On November 26, the Prudential Regulation Authority (PRA) issued a consultation paper (CP24/14) on Senior insurance managers regime: a new regulatory framework for individuals. The proposals seek to update the PRA’s approved persons regime in order to implement the Solvency II Directive (the Directive) and to closer align the regime for insurers with that being introduced under the Senior Managers Regime for banks.
In a move away from ‘intelligent copy out’ the proposed regime seeks to provide more detailed elaboration on the fit and proper measures set out in the Directive. The proposals aim to ensure that the senior persons who run insurers, or who have responsibility for other key functions within the business, behave with integrity, honesty and skill. Although broadly aligned with the regime for banks the proposals take into account the different business model of insurers and will take into account the different risks and features of the industry.
The following Controlled Functions will be designated as Senior Insurance Management Functions (SIMFs):
- Chief Executive Officer (SIMF1)
- Chief Finance Officer (SIMF2)
- Chief Risk Officer (SIMF4)
- Head of Internal Audit (SIMF5)
- Third Country Branch Manager (SIMF19) (Third-Country branches)
- Chief Actuary (SIMF20)
- With-profits Actuary (SIMF21) (For with-profits firms)
- Chief Underwriter Officer (SIMF22) (General (re)insurance and Lloyd’s managing agents)
- Underwriting Risk and Oversight Function (SIMF23) (Society of Lloyd’s)
- Group Senior Insurance Manager (SIMF7) (Group)
None of the sanctions contained in section 36 of the Financial Services (Banking Reform) Act 2013, nor the presumption of responsibility contained in section 66B of the Financial Services and Markets Act 2000 will apply to the above SIMFs. The certification regime being applied to banks will not be required by insurers for their employees. The PRA proposes that the scope of individuals subject to approval before taking up their roles will be more role-specific than is currently the case under the existing approved persons regime. These individuals will be held to account for the ongoing safety and soundness of their firms and for the appropriate protection of policyholders.
Other individuals, known as ‘key function holders’ (included in the Directive) but who do not hold either a PRA or Financial Conduct Authority (FCA) controlled function will be need to be pre-approved. The PRA will take appropriate action in relation to these individuals only where it considers that they do not meet fit and proper requirements on an ex-post basis. Other individuals on a parent/holding company board or holding key group functions will also be subject to this approach.
The PRA will apply a proportionate approach to the application of this regime with the result that smaller firms and third country branches may be able to combine responsibilities for different functions.
Key to the proposals will be the requirement for (re)insurers to maintain a ‘Governance Map’ identifying the individuals who run the firm along with the key function holders.
Certain ‘core’ responsibilities will need to be allocated amongst the controlled function holders (including FCA controlled functions) including such things as taking responsibility for ‘leading the development of the firm’s culture and standards’ and ‘embedding the firm’s culture and standards in its day-to-day management’. New conduct standards will be introduced for both SIMFs and key function holders.
The consultation closes on February 2, 2015.
For further information:
Also on November 26, the FCA issued a consultation paper (CP14/25) on Changes to the Approved Persons Regime for Solvency II firms. Solvency II requires that persons performing certain ‘key functions’ within firms are fit and proper. The FCA proposes to use its existing approved persons assessments but with adaptations where individuals will be carrying out Solvency II key functions.
The FCA anticipates that the existing FCA-designated controlled functions that are most likely to be Solvency II key functions are:
- Significant Management (CF29)
- Compliance (CF10)
- Appointment and oversight (CF8)
The FCA is not proposing to expand the existing scope of the above controlled functions. Any individual performing any Solvency II key function which falls outside the above categories will be picked up by the PRA ‘key function holder’ regime.
The FCA proposes to amend the Fit and Proper Test for Approved Persons (APER) in order to take into account the Solvency II framework when making an assessment. This will include consideration of the firm’s own assessment of a candidate under PRA rules and requirements contained in either the Solvency II Regulations or the European Insurance and Occupational Pensions Authority (EIOPA) guidelines.
To more closely align the regime applied to insurers to that applied to banks, the FCA proposes to require pre-approval of all individuals taking up executive and other functions within firms not otherwise approved by the PRA. These people will become FCA Significant Influence Function (SIF) holders. The FCA will continue to consent to individuals performing PRA functions from a conduct perspective.
In the joint PRA/FCA Strengthening accountability in banking: a new regulatory framework for individuals (CP14/14), the regulators proposed new Conduct Rules for approved persons. The FCA believes that these Conduct Rules are appropriate to insurers as well as banks. For insurers, however, the Conduct Rules will only be applied to those functions that require pre-approval. The proposed conduct rules build on the existing APER rules with two additions: individuals would be obliged to pay due regard to the interests of customers and treat them fairly; and those in positions of particular responsibility must ensure that any delegation of their responsibility is to an appropriate person and that they oversee the discharge of the delegated responsibility effectively. The rules will be divided into two tiers: Individual Conduct Rules applied to all PRA and FCA approved persons in Solvency II firms; and a second tier applied only to FCA SIF holders in such firms.
The FCA proposes that the functions of Chief Risk Officer and the Chief Internal Audit Function should be designated as FCA SIF holders in Insurance Special Purposes Vehicles (ISPVs). Although the PRA proposes not to require pre-approval for these roles in ISPVs, the FCA believes that these functions remain important from a conduct perspective and will pre-approve candidates on this basis. Furthermore, not all controlled functions are required in the UK branches of EEA Solvency II firms and there will be a general override where the assessment of whether someone is fit and proper is reserved to the home state. However, where the functions are required and the override does not apply, EEA branches will be subject to the same approach as applied to UK firms.
The consultation closes on February 2, 2015.
For further information: Changes to the Approved Persons Regime for Solvency II firms (CP14/25)