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 explanation as to who is best to be certified Determination of what qualifications they require www.dlapiper.com Confidential 7 September 2018 1
Your presenters today MICHAEL MCKEE Head of Financial Services MELANIE JAMES Regulatory Partner - Insurance Corporate & Partner - Finance, Projects & Regulatory Restructuring/Financial Markets DLA Piper DLA Piper PAUL BROWN Legal Director - Employment DLA Piper www.dlapiper.com Confidential 7 September 2018 2
Agenda Welcome and Introduction 1 Partner Melanie James Insurance Corporate & Regulatory 2 Overview of the SMCR Partner Michael McKee Financial Services Regulatory Key HR Issues of the SMCR 3 Paul Brown Legal Director Employment Law Group Panel and Q&A 4 www.dlapiper.com Confidential 7 September 2018 3
1 Welcome and Introduction
1. Welcome and Introduction 1.1 Introduction to speakers Regulatory environment 1.2 Objectives of the SMCR 1.3 Key points for consideration 1.4 Small run-off firms 1.5 www.dlapiper.com Confidential 7 September 2018 5
2 Overview of the SMCR
2. Overview of the SMCR Background to the SMCR 2.1 What is the SMCR? 2.2 Who will the SMCR apply to? 2.3 2.4 Senior Managers Regime Certification Regime 2.5 Conduct Rules 2.6 Liability Risks of Senior Managers 2.7 Transitional Arrangements 2.8 www.dlapiper.com Confidential 7 September 2018 7
2.1 Background to the SMCR A perception that individuals in the banking Poor Industry industry had been rewarded for inappropriate Reputation behaviour, and that enforcement action against such individuals had been very rare. The Parliamentary Commission on Banking Standards Changing ( PCBS ), formed by the Government following the Banking for banking crisis, published its report 'Changing banking Good for good' in June 2013, followed by FCA and PRA consultations during 2014. Aspects of SIMR apply on 1 January 2016 for Individual the UK to implement Solvency II . Accountability Regime applies to banks and remaining aspects Regime of SIMR come into force from 7 March 2016 . Consolidated SMCR will replace SIMR and come into force for all What's next? insurers on 10 December 2018 . www.dlapiper.com Confidential 7 September 2018 8
2.2 What is the SMCR? Three Levels of the SMCR Manager Conduct Senior Managers Regime enhances the Senior Rules accountability and responsibilities of a narrower and Chair more senior set of individuals, including the senior NEDs executives of the regions/functions/businesses and non- & Exec executive directors who chair board committees. Committee Conduct Rules Certification Regime requires a broader number of Material Risk Takers employees who are MRTs or who perform a role the and their managers misconduct of which may involve a risk of significant harm to the regulated firm or customers to be certified by Significant Harm Function the regulated firm (not by regulators), as being fit and and their managers proper to undertake their role. Conduct Rules sets out enforceable behavioral standards expected of regulated firm staff by the Above categories and all UK staff regulators and will apply to all UK staff (excluding (excluding ancillary staff ) ancillary staff) and persons within scope of the above two regimes, whether based in the UK or not. www.dlapiper.com Confidential 7 September 2018 9
2.2 What is the SMCR? 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. www.dlapiper.com Confidential 7 September 2018 10
2.3 Who will the SMCR apply to? 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. www.dlapiper.com Confidential 7 September 2018 11
2.4 Senior Managers Regime 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. www.dlapiper.com Confidential 7 September 2018 12
2.5 Certification Regime 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. Client Asset sourcebook ( CASS ) Managers of Certified Persons 1 5 Proprietary trader Material Risk Takers 2 6 Significant management Individuals dealing with clients 3 7 Functions requiring qualifications Algorithmic traders 4 8 www.dlapiper.com Confidential 7 September 2018 13
2.6 Conduct Rules - Individual Conduct Rules 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 www.dlapiper.com Confidential 7 September 2018 14
2.6 Conduct Rules - Senior Manager Conduct Rules "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 on 3 April 2017 www.dlapiper.com Confidential 7 September 2018 15
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