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

COVID-19 Governance: Regulatory impact for insurers

The COVID-19 pandemic is creating significant health, social and economic challenges world-wide, forcing governments and businesses to assess the impact on their people, operations and governance.

Our latest “at a glance guide” considers some of the announcements made to date by EIOPA, the PRA and the FCA.  These cover a range of issues including actions that insurers should be taking to protect customers and employees, encouragement to firms to preserve capital and the extension of reporting deadlines.

Our COVID-19 crisis hub aims to help our clients navigate their way through the many legal and regulatory issues that COVID-19 creates for their businesses.

For regular insurance sector updates, please also subscribe to HSF Insurance Notes.

If you would like to discuss arrangements for support on any of the issues raised by COVID-19, please ask your regular Herbert Smith Freehills relationship contacts, or one of the following members of our insurance team.

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

COVID 19 – PRA and FCA guidance on key workers in financial services

The UK Government has published guidance requesting that schools and other educational institutions provide limited care for children whose parents have roles that are critical to the COVID-19 response. This includes parents working in certain financial services roles, including in the insurance sector, that are essential to the functioning of the economy (referred to as “key financial workers” or “KFWs“).

The PRA and FCA have now published their own guidance, setting out the steps that firms should take.

Identifying KFWs

  • A KFW is any individual who fulfils a role which is necessary for the firm to continue to provide (i) essential daily financial services to consumers, or (ii) ensure the continued functioning of markets.  The guidance provides a list of example KFWs (PRA) (FCA).
  • KFWs could work for any categorisation of financial institution, including insurance companies and intermediaries
  • Firms are best placed to identify their KFWs; they should start by identifying the firm’s activities, services or operations which are essential to services in the real economy or financial stability and then identify the individuals essential to support those functions.
  • In the insurance sector, KFWs are likely to include individuals essential to the processing of claims and renewal of insurance policies.

Outsourced functions

  • When considering KFWs, firms should also identify any critical outsource partners that are essential to the continued provision of services, even if these are not financial services firms.

 Process

  • The PRA/FCA recommend that the individual designated as Chief Executive Officer under the Senior Managers and Certification Regime (SMF1) (or, if not applicable, an equivalent senior member of the management team) should be accountable for ensuring an adequate process so that only roles meeting the KFW definition are designated.
  • Firms should consider issuing letters to all individuals identified as KFWs as evidence of their status.

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

France sets out approach to post-Brexit servicing of policies held by UK expats

In February 2019, EIOPA published a series of recommendations (the “Recommendations“) for the insurance sector relating to the UK’s withdrawal from the EU (see our earlier blog post here).

The French regulator, the Autorité de contrôle prudentiel et de resolution (“ACPR“), has indicated that it does not intend to comply with Recommendation 6, relating to insurance policies sold in the UK by UK insurers to policyholders who have since relocated to an EEA state (“UK expats“).

UK insurers needing to service policies held by UK expats living in France post-Brexit should consider the ACPR announcement carefully. Some may need to secure passporting rights into France before the UK leaves the EU.

Background – Solvency II and third country firms

As widely discussed over the past few years, a risk associated with the UK’s withdrawal from the EU is that UK insurers with policyholders in EEA states will not be able to service those policies post-Brexit unless they have established an authorised branch in each country (or unless the policies have been transferred by the time of Brexit to an EEA carrier). This is because, whilst Article 162 of the Solvency II Directive provides for the authorisation of EEA branches of third country insurers, it is silent on how cross-border services business (often referred to as “non-admitted” insurance) from a third country (including the UK post-Brexit) should be treated and there is no consistent approach.

As the possibility of a country leaving the EU has not previously been seen as something for which extensive provision needs to be made in European legislation, little attention has been given to such differences. However, the risk to EEA policyholders of being unable to claim, post-Brexit, under policies held with UK insurers highlights the importance of understanding limits on individual state discretion in this area.

What has EIOPA said?

Under the Solvency II regime, cross-border insurance services are provided where an insurer established in one EEA state covers risks or commitments located in another EEA state.

Recommendation 6 (Change in the habitual residence or establishment of the policyholder) reads as follows:

23. Where a policyholder with habitual residence or, in the case of a legal person, place of establishment in the UK concluded a life insurance contract with a UK insurance undertaking and afterwards the policyholder changed its habitual residence or place of establishment to a EU27 Member State, competent authorities should take into account in the supervisory review that the insurance contract was concluded in the UK and the UK insurance undertaking did not provide cross-border services for the EU27 for this contract.

24. Competent authorities should apply the same approach to non-life insurance contracts that do not relate to buildings or to buildings and their contents or to vehicles.

In summary, EIOPA takes the view that the state of the risk/commitment under an insurance contract is fixed from the date a policy incepts. It does not change, therefore, if a policyholder moves his habitual residence (or establishment) from the UK to France (or any other EEA state) after the policy has been taken out.

Applying this approach, a UK insurer that continues to pay claims today after a UK policyholder has relocated to another EEA state will not be carrying on cross-border business and does not rely on passporting rights to make those payments. Post-Brexit, that insurer should also be able to continue to pay claims into France, say, without needing to obtain a local authorisation to replace lost passporting rights.

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 any Brexit-related Part VII schemes transferring policies to an EEA carrier.

What has the ACPR said?

In a statement published on its website on 8 November 2019, the ACPR stated that French law requires it to conclude that the state of the risk/commitment would move with a UK policyholder to France on a change of habitual residence or establishment (as the case may be). For a UK insurer to service that policy it would, therefore, need to have regulatory permission to conduct insurance business in France. Pre-Brexit, passporting rights held by the UK insurer would be sufficient. Post-Brexit, regulatory permission to conduct business in France would be needed.

If the ACPR’s announcement had stopped here, UK insurers needing to service policies held by UK expats post-Brexit would have been placed in an extremely difficult position. Helpfully, however, transitional rules aimed at ensuring that Brexit does not interrupt the payment of claims by UK insurers to policyholders in France appear to provide a solution.

In brief, French legislation (known as the Brexit Ordinance) allows UK insurers to perform their obligations under contracts written before Brexit, including under contracts written with UK expats, provided that, on the date the UK leaves the EU, the insurer holds passporting rights to operate in France.

ACPR has also confirmed that the Brexit Ordinance will not apply to renewals or to contracts providing for the payment of new premiums. This does not, however, prohibit the payment of “mandatory premiums” payable by the policyholder under the contract.

What has the PRA said?

On 12 November 2019, the PRA published a statement highlighting the ACPR’s comments. It encouraged firms to seek legal advice and consider any risk arising from the ACPR approach to affected policyholders as soon as possible. Specifically, firms should consider the need to secure passporting rights before exit day to ensure that they could can meet their obligations to UK expats post-Brexit by relying on the Brexit Ordinance.

Our view

The extension of run-off rights under the Brexit Ordinance to contracts held by UK expats with UK insurers is welcome. Without this concession, many UK insurers without a French branch would be concerned that they could not pay claims to UK expats, including those moving to France after Brexit, without breaking French law.

The impact of the ACPR’s comments on renewals and the payment of additional premium is likely to vary by type of policy. In the case of general insurance, UK firms should be able to take advantage of the Brexit Ordinance, at least until they renew (usually annually). In the case of long term business, annuity policies in payment at the time of Brexit and that have been secured by the payment of a single premium, should fall within France’s run-off regime. Drawdown and protection policies should also be able to benefit.

More difficult, perhaps, are long term savings contracts, such as pensions. Whilst, in a sense, no premium is ever mandatory as a policyholder can always lapse the policy, and firms should take advice, we expect that in context this must mean a payment of premium which is mandatory if the cover is to be maintained.

The ACPR comments that its approach to this issue is mandated by French case law and regulation. We would question whether the domestic law of any EEA state, rather than EU law, should determine the state of the risk or commitment under an insurance policy for the purposes of Solvency II rules on passporting.

Firms that need to rely on the Brexit Ordinance to meet their obligations to UK expats in France will need to ensure that they hold passporting rights into France at the date of the UK’s withdrawal from the EU (currently due to be 31 January 2020). Some insurers will already hold those passporting rights and need take no further action. Others, who have probably never sought to make sales into France, may need to secure their passporting rights before the UK leaves the EU. It is important that they do so. There is no de minimis threshold for the application of the French regime which means that the relocation of a UK policyholder to France (before or after Brexit) could put a UK insurer in breach of French law if it has not taken steps to obtain passporting rights before Brexit.

 

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2067
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Senior Associate, London
+44 20 7466 2158

Regulators extend transitional direction powers in line with Brexit delay

The FCA, Bank of England (“BoE”) and PRA yesterday announced measures to extend certain UK-specific Brexit transitional relief provisions for a further six months until 31 December 2020, in line with the extension of Exit Day until 31 October. This is generally in line with industry expectations and does not signal any material changes to the regulators’ policy or approach. (It should be noted that these timelines are separate from the 3-year maximum period applicable under the (separate) Temporary Permissions Regime (“TPR”), which remains unchanged in terms of overall maximum duration).

The FCA has issued a statement confirming its intention to extend the proposed duration of the directions issued under its temporary transitional power (“TTP”) to 31 December 2020, reflecting the six-month extension of Article 50. The TTP is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. For those areas covered by the TTP, firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

The FCA’s statement clarifies that, other than the additional time, the FCA’s approach to the use of the TTP remains unchanged from that previously communicated. Firms are reminded, in particular, that certain obligations will not be covered by the TTP: these include some significant areas such as reporting under EMIR and the MiFID II transaction reporting regime, which will present particular challenges for EEA firms operating in the EEA under the TPR. The FCA reiterates that it expects TPR firms to use the additional time between now and the end of October to prepare to meet these obligations and confirms that it will publish further information before exit day on how firms should comply with post-exit rules.

The PRA and BoE have published a related consultation paper, which provides an update on the BoE and PRA’s approach to the TTP. The consultation also briefly explains and consults on the proposals to amend further certain regulatory requirements to take account of changes to EU law taking effect between March and October 2019. On use of the TTP, the PRA and BoE confirm, consistent with the FCA, that the proposed adjusted fixed end date for the TTP directions will be 31 December 2020, and that the overall approach to use of the TTP remains generally unchanged from the approach previously outlined by the PRA and BoE.

PRA-regulated firms within the scope of the TPR are reminded that ,for the most part, the TTP will not apply to obligations arising in consequence of their status change upon entering the TPR. The PRA and BoE are also consulting on proposals to fix deficiencies arising from the UK’s withdrawal from the EU and to make consequential changes in light of the extension to the Article 50 period (in order to deal with EU binding technical standards (“BTS”) entering into force between March and October 2019). The PRA does not expect material changes to be required to address this. Changes required to take account of EU laws and regulations other than BTS remain the responsibility of HM Treasury, which is separately engaged on this exercise.  

 

Katherine Dillon
Katherine Dillon
Of Counsel, London
+44 20 7466 2522
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765

Preparing for Brexit: EEA (re)insurers – UK Temporary Permissions Regime

The FCA portal for incoming EEA firms to notify the PRA and the FCA of their intention to enter the UK Temporary Permissions Regime (“TPR”) is now open.

The TPR will apply if the UK leaves the EU on 29 March 2019 without an implementation (transitional) period. It ensures that EEA firms currently operating under an incoming passport (either from a UK branch or on a cross-border services basis into the UK) can continue to carry out regulated activities in the UK until they receive new direct authorisation by the UK regulators.

This short “at a glance” guide contains an overview of how the TPR will apply to EEA (re)insurers and suggests some next steps.  Notifications must be submitted before 29 March 2019.

 

Brexit Final Political Declaration: Nothing [new] to see here?

The Political Declaration setting out the Framework for the Future Relationship between the EU and the UK was published earlier today.

On financial services (including insurance), the final declaration essentially contains the same three points as in last week’s outline political declaration (as discussed in our blog post of 15th November), although there is some limited further clarification.

Continue reading

EIOPA issues second warning about the impact of Brexit on insurance contracts

EIOPA has published an opinion and FAQs emphasising the need for insurers and insurance intermediaries to explain to policyholders how Brexit will affect their insurance cover.

At first sight, EIOPA’s comments appear to reinforce concerns that political compromise cannot be expected on policies written (or performed) on a cross-border basis before the UK’s withdrawal from the EU (so-called “legacy contracts”). The particular issue for UK insurers is whether they will have the authorisation they need, post-Brexit, to continue to meet their obligations to EEA policyholders under these contracts. Closer examination of the words used by EIOPA may, however, mean that fewer policies are caught by this issue than has been assumed to date.

Our discussion of EIOPA’s latest opinion can be found here.

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BREXIT UPDATE – EEA (RE)INSURERS

EEA insurers and reinsurers doing business in the UK under the insurance passport must prepare for the UK’s withdrawal from the EU. We consider, in our latest “At a Glance” guide, the impact of Brexit on the cross-border activities of EEA (re)insurers, including how firms might respond to the European Council’s recent agreement to a transition period.

The “At a Glance” guide can be found here.