PRA consults on SMR/SIMR changes

PRA has published a consultation paper proposing changes to both the SMR and SIMR, but focuses predominantly on the SIMR, introducing what PRA describes as “optimisations”.

The proposed changes will apply to all Solvency II insurance firms and to large NDFs, and are designed to bring the SIMR more closely into line with the SMR. They include:

  • creating a new PRA SIMF (SIMF 24)– the Chief Operations function, which would be the most senior individual responsible for managing the internal operations and technology of the firm. PRA envisages that COOs, and potential chief administrative officers or heads of operations and technology may come within this role. It notes this is the exception to its general expectation that an SIMF can be shared but not split – although it does not expect it to be split among more than 3 individuals;
  • creating a new PRA Prescribed Responsibility for the firm’s performance of its obligations in respect of outsourced operational functions and activities. This would complement the new SIMF 24, and would need to be allocated to an individual approved in an SIMF or an FCA relevant senior management function. The PR would apply to third country branches in respect of the activities of the branch;
  • creating another new PRA SIMF (SIMF 6), the Head of Key Business Area function, for individuals who are responsible for large business areas or divisions within a firm. PRA proposes to set thresholds, so that individuals responsible for areas or divisions of firms that exceed those thresholds will be in scope of the new function. The idea is to catch individuals responsible for areas of the business that may have a potential impact on the firm’s stability who are not already within an SIMF;
  • requiring that the Chairman and CEO roles may not be held by a single individual at large firms (that meet a new definition). This mirrors the position for banks.  A “large firm” would be one with annual premium income of more than £1 billion in each of the 3 previous financial years, or with assets related to regulatory activities of more than £10 billion at the end of those periods; and
  • requiring that a NED oversight SIMF role at a large firm that is part of a group may not be performed by a an individual performing some executive function within that same group. PRA says many firms have proposed that senior group executives should be NED chairs for some of their large insurance subsidiaries, but considers this may create significant conflicts of interest.

PRA also proposes to require insurers to take steps to encourage board diversity. It plans to achieve this by requiring Solvency II insurers and large NDFs to have a policy to consider a broad set of qualities and competences when recruiting board members and have a policy to promote diversity among board members.

Finally, PRA proposes consequential amendments to the SMR forms following its recent new rules relevant to banks, building societies, credit unions, and PRA designated investment firms. The proposed amendments include:

  • the extension of certain Conduct Rules/ Conduct Standards to Notified NEDs, which include a new notification requirement under Section 64C of the FSMA in respect of internal disciplinary actions;
  • a new Chief Operations PRA SMF (SMF 24) for the individual with responsibility for the internal operations and technology of a firm; and
  • a new PRA PR for the firm’s performance of its obligations under the Outsourcing Part of the PRA Rulebook, to complement the Chief Operations SMF.

PRA has asked for responses to the proposals relating to the SIMR by 22 September, and to the proposals on the SMR forms by 14 August (as these relate to a policy that has already been consulted upon and finalised).

PRA also plans to consult soon, with FCA,  on the extension of the regime to (among others) all insurers.