When recruiting an individual who is to perform a controlled function, whether a person new to the firm or transferring from another role, it is crucial that there are the appropriate procedures in place to comply with the new SIMR, in force from 7 March 2016.
In this briefing, we set out a check list of matters to bear in mind when recruiting or transferring an individual to a new role which involves the performance of a controlled function, whether a PRA regulated senior insurance manager function (SIMF), a FCA regulated significant influence function (SIF) or a key function holder within an insurer. To help put these action points into context, we include in this briefing a description of the key regulatory concepts referred to. This briefing is aimed at HR managers, legal and compliance.
Ensuring authorised staff are fit and proper
The new PRA rules require insurers to satisfy themselves that a candidate seeking to perform any key function is fit and proper ie that they have the requisite competence and capability to carry out the function to which the application relates. The requirements specifically include:
- Personal characteristics including repute and integrity
- Competence, knowledge and experience to enable sound and prudent management
- Qualifications and training
Insurers must also notify the regulator of any changes in identity of individuals holding key roles and to provide them with all the information needed for the regulator to assess whether they are fit and proper. The requirement to ensure that these individuals are fit and proper is an ongoing one. This means having regular appraisals and performance reviews as well as additional checks as necessary depending on the nature and level of an individual's responsibilities.
The new rules relating to fitness and propriety came into force on 1 January 2016 for Solvency II insurers.
For those senior managers new to a role, PRA will, as now, assess for fitness and propriety when it receives an application for approval to perform a senior insurance manager function (SIMF). This will include an interview. PRA will supervise insurers' assessments on an ex-post basis for other key function holders covered by Solvency II. This means an assessment after PRA has been notified of the appointment.
The FCA will continue, as now, to assess fitness and propriety for all individuals for approval to perform controlled functions. Interviews will form a key part of the assessment process for significant influence functions (SIFs).
What other checks should a firm make?
As part of a firm's obligation to assess fitness and propriety, firms are also expected to make criminal record checks and take up appropriate regulatory references for certain roles, including:
- SIFs - FCA insurance controlled functions
- key function holders within an insurer
- certain non-executive director roles
Regulatory references must be obtained from former employers of candidates going back six years regardless of whether the past employers are authorised firms. There are transitional provisions which apply before 7 March 2016 so that, for example, there is no need to conduct extra criminal record checks or obtain a new reference for individuals grandfathering into a SIMF. There are also special rules which apply in relation to applications made, or references requested, prior to 7 March 2016.
The new rules relating to regulatory references are now expected to come into force in two tranches, with the first tranche on 7 March 2016. This week, the PRA announced that the final rules are expected to be published in mid-February 2016, with second tranche as soon as possible after that date. We hope to be able to report on the first tranche of the final rules in week 4 of this series of bulletins, "Handling departures and changing role".
What are the key regulatory concepts HR needs to know about?
Both the PRA and the FCA have new rules about governance maps. From 1 January 2016, firms should already have in place a governance map containing a list of the key functions and names of the persons who effectively run the firm or who are responsible for other key functions. For each named person there will be a summary of significant, and if applicable, SIMR responsibilities allocated to that person, reporting lines and lines of responsibility for each person listed. Records of governance maps should be kept for 10 years.
The PRA requires firms to allocate certain SIMR prescribed responsibilities to one or more persons who have been approved (in relation to that firm) to perform a SIMF by the PRA (or a SIF by the FCA). These responsibilities are designed to ensure that responsibility for certain key activities relating to the effective governance of the firm are allocated to a designated senior person. These "prescribed responsibilities" are additional to the responsibilities inherent in the definition of each PRA SIMF.
The governance of Solvency II firms needs to cover at least the following key functions: risk management, compliance, internal audit and actuarial, and those effectively running the firm, which will include the board and, potentially, a parent board. The PRA requires firms to identify (i) each of the functions that the firm considers to be a key function and (ii) any such key function that amounts to effectively running the firm.
Scope of responsibilities form (SoR)
A new form intended to clarify the scope of responsibilities assigned to individuals (SoR) must be submitted with each application for approval for a SIMF (from 1 January 2016) or SIF (from 7 March 2016) as an attachment to Form A or E as appropriate. It is also proposed that a SoR must also be kept for each key function holder and retained by the firm for 10 years with the governance map.
The SoR should clearly show the responsibilities allocated to the candidate. There should be one document per SIMF, or SIF holder per firm. If the regulator considers that the SoR is not sufficiently clear to be practical and usable it could be challenged as part of the application for approval, or in ongoing supervision. The SoR will contain more detailed information than the governance map so will be a valuable tool for supervisory and enforcement purposes.
HR Action Points
Conduct checks pre-offer/appointment to role
- Where appropriate, for appointments to new roles on or after 7 March 2016, firms should:
- Conduct appropriate fitness and propriety checks
- Conduct a full criminal record check, making sure the individual has first given consent (or the equivalent if the individual has lived or worked abroad in the previous six years)
- Take reasonable steps to obtain appropriate references from current and past employers (or organisations served as a NED) covering the last six years
- Consider what checks are required for applications made during the transitional period prior to 7 March 2016
- Ensure that proper handover into the new role is effected
Update governance maps
- Governance maps must be updated at least quarterly and in the event of a significant change (eg to the firm's governance structure, the significant responsibilities allocated to a key function holder, or the reporting line or lines of responsibility for a key function holder)
- In the event of a significant change, review the governance map and provide the PRA with a copy of the updated part of the map. Make sure that prescribed responsibilities have been allocated appropriately. It is worth checking with the appropriate senior managers to ensure they have been allocated the correct responsibilities with the map, that the map adequately covers all areas and is clear where there is any overlap
- As certain prescribed responsibilities are normally allocated to particular functions, consider if these should be set out in the contract of employment/appointment letter for the individual who is allocated any particular function eg Chairman
Apply to or notify the regulator
- Complete Form K and submit to the PRA/FCA in respect of all individuals grandfathering into the new regime (by 8 February)
- Complete either Form A or Form E for new applications for approval for a SIMF (from 1 January 2016) or SIF (from 7 March 2016).
- Complete a SoR with all new applications for SIMF (from 1 January 2016) or SIF (from 7 March 2016)
- Prepare and submit to the PRA SoRs for all grandfathered SIMFs before 7 September 2016
- Prepare and make available (but do not submit unless requested to do so by the FCA) SoRs for grandfathered SIFs (by 7 September 2016)
- Notify PRA of key function holders who are not SIMF or SIFs new to post after 1 January 2016 (Form M) (by 7 September 2016)
- Keep up to date record of the SoR for each key function holder
- Have the SoR record signed by the individual and a representative of the firm
- Train new employees and those new to a regulated role on the operation of the conduct rules
- Train employees to help them understand the legal and regulatory framework and their rights and duties, how to identify wrongdoing and what steps are available to them
- Consider when to make new recruits privy to their predecessor's handover documentation. This is likely to contain highly confidential information so a firm is unlikely to want to disclose this until the candidate has commenced employment with the firm.