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Senior Managers and Certification Regime takes effect for insurers

New accountability rules for staff at insurers and reinsurers regulated by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are now in force.11 Dec 2018

The Senior Managers and Certification Regime (SMCR) replaced the Senior Insurance Managers Regime (SIMR) and revised Approved Persons Regime (APR) for insurance firms from 10 December 2018. The rules, which were designed to increase individual accountability within the financial sector, already apply to banking staff and will be extended to all other regulated firms, including brokers, from next year.

"The extension of the SM&CR will ensure that all staff understand who has ultimate and overall responsibility," the FCA said in a statement. "It will also ensure firms' governance arrangements are transparent and set clear expectations for the conduct of all financial services staff."

The SMCR initially formed part of the UK government's programme of banking reform following the financial crisis of 2008. The Senior Managers Regime (SMR) requires firms to assign responsibility for certain areas of the business to named senior individuals, while the Certification Regime (CR) requires firms to assess the fitness and propriety of staff in certain roles. The regime also incorporates additional conduct rules, applicable to all staff other than those in ancillary roles.

The regulators have taken a two-tier approach to applying the new rules to insurers and reinsurers, to ensure that they are regulated in a way that is proportionate to their size and risk to the markets. A full-scope SMCR regime applies to 'Solvency II' insurers, including the Society of Lloyd's and Lloyd's management agents and third country insurers and reinsurers, as well as to insurance special purpose vehicles and large non-directive firms (NDFs). A streamlined version of the rules applies to smaller NDFs.

Senior managers at insurers will continue to be approved by the regulator, although firms will also be required to ensure that managers are suitable for their role and to review this once a year. Firms must now produce and keep up to date 'statements of responsibilities' and management of responsibility maps, replacing the previous scope of responsibilities and governance maps, setting out the individual responsibilities of each senior manager and the firm or group's management and governance arrangements. This brings about common terms between the banking and insurance sectors. Senior managers are also subject to a new 'duty of responsibility' to take reasonable steps to avoid the firm breaching its regulatory duties in the area for which they are responsible.

The CR effectively replaces and extends the APR, and applies to all employees performing "certification functions" as defined by the Financial Services and Markets Act (FSMA). These individuals will not be subject to regulatory approval, but their 'fitness and propriety' to perform their role must be assessed annually by the firm. The CR will become effective 12 months from the start of the SMCR, on 10 December 2019, and the first 'fit and proper' assessments must be completed by that date.

Financial services employment law expert Jon Fisher of Pinsent Masons, the law firm behind Out-Law.com, said that the certification regime would be the biggest change for Solvency II insurers who had previously been subject to the SIMR.

"Insurers will need to ensure that robust certification arrangements are put in place quickly so that they can meet the 10 December 2019 deadline," he said. "They will also need to make sure that all staff are trained in the Conduct Rules prior to that date.”