The Prudential Regulation Authority (PRA) has recently announced proposals for a new regime for "senior insurance managers", designed to reflect Solvency II governance requirements.
The regime will replace the PRA's current Controlled Functions (CFs) with a number of new designations. A helpful summary table is set out in Annex 1 of the associated FCA paper (discussed further below).
On one hand, the regime may be narrower than currently since it will no longer include the CF1 (director) function and hence will not necessarily cover all board members.
On the other hand, the PRA will require that so-called "key function holders" are fit and proper. This expression is left undefined – and the firm must itself determine what constitutes a key function – but this is intended to capture all other individuals who effectively run a (re)insurer. Note also the brand new CFs of Group Entity Senior Manager (designed to capture senior executives in insurance holding companies) and Chief Underwriting Officer (for general insurers and managing agents). In addition:
- the PRA will revise the conduct standards for approved persons and set out a set of factors as to whether a person is fit and proper.
- a firm will need to allocate each of the following prescribed responsibilities below to one or more approved persons (and possibly NEDs – see below): (i) ensuring that persons performing a key function are fit and proper; (ii) leading the development of the firm's culture and standards; (iii) embedding the firm's culture and standards in its day-to-day management; (iv) production and integrity of the firm's financial information and regulatory reporting; (v) allocation and maintenance of the firm's capital and liquidity; (vi) development and maintenance of the firm's business model; (vii) performance of the firm's ORSA; (viii) induction, training and professional development of all the protection of staff raising concerns; (ix) maintenance of the independence, integrity and effectiveness of the whistleblowing procedures, and the protection of staff raising concerns; and (x) oversight of the firm's remuneration policies and practices.
- a firm will need to maintain a "Governance Map", providing details of those who effectively run the firm, including "key function holders", and to record individual responsibilities. In enforcement cases, the map would be used as evidence of individual responsibility for the area where the breach occurred. The PRA has said that it will use it to identify those individuals to whom specific regulatory queries should be directed as well as to identify which are ultimately responsible.
Financial Conduct Authority
The FCA has also proposed amendments to its own CF regime. These will comprise (i) changes to the approved persons assessment process; (ii) additional "significant influence" CFs to replace those that would fall away from PRA supervision under the proposals discussed above; and (iii) new conduct rules.
What about NEDs? Neither the PRA's nor the FCA's proposals consult on the treatment of NED (other than to the extent necessary to implement Solvency II). This is because they have intentionally held fire on this, pending the outcome of a separate consultation undertaken in July 2014. This will be dealt with in a further paper in early 2015.
Read across to banking developments
These proposals do bear some parallels to the proposals for senior bankers made in July 2014. However, they will not include any presumption of guilt or "reverse burden of proof"; any criminal offence related to a decision causing a firm to fail or any "self-certification" regime. That said, despite its name, the Banking Reform Act, did introduce some changes for all authorised firms, including (re)insurers. Section 28 of the Act, which came into force on 25 July 2014, extends the period within which the regulators can pursue relevant persons from three years to six years in certain circumstances. This will further sharpen the mind of anyone considering a senior role.
Consultation on the proposals will close on 2 February 2015. The new regime will come into effect on 1 January 2016.
Although this overhaul of the CF regime is not radical - it represents the continuation of a number of regulatory themes that are already well-entrenched - the aggregate effect is certainly a tightening of the noose. We can expect lively discussions within firms as to who is doing what and how this will be portrayed on the dreaded governance map. A senior executive will need to think long and hard about taking up a role - not just how he will perform it, but also the situation that he will inherit. This includes the hapless "key function holder" who will find himself in the unenviable grey area of not necessarily being an approved person but all the same subject to oversight, and conceivably regulatory sanction. We can expect increased due diligence and both ways – from the firm to the individual, but also vice versa. Nobody wants to be the PRA's or FCA's first scalp.