This morning the FCA and PRA separately published a collection of documents containing the long-awaited final rules and guidance in relation to the Senior Insurance Managers Regime (SIMR) for Solvency II firms. The combined new PRA and FCA regime for accountability in insurance will be an extraordinarily untidy combination of tweaks to the Approved Persons regime (on the FCA side) and the introduction of a watered-down version of the Senior Managers Regime, combined with a Solvency II-driven ‘key function’ regime (on the PRA side).
Among the 400 or so pages, we would highlight the following points:
- PRA Supervisory Statement SS35/15 usefully collects together the PRA guidance so far on the identification of key functions (including which functions firms ought to consider designating as key functions for the Solvency II purposes).
- Firms that have been struggling to work out how far down the chain of command to go when appointing key function holders will find the guidance at paragraph 2.28 of SS35/15 useful:
“The PRA would normally expect a key function holder to report into a very senior figure at the firm such as the CEO or possibly some other SIMF holder”.
- SS35/15 (at paragraph 2.31) also provides welcome clarity on how the SIMR applies where a key function has been outsourced:
“Performance of each of the above key functions may be outsourced to another undertaking… However, there needs to be appropriate oversight of any outsourced functions. The PRA expects the governance map to set out which key functions have been outsourced (in whole or in part), the name of the service provider, and the identity of the key function holder within the firm who has the responsibility for oversight of that function.”
The FCA Conduct Rules/PRA Conduct Standards
- Neither regulator has made any changes to the substance of the content or scope of the Conduct Rules/Standards proposed in early consultations.
- The PRA has amended its proposed draft rule requiring a firm to be satisfied that a person performs a key function in accordance with the relevant Conduct Standards. The amended rule states that firms should consider whether a person has observed these Conduct Standards when performing an ongoing fit and proper assessment. The PRA has said that firms should take all reasonable steps to gather and consider information which indicates the extent to which individuals are following the relevant Conduct Standards, and they should also keep a record for this assessment. This will inevitably increase the record-keeping burden upon insurers’ HR departments.
- The PRA has indicated, somewhat controversially, that although it would not generally expect to assess a person’s actions in their private life against the Conduct Standards, it believes that “an individual’s wider behaviour could affect his or her ability to follow these standards more generally. The way in which a person behaves in their private life may then be relevant to any assessment, by the PRA or the firm itself, of whether that person is, or remains, fit and proper.” We predict a sudden and widespread aversion of insurance employees to Facebook and Instagram.
- The PRA cannot apply its Conduct Standards directly to notified NEDs, in the way that it can to a SIMF or to FCA Approved Persons. However, firms are required to ensure that all persons who perform key functions, which would include all members of the board, are fit and proper on an ongoing basis; and the PRA has said that it expects firms to consider whether their NEDs (and other key function holders) have complied with the Conduct Standards as part of that assessment.
- The PRA has provided helpful guidance on how firms should ensure that those individuals performing a key function observe the relevant Conduct Standards. For key function holders (including NEDs), the PRA expects the relevant Conduct Standards to be set out in the individual’s terms and conditions of engagement (i.e. employment contract). For other staff performing key functions, the PRA expects the generic Conduct Standards to be promulgated in a staff handbook, or similar document. The PRA has said that it expects that the relevant Conduct Standards should also be taken into account when setting an individual’s objectives each year.
Local board governance – forcing insurance groups to take a legal-entity view
- The PRA and FCA have both been active recently in reminding firms that belong to large international groups of the importance of robust corporate governance at legal entity level in the UK. PRA Supervisory Statement SS35/15 provides a pointed reminder about where the accountabilities fall where there is one or more individual who has been approved as a Group Entity Senior Insurance Manager (broadly, any individual within the wider group whose decisions and actions are regularly taken into account by the board of the subsidiary). The PRA states (paragraph 2.9) that:
“The board of the subsidiary is expected to provide proper oversight of the subsidiary and has regulatory duties under FSMA and fiduciary duties under the Companies Act 2006 in this regard. This means a Group Entity Senior Insurance Manager may direct elements of the business which form part or all of a subsidiary only to the extent that the board agrees to this… The PRA will hold the NEDs and the Group Entity Senior Insurance Manager accountable for this collaboration.”
- The PRA’s previous consultation (CP26/14) proposed that firms should have to request references before putting individuals forward for approval to perform a SIMF, and to provide references on past employees. The PRA’s subsequent rules (set out in PS3/15 published in March 2015) require firms to take reasonable steps to obtain references as part of their assessment of a person’s fitness and propriety, but the PRA did not set out details of the information which should be included in such a reference. In light of the recent Fair and Effective Markets Review (FEMR) and industry pressure for standardisation of references, the PRA has said today that it will not make any further rules on regulatory references at this stage and instead intends to consult on further proposals later in 2015. Subject to the outcome of this proposed consultation, the PRA says that it expects that its final rules on references will be made before the commencement of the SIMR on 7 March 2016.
Investment managers and traders within insurers
- Following the recent recommendations of the FEMR, SS35/15 includes a paragraph stating that the PRA expects that investment managers and/or traders at insurers would normally be expected to be performing a key function. As a result, firms are required to: (i) ensure on an ongoing basis that they are fit and proper; and (ii) require these individuals to observe the PRA Conduct Standards.
Key transitional dates
1 January 2016
- firms must have governance maps in place; and
- firms are required to submit a scope of responsibilities form for new SIMF applications.
8 February 2016
- firms must have submitted grandfathering notifications to the PRA and FCA (for SIF holders).
7 March 2016
- the new conduct rules will apply to PRA and FCA approved persons.
7 September 2016
- firms must submit scope of responsibilities form for grandfathered individuals to the PRA (by this date at the latest);
- firms must submit a notification form in respect of those ‘transitional’ key function holders at 1 January 2016 (who are not grandfathering). These are key function
holders who do not need to be pre‐approved by the PRA, but have to be notified to the PRA (for its assessment).