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Final Rules on Senior Managers and Certification Regime Published

  • United Kingdom
  • Employment law
  • Financial services and markets regulation
  • Insurance and reinsurance
  • Financial institutions - Insurance market
  • Financial institutions - Senior Managers and Certification Regime

05-07-2018

The PRA and the FCA have now published their final rules (PRA PS15/18, FCA PS18/15) on extending the senior managers and certification regime (SMCR) to insurers. The PRA has also published an updated supervisory statement SS35/15. At the same time the FCA has published its final rules for extending the SMCR to all financial institutions.

The FCA has also published a ‘Guide to the senior managers and certification regime for dual-regulated insurers’ which summarises its rules and provides guidance on the SMCR.

The extension of the SMCR applies to all Solvency II insurance firms and insurance special purpose vehicles, large non-Directive firms (NDFs) and small NDFs. FCA rules also apply to small run-off firms.

The extension of the SMCR will apply with effect from 10 December 2018 but there are transitional provisions. Firms should ensure that they have the appropriate personnel in the right approved functions prior to implementation.

PS15/18 and PS18/15: a summary

All PRA- regulated firms will now need to comply with a single accountability regime once the SMCR comes into full effect.

Our earlier briefing on the proposed SMCR extension sets out in outline the proposals for extension and can be read here.

These proposals have now been consulted on and there have been some changes to draft policy but none of these are significant.

Certification - small NDFs

There is a minor change for small NDFs - the certification regime will now encompass only members of the governing body (other than PRA/ FCA approved persons or non-executive directors) for these firms rather than including all members of the governing body and all employees who report directly to the governing body.

Certification: other firms

For firms other than small NDFs the PRA is proceeding with its proposals that certification functions should include key function holders (KFHs), material risk takers (MRTs) at Solvency II insurers (and large NDFs) and would exclude NEDs or senior managers and individuals who are temporarily covering a post for less than four weeks. The FCA certification regime will apply to those individuals who perform ‘significant harm functions’. The regime only applies if the firm has individuals performing a certification function, where it relates to a regulated activity. The set of FCA certification functions is wider than those specified by the PRA.

Fitness and Propriety

The FCA is implementing the fitness and propriety requirements that it consulted on so that firms must carry out fitness and propriety assessments at least annually and must obtain prescribed evidence in order to make their assessments.

Temporary cover for a SMF and conduct rules

The PRA provides that employees holding certification functions and employees who are performing a senior management function (SMF) on a temporary basis must comply with individual conduct rules in respect of the conduct of all business activities, both regulated and non-regulated.

The FCA confirms that it will also apply its conduct rules to a firm’s regulated and unregulated financial services activities, irrespective of whether the firm is a Solvency II firm or a small NDF.

Whilst the FCA conduct rules apply to all staff other than ancillary the FCA points out that a firm may of course choose to apply the rules to all staff.

Senior management functions

Despite concerns voiced, the FCA is proceeding with the proposed list of SMFs for Solvency II firms and large NDFs. Where a senior manager is performing a PRA and a FCA SMF at the same time an ‘overlap rule’ will apply (SUP 10C9.8) which means that a firm need only make one application and approval will cover both roles.

The FCA is also proceeding with a rule which applies the Overall Responsibility requirement to all Solvency II firms (excluding small run-off firms and ISPVs). This means that these firms must ensure that every activity, business area and management function has a senior manager with overall responsibility for it.

The FCA has earlier published a discussion paper on whether the legal function should come within the ambit of the overall responsibility rule. The FCA now states that it recognises that firms may not be able to make a decision and in some cases, the individual may require its approval (eg if they have responsibility for another area that comes under the SMF definition). It states that any firm that in good faith decides that it does or does not require approval does not need to change their approach until the FCA has published definitive guidance.

Notification of disciplinary action

The PRA is proceeding with a rule that notification must be made to it within seven business days of any disciplinary action taken by an insurer that relates to any action, failure to act or circumstance that breaches any conduct rule.

Statutory duty of responsibility

The PRA is amending SS35/15 to set out its expectations of the new statutory senior manager duty of responsibility.

The PRA is also adding some senior manager prescribed responsibilities (PRs)

No sharing of SMFs/ PRs

The PRA is also amending SS35/15 to provide that PRA PRs and SMFs can be shared but not split. The FCA states that a firm should not normally share a SMF between two or more senior managers. However, it may be appropriate as part of a job-share arrangement or where outgoing or incoming senior managers work together temporarily as part of a handover. With regard to PRs, the FCA provide that firms may only divide or share a PR in limited circumstances and where they can show this is appropriate and justifiable. Dividing and sharing PRs should not be a common practice across firms but there may be limited circumstances when this can happen. Firms must show this is appropriate and justifiable and does not leave a gap in responsibilities.

Handovers

Several concerns were raised by respondents to the PRA consultation about handovers of responsibilities. The PRA is proceeding with this rule which requires Solvency II insurers and large NDFs to take all reasonable steps to ensure a senior manager is provided with the information and materials that they will require to perform a new SMF or new responsibilities effectively. The FCA is also proceeding with its proposal for handovers. Solvency II firms and large NDFs must comply with the FCA’s more detailed requirements, given the importance of robust governance in these firms.

Criminal records checks

The FCA will only require criminal records checks for an applicant for a SMF. There is no requirement for this to be done annually although firms may choose to do this as part of their ongoing fitness and propriety assessments. Addressing concerns about the impact of the GDPR, the FCA has simply stated that it does not believe that SMCR and data protection obligations conflict since employers have legal obligations to process sensitive personal data such as criminal records.

We will be sending e-briefings on the transitional arrangements for the extension of the SMCR, steps to be taking in preparation for the regime and pitfalls and issues to look out for in light of the learnings from the application of the regime to financial institutions.

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