steps to prevent or stop the breach.
The introduction of the certification regime is one of the biggest changes for insurers.
Certain roles that are not SMFs but which could cause significant harm to customers or the firm will be "Certification Functions". People carrying out these functions will fall within the Certification Regime. It is recognised that some of the Certification Functions set out by the regulators' rules will not apply to insurers, being more relevant to banks and investment firms. However, all key function holders under the existing SIMR will be included.
Those falling within the certification regime will not require regulatory approval; instead, firms will be responsible for annually certifying that they are fit and proper to perform their role.
Basic rules of conduct will apply to almost every employee working in insurers, with the aim of improving the behaviour of all staff. The conduct rules will already be familiar to insurers from the changes introduced in March 2016, however, under the new regime they will have much wider application.
Firms will need to train staff on the application of these rules and notify the regulators if disciplinary action has been taken for breach of a rule.
Larger and more complex insurers will, in addition, be subject to certain enhancements to the regime, such as the requirement to have in place Responsibilities Maps. These are identical in substance to governance maps, which were introduced in March 2016, and so do not represent a major change. These insurers will also need to have in place handover procedures and every area of the firm will need a Senior Manager with overall responsibility for it.
The FCA's consultation and the PRA's consultation closed on 3 November 2017. Once the feedback has been analysed, final rules will be published in 2018. The new regime will not come into effect until the final rules have been published and a date is set for them to commence.
At TLT, the Financial Services Regulatory team and the Employment team have been advising on the Senior Insurance Managers Regime and the revised Approved Persons Regime applicable to the insurance sector since its proposal and have continued to do so following its commencement in March 2016. Both teams have also been advising on the Senior Managers & Certification Regime as it applies to the banking sector.
There are significant similarities between the regime for the banking sector and the new regime that will apply to the insurance sector. We are therefore well placed to advise your business on preparing for implementation of the new regime. Please get in touch to discuss how we can best assist your business.
Contributor: Amy WhitingThis publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.