The PRA and the FCA are introducing new rules in 2016 which are aimed at strengthening and clarifying the individual accountability and responsibility of directors and senior managers running large insurance and reinsurance companies.
This briefing, aimed at HR managers, legal and compliance is the first in a series of briefings setting out key action points leading up to the implementation dates of the new senior insurance managers regime (SIMR) as it relates to Solvency II firms. To help familiarise you with the maze of regulation, we include in our briefings a broad outline of the key features of the PRA's new SIMR, and the changes the FCA is making to its approved persons regime.
In very broad terms, why do HR need to be involved?
HR will work with compliance teams to ensure there is a seamless transition from the current to the new regime, as well as ensuring that moving forward, all regulatory requirements are met throughout the employment cycle. Key features of the HR role will include:
- Training staff to ensure everyone understands their responsibilities
- Reporting and notification requirements on
- Change of role
- Receipt of information regulator needs to know about
- Reference obligations
- Record keeping obligations
Key dates for your diaries
1 January 2016
New fitness and propriety rules came into force
8 February 2016
Deadline for notifying the PRA and the FCA of individuals who are to be grandfathered into new regime (use Form K)
7 March 2016
New SIMR framework and conduct rules and standards come into force
Use of application forms A and E become mandatory for Solvency II insurers
Whistleblowing champion to be appointed
7 September 2016
New whistleblowing rules come into force
Scope of Responsibilities forms (SoRs) for grandfathered Senior Insurance Manager Functions (SIMFs) to be submitted to the PRA and SoRs for grandfathered SIFs to be prepared for the FCA (but not submitted)
Notification forms for transitional key function holders who are not grandfathering to a controlled function, nor seeking approval from the PRA for a SIMF to be submitted to the PRA
What are the key features of the new regime for Solvency II insurers?
The SIMR follows to a certain extent the new Senior Managers Regime (SMR) which applies to UK banks, building societies, credit unions, PRA-designated investment firms and branches of foreign banks operating in the UK. Both regimes come into effect on 7 March 2016. The SIMR comprises the following key features:
- Individual senior managers are allocated specific "prescribed" responsibilities by their firm. For each senior manager, the firm must provide a Scope of Responsibilities form (SoR).
- New key controlled functions, whether under the PRA or the FCA, must be allocated to persons approved to perform such function by the relevant regulator. The firm must draw up a "governance map" to include the responsibilities assigned to each senior management function (SMF) and any other information that is relevant to the controlled function they perform.
- New conduct rules in force on 7 March 2016 are designed to hold individuals to account by means of disciplinary action, including fines and suspension.
- Fitness and Propriety checks revised and new rules concerning regulatory references.
- New whistleblowing requirements
What are the key differences between the SIMR for insurers and the SMR for banks?
- Under the SMR there is a new criminal offence of reckless misconduct in the management of a bank
- The presumption of responsibility applicable under SMR does not apply to an individual performing relevant controlled functions within insurers
- For insurers, the conduct rules only apply to individuals requiring regulator pre-approval, whereas most bank employees will be subject to the new conduct rules
- Insurers are not required to provide verifications for their employees ie there is no certification regime for insurers
Who is covered by the SIMR?
The new regime covers three, overlapping categories of individual:
- Approved Persons - Senior managers in insurers will be assigned a function which is either:
- PRA Senior Insurance Management Function (SIMF) e.g. Chairman
- FCA significant influence functions (SIFs) e.g. other Directors, compliance
- Key Function Holders – these are other senior individuals who, whilst not assigned a SIMF or SIF but who discharge a key function
- Other staff performing a key function – these might include junior staff
What are the key actions HR and compliance should take to comply with new rules?
Prior to 8 February
- Notify the PRA/FCA of individuals grandfathering into the new regime (Form K)
Prior to implementation on 7 March
- Prepare a governance map
- Identify which existing controlled function roles will grandfather into the new regime (applications to be submitted by 8 February)
- Consider whether there are any other individuals who will be performing a significant influence function (SIF) under the FCA , or a SIMF under the PRA, or who may be a Key Function Holder
- Make relevant applications in respect of controlled function roles and relevant notifications for other key function roles to the PRA/FCA by the appropriate deadlines
- Familiarise yourself with
- The new SIMR, including the new prescribed responsibilities
- PRA Conduct Standards
- FCA Conduct rules
- Review HR policies - whistle-blowing, disciplinary procedure, performance management
- Review internal process eg record keeping and notification policies
- Review employment contracts and Settlement Agreements
- Formulate policy to deal with senior managers' concerns – indemnities, insurance, remuneration
- Consider departure process including handover obligations, negotiated exits and references
Prior to 7 September 2016
- Complete and submit if necessary, SoRs for grandfathered functions
- Notify PRA about transitional key function holders who are not grandfathering to a controlled function, nor seeking approval from the PRA for a SIMF
What else to look out for
- Policy statement following the FCA and the PRA consultation on regulatory references
- Minor amendments to the PRA Handbook and Rule book and clarificatory rule changes relating to key function holder notifications following Occasional Consultation Paper PRA CP41/15 FCA CP15/37
And in relation to the SMR and whistleblowing generally…
- The PRA and FCA consultation on new whistleblowing rules for UK branches of overseas banks – the regulators are also considering whether similar requirements should be applied more widely to other regulated firms, such as stockbrokers, mortgage brokers, insurance brokers, investment firms and consumer credit firms
- More information following the HM Treasury policy paper on the proposed extension by 2018 of the SMR (and the related certification regime) to all firms authorised under the Financial Services and Markets Act 2000 (FSMA). This will include all insurers, as well as investment firms, asset managers, insurance and mortgage brokers and consumer credit firms