IMPLICATIONS FOR THE INSURANCE INDUSTRY 7 September 2018 - - PowerPoint PPT Presentation
SENIOR MANAGERS AND CERTIFICATION REGIMES IMPLICATIONS FOR THE INSURANCE INDUSTRY 7 September 2018 Confidential www.dlapiper.com Confidential 7 September 2018 0 Learning objectives Clarity of what is the main difference and why An
www.dlapiper.com 7 September 2018 Confidential
Confidential
7 September 2018
SENIOR MANAGERS AND CERTIFICATION REGIMES
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Clarity of what is the main difference and why An explanation as to who is best to be certified Determination of what qualifications they require
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MICHAEL MCKEE Head of Financial Services Regulatory Partner - Finance, Projects & Restructuring/Financial Markets DLA Piper MELANIE JAMES Partner - Insurance Corporate & Regulatory DLA Piper PAUL BROWN Legal Director - Employment DLA Piper
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Welcome and Introduction Melanie James
Partner Insurance Corporate & Regulatory
Overview of the SMCR Michael McKee
Partner Financial Services Regulatory
Key HR Issues of the SMCR Paul Brown
Legal Director Employment Law Group
Panel and Q&A
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Introduction to speakers
Regulatory environment
Objectives of the SMCR
Key points for consideration
Small run-off firms
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Background to the SMCR
What is the SMCR?
Who will the SMCR apply to?
Senior Managers Regime
Certification Regime
Conduct Rules
Liability Risks of Senior Managers
Transitional Arrangements
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Poor Industry Reputation Changing Banking for Good Individual Accountability Regime What's next?
Aspects of SIMR apply on 1 January 2016 for the UK to implement Solvency II. Regime applies to banks and remaining aspects
A perception that individuals in the banking industry had been rewarded for inappropriate behaviour, and that enforcement action against such individuals had been very rare. The Parliamentary Commission on Banking Standards (PCBS), formed by the Government following the banking crisis, published its report 'Changing banking for good' in June 2013, followed by FCA and PRA consultations during 2014. Consolidated SMCR will replace SIMR and come into force for all insurers on 10 December 2018.
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Senior Managers Regime
enhances the accountability and responsibilities of a narrower and more senior set of individuals, including the senior executives of the regions/functions/businesses and non- executive directors who chair board committees.
Certification Regime requires a broader number of
employees who are MRTs or who perform a role the misconduct of which may involve a risk of significant harm to the regulated firm or customers to be certified by the regulated firm (not by regulators), as being fit and proper to undertake their role.
Conduct Rules
sets
enforceable behavioral standards expected
regulated firm staff by the regulators and will apply to all UK staff (excluding ancillary staff) and persons within scope of the above two regimes, whether based in the UK or not.
Chair NEDs & Exec Committee Material Risk Takers and their managers Significant Harm Function and their managers Above categories and all UK staff (excluding ancillary staff )
Three Levels of the SMCR
Senior Manager Conduct Rules Conduct Rules
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The regime is comprised of three parts: a Senior Managers Regime - assigns specific responsibilities to senior management; a Certification Regime - requires firms to certify those employees deemed to be "material risk takers" or performing "significant harm functions" as fit and proper; and Conduct Rules - enforceable behavioural standards and rules related to professional conduct rather than conduct of business. – The Conduct Rules apply to all employees of a firm, other than ancillary staff (not only to individuals caught by the above regimes). This extends the scope of the regime to all but a small group of employees such as cleaners, caterers, security guards etc. – After the extension of the SMCR is effected, the Conduct Rules will apply to individuals within the scope of the Senior Managers Regime and the Certification Regime, whether based in the UK or not. This will practically mean that the rules will apply for most people working in financial services. – Firms are required to report any breaches of these rules to the regulator.
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The extended regime will cover all insurers and reinsurers regulated by the FCA and the PRA, meaning: – all Solvency II firms, including the Society of Lloyd's, managing agents, incoming branches of non-UK firms and ISPVs; and – all insurers outside the scope of Solvency II (referred to as "Non-Directive firms" or "NDFs"). Since 2016, the SIMR and APR for insurers have been aligned so far as possible with the SMCR for banks. Therefore, insurers will already be familiar with many of the fundamental elements of the extended SMCR. The FCA and PRA will apply the full SMCR to Solvency II firms and large NDFs, with a streamlined regime for small NDFs, small run-off firms and ISPVs. A small NDF is defined by the PRA as a firm where the value of assets for all the regulated activities it carries out is £25,000,000 or less. Any NDFs exceeding this threshold will be large NDFs.
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The FCA is introducing a new set of SMFs that will replace its significant influence functions (SIFs) for senior managers. The FCA SMFs for Solvency II firms and large NDFs are: – SMF 3: Executive Director – SMF 16: Compliance Oversight – SMF 17: Money Laundering Reporting Officer – SMF 18: Other Overall Responsibility – SMF 23B: Conduct Risk Oversight Officer (Lloyd's) – SMF 13: Chair of Nomination Committee – SMF 15: Chair of With-Profits Committee Every Senior Manager will need a Statement Of Responsibilities "SOR" Firms must produce a Management Responsibilities Map, which is submitted to the FCA and PRA and is kept up-to-date.
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Certification Regime will apply to all insurers for the first time Certified Persons perform a Certification Function Certified Persons may only be 'employees' of the firm Annual assessment and certification of Certified Persons – (re)issue certificate Record keeping and notification requirements Some of the certification functions already in place for banks (such as algorithmic trading and proprietary trading) are unlikely to apply in practice to insurers. It is possible that, for some small insurers, there may be no employees to whom the certification regime applies – e.g. where there are only a few senior individuals, supported by admin staff, and the senior individuals are senior managers.
Algorithmic traders Managers of Certified Persons
5
Material Risk Takers
6
Individuals dealing with clients
7 8
Functions requiring qualifications Client Asset sourcebook (CASS)
1
Proprietary trader
2
Significant management
3 4
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The first tier applies to all staff and the second tier applies to Senior Managers Rules drawn from existing principles under APER and the Principles for Business Applies to a firm's regulated and unregulated financial services activities Existing staff and new joiners to understand what the conduct requirements are and how they apply to them - training programmes will be required Firms are to notify the FCA of any disciplinary action arising as a result of a breach of the conduct rules
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"A senior manager is not liable just because the firm has breached a requirement. The senior manager’s liability arises because he or she has failed to take reasonable steps to prevent the firm from being in breach and the firm is in breach."
Mark Steward – FCA Director of Enforcement and Market Oversight in a speech delivered
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What constitutes 'reasonable steps' for the purposes of the SMCRs? Satisfy themselves, on reasonable grounds, that each area of the business for which they are responsible has appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff. This may include: – Initial review to understand area of responsibility and any risks – Quality of Management Information (MI) – Ability to control behaviour including by setting (non)financial incentives – Evidencing reasonable steps, do I need to write everything down? – Meeting minutes evidencing not only decision but challenge etc. – Regular meetings with legal, compliance, audit to identifying emergent risks – Proactive steps to address emerging problems and – Escalation where appropriate.
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Every Senior Manager will have a duty of responsibility to comply with the Senior Managers Conduct Rules. The burden of proof is on the FCA/PRA to show that the person did not take reasonable steps to avoid the occurrence of a regulatory breach. DEPP 6.2.9-E lists considerations the FCA will consider when deciding whether a SMF took reasonable steps: e.g. role/responsibilities of particular SM, nature/scale/complexity
Individual Conduct Rule 5 requires all staff to comply with proper standards of market
purposes of this rule. Whilst the FCA acknowledged that this does not make industry codes binding/breach subject to regulatory sanction, evidence of complying with a code will one way of demonstrating compliance with ICR 5. In practice, will this mean that codes like the Chartered Insurance Institute's Code of Ethics will become semi-enforceable by the FCA? Which codes will be recognised by the FCA? What about global codes?
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Senior Managers at Solvency II firms and large NDFs who are currently approved for their role will not need to reapply for approval, provided that their role can be mapped directly to an equivalent role in the SMR. All certified persons must be identified by 10 December 2018 and must meet the conduct rules from that date. The FCA and PRA have both confirmed a 12 month window for firms to complete fitness and proprietary assessments for certified persons and issue certificates, commencing on 10 December 2018. The conduct rules apply to all staff (other than Senior Managers and certified persons) from 10 December 2019. For Senior Managers, the FCA can convert a CF from the APR to an SMF. The deadline to submit the conversion documentation is 3 December 2018. No SMF can be performed on or after 10 December 2018 without approval having been granted.
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Source: FCA PS 18/15
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Individual accountability regime
Recruitment and responsibilities
Processes
Action points
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Employment life cycle
Recruitment Roles & responsibilities Remuneration Promotion & transfers Appraisals Monitoring & employee data Whistle- blowing Disciplinary action Termination of employment
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Shift of regulatory responsibility to employer Key drivers of HR change: – Certification; – Regulatory references Impact on employer's decision making processes – Exposure to claims from employees – Scrutiny from Senior Managers and regulators
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Recruitment
– Stress test processes – On-boarding / handover – References
Appraisal process Disciplinary process
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Staff across the firm will require training on aspects of the new regime Get to grips with the new rules – SMR, CR, conduct, references, remuneration, whistleblowing Identify senior managers and allocate responsibilities Prepare documentation – contract terms, job descriptions, policies Fit and proper assessments will be key – design processes for recruitment and annual reviews Plan for handling tricky issues such as regulatory references, disciplinaries involving conduct rule breaches and whistleblowing matters
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Clarity of what is the main difference and why An explanation as to who is best to be certified Determination of what qualifications they require
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