UK: Extension Of Senior Managers & Certification Regime To Insurers

Last Updated: 13 September 2017
Article by Nick Elwell-Sutton and Chris Holme

On 26 July the PRA and the FCA published their proposals to extend the Senior Managers and Certification Regime to insurers. This follows the implementation on 7th March 2016 of the Senior Insurance Managers Regime to insurers. The main purpose of this initiative is to align with the regulatory framework already in force for banks from 7th March 2016, while taking into account the unique characteristics of insurers. Overall, the stated intention is to implement a consistent but proportionate regulatory framework to strengthen individual accountability and promote effective corporate governance for all PRA regulated firms.

The Key documents to read

The FCA and PRA have each published separate consultation papers:

The key dates

  • 3 November 2017 - the PRA and FCA consultations both close
  • 2017 - further consultations from each of the regulators
  • Summer of 2018 – the regulators will publish policy statements, together with final rules and HM Treasury will set the implementation date for the extended regime, currently expected during 2018

Executive summary: what are the key differences between the extended SM&CR and the SIMR?

  • Whilst the PRA senior manager functions will remain, the FCA will also have its own new senior manager functions
  • The introduction of the Certification Regime will mean that most individuals in insurers will be covered by the new regime, whether as senior managers or certified persons
  • New simple code of conduct rules will apply to almost everyone in the firm. Firms will be under a new duty to notify the regulator of breaches of conduct rules by any employee to whom the conduct rules apply
  • The existing scope of responsibilities document will be replaced by the "statement of responsibilities"; governance maps will be replaced by "responsibilities maps" (large insurers only); senior managers will be under a new "duty of responsibility"
  • The regulatory references regime which currently applies to all approved persons in insurers will be extended to apply to all individuals subject to the Certification Regime
  • There will be new handover rules, similar to those required by banks, for large insurers
  • New rules will facilitate the transfer of senior managers from a senior manager function at a banking firm to a senior manager function at an insurance firm

The key features of the new regime

The SM&CR will replace the PRA Senior Insurance Managers Regime (SIMR) and the FCA revised approved persons regime for insurance firms.

This new regime will apply to all insurance and reinsurance firms which are regulated by the FCA and the PRA. This includes:

  • Insurers and reinsurers
  • Insurance special purpose vehicles (ISPVs)
  • The Society of Lloyd's
  • Managing agents
  • UK branches of third-country firms and EEA firms

The SM&CR will apply to all insurers but some of its features will apply only to Solvency II firms and large Non Directive Firms ("large insurers") (see Table 1 p.6 FCA paper)

There are three main elements to the regime:

1. The Senior Managers regime

2. The Certification regime

3. The Conduct Rules

1. The Senior Managers Regime

Regulator approval - As with the SIMR, the most senior individuals who perform key roles (senior management functions) will need PRA or FCA approval before starting their roles. As part of the application process, large insurers will be required to submit a management responsibilities map which replaces the current "governance maps" but which has a similar function.

Senior manager functions – The current set of PRA senior insurance management functions (SIMFs) implemented under the SIMR (or proposed under CP8/17) will not change and will be included in the new SM&CR but will be renamed senior manager functions (SMFs). However, not all insurers will be subject to the same list of SMFs (a small NDF will not need to apply the same functions as a Solvency II firm for example). The FCA proposes new SMFs for large insurers, in addition to the PRA SMFs.

Where a senior manager applies to perform a PRA and FCA function (eg a CFO will be an FCA executive director as well as a PRA senior manager) the PRA's approval covers both roles. Note though that a PRA approved senior manager who later wishes to perform an FCA SMF will need to apply to the FCA for approval to perform that new role.

What will the new senior manager functions look like?

New proposed FCA SMFs

  • Exec Director (SMF3)
  • Compliance oversight (SMF16)
  • Money Laundering Reporting Officer (SMF17)
  • Conduct Risk Oversight Officer (Lloyd's only SMF23b)
  • Other Overall Responsibility (SMF18)

Existing PRA SMFs (proposed to remain)

  • Chief Executive
  • Chief Finance Function
  • Chief Actuarial Function
  • With-profits Actuary
  • Chief Risk Function
  • Chief Underwriting Function
  • Underwriting Risk Oversight Function
  • Head of Key Business Area
  • Chief Operations
  • Group Entity Senior Manager

Non-Executive SMFs

New proposed FCA Non-Executive Senior Management Functions (SMFs)

  • SMF13 – Chair of Nominations Committee
  • SMF15 – Chair of the With-Profits Committee or the person(s) responsible for the with-profits advisory arrangement

Existing PRA Non-Executive functions (proposed to remain)

  • Chair
  • Senior Independent Director
  • Chair of Remuneration Committee
  • Chair of Risk Committee
  • Chair of Audit Committee

PRA and FCA proposals for Senior Manager responsibilities

  • A statement of responsibilities - mapping what they are responsible and accountable for. This replaces the existing "scope of responsibilities" document required under the SIMR but has a similar function;
  • A duty of responsibility – meaning that if something goes wrong in an area they are responsible for, the PRA or FCA will be able to hold them accountable if the regulator considers that the senior manager did not take "reasonable steps" to stop it from happening;
  • Prescribed responsibilities – these will vary by firm, and are specific responsibilities that the PRA or FCA will require firms to place on their senior managers. These are to make sure that there is a senior manager accountable for the SM&CR and key conduct and prudential risks. The FCA is proposing some new prescribed responsibilities which are in addition to the prescribed responsibilities already applicable under the SIMR. The full list of prescribed responsibilities will apply to large insurers; there are few prescribed responsibilities for small NDFs, third-country branches and ISPVs; and they will not apply to EEA branches;
  • Overall responsibilities – senior managers in large insurers must be responsible for each of the firm's business functions and activities.

2. The Certification Regime

This is the biggest single change which will affect insurers. The new Certification Regime will cover people who are not senior managers, but whose jobs mean they have a big impact on customers, markets, or the firm and includes all individuals who are already designated a Key Function Holder. These roles are called "significant harm functions". These individuals will not need to be approved by the PRA or FCA; rather they will be approved by their own firm. Their firm will have to "certify" they are suitable (fit and proper) to carry out their job (with a review taking place by the firm at least once a year).

The Certification Regime only applies to employees and not to NEDs.

The PRA and FCA propose slightly different certification functions, but the two do not conflict:

  • The PRA proposes that all key function holders (KFHs) in large insurers, along with ISPVs should be designated certification functions, unless that function is a PRA SMIF or FCA controlled function, or they are a NED.
  • The FCA proposes that their Certification Regime is made up of 8 significant harm functions known as certification functions. Some of the roles currently requiring approval under the approved persons regime will no longer need FCA approval and will instead be covered by the Certification Regime. The FCA proposes to apply the Certification Regime and conduct rules to incoming branches of non-UK firms comprising of both EEA and non-EEA branches.

The FCA Handbook and the PRA Rule book will set out the roles that are certification functions. The proposed roles set out in the consultation papers are as follows:

FCA's proposed roles as related to insurers

  • Significant Management function
  • CASS oversight function
  • functions subject to qualification requirements
  • Material Risk Takers
  • Anyone who supervises or manages a person performing a Certification Function

PRA's proposed roles

  • all Key Function Holders (KFHs) for all large insurers along with ISPVs
  • Material Risk Takers (MRTs) this will only apply to large insurers
  • individuals who are managing a Material Risk Taker

The PRA would normally consider the following as KFHs (or MRTs for large firms):

  • investment management (including reconciliation, valuation, or reporting, of asset holdings or positions)
  • claims management
  • underwriting and pricing of products
  • reinsurance
  • capital management
  • liquidity management
  • operational systems and controls
  • information technology (IT) and
  • managing MRTs (for 'large firms')

3. Conduct Rules

These will apply to almost all individuals working in financial services. The conduct rules set high level standards of behaviour.

Some conduct rules already apply to approved persons in insurers under the SIMR and the approved persons regime.

  • The PRA proposes to extend the application of its conduct rules to all employees holding a PRA certification function (including key function holders (KFHs) and MRTs at large insurers).
  • The FCA proposes to apply conduct rules to:

-All senior managers approved by the FCA

-All certified persons covered by the Certification Regime

-All other employees other than ancillary staff.

The FCA proposes to apply its conduct rules to the above individuals in relation to both a firm's regulated, and unregulated, financial services activities.

As with the SIMR, the PRA and FCA will require firms to notify them of internal disciplinary action against individuals within scope of the SM&CR for breaching a conduct rule. Firms are also expected to train their staff so that they know how the conduct rules apply to them.

Individual conduct rules:

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

Additional conduct rules applying to Senior Managers:

SC1 You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively PRA/FCA
SC2 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
SC3 You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee this effectively PRA/FCA
SC4 You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice PRA/FCA
SC5 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 should firms do now?

  • Work with HR, legal and compliance to build the strands of the new Certification Regime into the employee lifecycle so that they are taken into consideration on recruitment, training (particularly the new conduct rules), promotion, appraisal and dismissal

  • Make staff aware of what is on the horizon and in particular that most will, in future, be covered by the conduct rules

  • Review your recording and reporting systems for all staff to ensure that when managers address disciplinary issues, the relevant records are recorded appropriately as they may need to be reported to the PRA or FCA; ensure than an appropriate reporting procedure is in place

  • Engage in more detailed planning in relation to how you will prepared for and implement this new regime

Extension Of Senior Managers & Certification Regime To Insurers

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.

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