The Senior Insurance Managers Regime (SIMR), which comes into force in two stages (1 January 2016 and full implementation on 7 March 2016), in many respects mirrors the Senior Managers Regime for the banking sector which was brought into being under the Financial Services (Banking Reform) Act 2013. The insurance industry however has not been under the same scrutiny as the banking and so the reforms have developed differently to reflect the distinct needs and risks.

The PRA (as the prudential regulator for insurers) and the FCA (as the conduct regulator) first published consultations on the PRA’s SIMR and the FCA’s changes to the Approved Persons Regime (APR) in November 2014. On 13 August 2015 final rules and guidance on the SIMR were published setting out the PRA’s requirements of the standard of behaviour expected of those in positions of responsibility at regulated insurance firms. The FCA made amendments to its own APR to reflect the changes.

Solvency II Directive (2009/138/EC)

The Solvency II Directive provides the framework for a new solvency and supervisory regime for certain insurers and reinsurers in the EU and sets out standards for governance and fitness and propriety. The expectation for the new SIMR regulatory framework is that it should ensure that those individuals who run such insurers have clearly defined responsibilities and behave with integrity, honesty and skill.

The PRA has generally followed the approach of ‘intelligent copy out’ in transposing Solvency II. Solvency II ‘fit and proper’ requirements apply with modifications to insurance groups, holding companies and solo entities.

Solvency II insurers should have notified the PRA of their Key Function Holders (KFHs)1 by 1 January 2016 and full implementation is expected by 7 March 2016.

Smaller insurers outside the scope of Solvency II

For smaller insurers that do not fall within the scope of Solvency II (non Directive firms, or NDFs) the PRA and FCA have set out rules for the replacement of the current APR with a similar SIMR as for Solvency II firms. This will cover the assessment of fitness and propriety of senior insurance managers and directors, the allocation of certain responsibilities to senior individuals, and the application of relevant conduct rules to senior individuals. A proportionate approach has been adopted to reflect the different risks posed by these firms.

The policy framework

The PRA is replacing the PRA Handbook with a Rulebook and will issue supervisory statements to provide additional guidance. The PRA’s objectives are to promote the safety and soundness of PRA-authorised persons and to contribute to the securing of protection for policyholders.

Which firms are covered by the SIMR?

The SIMR will apply to:

  • All UK insurance and reinsurance firms, including third country branch undertakings, within the scope of Solvency II
  • The Society of Lloyd’s and managing agents
  • Insurance special purpose vehicles

SIMR

The scope of the SIMR covers

  • senior insurance managers who are subject to pre-approval by the PRA for a Controlled Function (CF)2
  • all other senior persons ( KFHs) who run an insurer or have responsibility for other key functions at those insurers who need to be assessed as fit and proper by the PRA3

Regulatory pre-approval applies to:

  • individuals working for insurance groups who intend to take up CFs in insurers
  • holding or other group company senior executives who have a significant influence on the management or conduct of the insurer’s affairs (SIMF 7).

Key points of the new regime include:

  • Senior insurance managers must be allocated new prescribed responsibilities
  • The scope of people subject to pre-approval is more role-specific
  • The PRA has published a more restricted range of job functions, which entail the carrying out of CFs, that are subject to regulatory pre-approval
  • The FCA requires pre-approval of individuals taking on executive and certain other functions within insurers where these positions have not already been approved by the PRA
  • New Conduct Rules or Standards will replace the Code of Practice for Approved Persons
  • Firms are required to produce and maintain a Governance map

Allocation of responsibilities

SIMR requires firms to allocate certain prescribed core responsibilities to one or more persons who have been approved by a regulator for a CF.

Scope of Responsibilities

  • Firms must submit a scope of responsibilities (SoR) form with each application for approval as a senior insurance manager made on or after 1 January 2016. The emphasis should be on recording what a senior insurance manager is responsible for, less about delivery of outcomes.
  • The completion of the SoR form is essential for new applicants but is not a condition for ‘grandfathering’4 existing senior managers
  • Only a summary should be included in the governance maps and made available to supervisors from 1 January 2016
  • The PRA is allowing up to a further six months to prepare and submit the SoR information for grandfathered individuals (deadline of 7 September 2016)

Governance map

As from 1 January 2016, insurers must compile and maintain a ‘Governance Map’ recording the positions of those that run the firm, along with the key functions within the firm and the names of individuals in these positions or with responsibility for a key function. The map must show reporting lines and detail where responsibilities are shared. The maps must be updated at least quarterly or where there are significant changes.

Conduct Rules

The PRA has published revised Conduct Rules (or Standards). The new rules build on existing Statements of Principle and the Code of Practice for Approved Persons principles. There are two tiers of rules:

  • individual conduct rules
  • Significant Influence Function holder conduct rules.

The revised Conduct Rules will apply from 7 March 2016. Until then the current conduct principles in the PRA Handbook will apply.

The PRA expects the Conduct Rules to be taken into account when setting an individual’s objectives each year. Firms should:

  • Take all reasonable steps to gather and consider information which indicates the extent to which individuals are following the relevant Conduct Rules
  • Retain a record of this information
  • Place requirements on persons performing key functions to observe the relevant Conduct Rules
  • Set out the relevant Conduct Rules for KFHs including NEDs in terms and conditions
  • Include generic Conduct Rules in a Staff Handbook or similar document for other staff performing key function

Fit and Proper assessments

The PRA or FCA (as appropriate) will continue to assess the fitness and propriety of individuals who require pre-approval to perform Senior Insurance Managers Functions (SIMFs) or CFs. For KFHs who do not exercise a SIMF (or a FCA Significant Influence Function) the PRA will supervise the insurer’s assessment of whether a person is fit and proper after their appointment. Firms will be required to make an ongoing assessment of the fit and proper status of all KFHs and so should have in place appropriate policies and procedures to do so.

The PRA has set out a non-exhaustive set of factors to be considered when assessing the fit and proper status of individuals. Read the rules here.

These rules, together with requirements to assess fitness and propriety and to notify the regulator about relevant information, will apply from 1 January 2016. However, the requirement for firms to satisfy themselves that individuals discharge their functions in accordance with conduct standards and the requirements for regulatory references and criminal record checks (see below) will not apply until full commencement of the SIMR.

References and checks

Firms must

  • request (and provide) regulatory references and
  • carry out criminal record checks

for individuals requiring pre-approval.

Firms must:

  • consider an individual’s past business conduct and
  • be satisfied that the individual is discharging his key function in accordance with relevant conduct standards.

The PRA has yet to finalise its approach with regard to the form and content of regulatory references: final rules will be made in early 2016.

Whistleblowing

Under a package of measures put together by the FCA and the PRA, an individual insurance NED will be responsible for oversight of the independence, autonomy and effectiveness of whistleblowing policies and procedures, including those for the protection of staff raising concerns. The NED will not however be responsible for the protection of staff who whistleblow.

Differences from the Senior Managers Regime

None of the sanctions in the Financial Services Banking Reform Act 2013 apply to the insurance industry nor does the presumption of responsibility in the Financial Services and Markets Act 2000 apply to individuals performing relevant CFs within insurers.

Crucially, there is no certification regime for employees.

Implications of the SIMR

The new framework will lead to changes in the way the regulators supervise individuals and standards in Solvency II insurers.

Whilst the mechanics of the approval process will essentially be the same firms should note:

  • Insurers must now undertake their own due diligence on whether the candidates seeking to perform a CF have the requisite competence and capability to carry out their function effectively
  • Insurers must have in place clear structures of accountability and delegation of individual and collective responsibilities, including checks and balances to prevent dominance by an individual
  • Firms should remember that the individual accountability of directors in scope of the SIMR are additional and complementary to the responsibilities of directors under UK company law (both statutory and fiduciary) and corporate governance principles
  • The PRA will retain legal powers to take formal supervisory and enforcement action where appropriate
  • The PRA will continue to have power to prohibit an individual from performing a function in relation to regulated activities where it believes the person is not fit and proper to do so.

Key Dates

1 January 2016: Solvency II firms and groups must have governance maps in place, which include a list of KFHs and their responsibilities

1 January 2016: new applications for the approval of individuals under the SIMR can be made using the new forms and should include a SoR form

8 February 2016: Deadline for firms to submit Grandfathering Notification (Form K) with one form submitted per firm

7 March 2016: SIMR comes fully into effect, including the new set of SIMFs and conduct standards

7 March 2016: individual (currently) approved persons notified to the PRA by firms will be grandfathered into an equivalent PRA (or FCA) function) under the SIMR

7 September 2016: Solvency II firms and groups must have a SoR in place for all SIMFs.

7 September 2016: Solvency II firms and groups must have notified the PRA of all KFHs

SIMR Forms

On 23 December 2015 the PRA published forms and accompanying guidance notes for both Solvency II and non Solvency II firms under the new regime.

http://www.bankofengland.co.uk/pra/Pages/authorisations/simr/default.aspx

PRA Q & As on the SIMR

The PRA published on 21 December 2016 responses to questions on the application of the SIMR:

http://www.bankofengland.co.uk/pra/Documents/supervision/strengtheningacc/simrqadec15.pdf

Final Rules

http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2215.pdf

Regulatory References

The FCA/PRA joint consultation on regulatory references in deposit-takers, PRA designated investment firms and insurers:

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2015/cp3615.pdf

Whistleblowing

The FCA/PRA joint consultation on whistleblowing in deposit-takers, PRA designated investment firms and insurers:

http://www.fca.org.uk/static/documents/consultation-papers/cp15-04.pdf