Insurance Regulatory eBulletin - SMCR

On 4 July, the PRA and FCA published a series of Policy Statements on the extension of the SMCR to insurers and all FCA solo regulated firms.

The SMCR for insurers will apply from 10 December 2016 and for FCA solo regulated firms from 9 December 2019.
 

The SMCR for FCA solo regulated firms in outline
The three main elements of the SMCR from the regime for banking firms remain and are called the ‘core regime’ and apply to almost all firms. There are increased obligations for firms covered by the ‘enhanced regime’ (larger and more complex firms) and reduced obligations for firms covered by the ‘limited scope’ regime.

Element Comprising
Senior Managers Regime The most senior people in a firm will be approved by the FCA, with firms also having a responsibility to ensure they are suitable (fit and proper) for their role (with a review at least once a year). The Senior Managers will be required to have:
·        a Statement of Responsibilities – mapping what they are responsible and accountable for;
·        a Duty of Responsibility – meaning that if something goes wrong in an area they are responsible for, the FCA will consider if they took "reasonable steps" to stop it from occurring;
·        Prescribed Responsibilities – responsibilities that the FCA will require firms to allocate to their Senior Managers.
Certification Regime This covers people who are not Senior Managers, but who can have a significant impact on customers, markets, or the firm ("significant harm functions"). The roles include proprietary traders, the CASS oversight function, functions subject to qualification requirements, client dealing functions, algorithmic traders, material risk takers, and any supervisor or manager of someone who is a certified person.
These individuals will not be approved by the FCA but will be approved by their own firm. The firm will have to ‘certify’ they are suitable (fit and proper) to carry out their job (with a review taking place at least once a year).
Conduct Rules These will apply to almost all people working in financial services and will be:
·        to act with integrity;
·        to act with due skill, care and diligence;
·        to be open and cooperative with the FCA, the PRA and other regulators;
·        to pay due regard to the interests of customers and treat them fairly;
·        to observe proper standards of market conduct.
There are additional conduct rules applying to Senior Managers:
·        to take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively;
·        to 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;
·        to take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee this effectively;
·        to disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Extending the SMCR to all FCA solo regulated firms – PS 18/14
On 4 July, the FCA  published a Policy Statement (PS) summarising the feedback it received to consultation papers CP17/25 'Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms', and CP17/40 'Individual Accountability: Transitioning FCA firms and individuals to the Senior Managers & Certification Regime'. It also contains the FCA's responses to the feedback received.

The FCA has made several changes to its proposals as a result of the responses it received, including removing the Prescribed Responsibility to inform the governing body of its legal and regulatory obligations, providing an easy notification process for firms that wish to voluntarily apply a higher regime tier, and amending three of the enhanced regime criteria to smooth single‑year anomalies.

The whole PS is relevant to all solo‑regulated UK firms authorised under the Financial Services and Markets Act, and EEA and third‑country branches. Chapters 8 and 15 of the document are relevant to firms subject to the Banking SMCR, and Chapters 2, 3, 10 and 13 are relevant to Appointed Representatives.

The SMCR will apply to all FCA solo-regulated firms from 9 December 2019.

The FCA also published a Guide to The Senior Managers and Certification Regime for FCA solo-regulated firms. The guide is a summary of the rules and guidance on the SMCR. It gives an overview of how the SMCR works and how the FCA will transition firms and individuals to the new regime.

Extending the SMCR to insurers – PS 18/15
On 4 July, FCA published a Policy Statement (PS) containing its responses to the feedback it received on consultation papers CP17/26 'Individual accountability: extending the Senior Managers and Certification Regime to insurers', and CP17/41 'Individual accountability: Transitioning insurers and individuals to the Senior Managers & Certification Regime'.

In the PS, the FCA summarises the changes to its rules to extend the SMCR, which is aimed at strengthening individual accountability in financial services. These rules will apply: the Senior Managers Regime (SMR) to all insurers; the Certification Regime to all insurers; and the Conduct Rules to most staff in insurers. The FCA notes that most of the responses it received either supported its proposals or asked for more clarification on the application of the rules.

The PS is relevant to all insurers and reinsurers regulated by the FCA and the PRA. The rules are near-final, as they are subject to commencement regulations to be made by HM Treasury. The FCA do not expect to make any significant changes to the near-final rules.

The SMCR will apply to insurance firms from 10 December 2018.

The FCA has published a Guide to the Senior Managers and Certification Regime for dual-regulated insurers. The guide is a summary of the rules and guidance on the SMCR. It gives an overview of how the SM&CR works and how it will move firms and individuals to the new regime.

The Duty of Responsibility for insurers and FCA solo-regulated firms – PS18/16
Since May 2016, the Duty of Responsibility has applied to Senior Managers of banking firms. It will also apply to Senior Managers of insurers and FCA solo-regulated firms when the SMCR is extended. On 4 July, the FCA published a Policy Statement (PS) setting out its final guidance on the Duty of Responsibility for insurance and reinsurance firms regulated by the PRA and FCA and firms regulated only by the FCA. The PS summarises and responds to the feedback received in reply to its Consultation Paper 17/42 (CP17/42), published in December 2017.

Under the Duty of Responsibility, the regulators can take enforcement action against Senior Managers if:

·        there was a contravention of a relevant requirement by the Senior Manager’s firm;
·        at the time of the contravention or during any part of it, the Senior Manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred;
·        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.

This PS sets out how the FCA will apply the Duty of Responsibility to insurers and solo-regulated firms once the SMCR is extended. The SMCR comes into force for insurers on 10 December 2018 and for FCA solo-regulated firms on 9 December 2019.

FCA proposes new Directory of financial services workers – CP 18/19
On 4 July, the FCA issued a Consultation Paper (CP) on proposals to introduce the Directory - a new public register for checking the details of key individuals working in financial services. The Directory will include information available through the FS Register, as well as information about a wider group of individuals. The CP sets out the FCA’s proposals for doing this following commencement of the SMCR. They are seeking feedback on:

·        which individuals to include on the Directory;
·        what information they should publish about each person;
·        when firms need to submit and update information about their employees.

The aim is to help protect consumers and firms by making it easier to check whether individuals work for an authorised firm and the proposals are designed to make the Directory user-friendly for both consumers and firms. It will also draw on information published on the FS Register making it easier to search the FS Register.

Alongside the consultation paper, the FCA have published a basic prototype version of the Directory. This is interactive to enable firms to see how the Directory could work and leave feedback.

PRA extension of the SMCR to insurers – PS 15/18
On 4 July, the PRA issued:

·        a Policy Statement (PS15/18) providing feedback to responses received on Consultation Paper (CP) 14/17 ‘Strengthening individual accountability in insurance: extension of the Senior Managers and Certification Regime to insurers’ and CP 28/17 ‘Strengthening accountability: implementing the extension of the SM&CR to insurers and other amendments’;
·        updated its Statement of Policy on approving individuals under section 59 of the Financial Services and Markets Act 2000 (the Act) subject to conditions and time limits, and varying approvals under section 59 of the Act. This statement is applicable to all PRA-authorised persons, including insurance special purpose vehicles (ISPVs), the Society of Lloyd’s (Lloyd’s) and managing agents at Lloyd’s;
·        updated its Supervisory Statement SS35/15 'Strengthening individual accountability in insurance July 2018' which details the PRA's approach to strengthening individual accountability in insurance. The statement outlines the PRA's expectations of how insurers should comply with the regulatory framework of the Senior Managers and Certification Regime (SM&CR);
·        updated its Supervisory Statement (SS39/15) on whistleblowing, which applies to the relevant firms and individuals working in the financial services sector, outlining the PRA's expectations on how firms should comply with the PRA rules on whistleblowing;
·        updated its Supervisory Statement SS10/16 ‘Solvency II: Remuneration requirements,’.
 
The key changes to the current SIMR of the extension to the SMCR are:
Senior Managers ·        new Senior Manager Functions – Head of Key Business Area and Chief Operations Function;
·        new Prescribed Responsibility for outsourcing to be allocated;
·        handover procedure required for all Senior Managers;
·        Duty of Responsibility for all Senior Managers;
·        principle of overall responsibility.
Certification Staff ·        Key Function holders to be Certification Staff (if not already Senior Managers);
·        firms responsible for assessing fitness and propriety on appointment and certifying ongoing (annually).