UK insurance regulation – looking forward to 2022

After a year of upheaval for the UK insurance sector in 2021, there seems little prospect of 2022 being any quieter.

From a regulatory perspective, 2021 began with the end of the Brexit transition period.  And while firms operating in UK insurance markets have been insulated from the full impact of Brexit during 2021, this is set to change in 2022.  Solvency II reforms can now also be introduced in the UK without regard to the constraints of EU membership.

Meanwhile, the FCA has embarked on an ambitious transformation programme, putting consumer protection at the heart of its focus on becoming a “more assertive, innovative, and adaptable” regulator.  The introduction of a new Consumer Duty is expected to bring about a step change in how financial sector firms behave.  Other recent developments carrying over into 2022 include proposals to improve regulated firms’ oversight of Appointed Representatives.

ESG remains, of course, high on the agenda of firms and regulators worldwide, with increasing engagement at Board and senior executive level on a range of issues.  Notably, COP26 brought climate change into sharp focus.  The PRA and the FCA are also looking to “accelerate the pace of meaningful change” in diversity and inclusion in the financial services sector.  Further activity can be expected in relation to each of “E”, “S” and “G” during 2022.

Other current areas of focus are the government’s post-Brexit review of the regulatory framework for financial services and the operational resilience of firms, including the challenges brought by Covid-19.

Our briefing, which can be found here, looks at some of the key regulatory developments that have taken place in 2021 and considers the outlook for 2022.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2067
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Hywel Jenkins
Hywel Jenkins
Partner, London
+44 20 7466 2510
Benedicte Perowne
Benedicte Perowne
Senior Associate, London
+44 20 7466 2026

FCA consults on the new Consumer Duty

The FCA has published Consultation Paper 21/36 (CP 21/36) which includes proposed new rules and guidance setting out a Consumer Duty which it considers will “fundamentally shift the mindset of firms” and establish an appropriate level of care to consumers. The consultation is open until 15 February 2022 and the FCA expects to confirm any final rules by the end of July 2022.

The significance of the impact to firms is highlighted by the FCA’s cost benefit analysis of introducing the new Consumer Duty. It considers that the total one-off direct costs firms may incur to comply with the Consumer Duty could be up to £2.4bn (incurred in performing gap analysis on their policies and processes, making relevant adjustments through change projects, training staff on the new requirements, as well as IT costs from system changes and costs to monitor and test consumer outcomes). The ongoing annual direct costs to be in the range of £74.0m to £176.2m.

In addition, the FCA anticipates (but does not quantify) firms incurring indirect costs in the form of potential loss in profits due to changes they make to their product design and prices.

Proposed new rules and guidance

The new rules are familiar from the previous consultation paper (CP21/13, which we commented upon in this blog), comprising:

  • A new Consumer Principle (Principle for Businesses 12) that would replace Principles 6 and 7 for retail business: “A firm must act to deliver good outcomes for retail clients
  • Three cross-cutting rules which require firms to:
    • act in good faith towards retail customers;
    • avoid causing foreseeable harm to retail customers; and
    • enable and support retail customers to pursue their financial objectives.
  • Four outcomes the FCA expects the new rules to achieve:
    • The product and services outcome: consumers are sold products and services that have been designed to meet their needs, characteristics and objectives.
    • The price and fair value outcome: consumers pay a price for products and services that represents fair value to them.
    • The consumer understanding outcome: consumers are equipped with the right information to make effective, timely and properly informed decisions.
    • The consumer support outcome: customers receive the support they need.

There have been some amendments in response to feedback received on CP21/13.

The FCA has removed reference to firms talking “all reasonable steps” in the cross-cutting rules, as it wants firms to focus on ensuring good outcomes for customers by acting reasonably, rather than focusing on compliance with rules in the steps they take to achieve that outcome.

The FCA therefore seeks to underpin the entire Consumer Duty with a concept of reasonableness in the new proposed rules, reflecting tortious duties under common law. In particular, the new Consumer Principle and related obligations “must be interpreted in accordance with the standard that could reasonably be expected of a prudent firm:

  • carrying on the same activity in relation to the same product; and
  • making assumptions about the needs and characteristics of its retail customers based on the needs and characteristics of an average retail customer.” [1]

It also proposes to introduce a new Individual Conduct Rule 6, which mirrors the new Consumer Principle, in requiring certified staff to “act to deliver good outcomes for retail customers” where their firms’ activities fall within scope of the Consumer Duty.

Initial reflections

Given the breadth of changes proposed by the FCA it will take some time to fully digest the potential impact and consequences of the proposed implementation of the Consumer Duty, but we  set out some initial reflections below.

In its proposed new Consumer Principle (requiring firms to “act to deliver good outcomes for retail clients”), the FCA hasn’t taken on board the concerns that a fair outcome isn’t always a good outcome from a customer’s perspective.  There will continue to be situations in which a client is disappointed – by the performance of an investment for instance – even where the firm has complied with both the letter and the spirit of the Duty. “Good practices” do not always result in “good outcomes” and it will be incumbent on the FCA and the FOS to distinguish between good outcomes and fair outcomes, regardless of the wording of the Duty.

Equally, one of the FCA’s proposed cross-cutting rules would require firms to avoid causing foreseeable harm to retail customers. While the FCA says that this is not intended to protect customers from all poor outcomes, the proposals will require firms to conduct regular reviews, and if a harm were not foreseeable at the outset, but later became foreseeable, the FCA would expect firms to take the appropriate action.

A more positive development is that the FCA is not proposing to provide a private right of action for breaches of any part of the Consumer Duty at this time. However, the FCA will keep the possibility of a PROA under review, including in light of the evidence seen by the regulator of firms’ embedding of, and compliance with, the Consumer Duty.

Further, it is positive that the FCA intends to work closely with the Financial Ombudsman Service with the aim of having a consistent view on the interpretation of the Consumer Duty while respecting the different roles of the FCA and the Financial Ombudsman.

In considering the proposed rules and guidance and, if implemented, seeking to comply with them firms will need to grapple with some internal tensions:

  • The FCA says the new rules should not mean firms are customers’ fiduciaries and that it respects the general principle in FSMA that customers are responsible for their decisions. However, the guidance states that “regulators cannot set a universal requirement of the degree of responsibility a consumer can be expected to take” and that firms must take into account behavioural biases and characteristics of vulnerability on customers’ decisions. This indicates there is a spectrum of responsibility between consumer and firm and, in some circumstances, the onus is more on the firm to be responsible.
  • It is helpful that the FCA has been clear that the Consumer Duty will have no retrospective effect. However, firms will need to review their products and services during the implementation period, and this might mean updating contractual terms and conditions of a product or service before it can continue to be sold (or renewed) to new or existing customers following implementation of the Consumer Duty. The FCA notes that significant changes may be required to existing contracts going forward, including to the level of remuneration for firms, to meet the requirements of the Consumer Duty.

In respect of monitoring requirements and governance requirements:

  • For many firms, the monitoring and governance requirements of CP21/36 look very similar, and the language echoes that of the FSA-era TCF initiative. However, it is fair to say that the FCA will be expecting firms to evolve from the TCF baseline to something more sophisticated, and – critically – to something which is set in the context of a strengthened individual accountability regime. It is reasonable to expect that firms’ approaches to monitoring will evolve over time as the industry gains more experience of the FCA’s approach to the Consumer Duty.
  • That the regulator says it is not requiring specific metrics or new reporting may initially seem less onerous, but the FCA expects firms to be able to ‘demonstrate effectively’ how they are monitoring outcomes, identifying harms or the risk thereof, and how they addressing issues they have identified. Further, firms will need to explain how they reached a decision on the most appropriate intervention, demonstrate how that intervention has addressed the concerns that they identified, and delivered good consumer outcomes and, if the intervention has not done so, what further they have done further to address the issue.
  • As with any FCA flagship initiative, the role of senior management and board is central. The FCA expects that, at least annually, a firm’s board will review the firm’s assessment of how it is delivering in line with the Consumer Duty. The Board is further expected to agree both (1) the actions required to address any issues which impact on the firm’s ability to deliver good outcomes, and (2) any changes to the firm’s future business strategy, before ‘signing off on the assessment’.
  • In addition, the FCA proposes to amend the SM&CR individual conduct rules in the Code of Conduct sourcebook (COCON) by adding a new rule requiring all conduct rules staff within firms to ‘act to deliver good outcomes for retail customers’ where their firms’ activities fall within scope of the Consumer Duty. This adds teeth to the FCA’s expectations on speak-up, not just for the firm but for individuals, because if the firm has succeeded in “allowing staff to feedback honestly when they think processes would be improved”, then a failure to raise an observed issue could constitute a failure to act to deliver good outcomes for retail customers.
  • The FCA sets out non-exhaustive lists of data which firms may want to collect, e.g., complaints data, customer retention data, and similar. It also outlines the FCA’s intention to make the Consumer Duty central to its authorisation, supervision, policy and enforcement processes, with the onus being very much on firms (or applicants as the case may be) to demonstrate to the regulator that it is (or can) deliver in line with the Consumer Duty.

In terms of the application of the Consumer Duty to multiple firms in distribution chains:

  • The good news is that the rules are intended to apply proportionately, taking account of a firm’s particular role. Firms are also only expected to take responsibility for their own activities and should not need to oversee the actions of others in the distribution chain.  There will be no joint and several liability.
  • In practice, the application of these principles is likely to be far from straightforward and careful examination of the new rules and proposed guidance will be needed. For example, where end users in a complex distribution chain do not achieve good outcomes, activities of all firms in that distribution chain (including ancillary unregulated activities which are connected with a regulated activity) are likely to come under scrutiny irrespective of how close a firm’s relationship is with those end users.  Further, whilst the FCA argues that “potential complications in contractual relationships should not arise”, this may not reflect reality as firms look to implement the new requirements.
  • Draft guidance confirms that there are situations in which firms do need to consider actions taken by other firms in a distribution chain. For example, firms will need to look carefully at the wider distribution chain when they put together their distribution strategy for products and services. It also goes without saying that, where Appointed Representatives distribute products, authorised firms must take responsibility for oversight of those activities.  This will include compliance with any more onerous requirements that may be imposed by the FCA following the publication of CP21/34 last Friday.
  • A particular focus of the FCA in recent years has, of course, been on general insurance distribution chains and on whether they provide “fair value” for customers. Firms that are involved in the distribution of general insurance will need to review how proposed Consumer Duty requirements change, or expand upon, rules that have already been introduced to meet concerns in this area.

Summary

The proposals from the FCA will add to the range of regulatory tools to address the poor customer outcomes it has identified in retail markets.

They would therefore give the FCA a greater ability to hold firms and senior management to account if poor outcomes are identified in the future, and they are intended to raise industry standards by putting the emphasis on firms to get products and services right in the first place.

Although the new proposed Consumer Duty will create a further burden on firms, the Handbook rules and guidance and non-Handbook guidance should provide greater clarity on the FCA’s expectations of the outcomes that should be achieved.

Given the FCA first consulted on a potential new duty of care in July 2018, it is good to now have greater clarity on the specific rules and guidance the FCA intends to implement in addition to the Consumer Principle. The changes required by firms will be significant, as highlighted by the FCA’s cost benefit analysis, and will include the need to perform gap analysis, make relevant adjustments through change projects, training staff, as well as IT costs and costs of monitoring and testing of consumer outcomes.

[1] New 2A.7.1R

 

Jenny Stainsby

Jenny Stainsby
Partner
+44 20 7466 2995

Karen Anderson

Karen Anderson
Partner
+44 20 7466 2404

Ben Goodman

Ben Goodman
Of Counsel
+44 20 7466 2862

Jon Ford

Jon Ford
Senior Associate
+44 20 7466 2539

Alison Matthews

Alison Matthews
Consultant
+44 20 7466 2765

Cat Dankos

Cat Dankos
Regulatory Consultant
+44 20 7466 7494

HM Treasury Consults on Amendments to Insurer Insolvency Regime

Recent proposals to amend insolvency rules applying to insurers aim to enhance and clarify existing powers for a court-ordered write-down of an insurer’s policy and other contractual liabilities under section 377 FSMA. Other proposed measures include:

  • a moratorium on certain contractual termination rights in service contracts and financial contracts to which insurers are party;
  • a suspension on policyholder surrender rights under life insurance policies; and
  • changes to the FSCS to ensure that policyholders are not disadvantaged if their policies are written down.

In “Amendments to the Insolvency Arrangements for Insurers: Consultation“, HM Treasury (“HMT“) notes that, although UK institutions have played an active role in the development of international resolution standards, the UK has not yet fully adopted these updated standards. HMT and the Bank of England are expected to develop a specific resolution regime for insurers in due course, which should complement these proposed insolvency reforms.

The deadline for responses to the consultation is 13 August 2021.

For a more detailed overview of the consultation proposals, please see our briefing here.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2067
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

Driving Meaningful Change in Diversity and Inclusion in the Financial Sector

Diversity and inclusion (D&I) has featured heavily in speeches by our UK regulators in recent months. The FCA, PRA and Bank of England (the regulators) have now published a discussion paper (DP21/2) which aims to kick-start discussion on how the financial services sector, with the help of the regulators, can “accelerate the pace of meaningful change” in improving D&I within financial services firms.

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FCA final rules on general insurance pricing practices – “At a glance” guide

The FCA has implemented a package of remedies to address problems identified in its market study looking at pricing practices in home and motor insurance markets.  “Price walking”, a practice which means that existing customers can pay considerably more at renewal of their policies than new customers for the equivalent cover, will be prohibited.

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FCA confirms proposals to prohibit “price-walking”

The FCA’s Final Report on general insurance pricing practices concludes that retail home and motor insurance markets are not working well for all consumers and confirms proposals to prohibit “price walking”.

The FCA’s reforms include the following key changes:

  • Firms will be prohibited from imposing a “loyalty penalty” on customers at renewal of their policy.
  • This prohibition will extend to products sold alongside insurance cover.
  • Manufacturers and distributors will be required to consider whether their products represent “fair value” for customers.
  • Further measures will aim to stop practices that act as barriers to switching.
  • New regular reporting requirements will be introduced to help the FCA’s ongoing supervision of home and motor insurance markets.

The period for responding to FCA Consultation Paper (CP20/19), which sets out its detailed proposals, closed at the end of January and the FCA intends to publish its response in Q2 2021. New rules are planned to take effect four months later.

Our summary of the FCA’s findings, proposed remedies to address failings in these markets and practical points for firms can be found here.

Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633

 

Beyond Brexit – what now for insurers’ legacy business?

As expected, the terms of the trade deal agreed between the UK and the EU on 24 December 2020 mean that Solvency II passporting rights are no longer available to UK insurers wishing to conduct insurance business in the EEA.

For UK insurers with policyholders in EEA States, this creates a particular concern that they will no longer be licensed to service those policies, including paying claims, unless they have established an authorised branch in each country. An alternative approach, and that which has been adopted by many insurers, has been to transfer the policies to an EEA carrier.

Post-Brexit, the risk to EEA policyholders of being unable to claim under policies held with UK insurers highlights the importance of understanding limits on individual state discretion in this area.

Summary

In our view, the argument that “expat business” (i.e. policies that were sold in the UK to policyholders who subsequently move to the EEA) is not cross-border business, and so is not affected by loss of passporting rights remains a valid one. This means that an EEA authorisation should not be required to continue servicing this type of policy.

However, it is also important to understand that EIOPA’s February 2019 recommendations to the insurance sector on Brexit (see our blog post for discussion) are not binding. Individual states are free, therefore, to apply the rules differently, to the extent that it is possible to diverge from other states under EU law. For example, our blog post dated 15 November 2019 describes the approach taken by France to the post-Brexit servicing of policies held by UK expats.

Finally, a number of EEA States have introduced run-off regimes to mitigate the impact of UK insurers’ loss of passporting rights from the end of the transition period. Each state’s regime is different, though, requiring specific legal advice to be taken in each case as to their effect.

EIOPA recommendations – February 2019

EIOPA’s Brexit recommendations contained the following guidance on legacy business:

  • EEA States were encouraged to apply a mechanism for the run-off of EEA business by UK insurers who lose their passporting rights or require those insurers to take immediate steps to become authorised.
  • EEA States were also encouraged to recognise that, whilst UK insurers should not be able to write new business (including any renewals, extension or increase of cover) without obtaining a suitable EEA authorisation, policyholders who exercise an option or right in an existing policy to start taking their pension should not be prejudiced.
  • Where a policyholder is habitually resident in the UK at the date of entering into a life insurance contract but moves to the EEA afterwards, national authorities should take this into account in their supervisory review.
  • National authorities should take the same approach to those classes of non-life business where the risk is treated by Solvency II as situated in the state of an individual’s habitual residence (or the state of a legal person’s establishment).

The recommendations suggested that a distinction should be drawn between legacy business that was written from the outset on a cross-border basis (“cross-border business”) and expat business.

 Expat business

It is implicit in EIOPA’s recommendations that it takes the view that the state of the risk/commitment under an insurance contract is fixed from the date a policy incepts and does not change if a policyholder subsequently moves his habitual residence (or establishment) from the UK to an EEA State. Applying this approach, a UK insurer that continues to pay claims after a UK policyholder relocates from the UK to an EEA State is not carrying on cross-border business and, under the pre-Brexit regime, did not rely on passporting rights to make those payments. Post-Brexit, the same insurer should, therefore, be able to continue to pay claims into that EEA jurisdiction without needing to obtain a local authorisation.

Equally, a UK insurer that meets its obligations to expat policyholders who exercise an option existing under their policy e.g. to exercise drawdown rights should not require an EEA authorisation to do so.

In our experience, most, if not all, UK insurers take the same view on this as EIOPA. They have not, as a consequence, included policies held by UK expats in Brexit-driven Part VII schemes transferring policies to an EEA carrier. The same issue arises, of course, in relation to moves by UK policyholders to non-EEA countries and it would certainly come as a surprise to UK insurers to find that they were unable to continue paying claims in those cases.

Cross-border business

By contrast, EIOPA’s recommendations suggest that the servicing of policies that were written before Brexit on a cross-border basis will require an EEA authorisation to replace passporting rights that are currently relied upon. In practice, consistent with this view, we understand that most policies in this second category have been transferred to an EEA insurer before the transition period came to an end on 31 December 2020.

Where a Part VII transfer completed before the end of the transition period, a UK insurer has no need to rely on any of the run-off regimes that have been put in place by a number of EEA states. The transitional relief provided by these regimes may, however, be important for:

  • firms who have begun the Part VII process but not completed the transfer of policies before 31 December 2020; and
  • firms who have decided not to transfer their cross-border business to an EEA-authorised insurer, perhaps because there are very few of these policies involved or the policies have a very short tail.

One remaining concern, though, is that firms falling into these two categories may end up with a “gap” in authorisation arising from the limited nature of the run-off regimes established by EEA authorities.

PRA guidance – February 2020

In February 2020, the PRA published guidance for UK insurers on their ability to service EEA liabilities once the Brexit transition period came to an end on 31 December 2020. In our view, the guidance is consistent with the view that expat business can continue to be serviced from the UK without an EEA authorisation.

However, the PRA did warn firms that do need an EEA authorisation to service their cross-border business that run-off regimes established by a number of EU authorities to ensure ongoing service continuity in relation to EU liabilities in a “no deal, no transition” scenario may not also apply from the end of the transition period. Firms who were intending to rely on those transitional regimes (as a temporary or permanent solution) were, therefore, advised to undertake a thorough analysis of their expected run-off profile, and to discuss their proposed approach with the relevant EU authorities. (The letter expressly referred to EU authorities and EU liabilities but should, in our view, have applied more widely to EEA authorities and EEA liabilities, consistent with the scope of the Solvency II regime.)

In practice, a number of EEA States have introduced run-off regimes to enable UK insurers to continue paying claims now that the transition period has come to an end. In Ireland, for example, UK insurers and intermediaries that satisfy conditions for entering into its temporary run-off regime are permitted to service their existing portfolio of contracts for a maximum of 15 years. The equivalent regime in Italy is not time-limited.

FCA guidance – December 2020

More recent FCA guidance for life companies and for general insurers (again issued before the end of the transition period) noted the approach taken by EIOPA to expat business but recognised that EIOPA’s recommendations were not binding on EU states. The FCA urged UK insurers with legacy business to engage with relevant national regulators whilst being guided in their decision-making by the need to secure appropriate outcomes for consumers.

It is far from clear what an insurer should do if regulation and customer interests conflict although the FCA’s comment that it would be “a bad outcome for a consumer not to receive the payment of a valid claim or any other payments they’re entitled to” suggests that firms must find a way of fulfilling their obligations to policyholders if at all possible. Other options for firms include compensating policyholders for the loss of benefits caused by local law restrictions or removing exit charges if a policyholder chooses to end the policy because of limitations e.g. on exercising rights or options.

For new business written after the end of the transition period, the FCA suggested that firms may need to spell out any limitations of the contract at sale.   This may include making it clear to new policyholders that moving to the EEA may affect their ability to benefit fully from their cover albeit that the position may change from state to state. For example, customers in some EEA states may lose the benefit of rights or options under their contract because an insurer lacks a local authorization.

What is clear in relation to both legacy and new business is that firms need to communicate with customers and keep them informed of any new developments that may affect their enjoyment of their policies.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2607
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

FCA consults on approach to authorising international firms

The FCA has published a consultation paper (CP20/20) describing its approach to the authorisation of international firms.  In the context of Brexit, the FCA’s comments will be relevant to firms (including insurers and insurance intermediaries) who have established EEA hubs to mitigate the loss of passporting rights, while continuing to conduct some of their activities through a UK branch.  In most cases at least, these firms will maintain their authorisation in the UK from the end of the Brexit implementation period by entering the Temporary Permissions Regime.  After that, they will require full authorisation in the UK which will bring the FCA’s guidance into play.

Key points for firms include:

  • UK presence: The FCA expects firms to have an establishment or physical presence in the UK (i.e. a UK “branch”).  This will, of course, be a relevant consideration for EEA firms that currently operate on a services-only basis in the UK but whose activities in the UK nonetheless will require authorisation once passporting rights fall away.  The need for a UK branch is, of course, consistent with the practice adopted by the PRA to international insurers.
  • Branch vs subsidiary: The FCA will be looking to see how firms mitigate heightened risks that come with conducting business through a UK branch, as compared with establishing a UK-incorporated subsidiary. We can expect the FCA to put pressure on an international firm to convert its branch to a subsidiary where it believes that operating through the branch poses an unacceptable level of risk.  Again, of course, this would be consistent with the approach that has already been taken by the PRA to insurers.
  • Cross-border services:  In assessing the risks of harm, the FCA will look at both (a) risks associated with activities being undertaken through a branch, for example, because it is more difficult for the FCA to take action or because of overlapping regulatory regimes in the home state and the UK; and (b) the nature and scale of activities the international firm intends to conduct from outside the UK which may raise different concerns e.g. FSCS cover may not be available.
  • Risks of harm: Three broad categories of harm identified in the paper are retail harm, client asset harm and wholesale harm, although the FCA will also consider sector and business specific risks as part of its assessment. The FCA will also consider home state regulation and supervision, together with international co-operation.
  • Limitations and requirements: The FCA may impose limitations or requirements as part of any approval given to an international firm if it believes it necessary to ensure that the firm will meet conditions for authorisation on an ongoing basis.  For example, it may limit the number or category of customers a firm can deal with.

Our longer briefing on CP20/20 can be found here.

The consultation will be of particular interest to insurance intermediaries that are only regulated by the FCA in the UK.  For insurers, the FCA’s comments supplement PRA guidance already issued on this topic (see SS44/15 and SS2/18).  The deadline for commenting on CP20/20 is 27 November 2020.

Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789

 

 

 

Upcoming webinar: Financial services – Update and preparations for no-deal

With UK/EU deal negotiations in the balance and a no-deal scenario still possible, a panel of experts from Herbert Smith Freehills, the Financial Conduct Authority and McCann FitzGerald (for the Ireland perspective) will review the current state of play on Brexit and what comes next for the regulation of cross-border financial services.

The webinar will take place between 2-3pm on 23 July 2020. Topics covered will include:

  1. Free trade agreement negotiations and equivalence assessments: stocktake
  2. UK and EU – no deal impact:
    • Equivalence and cooperation agreements
    • Position for EU27 firms and UK  – TPR, temporary transitional powers
    • Position for UK firms and EU27
    • FCA expectations for firms
  3. Ireland:
    • Position for UK firms operating in Ireland
    • Concerns for Irish firms in UK market
  4. What firms should be doing next

WHAT DO I DO IF I AM INTERESTED?

REGISTER – Please register here. We will then send you an email with a link to join the webinar and confirmation of your log-in address.

If you have queries about the webinars or the registration process please contact webinars@hsf.com.

UNABLE TO ATTEND ON THE DAY?

Please note this webinar will be delivered in a live format only and will not be available on demand.

If you would like to keep up-to-date with our latest Brexit analysis, please subscribe here to our Beyond Brexit blog.

Speakers:

Greg Sachrajda – Head of International Delivery, Financial Conduct Authority 
Zertasha Malik – Head of International, Financial Conduct Authority
Darragh Murphy – Partner, Financial Services Regulation, McCann FitzGerald
Clive Cunningham – Partner, Financial Services Regulation, Herbert Smith Freehills
Lode Van Den Hende – Partner, Competition, Regulation and Trade, Herbert Smith Freehills
Katherine Dillon – Of Counsel, Financial Services Regulation, Herbert Smith Freehills
Emma Reid – Associate, Financial Services Regulation, Herbert Smith Freehills

COVID-19: Governance: PRA and FCA confirm expectations for regulated firms under SMCR (UK)

The PRA and FCA have set out their expectations for UK-regulated firms under the Senior Managers and Certification Regime (“SMCR“) in the light of the COVID-19 outbreak.

A joint statement from the PRA and FCA applies to dual-regulated firms (the “Joint Statement“), while the FCA has published a separate statement for solo-regulated firms (the “FCA Statement“).

Some differences in expectations as between solo and dual-regulated firms are highlighted below.

Next steps

Firms should:

  • Ensure responsibility for the response to COVID-19 disruption is clearly allocated to one or more appropriate Senior Managers.
  • Document internally all decisions relating to the interim re-allocation of Senior Management Functions (“SMFs“) and Prescribed Responsibilities (“PRs“) as a result of temporary absences during this period. Firms should be prepared to share these internal documents with the regulators on request.
  • Communicate material temporary changes to the appropriate regulator promptly (this may not need to be by way of usual SMCR notification forms).
  • Keep contingency plans under review to ensure they remain up-to-date.
  • Take reasonable steps to complete any annual certifications that are due to expire while restrictions are in place.

Key expectations

Allocating responsibility for COVID-19 response

  • Firms are not required to allocate responsibility for their response to the disruption caused by COVID-19 to a single Senior Manager. No “one size fits all” approach is being mandated (with the exception of requiring the responsibility of identifying key workers to be allocated to SMF1 (Chief Executive Officer) – see the FCA and PRA statements for more information).
  • In the Joint Statement, the PRA also recommends that dual-regulated firms consider how they respond to unexpected changes to contingency plans, given the possibility of Senior Managers becoming temporarily absent. Solo-regulated firms should consider doing the same.

Temporary arrangements for SMFs and PRs

SMFs

  • Where a Senior Manager is unexpectedly absent due to illness (or other COVID-19 related circumstances), firms may choose to allocate SMFs to existing Senior Managers. In addition, under the existing ‘12-week rule’, firms may permit an unapproved individual to perform an SMF role where such arrangements are temporary.
  • For solo regulated firms, the FCA intends to issue a Modification by Consent to the 12-week rule to support firms using temporary arrangements for up to 36 weeks. This extended period is not currently available for dual-regulated firms (although this position remains under review).

PRs

  • The FCA and PRA expect PRs (for both solo and dual-regulated firms) to be allocated to existing approved Senior Managers wherever possible. Where this is not possible (for example due to other Senior Manager absences), the PR can be allocated to an unapproved individual performing an SMF’s role on an interim basis.
  • All temporary changes to SMFs or PRs throughout this period should be clearly documented on internal records, including in Statements of Responsibilities (SoRs) and Responsibilities Maps (where appropriate). These records will need to be available to the FCA and/or PRA on request.

Furloughing staff

  • Both statements confirm that furloughed Senior Managers will retain their approved status during their temporary absence and will not need to seek re-approval.
  • Certain ‘required’ functions (such as Compliance Oversight and MLRO) and/or ‘mandatory’ functions (such as the CEO, CFO and Chair of the Governing Body for Solvency II insurers) should only be furloughed “as a last resort”. Firms must arrange cover for those SMFs during the individual’s absence.
  • Firms have greater flexibility in furloughing Senior Managers whose functions are not mandatory. However, in the Joint Statement, dual regulated firms are cautioned to think carefully about the implications of furloughing non-mandatory SMFs (such as SMFs responsible for business continuity). Solo-regulated firms should also consider the implications of furloughing key senior staff.

Notification requirements during this period

All firms

All firms should update the FCA (and, where relevant, the PRA) by email or by telephone where:

  • unapproved individuals are acting as SMFs under the ‘12-week rule’; and/or
  • Senior Managers have been furloughed.

Firms are not required to submit Forms C, D or J in connection with these temporary absences.

Solo-regulated firms

  • Solo-regulated firms will not be required to submit an updated SoR for approved Senior Managers if a temporary change is made to their responsibilities. However, solo-regulated firms will still need to notify the FCA of the detail of any changes (by email or by telephone) that would normally be included in updated SoRs.

Dual-regulated firms

  • Dual-regulated firms are still required to update and submit SoRs if there are significant changes “as soon as reasonably practical”. It is acknowledged that this may take longer than usual due to current operational challenges.

No change to the obligation to certify staff as fit and proper

  • Dual-regulated firms should take reasonable steps to complete annual certifications due to expire during this period. What might constitute reasonable steps may be altered given the current situation, and certification policies and procedures may need to be adapted.
  • While not specifically addressed in the FCA Statement, in the absence of any new regulatory guidance, the FCA’s expectation appears to be that solo-regulated firms should also take reasonable steps to continue with annual certifications during this period.

Our blog post on the PRA and FCA’s guidance on key workers in financial services is available here, and our general briefing on COVID-19 – Key Issues for Employers is available here.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633