New accountability rules in force for insurers from 10 December 2018

The SMCR was introduced for deposit-taking banks and building societies on 7 March 2016, and was designed to make individuals at regulated firms more accountable for their conduct and compliance.

Consultations on how the regulators will deal with the transition of staff from the existing regulatory regimes were published by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) last year, and close on 21 February. Firms subject to the Solvency II Directive, large non-directive firms (NDFs) and insurance special purpose vehicles will transition automatically, while small NDFs and small run-off firms will be required to submit additional information to the FCA before they can transition.

Brokers and other smaller solo-FCA regulated firms will not become subject to the SMCR until a yet to be announced date, which is expected to be in mid-to-late 2019.

While the regulators had already been working towards an assumed late 2018 date at which the regime would be extended to insurers, confirmation from the Treasury would give firms certainty as they put preparations in place, said insurance law expert Colin Read of Pinsent Masons, the law firm behind Out-Law.com.

"The extension of the regime will support the continued growth and resilience of the UK's financial services sector, as well as enhanced outcomes for consumers and competition," he said. "Insurers must now engage in detailed planning measures in order to implement the regime by the deadline. All staff on the payroll, in particular senior managers, ought to be made aware of what is on the horizon and, in particular, that most employees will be covered by the conduct rules."

"Post-Brexit, the UK will continue to be a global leader and influencer of international standard-setting bodies. The extension of the SMCR regime to insurers serves to promote the UK's commitment to the highest levels of accountability and transparency within the financial services sector," he said.

Once in force, the senior managers' regime will require insurers to assign responsibility for certain areas of the business to named senior individuals. The certification regime will require them to annually assess the fitness and propriety of staff in certain roles, rather than these individuals being approved by the FCA under the current Approved Persons rules. The regime also incorporates additional conduct rules, applicable to all staff.

A major change for senior managers at insurers will be the extension of the 'duty of responsibility', which currently only applies to senior managers at banks. The FCA is currently consulting on how this will work. The duty of responsibility allows the FCA to take action against a senior manager for failures in their area of responsibility at the business, unless the senior manager took reasonable steps to prevent that breach from occurring or continuing.

"In light of these new rules, insurers will need to update their employment contracts and HR policies, such as their disciplinary procedures," said employment law expert Jon Fisher of Pinsent Masons. "The certification regime should be integrated within the annual performance review process."

"All employees will need to be made aware of the new conduct rules and the consequences for them of failing to comply with them," he said.

The SMCR is made up of the senior managers' regime, the certification regime and the conduct rules.

People performing senior management functions will need PRA or FCA approval before starting their roles. As part of the application process, large insurers will be required to submit a management responsibilities map which replaces the current 'governance map' but which has a similar function. This is intended to provide greater transparency, making it more straightforward to identify senior individuals who are responsible for considering consumers' interests and treating them fairly.

The new certification regime will cover people who are not senior managers, but whose jobs mean they have a significant impact on customers, markets, or the firm and includes all individuals who are already designated a Key Function Holder, meaning they have "significant harm functions" which the FCA has set out in eight categories. Those individuals will need to be approved by their own firm, but not by the PRA or FCA.

The regime shifts the onus onto insurers to report any areas of misconduct by staff. Insurers will have to certify that their staff are fit and proper people to carry out their job, with a review taking place by the firm at least once a year.