Preparing for the senior managers and certification regime

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The Senior Managers and Certification Regime(SM&CR) is currently expected to come into effect on 10 December this year for insurers.

In the last couple of years dual-regulated firms involved in banking and investments have, by necessity, become well versed in the ways of SM&CR, whilst those running and influencing insurance companies have had to adapt to living with SM&CR’s somewhat eccentric cousin, the Senior Insurance Managers Regime(SIMR), which seeks to accommodate the senior management accountability requirements of Solvency II. Meanwhile solo-regulated firms – such as insurance brokers – have been left largely undisturbed to enjoy the cosy familiarity of the Approved Persons Regime (APR).

Clearly it makes little sense for the financial services sector to be running three accountability regimes concurrently, and it was probably inevitable that the regulators would want to bring all firms back onto a single track (or at least a version of it).

Certification is the one part of SM&CR that is currently causing solo-regulated firms quite a few sleepless nights, as they grapple with the task of identifying who within their organisations will need to be certified

The upshot is that solo-regulated firms must start preparing themselves for life under SM&CR. Fortunately, the regulators have remembered the word ‘proportionality.’ So although all firms will come under SM&CR’s banner, there will be different degrees of compliance according to the size and type of firm. For larger and more complex firms, an ‘Enhanced Regime’ will apply, with the remainder falling under the ‘Core Regime’.

The Core Regime consists of three main elements. Firstly, there’s the ‘Senior Managers Regime’. Effectively this is APR given a make-over and retaining the requirement for those being appointed to Senior Management Functions to be pre-approved by the FCA.

So far, so good? Well, it does have a reassuringly familiar feel to it, although some of the finer details such as mandatory DBS checks and the requirement to provide FCA with details of a senior manager’s roles and responsibilities are new to the game.

The big changes come when we look at the organisational hierarchy beneath those performing Senior Management Functions. Here we inevitably find a layer of managers and influencers whose jobs mean that they can have a big impact on customers, the firm and/or market integrity. Those who populate this space will come under the Certification Regime.

The Certification Regime brings with it the requirement for firms to certify the fitness and propriety of those performing Certified Functions, once a year. The FCA does not get involved in this process, nor does it pre-approve Certified Function holders when they are being appointed. From the feedback I’ve received from those contacting Searchlight for advice and assistance, Certification is the one part of SM&CR that is currently causing solo-regulated firms quite a few sleepless nights, as they grapple with the task of identifying who within their organisations will need to be certified.

Firms will need to keep the regulator fully informed and should be prepared to have their homework strictly marked – so proper governance around making and recording decisions is as important now as it’s ever been.

As anyone who’s been paying attention over the past few years will know, ‘Conduct’ and  ‘Culture’ sit at the very heart of regulation today. So, we shouldn’t be surprised that Conduct Rules form SM&CR’s third element and can be seen as the binding agent that holds the rest of the structure together.

The Conduct Rules are made up of two tiers. Tier 1 applies to all staff at all levels above so-called ‘ancillary roles’ – such as cleaning, maintenance and reception staff. This brings with it a requirement to make sure that all relevant employees are familiar with, and obviously comply with, the regulator’s expectations regarding standards of professional behaviour and conduct. Ensuring this knowledge is properly communicated and that awareness is maintained should be a key training priority for insurance brokers.

senior managers are expected to set an example, and should in turn expect to be made an example of if they don’t set a good one!

The more onerous Tier 2 rules apply only to Senior Managers and Certified Function holders. The regulator has been at pains to ensure that the burden of individual accountability falls squarely where it belongs: on the shoulders of those at the very top of an organisation’s hierarchy, who should be actively promoting an appropriate business culture and setting the standards of professional behaviour that all employees should be required to meet. The FCA’s message is clear – senior managers are expected to set an example, and should in turn expect to be made an example of if they don’t set a good one!

At this stage, the definitive shape of SM&CR has yet to be buttoned down, although a good idea of its outline can be gained from the FCA’s and PRA’s respective output on the subject, covering those who are dual-regulated under the current SM&CR and SIMR regimes and those who are solo-regulated under the current APR.

So, if you’re a solo-regulated firm what steps should you be taking now?

You will need to familiarise yourself with the FCA’s output on the subject, then review your firm’s current approved person arrangements in light of this. You should also pay close attention to the requirements of the Certification Regime, who within your firm falls within its scope, and why. You may conclude that the number of senior manager function holders (i.e. what were formerly Approved Persons) reduces. However, there will be a new layer of Certified Function holders who must be identified and administered accordingly. This is likely to have an impact on your systems and controls, particularly around maintaining HR and training records.

Careful thought should also be given to the awareness training that all relevant staff will need around conduct rules and what these mean to them in terms of their day to day role.

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SEARCHLIGHT INSURANCE TRAINING - Arranging training and consultancy for the Financial Services industry - Setting up and developing a new insurance company - Leading an asset finance company - Non-Executive director Specialties: - A versatile and innovative professional executive with proven track record - Experienced non-executive director - Experienced in takeovers and mergers - Liveryman at the Worshipful Company of Insurers - Chartered Insurer

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