On 4 July 2018, the PRA published policy statement (PS)15/18 in response to Consultation Paper (CP) 14/17 ‘Strengthening individual accountability in insurance: extension of the Senior Managers and Certification Regime to insurers’ and CP 28/17 ‘Strengthening accountability: implementing the extension of the SM&CR to insurers and other amendments’. As well as feedback to responses to these CPs, the PS also provides:
- the final rules for the extension of the Senior Managers and Certification Regime (SM&CR) to insurers by amending the Senior Insurance Managers Regime (SIMR);
- an updated Supervisory Statement (SS) 35/15 ‘Strengthening the individual accountability in insurance’ and terminology updates to other existing SSs;
- a consolidated Statement of Policy (SoP) ‘Conditions, time limits and variations of approval’; and
- the streamlined set of forms for the SM&CR and amendments to Part 4A permissions forms.
Responses to CP14/17 Strengthening individual accountability in insurance: extension of the Senior Managers and Certification Regime to insurers
The PRA received 14 responses to this CP and while respondents broadly supported the proposals, there were some who raised concerns about the complexity, proportionality and costs and benefits of the proposed regime and the frequent changes that have already been made to a regime that has been in place for less than two years. On this latter point, the PRA has said that it does not intend any further significant changes unless it considers that the policy has not been sufficiently embedded and implemented within firms.
Certification Regime for insurers other than small non-directive firms (NDFs)
One of the PRA’s proposals was that the certification functions for Solvency II (SII) firms would include key function holders (KFHs) and material risk takers (MRTs) at large insurers. Non-Executive Directors (NEDs) or individuals approved for a senior management function (SMF) by either the PRA or FCA would be excluded. Similarly, individuals appointed to a certification function but only to cover the absence of the employee in that role would also be excluded provided that the absence is reasonably foreseeable and is for less than four weeks.
Some respondents felt this proposal would “dilute transparency and accountability”, suggesting that it would be an additional cost for firms but with no tangible benefit. The PRA disagreed. It believes the Certification Regime builds on the current SIMR framework where KFHs are identified by firms, therefore a clear record of their responsibilities should already be in place. KFHs are seen by the PRA as having responsibility for a function that is fundamental to the sound and prudent management of the firm. This same view is applied to large firms who have MRTs.
The PRA’s position on the Certification Regime will not change as it believes the policy should enhance the accountability of KFHs and MRTs.
Conduct Rules to employees in a “certification function” and certain other employees
The proposal here was to extend the application of the Conduct Rules to all employees holding a PRA “certification function” – including KFHs – at insurers as well as to those employees at firms performing an SMF on a temporary basis.
One respondent queried whether it was intended that the Conduct Rules should only apply to regulated activities, referencing IT and HR functions as examples. The PRA’s position is that Conduct Rules should apply in respect of the conduct of all business activities as regulated and non – regulated activities such as IT and HR may affect the safety and soundness of a firm. Accordingly, the PRA is maintaining its position.
Duty of Responsibility
Under section 66B of FSMA, a person is guilty of misconduct if any of the three conditions are met. One of these arises from the Duty of Responsibility, which states that a person will be guilty of misconduct if the PRA finds that all of the four following criteria are met: (i) the person is or was a Senior Manager in a PRA authorised firm; (ii) there has been or continues to be a contravention of a “Relevant Requirement” (section 66B(4) of FSMA) by the firm; (iii) the Senior Manager was, at the relevant time, responsible for the management of any of the firm’s activities in relation to which the contravention occurred; and (iv) the Senior Manager did not take steps as a person in the Senior Manager’s position could be reasonably expected to take to avoid the contravention occurring (or continuing).
The PRA’s expectation of how firms should observe the new statutory ‘duty of responsibility’ is set out in SS35/15, but essentially when looking at whether an individual took steps as a person in their position (i.e. Senior Manager) could reasonably be expected to take to avoid the contravention occurring (or continuing), the PRA will consider the circumstances as they existed at the time. It does not intend to apply standards retrospectively or with the benefit of hindsight.
No comments from respondents were raised and the PRA is maintaining this policy as consulted.
Prescribed responsibilities (PRs)
SS35/15 explains the PRA’s proposals to add new PRs that should be allocated to a Senior Manager. Four new PRs were proposed for third country branches and Swiss general insurers.
No comments from respondents were raised regarding these proposals, and the PRA will maintain its position on this policy.
Statement of responsibility and management responsibility maps
The PRA proposed to rename the current ‘scope of responsibility’ records and ‘governance maps’ in the SIMR as ‘statements of responsibility’ (SoRs) and management responsibilities maps (MRMs). It also proposed that MRMs should include a record of any matters reserved to the governing body.
For consistency with the FCA regime, the PRA has said it will maintain the new terminology for SoRs and MRMs and will also maintain its expectations on SoRs and MRMs as set out in its updated SS35/15.
Another related proposal was that if there is significant change to the SoR for an individual performing an SMF, then a copy of the revised SoR would need to be provided to the PRA in line with the requirements in FSMA. Some respondents questioned whether this was necessary as potentially there could be a lot of updates to the regulator. The PRA reminded respondents that this is a statutory obligation in section 62A of FSMA.
The updated SS35/15 does, however, clarify what the PRA would consider to be a “significant” change, prompting the need for firms to submit a revised SoRs.
Responses to CP28/17 Strengthening accountability: implementing the extension of the SM&CR to insurers and other amendments
The PRA received only 8 responses to this CP, which should be read alongside the FCA’s PS18/15 containing equivalent proposals to implement the extension.
As with CP14/17, respondents were largely in support of the proposals, such as:
- individuals who have been approved for an SMF within insurance firms should be treated equivalently to individuals who have been approved for an SMF within banking firms;
- the new requirement on insurers to certify employees performing certification functions as fit and proper would take effect 12 months after the commencement date of the regime for insurers; and
- amendments will continue to be made to the PRA Rulebook and forms as part of the PRA’s extension to remove gendered language from the SM&CR.
The PRA’s rules are unlikely to change unless of course required by the regulations made by HM Treasury for the amendments to FSMA.
The SM&CR extension will apply with effect from 10 December 2018.