Regulator finalises senior managers' rules for insurers

The senior insurance managers' regime (SIMR) is based on similar rules that will apply to senior bankers from March next year, but "tailored to the different business models and associated risks of insurers", the PRA said. The new rules will replace the PRA's current approved persons regime (APR) for the most senior insurance staff, and make it easier for the regulator to hold these individuals personally responsible for regulatory breaches. The APR will continue for other insurance staff.

PRA chief executive and Bank of England deputy governor Andrew Bailey said that the new rules would embed "the simple principle that you can delegate tasks and work, but you cannot delegate responsibility for the safety and soundness and conduct of your firm" at "all levels of banks and insurers".

The PRA intends to introduce a modified version of the new regime for smaller insurers, who will not be subject to new solvency and risk management standards when the EU-wide Solvency II regime takes effect next year. It has also published "near-final" rules setting out how the banking senior managers' regime (SMR) will be applied to senior staff at UK branches of banks headquartered outside of the European Economic Area (EEA).

By publishing the documents far in advance of the entry into force of the new regime, the PRA said that it intended to provide insurers with the "clarity and certainty" necessary to make the new regime a success. However, financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said some of the detail was still up for debate.

"Although the policy statements do provide some clarity around the application of the regime – including the requirements applicable to individuals at a 'group entity', the role of non-executive directors and the various key functions, there continues to be room for some interpretation and flexibility in how firms apply the requirements," he said. "This will require input from the business and external advisors, culminating in a conversation with the regulators to identify their views on the firm's proposals for application of the regime."

"The regulators' clear aim is to hold individuals accountable for failings in areas for which they have taken responsibility. Whilst the reverse burden of proof in the SMR is not included in the insurance regime, the statement that 'senior managers will be held individually accountable for the areas they are responsible for' puts down a clear marker that individuals will need to be able to evidence the steps they took to meet the relevant regulatory requirements. Any senior manager responsible for an area in which there is a regulatory breach will be for the regulatory high jump," he said.

The SIMR will apply to senior managers who are running insurance companies, or who have responsibility for certain 'key functions'. These functions will include risk management, compliance, internal audit and actuarial as a minimum, with additional functions covered based on their importance to the "sound and prudent management" of the individual firm. The rules cover the assessment of fitness and propriety of senior managers, the allocation of certain responsibilities to those individuals and new conduct rules.

The PRA's final policy statement extends the basic requirement to require a reference from the former employers of a senior manager to cover current or former non-executive director (NED) roles. It does not, however, contain substantive rules on the form and content of such references, for either NEDs or senior managers. These will be finalised as part of the PRA's response to the Fair and Effective Markets Review (FEMR), which issued recommendations about these references in its final report in June.

Senior staff at 'non-directive firms' (NDFs) with assets of more than £25 million, which will not be caught by the Solvency II regime when it comes into force across the EU on 1 January 2016, will be subject to a "streamlined" version of the rules. These new rules, which will be finalised after a further PRA consultation, would also apply to run-off firms that are not covered by Solvency II transitional measures. The PRA has already finalised the rules for NDFs with assets of less than £25m.

The PRA also intends to extend the SMR for banks to UK branches of foreign banks, known as 'incoming branches'. It has now published final and near-final rules, tailored to reflect the characteristics of these branches and aligned with its approach to branch supervision; although it will not be able to fully finalise these ruled until the UK parliament approves legislation extending the definition of 'relevant authorised persons' regulated by the PRA to cover incoming branches.