Updating your firm's Staff Handbook, contracts of employment and template settlement agreements will be a key responsibility of HR and compliance teams in the lead up to implementation of the Senior Insurance Managers Regime (SIMR) on 7 March 2016.
For this purpose, an understanding of the new conduct rules and their practical implications for firms is important.
The new conduct rules
The new PRA conduct standards and the new FCA conduct rules are a key feature of the new regime designed to hold individuals to account by means of disciplinary action, including fines and suspension. The regulator can take disciplinary action up to six years from the date on which it becomes aware of the issue.
A breach of the conduct standards by an individual will result in personal culpability only where:
- The person's conduct was deliberate
- The person's standard of conduct was below that which would be reasonable in all the circumstances
Both sets of revised conduct rules apply from 7 March 2016.
| Label | Conduct Rule | regulator |
|---|---|---|
| Rule 1 | You must act with integrity | PRA/FCA |
| Rule 2 | You must act with due skill, care and diligence | PRA/FCA |
| Rule 3 | You must be open and cooperative with the FCA, the PRA and other regulators | PRA/FCA |
| Rule 4 | You must pay due regard to the interests of customers and treat them fairly | FCA only |
| Rule 5 | You must observe proper standards of market conduct | FCA only |
| SM1 | You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively | PRA/FCA |
| SM2 | You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system | PRA/FCA |
| SM 3 | You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively | PRA/FCA |
| SM 4 | You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice | PRA/FCA |
| SM 5 | When exercising your responsibilities, you must pay due regard to the interests of current and potential future policyholders in ensuring the provision by the firm of an appropriate degree of protection for their insured benefits. | PRA only |
What are the implications of the new conduct rules?
The possibility that individuals could be personally culpable may lead to more whistleblowing, as well as greater care in record keeping on the part of senior managers. For example, both PRA and FCA provide a new disclosure conduct standard for SIMFs and SIFs (see SM4 in the above table).
Similarly a new FCA duty on SIFs to pay regard to the interests of customers and treat them fairly could result in individual advisors at insurers being personally responsible for the products they sell to customers. It is possible that this too could lead to considerably more whistleblowing in future.
Also of note is that delegation has been identified as an issue requiring a new conduct rule (see SM3 in the above table). As a result all senior managers would be well advised to keep records relating to their delegation of responsibilities.
HR Action Points
Contracts
- Contracts of employment/letters of appointment for non-executive directors should be amended to include the relevant conduct standards for key function holders. Other changes to contracts may be needed to deal with disciplinary action leading to a reduction (malus) or recovery (clawback) of remuneration
- Check terms of contracts of employment and template settlement agreements that they do not contain any provisions which prevent or discourage an employee from making a protected disclosure or a "reportable concern". You may want to go further and include a positive contractual obligation on employees to raise wrongdoing
- Check template settlement agreement terms do not prevent or limit the firm's ability to disclose relevant information in regulatory references
- Obtain employee written consent to any changes to existing contracts of employment
Disciplinary procedures
- Update disciplinary policies to include the generic conduct standards for staff performing key functions; consider incorporating PRA/FCA guidance on how to comply with its conduct standards and making clear when PRA/FCA will be notified of information relating to any individual's conduct, including those that do not come to the firm's attention until after the person has left the firm or ceased to be a key function holder
- Consider whether to include an option for employees to be legally represented at disciplinary hearings; this is likely to be requested by employees in future
- Where the allegations concern breach of conduct standards, ensure that those involved in the investigating and disciplining process understand the conduct standards and how they apply across the firm's business
- Ensure that investigations are carried out in good time and that all disciplinary matters and other reportable concerns are properly recorded
Performance Management
- Establish policies and procedures to ensure that the firm gathers and regularly reviews information which indicates how individuals are following the relevant conduct standards – this will include an annual assessment built into the appraisal process and ensuring that objectives are streamlined across key functions
- Train senior managers on the proper use of performance management procedures and the financial risks of unfair dismissal and whistleblowing claims to the firm – there could be a tension between a senior manager wanting to protect their own position by dismissing underperforming employees, and the firm's need to protect itself from unnecessary unfair dismissal claims which might result from over hasty decisions to dismiss, rather than follow appropriate procedures
- Keep records showing the firm's compliance with these procedures
- Encourage the senior manager to keep records of duties they have delegated and to whom – this will also be relevant when the manager is absent due to sickness and holiday or other leave
Regulatory References
- Introduce a policy dealing with the new regulatory references responsibilities. This could include guidance on how and when references will be given by the firm. There should also be a process in place to monitor references for 6 years after they have been given - this will involve making sure current managers report any information which is uncovered or which emerges relating to the individual concerned after their departure
- Firms must not enter into any arrangement or agreement (e.g. settlement agreement) which limits their ability to disclose relevant information
Training
- Notify and train all individuals who are subject to the new conduct rules to ensure they understand them
Next week we will be covering the new whistleblowing rules.
Podcast
We will also be providing a podcast which will be available from 3 March 2016.
Save the date
We will be holding an event on Wednesday 6 April 2016 to go through the regulation changes click here to register your interest.
REG . READY . 2016: Policies And Contracts, Including Amending Disciplinary & Performance Procedures
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
