Out-Law News 3 min. read

UK financial regulators set out 'proportionate' senior persons rules for Solvency II and non-Solvency II insurers


Senior staff at smaller insurance firms not subject to the new Solvency II EU-wide regulatory regime will be subject to complementary, but proportionate, regulatory oversight, according to the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

The regulators have published a series of consultation papers setting out their proposed changes to the 'approved persons' and 'senior insurance managers' regulatory regimes, taking into account new standards of conduct that will be imposed by the EU's Solvency II Directive once in force next year. The consultations, which close on 15 May, include changes to the wider FCA handbook and PRA rulebook and transitional arrangements for firms and affected individuals.

"The FCA has set out that the conduct rules due to be implemented by the PRA in relation to the banking regime will now also be applicable to the insurance regime," said financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com. "Senior management within insurers should carefully consider the requirements to be placed upon them by these new rules."

"This is a further example of the FCA and PRA seeking to clarify their expectations of senior managers with the almost inevitable conclusion that these rules, along with more detailed statements of responsibility and attestations, will be used to hold senior management to account personally," he said.

Solvency II comes into force across the EU on 1 January 2016, and will apply to more than 400 retail and wholesale UK insurance firms and to the Lloyd's insurance market. The new rules set out broader risk management requirements for insurers, require firms to hold enough capital to cover all their expected future insurance and reinsurance liabilities and introduce a new "fit and proper" test for firms' senior managers.

The PRA published its final Senior Insurance Managers' Regime (SIMR) rules last month. This new framework, which will come into force next year alongside similar rules for senior bankers, will apply to those who are running insurance companies or who have responsibility for certain 'key functions'. These new rules will not entirely replace the existing 'approved persons' regime, which will continue for those who are not senior insurance managers.

The FCA and PRA have published a joint consultation paper setting out how they will change their existing rules for 'approved persons' at firms subject to the Solvency II regime, while the FCA is also proposing changes to the governance arrangements for Solvency II firms. Separate FCA and PRA consultations then set out proposals for changes to the 'approved persons' regime applicable to 'non-directive firms' (NDFs).

The draft rules propose simplifying the current list of possible controlled functions into a single 'small insurer senior management' NDF function, as well as how the fitness and propriety of those individuals would be assessed and conduct standards applied. Individuals that are currently approved to perform controlled functions would be 'grandfathered' into the new regime.

The new Solvency II 'fit and proper' requirements will apply to those persons who will be responsible for key functions from 1 January 2016, according to the FCA and PRA's joint consultation. The new approved persons regime for Solvency II firms would begin on 7 March 2016 at the same time as the SIMR, subject to the relevant provisions of the Banking Reform Act being brought into force.

According to the PRA, the new regimes are designed to ensure that those who run regulated firms "have clearly defined responsibilities and behave with integrity, honesty and skill". However, it said that it would not be appropriate to apply the SIMR in its entirety to senior persons at NDFs.

"NDFs pose different risks to the PRA's objectives compared with Solvency II firms," the PRA said. "For example, almost all of these firms have assets of less than £25 million and annual premium income of less than £5 million. Accordingly, many features of the SIMR have been streamlined to take a more proportionate approach to the way the regime would apply to NDFs."

The PRA published final rules setting out how it will implement Solvency II in the UK earlier this month. At the time, chief executive Andrew Bailey said that large insurers should prepare for a "fundamental change" to the way in which they are regulated.

The FCA and PRA plan to publish their final rules and forms in summer 2015. This quick turnaround is designed to allow time for full transition to the reformed regime in time of the relevant provisions of the Banking Reform Act coming into force on 7 March 2016, the regulators said.

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