Last summer Mark Carney, Governor of the Bank of England, announced that the new regime for regulating individuals at UK banks, designed to make it easier to take disciplinary proceedings against individual members of senior management, would be extended to UK insurers. He explained that
“alongside reforms that Parliament has asked us to make to hold senior bankers to account, we will create a similar regime for senior managers in the insurance industry. Integrity, honesty and skill are not optional, whether you run an insurance company, global investment bank or building society.”
In November the PRA and FCA published their proposals for this new regime for insurers and an extensive consultation exercise has followed. The new regime will apply to the 400 or so insurers who are subject to Solvency II, leaving 100 smaller insurers under the existing approved persons regime. References to ‘insurers’ in this article are therefore intended to cover Solvency II firms only.
Are the proposals sensible and properly coordinated?
Disappointingly the PRA and FCA have each adopted their own, very different, approaches to the regulation of individuals at insurers, making the new system significantly more complex and confusing than the current regime. In my view this uncoordinated approach is entirely unnecessary and appears to evidence a lack of meeting of minds between the prudential and conduct regulators.
At a high level, the PRA has taken the view that what is good for banks must be good for insurers, and so has sought – subject to some important statutory restrictions on its powers - to impose on insurers a regime similar in terminology and approach to the “Senior Managers Regime” for banks. Senior management roles at insurers requiring pre-approval by the PRA will renamed as “Senior Insurance Management Function” holders or “SIMFs”.
Conversely the FCA has adopted a more minimalist approach, preferring to tinker with the existing approved persons regime simply to bring it into line with requirements under Solvency II. As a result, individuals requiring pre-approval by the FCA will continue to be known as “Significant Influence Function” holders or “SIFs”.
This leaves insurers with the awkward task of piecing together the two regimes in order to identify the changes that will need to be made and to start work on separating out its SIMFs from its SIFs.
The good news
For insurers, the good news is that a number of the changes to the Financial Services & Markets Act 2000 to introduce the Senior Managers Regime were expressly limited to banks. As a result, amendments to the legislation itself would be required if the regulators wished to extend the full ambit of reforms to the insurance industry.
For example, the new criminal offence of ‘reckless mismanagement’ is a provision that applies only to UK banks and not to insurers. Similarly the ‘presumption of responsibility’ that applies to senior managers within banks, reversing the burden of proof in relation to personal culpability where the firm breaches its regulatory duties, cannot be extended to insurers.
Perhaps most significantly, the imposition of personal binding regulatory duties on all employees of banks (who can also be disciplined for being ‘knowingly concerned’ in a breach by the firm), will not extend to insurance companies. For the time being, therefore, insurers are immune from some of the more painful aspects of the new banking regime.
The implementation challenge for insurers
While the reforms are therefore undoubtedly less severe for insurers than for banks, they will still present a significant challenge in transitioning across from the current set of rules and ensuring that appropriate procedures and processes are in place to meet the standards imposed by the new regime.
The steps that will be necessary to get insurers ready for the new regime will require Compliance, Legal, HR, Risk and Training & Compliance teams to work together cohesively in order to implement the new rules in a sensible manner and in a way that avoids some of the numerous potential pitfalls. A cross-departmental approach will be key to getting implementation right.
The workstreams will need to cover a variety of areas including:
Mapping of new roles: The process of identifying which individuals will be required to be SIMFs or SIFs under the new regime, including potentially those working in other jurisdictions and other parts of the insurer’s group. The insurer will need to identify which individuals are ‘effectively running the firm’. Those performing other ‘key functions’ will also need to be identified and recorded.
Allocation of prescribed responsibilities: Identifying which of the SIMFs are to take on each of the prescribed responsibilities that insurers are required to allocate. This may be a fairly simple process in theory, but the reality is that members of senior management may well be reluctant to take on these additional regulatory responsibilities (with the corresponding increased regulatory risk) and therefore a detailed negotiation may ensue.
Preparation and maintenance of a comprehensive “governance map”: Insurers will be required to prepare and keep up to date a comprehensive document identifying the key functions involved in effectively running the firm; the identity of each individual conducting such a role; a summary of the responsibilities allocated to each such individual; the reporting lines and lines of responsibility for each such individual; and details of how the governance arrangements fit into the wider group arrangements. The governance map must be provided to the PRA and FCA on request.
Self-assessment of fitness and propriety and notification for certain individuals: The current proposal is that, for a small population of an insurer’s senior management, there will be no regulator pre-approval required, but rather the insurer will need to conduct its own self-assessment of fitness and propriety and then make a formal notification to the PRA (with details of how they have been assessed). This applies to non-executive Directors who do not chair key committees, and for ‘key function holders’ within the firm who are not conducting a role that requires pre-approval. The insurer will be required to impose conduct rules on these individuals as a matter of employment law, even though they do not apply directly. Ongoing monitoring must be undertaken and notifications made to the PRA where the insurer later has concerns about the individual’s fitness and propriety. A parallel internal regime will therefore need to be put in place for individuals in this new category.
Changes to recruitment processes: The new regime places upon the insurer the primary burden of assessing fitness and propriety of members of senior management, and imposes strict rules on taking up prior employer references (dating back at least five years) and conducting criminal record checks. Similarly insurers will be required to provide full references to prospective new employers for individuals they employed up to five years previously.
Contracts of employment: Given the duties to be imposed on insurers in relation to certain key function holders, it is likely that a series of changes to standard employment contracts will be needed in order to protect the insurer.
Training on new personal conduct rules: The PRA and FCA each propose a new set of personal conduct rules, which SIMFs and SIFs will be required to adhere to. These are based on the existing Statements of Principle for Approved Persons but include new provisions – such as the personal duty to ensure that due regard is paid to the interests of policyholders, and that they are treated fairly – and therefore training on the meaning and effect of the new rules will be required.
Grandfathering from current regime: It is currently unclear whether those who perform SIF roles at present will automatically become approved under the new regime, or whether a fresh assessment by the regulator(s) will be required. As Parliament has been so critical of the existing approved persons regime, it has questioned whether it is appropriate to grandfather approvals across to the new regime. If there is no grandfathering, this would impose huge burdens on the regulators and on insurers. We await the regulators’ proposals in this area.
At many insurers, work has already begun to plan the necessary steps to transfer across to the new regime. The first set of near final rules has now been published, albeit with final supervisory statements to be issued later in 2015. This will give firms time to prepare for implementation and implement their new processes before the rules come into force on a staggered basis on 1 January 2016 and the 7 March 2016.