Background

On 26th November PRA and FCA published 2 separate consultations (PRA’s CP26/14 and FCA’s CP14/25) on their proposals for a senior insurance managers regime (SIMR) to regulate individuals at insurers (which will develop/replace the current APER regime). This follows the joint PRA/FCA consultation on 30th July 2014 on the senior managers regime for the banking sector – to read more about the banking proposals, you can read the RegZone report here.

The main impact of the insurance changes is to strengthen the regulatory regime applicable to individuals and to toughen the governance and vetting regime.

The changes will impact between 400 and 450 insurers which fall within the scope of Solvency II and apply to the Society of Lloyd’s and Lloyd’s managing agents, the UK branches of third country insurers and Insurance Special Purpose Vehicles. For the time being non-directive insurers will continue to operate under the existing APER rules.

The regulators will consider in due course whether, and to what extent, to make similar changes for other types of authorised firms.

Overall SIMR will not go so far as the regime for bankers, in particular –

  • The presumption of responsibility for senior managers  (section 66B(5) of Financial Services and Markets Act 2000) does not apply

  • The new criminal offences (s.36 Financial Services (Banking Reform) Act 2013) do not apply

  • The scope of the PRA/FCA conduct rules for individuals is much narrower (and the Certification Regime does not apply).

This report looks at some of the more important changes in CP26/14 and 14/25.

PRA’s approach

PRA’s proposals are driven by two factors –

  • New governance, fitness and propriety and other similar requirements under Solvency II. These requirements are defined/to be defined in EU level legislation including directly applicable Solvency II Regulations such as Implementing Technical Standards and Delegated Acts (and also in EIOPA guidelines). Solvency II includes requirements for vetting/pre-approval of those in ‘key functions’ ; and

  • Consideration of the proposed senior managers regime for banking (Banking SMR) and how far to apply these changes to insurers.

The proposed SIMR will cover senior insurance managers who are subject to pre-approval by the PRA for Controlled Functions together with all the other key function holders i.e. senior persons who effectively run the insurer or have responsibility for other key functions.

The Senior Insurance Manager Functions (Controlled Functions - CFs) are   - Chief Executive Officer, Chief Finance Officer, Chief Risk Officer, Head of internal audit, Chief Actuary (and for with-profits insurers, a With-Profits Actuary), Chief Underwriting Officer (for general insurers and reinsurers and Lloyd’s managing agents) and Underwriting Risk Oversight Function (for the Society of Lloyd’s only)

This is more granular/role specific and more focused than the current regime. (Some heads of business units cease to be caught by the new PRA regime but see below re FCA’s plans to maintain pre-approval.) This reflects the Banking SRM which attempts to focus responsibility on fewer senior positions.

Ten prescribed responsibilities must be assigned to a person approved by PRA or FCA for a CF. The responsibilities are

  • the firm’s Solvency II ORSA,
  • its training and induction of key function holders,
  •  its business model,
  • leading the development of its culture,
  • embedding its culture,
  • the integrity of its financial information and reporting,
  • its remuneration policies,
  • its whistleblowing procedures,
  • its vetting processes and
  • its capital and liquidity.

Governance – allocation of responsibilities and Governance Maps

As well as tougher requirements on vetting, PRA is also aiming to improve governance. PRA will require firms to maintain a Governance Map covering those who effectively run the firm, along with those in key functions. Allocation of responsibilities must be recorded in this document.

The map will be used by PRA in its supervision of the firm and is intended to promote effective governance arrangements. This appears to be equivalent to the new requirement for a ‘responsibilities map’ under the banking regime, but the insurance proposals do not include the more the prescriptive requirements for bankers, such as handover certificates.

More broadly PRA seeks to explain how SIMR will impact the supervisory life cycle. In enforcement cases against individuals (either on the basis of a breach of the standards below or for being knowingly concerned in a breach by the firm) the Governance Map will be evidence of individual responsibility for the area where the breach occurred (although, as noted above, there will be no presumption of responsibility as applies under the Banking SMR).

NEDs and FCA SIF holders

Both PRA and FCA are still considering the precise scope of the Banking SMR and SIMR in relation to non-executive directors. FCA proposes to require pre-approval of certain functions where the PRA will no longer do so – as FCA Significant Influence Function holders (SIF holders).

PRA and FCA Conduct rules for individuals under SIMR

PRA aims to have similar rules for those at insurers and in banking. In the case of insurers, however, the standards will only apply to those who are subject to PRA/FCA pre-approval (unlike the equivalent banking rules which extend to almost all employees).

There are three generic standards on integrity, skill, care and diligence and dealing with PRA in an open fashion (relevant to all key functions) and further standards applicable to senior insurance managers and key function holders (relating to the firm’s business being effectively controlled and complying with the regulatory regime, the delegation of responsibilities (both within the firm and where third party outsourcing is involved) and the disclosure of information to regulators).

There will be a new PRA standard (for key function holders) directed at policyholder protection – ‘When exercising your responsibilities, you must pay due regard to the interests of current and potential future policyholders in ensuring the provision by the firm of an appropriate degree of protection.’  This applies PRA’s insurance sector objective (of policyholder protection) to senior managers at a personal level.

Similar to the banking regime, FCA will also introduce a specific standard expressly requiring individuals to pay due regard to the interests of consumers and treat them fairly. This applies TCF at an individual (as well as at a firm) level. This standard and the other three FCA senior manager standards, which mirror PRA key function holder standards, will apply to FCA SIF holders only within Solvency II firms and to all approved persons in such firms.

Timetable

Responses to both consultations are required by 2nd February 2015. Further consultations from PRA and FCA are expected in early 2015 to deal with their conclusions on NEDs (under both SIMR and Banking SMR).

Solvency II rules must be in place by 31st March 2015 and will take effect on 1st January 2016. The first tranche of the PRA changes in CP 26/14 will track this timetable. This tranche covers fit and proper requirements on firms (including criteria), notification of information on individuals to PRA, identification of key functions and Governance Maps. No date has yet been set for implementation of the final tranche.