December 14, 2017
Accountability has always been at the core of Eames Partnership’s fundamental values, with every one of our team accountable for delivering results and exceptional service to our clients.
And it’s something that UK financial services regulators have been shining a bright spotlight on in recent years, placing greater emphasis on senior leader accountability for failings in conduct and competence within companies not just for themselves but also their staff.
Last week, data from law firm RPC showed that the Financial Conduct Authority (FCA) had banned 18 people from working in the industry in year ending 30 September 2017. Whilst this represents a 75 percent reduction from the peak number of prohibition orders handed down in 2010, the law firm highlighted that this shouldn’t be seen as the FCA going “soft” but rather a result of a tougher approach to regulation.
Indeed, the UK (re)insurance industry will have to pay closer attention to accountability next year, as the pending extension of the FCA’s Senior Managers and Certification Regime (SMCR) to all regulated financial services firms comes into force.
The SMCR was introduced in 2016 for the banking sector to encourage a culture where staff at all levels take personal responsibility for their actions, while a similar Senior Insurance Managers Regime (SIMR) was introduced for insurance firms in the same year to implement aspects of the Solvency II directive and also to ensure some alignment with the senior managers’ regime for the banking industry. However, as the insurance industry has not been under the same scrutiny as the banking sector, the SIMR reforms were developed differently to reflect the distinct needs and risks.
But from next year, the SMCR will replace both the FCA revised Approved Person Regime (APR) and also the Prudential Regulation Authority (PRA)’s for insurance firms.
The SMCR marks a significant cultural change, encouraging an ethos of personal responsibility that impresses upon all staff the value of good culture to the health of the firm and the financial services industry more widely.
Exact timeframes for the implementation of the extension are still uncertain. In follow consultation papers published yesterday (13 December), the regulators said they expect the new rules to apply to insurers from “late 2018” although they said an exact commencement date must be confirmed by the Treasury at which point final policies and rules will be published.
So, what are the key changes for insurers?
Whilst there are many parallels between the SIMR and the SMCR, the latter applies more stringent rules to the (re)insurance industry, making it easier for regulators to hold individuals accountable.
In July 2017, the FCA and PRA published consultation papers outlining proposals for the SMCR to insurers and all other regulated firms. The regulators have proposed a proportionate approach to implementing the new regime, with the full SMCR applying to Solvency II firms as well as large non-directive firms (NDFs) i.e. insurers that fall outside of the scope of Solvency II but have an asset value of least £25mn, while a “lite” version will apply to other carriers.
Introduction of a Certification Regime
Arguably one of the biggest changes for insurance firms is the introduction of a certification regime, which will require companies to annually identify, assess and certify the fitness and propriety of employees who are not classed as Senior Managers but whose role is deemed capable of causing ‘significant harm” to the company or its customers (certification functions), meaning that many more staff will be captured by the SMCR regime.
Importantly, an individual performing a certification function will not be subject to direct approval by the PRA or FCA. However, a firm must take reasonable care to ensure that an employee does not perform a certification function without having first been certified as fit and proper to do so.
In their follow-up consultation papers, the regulators have proposed that the new requirement to certify employees performing certification functions as fit and proper would come into effect 12 months after the HM Treasury has announced a commencement date.
Another significant change is the application of certain conduct rules to a much wider population of firms' employees.
Under the SMCR, the PRA proposes to apply new conduct rules to individuals who are approved by the PRA or FCA as senior managers or who fall within the PRA certification regime. Meanwhile, the FCA will apply the rules to all staff other than those performing ancillary roles (such as cleaners, receptionists, security guards etc.) rather than just senior management.
The core set of individual conduct rules shared between both the FCA and PRA requires individuals to act with integrity; act with due care, skill and diligence; and be open and cooperative with the FCA, the PRA and other regulators. Additional rules will be imposed upon senior managers. Firms will also be required to notify the regulator of any disciplinary action taken against a member of affected staff in breach of these rules.
Meanwhile, there are also a number of key changes specifically for senior managers at (re)insurance firms i.e. those who perform Senior Management Functions. These include the likes of chairman, chief executive etc.
In its follow-up consultation papers released yesterday, the FCA shed some light as to how the transition for insurers and individuals to the SMCR would work, proposing proportionate approaches for different types of firms. The regulator is proposing to automatically convert individuals at small NDFs, small run-off firms and ISPVs from the Approved Persons Regime to the new regime, with Solvency II firms and large NDFs requiring additional paperwork.
Another significant proposition includes extending the “duty of responsibility” to insurers, which currently only applies to senior managers of banks. This enables the regulator to hold senior managers accountable if a regulatory breach occurs in their area of responsibility and they are unable to demonstrate that they took reasonable steps to prevent or stop wrongdoings.
With a greater emphasis on individual accountability and culture, the pending implementation of the new regime stresses the need for insurance companies to have the individuals in place. At Eames Partnership, we are dedicated to identifying senior candidates that share the same accountability ethos as we do internally. If you are interested in finding out how we can help you find the highest-calibre individuals to ensure their capabilities mirror the changing regulatory requirements of your business, please contact Peter Jackson at email@example.com or on +44 (0)207 092 3214.