Regulatory: New senior insurance managers regime
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have issued separate consultation papers on the new Senior Insurance Managers Regime (SIMR), key elements of which are due to apply in time for the implementation of the Solvency II regime (Solvency II) from 1 January 2016. The SIMR proposals will result in substantial change to the existing approved persons regime (APR) and follow the PRA’s and FCA’s joint consultation in July 2014 on the introduction of a senior managers regime that will replace the existing approved persons regime for banks and investment firms during the course of this year.
The SIMR proposals take into account the changes that will be introduced to the senior managers regime for banks and investment firms, as well as implementing the ‘fit and proper’ requirements of Solvency II
The PRA's proposals
The PRA recognises that good governance is central to the prudential soundness of the firms it regulates and to the achievement of its statutory objectives. Key to this is the appropriate and transparent allocation of oversight andmanagement responsibilities within each firm and group. This is intended to enable proper decision-making, avoid conflicts of interest, and ensure sound management of the undertaking.
Under the PRA’s proposals:
- The SIMR identifies a granular, role-specific set of “controlled functions” (CF) or “senior insurance manager functions” (SIMF), including – by way of example – the chief executive function, chief risk function and chief finance function. Supervisory pre-approval is required for any appointment to a CF or SIMF. The “director function” and “non-executive director functions” (which are controlled functions under the APR) are not necessarily CFs or SIMFs under the SIMR. The SIMR also introduces a requirement for firms to make their own evaluation of fitness and propriety in relation to persons who do not occupy a CF or SIMF but who are nonetheless “key function holders”. A “key function holder” is a person who is responsible for a “key function”.
The list of “key functions” includes an insurer’s risk management, compliance, internal audit and actuarial functions, but is not exhaustive, so firms accustomed to working with a prescribed list of controlled functions will have to consider who they identify as “key function holders”. These key function holders may exist outside of the board room, possibly capturing individuals at a lower level of management than currently within the scope of the approved persons regime. The SIMR establishes more stringent notification and governance arrangements, including a new rule which would require insurers to compile and maintain a Governance Map, recording the positions of those that effectively run the firm, along with individuals in key functions within the firm. The document will record the allocation of significant management responsibilities and reporting lines for each of the senior persons, reflecting a focus on personal accountability.
Supervisors are likely to refer to Governance Maps, including information on the scope of individual responsibilities in a number of scenarios, including:
- during the initial assessment for PRA approval, where information provided on the scope of an individual’s responsibilities will be used to highlight the areas which the candidate will be responsible for managing and to help the PRA to assess their ability to do so;
- in daily supervision, where the PRA expects to use them to:
- identify relevant individuals to whom specific regulatory queries should be directed;
- understand how the allocation of responsibilities to individuals has changed to reflect changes to the insurer’s business model or as a result of changes in the external environment; and
- clarify which individuals are ultimately responsible for certain actions which supervisors expect the insurer to take; and
- in enforcement cases, as evidence of individual responsibility for the area in which an alleged breach occurred.
- In addition, the PRA proposes to revise the conduct standards which are set out in the APER Part of the PRA Rulebook, along the lines of the conduct rules proposed for individuals working for banks and investment firms. This will enable a suitable alignment of the conduct standards for individuals at both insurers and banks.
These conduct standards will include three generic standards that are relevant to all those individuals performing a key function, together with a set of further conduct standards that are relevant specifically to senior insurance managers and key function holders (other than NEDs). These three generic standards would comprise acting with integrity, due skill, care and diligence, as well as dealing with the PRA and other regulators in an open and cooperative way, effectively embedding principles of regulatory candour and cooperation as management responsibilities.
These conduct standards will all be applied directly through the PRA Rulebook to those individuals, who are either in a CF or SIMF and subject to pre approval by the PRA, or who are approved by the FCA for a CF that is deemed to be a “relevant senior management function”. The PRA proposes that the revised conduct standards described above will apply from the date on which the full SIMR is commenced. For the period from 1 January 2016 until then, it is proposed that the current conduct principles in the APER Part of the PRA Rulebook will remain in place.
The PRA expects to publish a further consultation on the role of NEDs in the SIMR in early 2015, taking into account the context of both the insurance and banking regimes.
The FCA’s proposals
The FCA also proposes amendments to its own APR for Solvency II firms. The key proposals are:
- Those executives and certain other CFs which the PRA is proposing not to maintain are to be FCA Significant Influence Functions (SIFs) and therefore subject to the FCA’s pre-approval. This is to ensure that individuals who can significantly impact the FCA’s objectives remain in-scope of conduct regulation. This proposal means that senior individuals would be subject to different regimes.
- Apply to the FCA and PRA-approved persons new FCA Conduct Rules mirroring those proposed in the Strengthening accountability in banking: a new regulatory framework for individuals consultation paper. These rules build on the existing APER, with two additions. Firstly, individuals would be explicitly required to pay due regard to the interests of customers and treat them fairly, mirroring existing obligations on firms. Secondly, there is a specific requirement on those in positions of particular responsibility to take reasonable steps to ensure that any delegation of their responsibilities is to an appropriate person and that they oversee the discharge of that delegated responsibility effectively. This aims to strengthen senior accountability for activity in the area of business for which they are responsible but which they are not personally managing.
- Also of note is that the FCA does not propose to bring across certain aspects from the proposed Senior Managers Regime for banks, such as the presumption of responsibility for the purposes of establishing misconduct by senior managers and the Certification Regime which requires banks to certify certain bank employees as being fit and proper.
The consultation period for both proposals closes on 2 February 2015.