UK: The Extension Of The SM&CR To Insurers And FCA Solo Regulated Insurance Intermediaries

Last Updated: 3 August 2018
Article by Nick Elwell-Sutton
Most Read Contributor in UK, November 2018

On 4th July 2018 the PRA and FCA published their near-final rules on how they plan to extend the Senior Managers and Certification Regime (SM&CR) to insurers on 10 December 2018. FCA solo regulated insurance intermediaries have more time to prepare since the proposed implementation date for those firms is 9 December 2019.

So what has happened already?

The SM&CR was rolled out to banks, building societies, credit unions, and PRA designated investment firms ("banking firms") in 2016. A modified version of the regime, the Senior Insurance Mangers Regime (SIMR), was also rolled out to dual-regulated insurers and reinsurers at the same time. The regulators now intend to extend the SM&CR to those insurers as well as to most financial services firms; these include, for example, investment managers, Independent Financial Advisors (IFAs), consumer finance firms, but also insurance intermediaries such as MGAs, brokers and other intermediaries whose business involves conducting regulated activities concerning insurance.

The regulators already published their draft proposals for extending the SM&CR in last year's consultation papers1. For a summary of the key proposals for the new regime for insurers (which includes re-insurers, insurance special purpose vehicles (ISPVs), the Society of Lloyds, managing agents and UK branches of third-country firms and EEA firms) see our earlier briefing. For FCA solo regulated financial services firms (which includes insurance intermediaries), see our separate briefing.

Only minor changes have been made to the regulators' original proposals. For insurers, if you would like to read more on the feedback and the regulator's responses, as well as the proposed rules, see the regulators' latest Policy Statements2 and the new FCA guide for insurers (see end of this Briefing for links). For insurance intermediaries, see the latest Policy Statements3 and the FCA guide for FCA solo-regulated firms.

The proposed timetable and key action points for implementation

Commencement

10 December 2018 (insurers)

9 December 2019 (insurance intermediaries and other solo regulated firms)

Conduct rules apply to Senior Managers and Certification Staff so before commencement, firms must:

  • Identify senior managers in insurance intermediaries
  • Identify Certification Staff
  • Train them on the Conduct Rules
  • Review contracts of employment

Transitional period

One year from Commencement

During this one year period, firms must:

  • train all other Conduct Rules staff in preparation for when it applies to them at the end of the transitional period
  • assess existing Certification Staff
  • identify new in-period Certification Staff
  • assess Certification Staff hired during transitional period

Post transitional period

10 December 2019 (insurers)

9 December 2020 (insurance intermediaries and other solo regulated firms)

  • Conduct Rules apply to all staff
  • Initial Certification Assessments completed

Firms must check that the firm's information is correct on the Financial Services Register after automatic conversion

Ongoing requirements to:

  • train new staff in the Conduct Rules and
  • re-certify Certification Staff as fit and proper at least annually

How will individuals be moved to the new regime?

There will be a proportionate approach to accommodate difference business models.

For smaller insurers (small Non-Directive Firms (NDFs), small run-off firms and ISPVs), Senior Managers at these firms will be automatically converted wherever possible with no action required by firms4. Of course, the majority of those under existing functions will not automatically convert because those roles will no longer require approval and will not be Senior Manager roles5. The same principle of automatic conversion also applies for core and limited scope firms in FCA solo-regulated insurance intermediaries.

For larger insurers (Solvency II firms, and large NDFs) and for FCA "enhanced firms" there will be no automatic conversion to new Senior Manager roles. To convert existing approved individuals to new Senior Manager roles, these firms will need to submit:

  • Form K conversion notification
  • Statements of responsibilities
  • Responsibilities Map

What are the transitional arrangements?

Certified Staff

The new Certification Regime will cover people who are not senior managers, but whose jobs mean they have a significant impact on customers, markets or the firm. For example, a class underwriter or the head of catastrophe modelling. Once a year, firms will need to assess and confirm that they are fit and proper for their roles.

The requirement for firms to certify relevant employees as fit and proper for the first time will commence 12 months after Commencement.

However, the Conduct Rules in COCON in the FCA handbook will apply to these employees from Commencement. Therefore, all firms will need to identify their certification staff from Commencement. Firms will not be required to obtain regulatory references for existing employees who will be performing the same role after Commencement.

Other Conduct Rules staff

There are also individuals who will not hold a Senior Manager role or Certification Function but will still be subject to the Conduct Rules in COCON. Firms will have 12 months from Commencement before the Conduct Rules apply to these staff in order to give them the opportunity to give these individuals the right training.

Appointed Representatives

The SM&CR does not apply to Appointed Representatives (ARs) (except for certain Limited Permission Consumer Credit firms that also act as ARs for other businesses).

What should HR be should be doing now?

For larger firms, it is more likely that your compliance team will be managing the transition from SIMR/APR to the SM&CR (or for insurance intermediaries from Approved Persons Regime to SM&CR) so check who is responsible for implementing the requirements and what involvement HR, legal and compliance functions will have.

That said, much of what needs to be done in the run up to the new regime will need HR input, so HR should liaise with compliance to:

  • Identify for each member of staff how they will be classified (whether senior manager, certified person, other conduct rules staff or ancillary staff) after Commencement, map across all existing Senior Manager roles (whether SIMFs or SIFs) into new Senior Manager functions and ensure all prescribed responsibilities are allocated appropriately. Check every activity, business area and management function has been allocated to a Senior Manager under the Overall Responsibility requirement
  • Consider if the firm has the appropriate people in the correct approved functions before conversion of approved individuals to Senior Manager roles. This will make conversion much easier and smoother. Consider whether conversion will be automatic and if not, what forms and documents need to be submitted to the regulator
  • Larger insurers and enhanced firms will need to submit 'statement of responsibility' documents and 'management responsibility maps'. For smaller firms, consider preparing these documents in any event since this will help you map out the various Senior Manager and certification roles and make transition easier
  • Agree training needs for HR managers and all other staff, starting with all Senior Managers and certification staff, and rolling out to all staff subject to the conduct rules
  • Consider how to embed compliance with the conduct rules across all levels of your organisation including new recruits
  • Build into recruitment, training, promotion, appraisal and dismissal processes, assessment of fitness and propriety and conduct, and provision of regulatory references and criminal records checks
  • Review contracts of employment as well as policies and procedures to ensure they are compliant?
  • Review your recording and reporting systems so that disciplinary issues are recorded appropriately as they may need to be reported either to the regulator or reflected in a regulatory reference
  • Make staff aware of what is on the horizon and in particular that most will, in future, be covered by the conduct rules

How Clyde & Co can help

We have considerable experience in advising banking firms and insurers when they transitioned to the SM&CR and SIMR respectively in 2016 so we are well placed to assist both insurers and financial services firms, including insurance intermediaries, leading up to the extension of the SM&CR. To start you off, we can provide off the shelf and bespoke training to HR teams and management on the basic principles of the SM&CR. We can advise on all of the action points above, including in particular amending contracts of employment and relevant policies.

Key documents and Links

Latest policy papers for insurers (July 2018)

For latest policy papers for FCA solo regulated firms (including insurance intermediaries), see the FCA website and the links in our recent briefing:

The Extension of the Senior Managers and Certification Regime to all FCA regulated firms

Footnotes

1 CP28/17, CP17/41 and CP17/42

2 PS18/15, PS18/16 and PS 15/18

3 PS18/14, PS 18/16

4 For example, someone performing a CF10 (Compliance Oversight function) will be eligible to be converted automatically into a SMF16 (Compliance Oversight function)

5 Eg CF10a (unless the individual meets the senior manager function test), CF28, CF29, CF30 and CF2 (Non-Executive Director except SMF9- Chair)

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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