Thursday, 27 November 2014

Approved Persons in UK under Solvency II - "SIMF-ly The Best"?

The UK prudential and conduct supervisors doubled-up this week with a barrage of paperwork regarding "Fit and Proper" assessment of senior staff members in Insurers under Solvency II.

This was already acknowledged as an area where intelligent copy-out wouldn't quite cut the mustard for UK plc, so no doubt the Compliance functions of insurance entities have been looking forward to these publications appearing. Given the light touch on the topic in the Directive (Art.42) and Delegated Acts (Art.273), this is very much welcome gristle.

Evidently "Proper" - but "Fit" enough?

While the maintream media has cranked out some comment already on both the FCA (here) and PRA approach (here, here and here), they are naturally broad with their brushes. I thought I would cut it up into my much more insular world of "what does it mean for Key Functions under Solvency II".

PRA Consultation Paper
  • The regulatory framework for individuals will be called the Senior Insurance Managers Regime (SIMR), and will come into force from 1st Jan 2016. 
  • The CP is targeted at ensuring fitness and propriety of individuals running an insurer, or performing a Key Function.
  • NED's have been left out of this paper, as there is a wealth of comment already provided on a separate joint FCA/PRA consultation from the Banking industry.
  • That said "...the regime for insurers should not be identical to the regime for banks". 
  • While Controlled Functions continues to exist as a PRA term, it will be interchangeable with the term Senior Insurance Management Functions ("SIMFs"), which I have used below.
Going into detail, we find the following;
  • CEO, CFO, CRO and Head of Internal Audit are all SIMFs, with Chief Actuary, WP Actuary and a couple of Lloyds-specific roles also lined up.
  • Some Group-specific SIMFs also created.
  • Any Solvency II "Key Function" holders who are not SIMFs will simply be assessed within the business, with the PRA having right to overturn. I thought this would include the Head of Compliance, but they are picked up by the FCA (below). Not sure who else could be Key Function but not a SIMF, unless some SIMF role-holders don't plan to also do a day job.
  • List of new Core Responsibilities provided which need to be allocated to one or more SIMFs (2.21). These include the old chestnuts of remuneration policy and "culture" in its broadest sense, as well as performance of ORSA.
  • A form will follow which needs to be completed by firms for all prospective SIMFs and Key Function holders containing "relevant information" on them - I suspect this will be a LinkedIn cut-and-paste job.
  • Obligation to make and maintain a "Governance Map" listing the positions and key functions which run the firm, the allocation of management responsibilities (including the new ones in 2.21 presumably) and relevant reporting lines. Oddly, the PRA think "...there will be some costs in compiling and maintaining the Governance Map", when it feels like a lazy Thursday morning for Company Secretarial to me...
  • Some reinforcement of Conduct standards for SIMFs and Key Function holders, with Key Function holders having an additional policyholder protection-related standard added to their armoury.
  • Emphasise that Fit and Proper needs to be assessed on an ongoing basis, as opposed to periodically, which effectively gives the regulator a get-out-of-jail when a bad apple SIMF mismanages a firm (i.e. "why didn't you pick it up internally first?").
  • Solvency II brings in a legal requirement for firms to satisfy themselves of a candidate's fitness and propriety before sending applications to the PRA. They therefore plan to assess whether firms recruitment processes are "appropriately rigorous", which feels like a step into the un-assessable (if that is even a word).
Proposed Supervisory Statements are appended to their document covering the assessment of fitness and propriety, and the application of new conduct standards. From those I would highlight;
  • "The norm" is for single individuals to perform SIMFs
  • That firms may add to the list of conventional Key Functions using a bullet-point checklist
  • Firms can "...freely decise how to organise each function in practice"
FCA Consultation Paper
  • The existing Approved Persons Regime will be adapted to fit Solvency II and PRA/EIOPA requirements, as well as existing application forms.
  • "Pre-approval" will therefore still exist in 2016.
  • While the PRA pick up approval of most Key Functions under Solvency II, the FCA keep hold of the approval of Compliance Function heads, which don't feature in the SIMF list.
  • Give themselves some leeway to impose approval and conduct obligations on "certain other functions" in insurers
  • Appear to be combing over conduct-related rules from their work with the banking industry
Frankly, the amount of crossover between prudential and conduct regulators, existing and new rulebooks, and banking and insurance industries, makes this particular topic an awkward read, which is why I don't work in Compliance!

Levity aside, the outcome of these consultation papers will have a significant effect on insurers existing onboarding and approval processes, content of executive job specifications, and indeed the fundamental operacy of governance systems, given the level of prescription involved. Now would be a good time to start briefing!

No comments:

Post a Comment