On 26 November 2014 the Prudential Regulation Authority (PRA) issued a consultation paper on its proposals for a revised regulatory regime for senior insurance managers (SIMR). The purpose of the proposed changes is principally to implement Solvency II requirements but, as expected, the PRA has also taken the opportunity to apply aspects of the Senior Managers Regime proposed for banks, with the strong emphasis contained in those rules on individual accountability (see June 2014 In-Sight). While the PRA is the lead transposing authority in relation to Solvency II, the issue of fitness and propriety of key individuals at insurers impacts the objectives of the Financial Conduct Authority (FCA), which has also issued a consultation paper on changes to its existing Approved Person Regime (APR).
The proposals are in line with the PRA’s objective of ensuring accountability and responsibility at senior level. The proposals will make it easier to apportion blame to specific individuals for regulatory failings, although at the same time the PRA states that it does not intended to undermine or change the fiduciary, legal and regulatory responsibilities of the board.
The obligation to implement Solvency II requirements coupled with the desire to combine these with aspects of the banking regime and the need for these to interact with the FCA’s APR means that the proposals are somewhat unwieldy and difficult to navigate.
Who is within the scope of the PRA proposals?
The proposals will apply to all firms covered by the requirements of Solvency II. Firms excluded from the scope of Solvency II by virtue of their size will continue to be subject to the existing APR, unless they opt in to Solvency II. However, the PRA will be consulting in due course on its approach to supervision of those firms, so the position may well change.
Individuals affected by the proposals
The proposals do not cover the position of NEDs, which is expected to be dealt with in a further consultation, once the PRA has digested the considerable amount of feedback it received to its proposals on NEDs in the banking sector.
The PRA is proposing a new set of Controlled Functions, which will also be known as Senior Insurance Management Functions (SIMFs). These are more role specific than the current Controlled Functions, and intended to target those who play a critical role in the insurer and would be held responsible for ensuring the ongoing safety and soundness of the firm and the appropriate protection of policyholders. They include Chief Executive Officer, Chief Finance Officer, Chief Risk Officer, Head of Internal Audit, Chief Actuary, With-Profits Actuary and Chief Underwriting Officer. Senior executives in parent or other group companies who have
a significant influence on the management or conduct of the insurer’s affairs will also need to be approved for a new Group Entity Senior Insurance Manager function.
There will be a new category of senior personnel, called “key function holders”, being those who are effectively running the business, or who have responsibility for other key functions. This category will include those approved to perform SIMFs and certain FCA Controlled Functions (see “interaction with FCA Approved Person Regime” below).
Certain requirements also apply to those “performing key functions”. It is not clear who, aside from key function holders would fall within this category.
What are “Key functions”?
Aside from the actuarial, risk management, internal audit and compliance functions prescribed by Solvency II, these are:
- The function of effectively running the business (there is no guidance on what this might mean); and
- Any other function which is of specific importance to the sound and prudent management of the firm.
It is up to the firm to identify key functions falling within these categories.
Fit and proper assessments
Firms will be obliged to assess the fitness and propriety of all key function holders and all those performing key functions (whoever they may be). They must provide the PRA with information on the skills and experience of, and allocation of responsibilities to, each key function holder. In the case of individuals performing SIMFs, this appears to be in addition to the information requirements applying as part of the application for approval. Key function holders who are not performing SIMFs will not be subject to a requirement for prior approval by the PRA, although they may require approval by the FCA. Other persons performing key functions are not subject to approval by either regulator.
Fitness and propriety must be assessed on an ongoing basis. The PRA may test the design and robustness of policies and procedures for reviewing fitness and propriety as part of its supervision of management and governance.
Allocation of responsibilities
There is a list of prescribed responsibilities that must be allocated to one or more individuals approved by either the PRA or FCA for a Controlled Function. Firms will be expected to have checks and balances to prevent dominance by an individual, and to ensure that key function holders remain accountable for the actions of those to whom they delegate, including outsourced service providers.
The allocation of prescribed responsibilities, and of any other significant management responsibilities, must be recorded in a Governance Map, along with details of reporting lines, key functions identified by the firm (highlighting those that amount to effectively running the firm) and the names of the individuals effectively running the firm or responsible for other key functions.
Where the firm forms part of a group, the interaction of the firm’s and the group’s management and governance arrangements must also be recorded.
The Governance Map will be used as a supervision tool by the PRA:
- During the initial assessment of candidates for PRA approval, so the PRA can clearly understand the scope of their role and more easily assess their suitability for it
- In daily supervision, to assist in directing regulatory queries, assessing how the allocation of responsibilities adapts to reflect changes to the business model or in the external environment and to clarify who is ultimately responsible for actions which supervisors expect the insurer to take
- In enforcement cases, as evidence of individual responsibility for the area where an alleged breach occurred
Interaction with the FCA’s Approved Person Regime
The corollary of creating the more specific Controlled Functions is that PRA approval will no longer be required for some of the current, more broadly defined, Controlled Functions. The FCA is proposing to make some of the Controlled Functions that the PRA will not be maintaining, FCA Significant Influence Functions (SIFs) subject to pre- approval by FCA. A director currently approved by the PRA for CF1, for example, will in the future require approval by the FCA (unless he is approved for a SIMF).
The FCA also proposes to continue the existing approve and consent model for SIMFs, to ensure that candidates for those functions are suitable from a conduct perspective.
The FCA regards the following SIFs as most likely to be key functions, depending on the circumstances of the firm:
- Significant management function (CF29)
- Compliance function (CF10)
- Apportionment and oversight (CF8)
Individuals approved for these SIFs would therefore be key function holders, and subject to relevant PRA rules.
All key function holders and individuals performing key functions will be subject to requirements to act with integrity and with due skill, care and diligence and to deal with the PRA and other regulators in an open and co- operative way.
There is a further set of conduct standards which only apply to key function holders.
When will the changes take effect?
While the detailed timing is still to be established, an initial tranche of rules will be made in March 2015 and will be commenced with effect from January 2016 in line with the timetable for transposing Solvency II. These would cover:
- The requirement for firms to assess fitness and propriety and the criteria for that assessment
- Notifications of information on individuals to the PRA
- Identification of key functions
- Compilation of a governance map
The timetable for the remaining rules will be determined later this year.
A further technical consultation will follow which will deal with forms, consequential changes and the detailed rules on transitional arrangements from the APR to the Senior Insurance Managers Regime.