Possible extensions to the scope of the Senior Manager and Certification Regime

As part of the UK financial services regulators’ continued efforts to seek enhancements to existing governance frameworks, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have issued consultation papers proposing to extend the scope of the Senior Manager and Certification Regime (SM&CR) to almost all insurance businesses, carriers and intermediaries alike. The FCA issued two separate consultation papers: (CP17/25) “Individual accountability – extending the Senior Managers and Certification Regime to all FCA firms” and (CP17/26) “Individual accountability – extending the Senior Managers and Certification Regime to insurers”. Separately, the PRA issued its consultation paper, (CP14/17) “Strengthening individual accountability in insurance: extension of Senior Managers & Certification Regime to Insurers”, which deals only with insurers and is to be read in conjunction with the FCA’s CP17/26. Whilst all tailored for slightly distinct purposes, the fundamental regime and the core impacts are largely the same, save where specific distinctions need to be made for particular institutions, for example in relation to insurers subject to Solvency II.

For many of us, the ‘Approved Persons’ Regime (APR) has been a central plank of insurance regulation for some time and it is a well-entrenched model. It was only recently that this regime was overhauled as it applies to insurers with the introduction of the Senior Insurance Managers Regime (SIMR). As significant a change as the introduction of SIMR was for insurance regulation, however, the current proposals – if they come into being – will see an even more drastic change and will result in a framework that is consistent with that which was applied to the banks back in March 2016. Whilst the extension will build on many of the principles that SIMR introduced for insurers (rather than replacing it with something materially different), the real difference will be seen in the impact on the FCA’s APR, which in 2016 was revised, but will now effectively be superseded and replaced for all FCA authorised and regulated insurance businesses (those aspects being covered by the FCA’s consultation papers). Crucially, the SM&CR will not just extend to insurers, it will also extend to so-called ‘FCA solo-regulated’ entities, such as brokers, managing general agents and other intermediaries.

This regime will not just apply on a ‘corporate level’, rather, its effect will extend to many employees of these businesses personally. The core focus of this regime, which was made clear when it was introduced for banks in 2016, is to broaden the scope of governance so that it penetrates throughout financial services organisations in order to impose individual accountability upon those who run those entities, or have responsibility for important parts of them.

The SM&CR can be broken down into three main sections:

  • Senior Managers
    • The appointment of individuals by firms to perform certain ‘Senior Management Functions’ will be subject to prior approval of the PRA/FCA (as applicable). For insurers, these functions will include those already set out under the existing SIMR (subject to the additional proposals set out in the PRA’s consultation paper).
    • Senior Managers will have to maintain a ‘Statement of Responsibilities’ which will set out those areas of the business for which they are responsible and accountable. For some firms, the regulator will specify certain ‘Prescribed Responsibilities’ which must be assumed by a firm’s Senior Managers.
  • Certification Regime
    • This applies to individuals who are not Senior Managers but who work in positions that could pose a risk of significant harm to the firm, the firm’s customers, or to the market generally.
    • Appointments to these roles/positions, which are yet to be clarified in full, will not be subject to prior approval of the regulators but the firm will need to certify that any such individuals are fit and proper on at least an annual basis.
  • Conduct Rules
    • The Conduct Rules have an even broader application and will need to be complied with by all employees in an insurer or insurance intermediary (with a few exceptions), with some additional Conduct Rules applying only to Senior Managers.

This is a high level summary of the so-called ‘Core Regime’: a baseline of requirements. There are certain firms, those which are very large or complex, that will have to comply with the ‘Enhanced Regime’ which incorporates certain additional requirements. Conversely, there will be some firms that will be deemed ‘Limited Scope’ by virtue of being particularly small or falling into certain categories – these firms will only be required to comply with a reduced scope of the regime.

The introduction of the SM&CR to insurers, and particularly to solo FCA regulated intermediaries, represents a significant raising of the bar when it comes to regulatory compliance and governance. The new certification regime does not just extend to the regulated firms and those in specific senior positions, but can apply to other ‘non-senior’ employees who perform roles which are capable of causing significant harm. The apparent broad remit of this proposed extended regime should command the attention of all employees working for insurers, brokers and other insurance businesses who could potentially fall into this category.

Insurance businesses should consider the proposals carefully, especially those which might be caught by the Enhanced Regime. Firms should consider communicating these developments to its staff, and those individuals performing Senior Management Functions or who will be caught by the Certification Regime should take particular note. Firms might consider taking steps to assess how their existing governance structures might be impacted by these changes and the time and cost impacts of having to make any changes to cater for it. Training sessions for all employees might be necessary and regular communication with the board is crucial to ensure important messages on the topic are coming from ‘the top’.

It is anticipated that the final rules regarding the extension of the SM&CR will be published in 2018, but the consultation will remain open until November 2017, and further steps may be necessary. No date for when the new regime will come into force has yet been determined by the regulators.

Simon Cooper, Sam Batchelor