What Insurance Firms Need to Know About the Incoming SM&CR
Insurance firms are gearing up for the implementation of the Senior Managers and Certification Regime on 10 December this year. The SM&CR will replace the revised APR for financial services firms and was rolled out to banking firms in March 2016. It will, from 10 December 2018, apply to all insurers and reinsurers regulated by the FCA and PRA (Solvency II, Non-Directive firms, and Small Run-Off Firms). The Regime is designed to reduce harms to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account, specifically encouraging staff to take personal responsibility for their actions, improve conduct at all levels, and make sure that firms and staff clearly understand and can show who does what.
Insurers will move to the new regime from 10 December 2018 in a two-step transition:
Firms need to identify certification staff before 10 December, but will have 12 months to complete the certification process,
Senior Managers and Certification staff will need to have been identified and trained on the Conduct Rules ahead of 10 December and abide by these from this date. Other staff subject to the Conduct Rules will need to have been trained by 12 months from the commencement date.
Senior Managers Regime
Senior Management Functions are a new type of controlled function – which ones will apply will depend on the type of firm. Senior Managers are the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity. The FCA make particular functions SMFs so that they know who a firm’s most senior decision makers are, and ensure that responsibilities are clearly allocated. Firms won’t need to change their organisation; they will only need to have SMFs for functions that they currently have, and won’t need to hire new people – except for FCA Required Functions, and firms should already know whether these functions apply to them or not. Anyone who performs an SMF needs to be approved by the FCA before they begin their role. Guidance provided by the FCA confirms that in the event of an unforeseen or temporary absence (less than 12 consecutive weeks) of a Senior Manager, firms are allowed to have someone cover the role without being approved.
Under the new regime, every Senior Manager will need to have a Statement of Responsibilities document, which should set out their role and what they are responsible for. The document will be much the same in substance as the Scope of Responsibilities document that some insurers were required to submit under the revised APR and the SIMR. Firms will need to ensure that they submit SoRs with an application for approval of a new Senior Manager, and keep the SoR up to date, and resubmit them where there is a significant change in responsibilities.
The regime introduces Prescribed Responsibilities – a set of specific responsibilities that are to be defined in SYSC 24 of the FCA Handbook and in the PRA Rulebook, that a firm must give to a Senior Manager. Firms will need to carefully consider which Senior Manager is the best person to hold each of the PRs; they should be given to the Senior Manager who is the most senior person responsible for that issue, and need to have sufficient authority and an appropriate level of knowledge and competence to carry out the responsibility properly.
Solvency II and large NDF firms need to be aware of extra requirements that apply to them, including
Additional Senior Management Functions.
Additional Prescribed Responsibilities.
Overall Responsibility – this requirement means that affected insurers need to make sure that every activity, business area and management function has a Senior Manager with overall responsibility for it.
Responsibilities Maps – a single document setting out the firm’s management and governance arrangements, giving an overview of the allocation of responsibilities across a firm, and showing that the Senior Managers’ SoRs don’t leave gaps. Rules and Guidance are to be set out in SYSC 25.
Handover Procedures – affected firms must take all reasonable steps to ensure that a person taking on a Senior Manager role has all the information and materials they need to be able to do their job effectively.
The introduction of the Certification Regime is one of the biggest changes for insurers from the previous regime. It will apply to people who perform certain functions (those that involve, or might involve, a risk of significant harm to the firm or any of its customers), but who are not Senior Managers. Certification is not limited to regulated activities. In addition, if a Senior Manager performs one of these roles, and it is not related to their Senior Manager Function, then they will also need to be certified. Certification must be completed at least once a year, should take into account the qualifications, training and competence of the individual, and certificates issued should state that the authorised person is satisfied that the person is fit and proper to perform the Certification Function, and set out the aspects of the firm’s business in which the individual is involved. Some of the staff in the scope of the Certification Regime may have been previously approved by the FCA – the FCA will no longer approve these people, as one objective of the Certification Regime is to reinforce that firms are responsible for ensuring their staff are fit and proper.
Fit and Proper Requirements
Firms need to assess those in SMF, Certification Function and NED roles at least once a year, taking into account relevant FCA rules around these qualifications, training, competence and personal characteristics, as set out in the FIT section of the FCA Handbook.
Firms will also need to undertake criminal records checks as part of each Senior Manager approval application, to ensure that the information the candidates have provided is accurate and complete. This requirement also applies to NEDs who are not Senior Managers where a fitness requirement already applies to them.
Firms seeking to appoint someone to a Senior Manager or Certified role need to request a regulatory reference from the candidate’s previous employers (for a period of 6 years). Firms will also be required to disclose certain information going back 6 years, including details of any disciplinary action taken due to breaches of the Conduct Rules, and any findings that the person was not fit and proper.
The Conduct Rules apply to staff in two tiers – the first tier covers all staff who are not ancillary staff, the second tier applies only to Senior Managers. Firms need to make staff who are subject to the Conduct Rules aware that they apply to them, and provide appropriate training.
Where disciplinary action has been taken against a person for a Conduct Rules breach, firms are required to notify the FCA. Where the breach relates to an SMF holder, the notification should be submitted within 7 business days of the conclusion of disciplinary action, for all other staff, the notification should be made each year via GABRIEL. An annual notification about Conduct Rules should be made even if there haven’t been any breaches.
Firms affected by the changes will move to the new regime from 10 December 2018. All firms will need to identify their Certification Staff at the start of the new regime, but have 12 months from Commencement to complete the initial certification process.
Senior Managers and Certification Staff will need to have been trained and abide by the Conduct Rules from the start of the new Regime, but firms will have 12 months to train their other staff on the Conduct Rules.
Solvency II firms and large NDFs will need to notify the FCA which individuals are to be converted to which SMFs, submitting conversion notification Form K alongside their Responsibilities Map and SoR. If the individuals can be mapped directly from the revised APR, firms won’t need to re-apply for approval. If new or transferred individuals will be placed in Senior Manager Functions, firms will need to submit forms A and E respectively. Firms must ensure they submit the required conversion notification – if they do not, their approvals will lapse, they will be in breach of regulatory requirements, and they will have to re-apply for approval of individuals through the full SM&CR application process.
Individuals at Small NDFs, small run-off firms, and ISPVs will be automatically converted where possible, with no action required by the firm. It is recommended that firms consider whether any changes to approvals are necessary ahead of Commencement. In the event that the firm wishes to notify the FCA of changes to existing approved persons whose functions can be mapped to mapped SMFs, they should submit the appropriate form. If the firm wishes to apply for approval for a new individual to an SMF either before or after commencement, this also requires the submission of the relevant form.
A number of existing functions won’t be automatically converted, because some roles no longer require approval by the FCA. These will lapse at the start of Commencement, but it is likely that these individuals will be within the scope of the Certification Regime.
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