In March 2016, the FCA replaced the Approved Persons Regime (APR) with the Senior Managers and Certification Regime (SM&CR) for banks following recommendations from the Parliamentary Commission on Banking Standards (PCBS). The PCBS had reviewed the banking industry following the financial services crisis in 2008. The original legislation did not cover insurers.
The Prudential Regulation Authority (PRA) introduced the Senior Insurance Managers Regime (SIMR) on 7 March 2016 and the FCA revised the APR to complement the PRA’s proposals.
On 4 May 2016 Parliament passed the Bank of England and Financial Services Act 2016 which will extend the Senior Managers' and Certification Regime to all persons authorised under the Financial Services and Markets Act 2000 by 2018 including insurers. It is expected that over 60,000 financial services firms and 200,000 individuals will be brought within the scope of the SM&CR by virtue of the Act which amends both FSMA 2000 and the Financial Services Act 2013.
The Senior Insurance Managers Regime (SIMR) provides a regulatory framework for similar standards of fitness and propriety, conduct and accountability to be applied to individuals in positions of responsibility at insurers, as for banks and large investment firms (SM&CR) and is tailored to address those risks specific to the Solvency II insurance industry. Non-Solvency II insurers (non-Directive firms NDFs) will be subject to variations of the regime. NDFs with assets over £25million from regulated activities will apply a similar SIMR regime to SII firms, while small NDFs small run – off firms, and ISPVs will apply a streamlined regime.
The SIMR is a reflection of the PRA’s aim to operate a single, consistent regime wherever possible.
On 4 July 2018 the PRA published final rules for the extension of the SM&CR for insurers in PS15/18. The new regime comes into effect 10 December 2018 and 10 December 2019, by virtue of the Commencement Order bringing into force the relevant amendments to FSMA in the 2016 Act. The FCA also published near final rules for how it intends to extend the SM&CR to all dual-regulated insurers (PS18/15 and PS18/16 (the Duty of Responsibility for insurers and FCA solo-regulated firms)).
The extension will affect all insurers and reinsurers regulated by the FCA and the PRA, ranging from very small firms outside the scope of the Solvency II Directive, to some of the largest global firms but will apply differently depending on the category of SM&CR firm. There are also 2 transitional provisions to help firms move to the new regime.
The SM&CR consists of 3 parts, which apply on a legal entity basis:
The Senior Managers Regime (SMR) - which focuses on individuals who hold key roles or have overall responsibilities for whole areas of relevant firms
The Certification Regime - a new FSMA requirement for all firms, will make firms more responsible for assessing fitness and propriety of staff, and for issuing the certificate which will need to be renewed at least once a year. The CR applies to people performing Certification Functions, ie employees but who are not Senior Managers. Some of the staff in scope of the Certification Regime may previously have been approved by the FCA, this approval will no longer be required as the onus is on the firm to ensure their staff are fit and proper.
Conduct Rules - a new set of enforceable Conduct Rules. The majority of employees working for regulated entities will be covered by enforceable conduct rules - viewed as an "important tool to achieve cultural change across organisations". The rules will not apply to "ancillary staff". Firms are required to report breaches of conduct rules to the FCA. All “conduct rules staff” have a duty to treat customers fairly and are at risk of regulatory enforcement/fines.
The rules bring about the following:
-The 10 PRA Senior Insurance Management Functions (SIMFs) will be maintained and renamed SMFs, FCA proposes 5 executive functions as FCA SMFs;
-Senior Managers will be subject to an annual assessment of fitness and propriety and will need to be approved by the PRA/FCA and will be allocated "Prescribed Responsibilities" (PRs) .
--The PRA and FCA propose 19 PRs: PRA/FCA - 7; PRA only - 9, FCA only - 3;
All Senior Managers will have a general Duty of Responsibility, which means that they will have a formal responsibility to take reasonable steps to prevent breaches;
-Scope of Responsibilities document (required by every Senior manager) renamed ‘Statement of Responsibilities’ to be consistent with the new legislation which will clearly set out the role and responsibilities of the Senior Manager;
Outsourcing under the SMR - whilst functions may be outsourced, a firm may not outsource the accountability for the function;
-The ‘governance map’ that covers all Senior Managers and Key Function Holders (under the PRA SIMR), as well as all senior individuals of interest to the FCA to be replaced with "Responsibilities Map".