SMCR – what insurance brokers need to know – part two
What is the SM & CR?
SM & CR is a logical way of defining the accountability of individual manager or director in your brokerage and replaces the FCA “Approved Persons” regime known as APER.
In addition, the SM & CR introduces conduct rules and requires changes to processes and training throughout the business. There are three categories of the regime at three levels of business: Enhanced, Core and Limited Scope.
Why has the SM & CR been introduced?
Some would accuse the FCA of fixing something that isn’t broken in the insurance industry, but fundamental flaws in the governance of banking were laid bare by the financial crisis and the regulator has acted across the entire financial services sector to correct these.
While SM & CR previously applied to insurers regulated by the PRA, it is now being adapted and rolled out to “solo regulated” firms, meaning those regulated by the FCA alone such as insurance brokers.
Which category of SM & CR will my business fall into?
Almost all insurance brokers will be categorised as “Core” firms under the regime. The Core regime applies to firms with any FCA Approved Persons at present and revenue from intermediary activities of less than £35 million per year. Greater revenue than this means you are an “Enhanced” SM&CR firm.
Only sole traders and firms whose principal business is not insurance intermediation could qualify as “Limited Scope” firms.
There are three categories of staff, reflecting their level of responsibility: Senior Managers, Certified Individuals and Conduct Staff.
Senior Managers are those that carry out Senior Management Functions (SMF’s) and will be subject to the Senior Managers Regine (SMR). Between them, they will need to cover the “Prescribed Responsibilities” (see below) covering a firm’s conduct and risk management.
This includes most (but not all) previously Approved Persons, while Certified Individuals are those who supervise or manage certified functions. Conduct Staff means all other staff, with the exception of “ancillary” staff such as cleaners. Conduct Staff will have to be aware of, and trained in, the Conduct Rules
What are the Prescribed Responsibilities for Core firms?
- The performance of the firm of its obligations under the Senior Managers Regime
- The performance of the firm of its obligations under the Certification Regime
- The performance of the firm of its obligations in respect of notifications and training of the Conduct Rules
- Responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime
- Responsibility for the firm’s compliance with CASS
The person who currently reports on CASS will likely be the person who needs to be certified as having oversight of the operational effectiveness of a firm’s systems and controls for client money and assets.
When does the SM & CR come in to force?
The SM & CR regime applies from 9 December 2019 and by then firms must have identified and trained Senior Managers and Certified Individuals. SM’s and CI’s must abide by the Conduct Rules from that date, but there will be a one-year transition period during which brokers must complete the certification process and train staff throughout the business in the Conduct Rules.
What are the next steps for Senior Managers?
Brokers will need to review and update their existing governance framework – the FCA suggests drawing up a “map” of responsibilities across the business, which will also serve to document the process. Areas of responsibility for each Senior Manager must be allocated and documented in a statement of responsibility. These statements should be added to the Senior Manager’s job descriptions and refer to major the areas of regulatory impact e.g. product suitability and governance.
Over and above this, the SM & CR requires Senior Managers to evidence that they take “reasonable steps” to control and govern their business and take proactive measures to address any issues. For example these will include risk audits, management controls, CPD history, ongoing training and regular reviews of accurate MI.
What are the next steps for Certified Individuals?
Your brokerage will need to identify Certified Individuals, which may include some previously Approved Persons who have “stepped down” to the Certification Regine (CR). Certified Individuals will need to be assessed for their competency to manage their area of the business, their honesty and integrity (e.g. fit and proper tests). Initial fitness and propriety tests must be carried out by 2020 on all CI’s and procedures established to ensure ongoing annual assessments.
What are the next steps for Conduct Staff?
Existing staff must be provided bespoke training on how the five conduct rules apply to them. Recruitment and induction for new staff must cover the five conduct rules, for example in contracts of employment, the employee handbook and staff training.
What are the five Conduct Rules?
- Rule 1: You must act with integrity.
- Rule 2: You must act with due skill, care and diligence.
- Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators.
- Rule 4: You must pay due regard to the interests of customers and treat them fairly.
- Rule 5: You must observe proper standards of market conduct
These can be found here: https://www.handbook.fca.org.uk/handbook/COCON/2.pdf
How do we inform the FCA who our Senior Managers and Certified Individuals will be?
The FCA will require the following information to be submitted via the Connect portal by 24 November 2019:
- A Form K notifying which currently approved individuals should be converted to the equivalent Senior Manager Function (including Non-Executive Directors and Chairs)
- A Responsibilities Map
- A Statement of Responsibilities for each of the firm’s Senior Managers
Form K will be available on Connect from 9 September 2019. For more details see: https://www.fca.org.uk/firms/senior-managers-certification-regime/solo-regulated-firms/checklists