LIBOR-fixing, Forex-rigging and other high-profile market conduct failures since the 2008 financial crisis have led the Financial Conduct Authority (FCA) to set a timetable for extending the Senior Managers and Certification Regime (the Regime) to include insurers and reinsurers.
The Regime is likely to be implemented in early 2018. Broadly, the aim of the Regime is to improve industry culture and enhance market integrity by ensuring that staff are accountable for their actions, and that senior staff take responsibility for defined business activities. A senior manager, as defined in the FCA Handbook, will require either PRA or FCA approval before starting a role.
Who this applies to
- Insurers and reinsurers
- Insurance Special Purpose Vehicles (SPVs)
- The Society of Lloyd’s
- Managing Agents
- UK branches of third-country firms and EEA firms
Which employees will be affected?
The Regime is currently only likely to impact:
- Those involved in performing senior management functions.
- Those who are not senior managers, but whose role makes it possible for them to cause significant harm, either to the firm or to consumers.
Key aims
- Encourage staff to be personally accountable for their own conduct and the conduct of those they manage.
- Improve staff conduct throughout organisations.
- Ensure that firms and staff are aware of their key responsibilities and how these are distributed within the organisation.
Key features/changes
Insurers that are regulated by both the FCA and PRA will have to comply with both regulators’ specific rules. The FCA’s Regime for insurers will require Solvency II firms and large non-Directive firms (NDFs) to implement elements of the Regime, while small NDFs and insurance SPVs will have to implement a subset of the requirements.
Senior Manager Functions
The FCA intends to introduce new Senior Manager Functions (SMF), which will join the existing list of controlled functions under the Financial Services and Markets Act 2000 (the Act).
Firms will need to:
- Check the requirements of the Act for their particular business as not all SMFs will apply to every firm.
- Consider what activities, business areas and management functions it performs, including business conducted by offices overseas, and identify who has overall responsibility for these at senior level. If that person is not already a Senior Manager, s/he will need to be approved for the “Other Overall Responsibility Function”, as defined in the FCA Handbook.
- Satisfy themselves that all senior managers are fit and proper to perform their roles.
- Consider whether there is any overlap with the existing PRA SMFs. If there is, a firm will not require separate FCA approval.
- Provide a ‘statement of responsibilities’ to the FCA when any senior manager applies for approval, which clearly sets out the aspects of the organisation and/or tasks for which the senior manager is directly accountable. This will be identical to the scope of responsibilities used in applications made under the Regime at present.
- Allocate the FCA’s new ‘prescribed responsibilities’ to their senior managers, which will include responsibility for each of the firm’s business functions and activities.
- Actively ensure that senior managers continue to be fit and proper by undertaking reviews at least annually.
Certification Functions
Under the Regime, Certification Functions will apply to staff who perform certain roles. The onus will be on the firm to:
- Identify which employees perform roles which are considered to be Certification Functions.
- Satisfy themselves that those employees are fit and proper to perform their roles and review this annually.
- Issue a certificate to any employee performing a Certification Function stating that they are deemed fit and proper to do so and detailing their responsibilities.
- Issue a notice to any employee to whom the firm refuses to grant a Certification Function setting out what steps it will take as a result of the decision and why.
Conduct Rules
The proposed new Conduct Rules will apply to employees involved in financial service activities.
As a result of these, firms should:
- Take heed of the Conduct Rules proposed by the FCA.
- Train staff to ensure they acknowledge and adhere to the applicable Conduct Rules.
- Notify the FCA when they have taken formal disciplinary action against a person for breaching a Conduct Rule.
Comment
Firms may consider the Regime as a further, possibly unwelcome, regulatory burden. However, in practice, implementation should not require a great deal of additional work. Many firms will already have the framework and processes in place to enable them to implement the changes easily, and firms are likely to benefit overall by providing reassurance to consumers and ultimately improving industry standards of behaviour.
Read other items in the Professions and Financial Lines Brief - December 2017
