By Deborah Margolis - 27 June 2019
If you work in HR in the insurance (or financial services) sector, you are likely to have heard about the Senior Managers and Certification Regime (“SMCR”). In this article, for those who are new to SMCR or who need a refresher, we set out the key ways that SMCR will impact your role in HR.
What is it?
SMCR applies to insurers, banks and some other financial services institutions. For insurers, it came into force on 10 December 2018, replacing the Senior Managers Insurance Regime. In a nutshell, the intention behind the regime is to encourage individuals to take greater responsibility for their actions, make it easier to hold them to account and bring more individuals within the remit of the FCA and/or PRA (the “Regulator”).
Who does it impact?
With the SMCR hierarchy, there are four key layers of roles and responsibilities: Senior Managers, Certified Staff, Conduct Rules Staff and Ancillary Staff (for our purposes, the first two are most relevant).
- Taking responsibility - the most senior staff within an insurance business will be classed as Senior Managers and are responsible for performing Senior Management Functions (“SMFs”) and “prescribed responsibilities” (“PRs”) which form a part of that.
- Recording responsibilities - the SMFs and PRs that have been allocated to each Senior Manager will need to be recorded in the firm’s “management responsibilities map” which sets out the firm’s management and governance arrangements. The key point is to ensure that there are no gaps in accountability and that all functions are covered at all times to enable the Regulator to point who was responsible in the event that there is an issue.
- Duty of responsibility - Senior Managers are accountable for the activities that happen “on their watch” under the duty of responsibility. The Regulators can take action against Senior Managers if there is a regulatory breach in an area of the business they are responsible for and they do not take the steps that they would reasonably be expected to take.
- Statements of responsibilities - each Senior Manager is required to have a “statement of responsibilities” recording the SMFs and PRs that have been allocated to them. This should be a self-contained document that should be kept up to date and resubmitted to the Regulator in the event of a significant change.
- Approval of Senior Managers - Senior Managers must be pre-approved by the Regulators and the statement of responsibilities forms part of that application. Prior to any application the for approval, firms will need to conduct their own assessment of fitness and propriety (see below).
- Handover - under SMCR, firms need to ensure that handover is properly dealt with for outgoing Senior Managers to ensure a smooth transition. One way for this to be done is for the outgoing Senior Manager to prepare a handover certificate.
- Certified Staff are those whose role poses a significant risk of harm to the firm or any of its customers, although they are less senior than Senior Managers.
- Certified Staff are not subject to pre-approval by the Regulator and instead they must be pre-approved by their firm as fit and proper. It is the firm’s responsibility to make that assessment.
Conduct Rules Staff and Ancillary Staff
Ancillary Staff are those whose roles are ancillary to the insurance business, i.e. security, medical staff and receptionists. The remaining staff, who are not Senior Managers, Certified Staff or Ancillary Staff will be Conduct Rules Staff.
- One of the biggest changes for insurers is that conduct rules (which are set out in the Code of Conduct sourcebook) will apply to all staff in the business apart from Ancillary Staff. There are enhanced conduct rules for Senior Managers.
- Breach of conduct rules - insurers will need to notify the Regulator when they have taken formal disciplinary action against a person for breach of a conduct rules:
- For a Senior Manager – this notification must be made as soon as practicable and in any event, within 7 business days.
- For Certified Staff and Conduct Rules Staff - the notification will have to be made annually in October.
- Under SMCR, firms are required to ensure that all individuals subject to conduct rules (which will include most people in the business) are trained on the rules and how they apply to them.
What is Fitness and Propriety (“F&P”)?
In order to undertake their role, Senior Managers and Certified Staff must meet certain standards of F&P, which firms are required to assess:
- at the point of recruitment (for example using background checks and by obtaining regulatory references, which go back six years);
- on an annual basis (normally at the same time as the appraisal review); and
- on an ongoing basis during employment (for example if F&P is raised as part of a disciplinary or investigation or as part of a performance review).
If, at any stage, questions arise as to an individual’s F&P, the insurer should consider whether the individuals meet the required standard to perform their role.
The assessment of F&P takes into account an individual’s:
- honesty, integrity and reputation;
- competence and capability; and
- financial soundness.
If an insurer believes that a Senior Manager does not meet the standard, the firm must report this to the Regulator. In the case of Certified Staff, the firm will have to refuse to renew their F&P certificate and take reasonable care to ensure that the individual ceases to perform the certification function in question. They will have to consider whether they ought to notify the Regulator prior to the annual re-assessment.
For more information about SMCR compliance and training and how we can help you, please get in touch with Richard Harvey, Caroline Baker or Deborah Margolis.