A slew of policy statements and consultation papers were issued in March on the proposed new approval and fitness and propriety regimes for senior managers in insurance firms.
- PRA Policy Statement PS3/15 “Strengthening individual accountability in banking and insurance”. This follows on from CP14/14 “Strengthening accountability in banking: a new regulatory framework for individuals”; and CP26/14 “Senior insurance managers regime: a new regulatory framework for individuals” (http://www.clydeco.com/ insight/newsletters/view/corporate-insurance-newsletterfebruary-2015 ). The Policy Statement contains feedback and final rules on the scope of the new regime, allocation of responsibilities, and assessing fitness and propriety (other than rules on the provision of references)
- A joint FCA/PRA consultation, FCA CP15/16 and PRACP13/15, which deals with forms, consequential changes and transitional arrangements and the FCA’s proposed governance arrangements for Solvency II firms, as well as feedback to responses on the FCA’s November consultation on changes to the approved persons regime (APR)
- PRA CP12/15: Senior Insurance Managers Regime: a streamlined approach for non-Solvency II firms
- FCA CP15/15: Changes to the Approved Persons Regime for insurers not subject to Solvency II
Key points – PS3/15
Maintaining governance maps: The PRA has acknowledged concerns about the potential burden of maintaining a single up to date document at all times. It will therefore allow a series of documents to be maintained as long as these are presented in a coherent and clear manner, which will only need to be updated quarterly, and whenever there is a significant change in governance structure, allocation of responsibilities or the reporting lines or lines of responsibility for a key function holder.
Identifying key functions: The PRA has suggested a number of functions which firms may consider are key functions, depending on the nature and complexity of the firm’s business. These are: investment functions; claims management function (especially for general or health insurance firms); IT functions; and reinsurance functions (if separate from the other key functions e.g. other risk management).
Assessing fitness and propriety: The PRA believes that most firms have a regular cycle of appraisals and performance reviews that provides a base line for these assessments, although additional checks may be appropriate taking account of the nature and level of an individual’s responsibilities. The PRA expects firms and groups to take all reasonable steps to gather and consider information which may be relevant to an individual’s business conduct, including possibly using pre-employment questionnaires. Where a firm becomes aware of past business conduct that might be relevant to an assessment of fitness and propriety, it will expect the firm to make reasonable enquiries to establish the circumstances of that conduct and its relevance. It expects regulatory references and the Financial Services Register to be a source of information that firms will use.
Group Entity SMF: Despite concerns about duplication between the PRA’s fit and proper requirements and those of other regulators, the PRA has maintained its stance that firms should seek approval for individuals elsewhere in the group exerting a significant influence on their management, to ensure those individuals take account of the interests of the firm and not just the wider group. However, the PRA may take into account assessments of fitness by other regulators.
Prescribed Responsibilities: The wording of some of the prescribed responsibilities has been amended to bring it in line with the corresponding responsibilities in the SMR regime for banks. In insurance groups with several regulated entities, responsibilities may be allocated to the Group Entity Senior Management function holder. This allocation must be clearly set out in governance maps and any potential conflicts of interest addressed properly. The firm will need to ensure each individual has the necessary time and resources to perform their role.
Compliance function: The Solvency II compliance function is different to the current CF10 approved by the PRA. An individual responsible for Solvency II compliance who is not also performing another controlled function will need to be notified for this Solvency II key function role to the PRA.
Third country branches: At least one person must be approved for the Third Country Branch Manager function. The key functions in respect of the branch’s operations, including at least the four minimum key functions specified in Solvency II, must also be identified.
Final supervisory statement material on the scope of the SIMR and the allocation of responsibilities is to be issued later in 2015, together with final rules and supervisory statements relating to the provision of references and conduct rules and standards.
The rules on fitness and propriety of those performing or responsible for key functions will have effect from the 1 January 2016, in line with the deadline for implementation of Solvency II. The remaining rules introducing the SIMR, which are designed to align the insurance regime with the new regime for banks, will have effect from 7 March 2016, when the Financial Services and Markets Act 2000 (Banking Reform) Act 2013 comes into force.
Key Points - FCA CP15/16 and PRA CP13/15
Transitional arrangements: The two stage implementation for the proposals makes the transitional arrangements particularly byzantine in their complexity.
From 1 January 2016:
- Applications for approval for a controlled function must include information on assessing fitness and propriety and the candidate’s proposed scope of responsibilities, including any prescribed responsibilities allocated under the new allocation of responsibilities rulebook
- Subject to point 3 below, for Solvency II key function holders (including those in post at 1 January 2016) who are not performing PRA controlled functions, the firm must submit a notification form so that the PRA can assess fitness and propriety, together with a scope of responsibilities document. For proposed appointees, these documents should be submitted as soon as the candidate has accepted the terms of his/ her appointment
- However, if the Solvency II key function holder is in or is applying to be in a FCA controlled function, it is currently proposed that firms do not need to submit the PRA notification form.
From 7 March 2016:
- Existing approved persons performing a function that will become a PRA or FCA controlled function at 7 March 2016 will be grandfathered across to the appropriate function, provided the firm submitted a grandfathering notification form in respect of those individuals by 8 February 2016. The form must include individuals going through the approval process under the existing regime, to cover the eventuality that their application may be determined before 7 March
- New applications, together with a scope of responsibilities document, must be submitted for key function holders who will be performing a new PRA controlled function from 7 March 2016, by the rulemaking date. They will not need to submit the key function holder notification form as well
- Applications for approval under the existing regime made before 7 March 2015 which have not been determined by that date will be treated as if they had been made for the relevant controlled function under the new regime. Firms will be required to update the application to make it clear which PRA Significant Insurance Management Function (SIMF)/FCA Significant Influence Function (SIF) will be performed
- The new PRA conduct rules will apply to PRA approved persons and FCA approved persons who are in a relevant senior management function i.e. those performing FCA CF1, CF7, CF10, CF28 or CF51 who have responsibility for activity directly relating to the sound and prudent management of the firm
- The new FCA SIF conduct rules will apply to SIF holders and SIMF holders.
A table mapping the existing controlled functions to the new controlled functions is at Annex 1 to the CP.
FCA governance proposals: The FCA is proposing to amend its handbook to ensure that it has appropriate powers in relation to governance, but also to minimise overlap with PRA governance rules. It is therefore proposing:
- Rules to ensure that governance maps cover all senior individuals of interest to the FCA, so that it can take enforcement action against firms not clearly or appropriately allocating responsibilities of key interest to the FCA
- To require firms, when amending governance maps to reflect changes to an individual’s responsibilities, to update that individual’s scope of responsibilities document
- To require firms to keep records for ten years to enable identification of historic accountabilities if any problems come to light in the future
- Changes to the SYSC rules to minimise overlap with PRA’s rules
- To remove CF8 (apportionment and oversight) for Solvency II firms, while requiring responsibility for allocation of responsibilities to be allocated to a senior approved person and responsibility for oversight of the establishment of systems and controls to be allocated to the CEO or equivalent.
Key Points – PRA CP12/15 and FCA CP15/15
The PRA is not intending to apply the new SIMR to nondirective firms (other than those with assets of more than £25,000,000) on the basis that it would be disproportionate for firms of that size. Accordingly it is proposing that:
- The existing director, NED, CEO, director of unincorporated association, and small friendly societies functions will cease to apply and will be replaced by a single small insurer senior management function (SISMF) for which one or more individuals must be approved. The current chief actuary and with profits actuary functions will be discussed in a consultation later this year
- Fit and proper criteria would remain the same but a requirement would be added for criminal record checks to be applied. The proposed scope of an individual’s responsibilities would need to be included with each application for approval
- Firms would have to notify the PRA of any significant change of responsibilities for a senior manager and of any information that would be reasonably material to the fit and proper assessment of the current or former holder of a controlled function
- Four prescribed responsibilities – business plan and management information, financial resources, legal and regulatory obligation, oversight of proportionate systems and controls, and risk management – must be allocated, contrasting with the eleven required for Solvency II firms. Information on the scope of responsibilities of each individual would be required but no governance map
- Firms will not be required to comply with the Solvency II requirements to identify key functions, ensure that staff performing these functions are fit and proper and notify the PRA of details of all key function holders so that the PRA can make a fit and proper assessment
- There will be no group related requirements
The new list of SISMFs will be introduced from 7 March 2016, and rules for assessment of fitness and propriety and the new conduct standards will apply from that date. Rules relating to the allocation of the four prescribed responsibilities will commence 12 months later.
The FCA states in its CP that the PRA’s proposed prescribed responsibilities are not wide enough to cover the full range of FCA interests. It is therefore proposing:
- That individuals in executive governing roles who will no longer be approved by the PRA (the director, CEO, director of unincorporated association and small friendly society functions) should be subject to pre approval by the FCA as significant influence function holders
- That NEDs performing the chairman or senior independent director role or who chair the remuneration, risk, audit or nominations committees should also be subject to pre-approval by the FCA
- To require information on the applicant’s proposed scope of responsibilities when applying for approval, on the basis that these documents can be useful for supervisory purposes to establish who is responsible for which area of the firm’s business. Firms will also be required to update their scope of responsibilities documents and to keep records for 10 years to enable them to identify historic accountabilities.