UK: UK Regulators Finalize Rule Changes For Extending Individual Accountability Regime To Insurers

On July 4, 2018, the U.K. FCA and PRA published Policy Statements confirming the near-final and final rule changes they will apply to extend the application of the SM&CR to insurers. The Policy Statements do not make any changes to the prudential rules implementing Solvency II or to the wider U.K. regulatory framework for insurers.

The extended SM&CR will apply from December 10, 2018, subject to commencement regulations being made by HM Treasury. The SM&CR will apply to all insurers and reinsurers regulated by the FCA and the PRA. The Policy Statements will be of specific interest to Solvency II firms (that is, all firms within the scope of the U.K. rules implementing the Solvency II Directive), insurance special purpose vehicles (undertakings with permission to carry on the regulated activity of insurance risk transformation), insurers outside the scope of the Solvency II Directive (so-called Non-Directive Firms) and small run-off firms (all insurers with less than £25 million technical provisions that no longer have permission to write or acquire new business).

The FCA and the PRA introduced the SM&CR in 2016 to apply new individual accountability obligations to U.K. banks, building societies, credit unions, PRA-designated investment firms and branches of EEA and non- EEA (third-country) banks operating in the U.K. An accountability regime for insurers was also introduced at the same time, by: (a) the PRA's Senior Insurance Managers Regime; and (b) amendments by the FCA to its Approved Persons Regime to implement the governance requirements of the Solvency II Directive. However, the accountability regime for insurers lacks certain key elements of the SM&CR and therefore the government has taken the decision to replace the existing regime for insurers with the full SM&CR.

The FCA's July and December 2017 consultations and Policy Statements

In July 2017, the FCA and PRA published consultations entitled "Individual accountability: extending the SM&CR to insurers." The consultation closed on November 3, 2017. In December 2017, the FCA also set out proposals for applying the regime to employees of the insurance firms that would be brought into the SM&CR, in a consultation entitled "Individual accountability: transitioning insurers and individuals to the SM&CR." That consultation closed on February 21, 2018.

In its Policy Statement, the FCA explains the changes to its rules that will apply the SM&CR to all insurers, replacing the Approved Persons Regime. The rule changes will also apply the Conduct Rules to most staff in insurers. Following supportive feedback to the proposals in its consultations, the FCA will implement the proposals as consulted on. The Policy Statement also sets out combined lists of FCA and PRA senior management functions and FCA and PRA prescribed responsibilities.

Duty of responsibility for insurance and reinsurance firms regulated by the FCA

The duty of responsibility is a component of the SM&CR that allows the FCA to take enforcement action against a Senior Manager where there has been a contravention of a relevant requirement by the Senior Manager's firm, in circumstances where the Senior Manager did not take such steps as a person in their position could reasonably have been expected to take to avoid the contravention occurring or continuing. The FCA updated its Decision Procedure and Penalties manual (DEPP) in May 2017 to set out guidance on how it on how it enforces the duty of responsibility.

The FCA consulted in December 2017 on how it proposed to apply the duty of responsibility to senior managers of insurance and reinsurance firms. In that consultation, the FCA summarized some of the factors it took into account, in its earlier consultation in July 2017, when proposing only definitional changes and new guidance in its DEPP manual to reflect the extension of the duty to insurance and reinsurance. The FCA sought feedback on whether any further changes might be required. In its Policy Statement, the FCA explains that, following responses to that consultation, it remains of the view that that no further amendments to DEPP or its other rules are necessary for implementing the duty of responsibility, other than the definitional amendments and guidance consulted on.

The PRA's consultations

In July 2017, the PRA published a consultation paper entitled "Strengthening individual accountability in insurance: extension of SM&CR", which set out its substantive proposals for extending the SM&CR to insurers. The consultation closed on November 3, 2017. The PRA consulted further in December 2017 in a consultation entitled "Strengthening accountability: implementing the extension of the SM&CR to insurers and other amendments." That consultation built on its July 2017 consultation and was also expected to be read in conjunction with the PRA's earlier consultations on optimizations to the Senior Insurance Managers Regime and changes to SMR forms.

The December 2017 consultation set out the PRA's proposals to simplify the requirements on firms, by streamlining the existing SM&CR and SIMR forms and amending Part 4A Permission forms to reduce the total number of forms from 26 to 11. The forms will no longer distinguish between firm types, so the same set of forms can be used by both banking firms and insurance firms. The PRA set out a proposed list of Senior Management Functions for the newly integrated regime and the process for individuals transferring from an SMF at an insurance firm to a banking firm. The PRA also took the opportunity in that consultation to make some changes to remove gendered language from the SM&CR.

The PRA's Policy Statement sets out feedback on the responses it received to its July and December 2017 consultations. The Policy Statement explains that respondents were broadly supportive of the proposals and therefore the PRA will be implementing its proposals largely as consulted on, subject to a minor change in the scope of application of the Certification Regime to small NDFs: This change will mean that, instead of the CR applying to all members of the governing body and all employees reporting directly to the governing body, the CR will instead apply only to members of the governing body other than PRA/FCA approved persons or non-executive directors.

The Policy Statement includes the final PRA instrument for amending the PRA rules to extend the SM&CR to insurers. The Policy Statement also includes (in appendices):

  • An updated version of the PRA's supervisory statement on strengthening individual accountability in insurance (SS 35/15);
  • A consolidated statement of policy on conditions, time limits and variations of approval; and
  • A directory of the streamlined set of forms of the SM&CR and amendments to Part 4A FSMA permissions forms.

The transition process

The FCA has separately published a Guide for insurers on moving to the new regime from December 10, 2018, which among other things explains how the SM&CR applies to different type of insurer and sets out implementation timescales.

The rules include two transitional provisions to help firms move to the new regime:

  • Firms must identify their Certification Staff ahead of December 10, 2018, but have a further 12 months to complete the initial certification process.
  • Senior Managers and Certification Staff will need to have been identified and trained and abide by the Conduct Rules ahead of the start of the new regime, but firms will have 12 months to train their other staff on the Conduct Rules.

The FCA Policy Statement on extending the SM&CR to insurers (FCA PS 18/15) is available at: https://www.fca.org.uk/publication/policy/ps18-15.pdf, the FCA Policy Statement on guidance on the duty of responsibility for insurance and reinsurance firms regulated by the FCA, and FCA solo-regulated firms (FCA PS 18/16) is available at: https://www.fca.org.uk/publication/policy/ps18-16.pdf, the PRA Policy Statement on extension of the SM&CR to insurers (PRA PS 15/18) is available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/policy-statement/2018/ps1518.pdf, the FCA's SM&CR guide for insurers is available at: https://www.fca.org.uk/publication/policy/guide-for-insurers.pdf and HM Treasury's announcement of the SM&CR start date for insurers is available at: https://www.gov.uk/government/news/new-accountability-rules-for-insurers.

A summary of the July 2017 consultations is available at: https://finreg.shearman.com/financial-conduct-authority-consults-on-extending and a summary of the December 2017 consultations is available at: https://finreg.shearman.com/uk-regulators-consult-further-on-extension-of-ind.

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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