Approved persons under Solvency II

What will be the regime for approved persons in insurance and reinsurance undertakings under Solvency II?

Robert Purves of 3 Verulam Buildings considers the seemingly identical consultations published by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).

Original news

PRA consults on new insurers’ accountability regime, LNB News 26/11/2014 124

The PRA is proposing to introduce a new accountability regime for the insurance sector, aiming to embed a clearer system of accountability and responsibility for senior individuals working for insurance firms and groups. The proposed Senior Insurance Manager’s Regime (SIMR) also takes account of the need to introduce measures relating to governance and the fitness and propriety of individuals as part of Solvency II. The PRA is seeking comments on its proposals by 2 February 2015.

FCA proposed changes to the Approved Persons Regime for Solvency II, LNB News 01/01/0001 1176

The FCA is proposing to make changes the Approved Persons Regime for Solvency II firms to address a number of matters, including the FCA’s role in reviewing firms’ assessments of the fitness and propriety of important individuals within firms to support the implementation of Solvency II. The FCA is seeking views on the proposed changes by 2 February 2015.

What has prompted these consultations?

As part of its requirements relating to the conditions under which insurance and reinsurance undertakings conduct their business, the EU Directive 2009/138/EC (Solvency II) sets out ‘fit and proper requirements for persons who effectively run the undertaking or have other key functions’. Specifically, Solvency II, art 42 provides as follows:

‘1. Insurance and reinsurance undertakings shall ensure that all persons who effectively run the undertaking or have other key functions at all times fulfil the following requirements:

(a) their professional qualifications, knowledge and experience are adequate to enable sound and prudent management (fit); and

(b) they are of good repute and integrity (proper).

2. Insurance and reinsurance undertakings shall notify the supervisory authority of any changes to the identity of the persons who effectively run the undertaking or are responsible for other key functions, along with all information needed to assess whether any new persons appointed to manage the undertaking are fit and proper.

3. Insurance and reinsurance undertakings shall notify their supervisory authority if any of the persons referred to in paragraphs 1 and 2 have been replaced because they no longer fulfil the requirements referred to in paragraph 1.’

What are the regulators’ proposals?

Given that the deadline for the transposition of domestic legislation implementing Solvency II is 31 March 2015, ahead of an anticipated effective date of 1 January 2016, the UK implementation of Solvency II has already been the subject of significant consultation.

In particular, the PRA which, as between it and the FCA has lead responsibility for the implementation, has issued a series of consultation papers setting out its proposals for the domestic implementation of Solvency II by way of PRA rules. The intention is that these rules will be set out in the PRA Rulebook, which is entirely separate (both in content and style) from the FCA Handbook of Rules and Guidance.

Are both proposed regimes (FCA and PRA) identical?

PRA CP 26/14

PRA CP16/14 (Transposition of Solvency II: Part 3) (LNB News 11/08/2014 130), published in August 2014 indicated (at para 1.17 and following) that the PRA would set out later in the year its proposals for the domestic implementation of the ‘fit and proper’ requirements in Solvency II, art 42. PRA CP 26/14 (Senior insurance managers regime: a new regulatory framework for individuals), FCA CP 14/25 (published in November 2014) makes good on that promise.

In summary, PRA CP 26/14 sets out:

Some proposed changes to the PRA’s rules to implement the ‘fit and proper’ requirement provisions of Solvency II.

The PRA’s proposed amendments to the approved persons regime for insurers to bring into effect a senior insurance managers regime (SIMR), which will be analogous but not identical to the senior managers regime (SMR) that was proposed for banks in PRA CP14/14 (Strengthening accountability in banking: a new regulatory framework for individuals) (LNB News 30/07/2014 121), published in July 2014.

CP 26/14 sets out the PRA’s proposed requirements in relation to:

  • the scope of the PRA’s proposed new SIMR for insurers
  • the allocation of responsibilities to senior insurance managers
  • the application of conduct standards to individuals performing key functions, and
  • the assessment of fitness and propriety of those individuals

The PRA proposes to focus only on the executive director roles that are most critical to its statutory objectives. So, for example in relation to a UK-incorporated insurance undertaking that is not an insurance special purpose vehicle, only executive directors who perform the following functions will require PRA pre-approval:

  • Chief Executive (will become SIMF 1)
  • Chief Finance Officer (will become SIMF 2)
  • Chief Risk Officer (will become SIMIF 4)
  • Head of Internal Audit (will become SIMIF 5)
  • Group Entity Senior Manager (will become SIMF 7)
  • Chief Actuary (will become SIMIF 20)
  • With-Profits Actuary (will become SIMF 21)
  • Underwriting Function (General Insurance Firms) (will become SIMIF 22)
  • Underwriting Risk Oversight Officer (Lloyd’s) (will become SIMIF 23)

FCA CP 25/14

Since the transposition of Solvency II is primarily the responsibility of the PRA, the FCA’s parallel consultation paper 25/14 (Changes to the Approved Persons Regime for Solvency II firms), published in November 2014, proposes that FCA pre-approval will be required only in respect of those individuals performing FCA significant-influence functions that are not otherwise PRA-approved. The consultation paper includes a useful Annex 1, which sets out in tabular form the intended relationship between PRA and FCA controlled functions if the consultation proposals are adopted.

In parallel the consultation paper proposes amendments and additions to the existing FCA Code of Practice for Approved Persons (APER), by the introduction of Conduct Rules which, in relation to Solvency II firms would:

  • explicitly require senior individuals to pay due regard to the interests of customers and treat them fairly, mirroring existing obligations on firms
  • require those individuals in positions of particular responsibility to take reasonable steps to ensure that any delegation of their responsibilities is to an appropriate person and that they oversee the discharge of that delegated responsibility effectively

This aims to strengthen senior accountability for activity in the area of business for which those individuals are responsible but which they are not personally managing.

What are the next steps?

In view of the short deadline for the transposition of domestic requirements implementing Solvency II, both the PRA and the FCA consultations close on 2 February 2015.

Robert Purves was formerly chief counsel, insurance and prudential policy at the Financial Services Authority (FSA) and now acts for a wide range of financial services firms and both the FSA’s successor bodies, the FCA and PRA.

Interviewed by Barbara Bergin.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Relevant Articles
Area of Interest