PRA consults on funded reinsurance

The PRA’s consultation on funded reinsurance is a welcome development. This is an area in which the PRA has signalled interest for quite a long time, and clarity on its expectations is helpful.

A number of the proposals will be familiar to insurers, albeit they will likely lead to some increased formality and documentation. In some areas, many insurers will welcome the PRA’s suggestions as they will help to ensure that the bulk annuity market is not being distorted by a small number of parties taking risks that others regard as inappropriate.

Aspects of the consultation seem to us, however, to raise practical concerns. Some of the proposals relating to how reinsurers are assessed, including the obligation to establish whether reinsurers’ default risks derive from correlated sources or business models, appear difficult to implement. This may be particularly problematic for larger, more established reinsurers. Other proposals may be reasonable, but it will be important to see how they are implemented (eg ensuring collateral assets are in a form that would allow MA compliance on recapture).

A lot depends on how the PRA interprets the idea of proportionality. Some of the measures would, if applied uniformly without regard to context, seem over the top. Others could potentially even lead to the opposite of the PRA’s objective or cause.

Background to CP

The PRA has seen an increase in funded reinsurance in recent years, which it believes to have been fuelled by more, and higher value, transactions in the UK bulk purchase annuity (“BPA“) market. If the reinsurers were to fail, the consequences for UK insurers in this market (and potentially UK pensioners) would be significant. As a result, the PRA wants to set out its expectations clearly.

In consultation paper CP24/23, released on 16 November 2023 (the “CP“), and its accompanying draft supervisory statement (the “SS“), the PRA focusses on three key risks which are raised by funded reinsurance, namely credit, collateral and systemic risks. As the PRA seems to be saying that it does not, as of yet, have concerns about systemic risks (ie it will monitor those risks for now, rather than address them), we do not comment on those.

The PRA’s launch of this consultation is generally to be welcomed. This is an area the PRA has indicated an interest in for some time, and it is helpful for the PRA to make its expectations clear. Most of its comments are unsurprising albeit that some, as discussed below, may give rise to practical difficulties. Furthermore, this is an area of real importance to the wider economy, relating to what will be, for many UK pensioners, their main source of income.

Counterparty risk

As part of its risk management system, the UK insurer ceding the risk will be expected to consider the impact of a potential recapture of all ceded business, including on its SCR. With this in mind, insurers will need to set:

  • internal investment limits for exposures to an individual counterparty, which should be “focussed on the idiosyncratic risk of a counterparty” , such that it may default independently of other counterparties in the market;
  • an additional limit for concentration risk, based on the simultaneous recapture from multiple “highly correlated” counterparties; and
  • an aggregate limit based on ensuring a diversified asset strategy as well as operational capabilities on recapture.

To implement those requirements, a cedant firm will need to understand the extent to which its reinsurers are “highly correlated”. The PRA states that firms should assess “similarities in the risk profile of counterparties” operating in this market, but does not say how that should be done.

This seems like a sizeable burden. Assessing the credit risk of an individual counterparty can be a significant exercise, but the PRA’s proposal would require a much deeper understanding of the various reasons reinsurers might default. Even after developing that deeper understanding, the insurer would need to be able to compare the risks between different reinsurers and then identify ways in which those risks are correlated.

That kind of exercise would likely need substantially more data than reinsurers provide at the moment, which raises a point for contracts. It is also not a given that reinsurers would agree to disclose the additional data. Even if reinsurers could be persuaded in that regard, the additional processes and expertise that UK insurers would need to put in place seem likely to result in significant expense. As a result, it seems likely that there would be practical difficulties with implementing the PRA’s suggested approach.

We have a similar concern about the PRA’s expectation that insurers should “analyse how the solvency ratio of their counterparties changes under various market stresses”, and how this could inform their assessment of a stressed probability of default. This is said to reflect an existing requirement of the PRA’s rules on internal models. However, if read too literally, we believe it sets an impossibly onerous challenge, given the detail the cedant would need about the reinsurer if it were to conduct that exercise properly.

In a presumably related point in the context of the SCR, the PRA indicates that firms should look to gather non-public information as part of their counterparty approval processes. It goes on to say, however, that such information should not be used to assign a lower probability of default to a counterparty than would otherwise be used. Is this an example of the PRA both having its cake and eating it? Why can the information provided only result in a more negative view of the reinsurer?

The practical issues seem important in and of themselves. Perhaps the bigger point, however, is the incentives they would create. The exercise of assessing large, well-diversified (across products, assets and geographies) reinsurers would be more complex, and so require more time and expertise (ie cost), than in the case of a small, mono-line reinsurer. If the same assessment needs to be done regardless of how likely the reinsurer is to default, it creates an incentive to transact with reinsurers with simpler balance sheets. That incentive would nudge the market in the very direction that the PRA is presumably trying to avoid. As such, a statement in the final SS to the effect that the measures can be applied in a proportionate way would be welcome. Even if the PRA’s view is that this is implied, the factors it would take into account (and not take into account) when assessing whether proportionality has been properly applied would be a useful addition.

Collateral risk

The PRA is concerned that, in a competitive BPA market, firms might be able to offer pension scheme trustees a lower price by accepting lower quality collateral from their funded reinsurer, with the result that firms would then be in a more vulnerable position on recapture.

To address this concern, the PRA expects firms to establish clear collateral policies as part of their risk management processes. These policies should be closely linked to firms’ limit setting process (see above) and would need to cover, at a minimum:

  • approaches to credit assessments;
  • valuation methodologies by asset class;
  • matching adjustment (“MA“) eligibility monitoring;
  • SCR modelling; and
  • investment management approaches on recapture.

In the context of calculating the extent to which collateral supporting funded reinsurance arrangements mitigates risk for SCR purposes, the PRA’s expectations include a requirement to stress assets held as collateral on a look-through basis to reflect the risks that a firm would face on recapture. Other requirements include considering possible mismatches between the stressed value of the underlying insurance liabilities and the stressed collateral required under the funded reinsurance arrangements. Firms should also consider the risk that counterparties would not be able to replenish the collateral portfolio in stressed conditions.

These proposals may all be reasonable, but, as with the requirements related to credit risk, much depends on their application. For example, requiring firms to consider how they would meet the MA criteria if a recapture occurred seems fair (assuming MA reliance would be part of their recapture plan (see below), which does seem highly likely). However, the majority of reinsurers in this market are high-quality counterparties with a very low risk of default. Disregarding this, with the result that investment management strategies are forced to be highly conservative, will impact the costs of BPA transactions (ie trustees will pay for this conservatism with higher premiums) and could well work against the objectives behind the liberalisation of the categories of MA eligible assets, as reflected in the PRA’s CP19/23. These increased costs need to be justifiable and rooted in real risks. For example, the importance of collateral, and so the need for prescribed restrictions, is less when a reinsurer’s SCR is 200% than at 100%.

Recapture plan

Firms will be required to formulate and document a recapture plan for their funded reinsurance arrangements. These would need to demonstrate that the firm’s business model can survive a single recapture event and multiple recapture events from correlated counterparties.

Recapture plans should also establish a clear and structured decision-making process for assessing whether ceded business should be recaptured when optional contractual termination event clauses are triggered.

The burden of this exercise could be significant. It would be helpful if the PRA could clarify how firms should approach this. In particular, a confirmation that an exception, or at least a significant transition period, will be granted for existing relatively low risk reinsurance (eg if a reinsurer is in a sophisticated jurisdiction and is highly capitalised) would be a positive addition.

Contractual mitigations

The PRA notes that appropriate contractual protections should be introduced into funded reinsurance arrangements. Firms should adopt internal guidelines setting out the minimum protections that should be sought and the rationale for seeking them. These include the approach to termination rights, substitution of collateral assets, rules on investment management (including valuation), concentration limits, rights to obtain information (including information that may be commercially sensitive) and choice of applicable law.

In our experience, UK insurers already include many of these types of contractual protections. We would not, therefore, expect this aspect of the SS to change the high-level approach in most cases (though the detail of the clauses may need to be different). If, however, arrangements are being entered into without including these protections, clarity from the PRA is a positive development to ensure that some are not seeking to gain commercial advantage by taking risks that most insurers in the market regard as inappropriate.

Conclusion

In general, moving towards a more detailed framework in the manner proposed by the PRA is prudent, particularly in light of a growing BPA market and the fundamental objective of ensuring the insurance industry operates effectively for underlying policyholders.

Firms will need to consider how best to meet the PRA’s expectations. This may mean looking at existing funded reinsurance arrangements and considering how to respond if those arrangements fall short of expectations. In our experience, most insurers already spend a lot of time thinking about the types of contractual protections the PRA has referenced. They also put considerable effort into understanding how a recapture would be implemented in practice, albeit that the new proposals may result in increased formality in that respect.

However, some aspects of the CP proposals (in particular in relation to assessing and monitoring counterparty credit risk and reinsurers’ solvency ratio changes under stress) impose obligations that seem likely to give rise to practical issues. Insurers will need to assess if these are proportionate and provide feedback on the CP if they feel that they are not. In our view, the PRA should consider these issues in detail, and should in particular consider if being unclear about how proportionality will be applied might incentivise the types of risks the PRA is looking to discourage.

 

Geoffrey Maddock
Geoffrey Maddock
Partner
+44 20 7466 2067
Grant Murtagh
Grant Murtagh
Partner
+44 20 7466 2158
Julia Danskin
Julia Danskin
Senior Associate
+44 20 7466 2160
Tim Coorey
Tim Coorey
Senior Associate (Australia)
+44 20 7466 2001

PRA consults on matching adjustment reforms: new-found freedoms or simply different chains?

The PRA’s latest consultation on reforming the UK’s insurance regulatory regime proposes a number of changes to the matching adjustment rules. This is the second PRA consultation to follow the UK Government’s Solvency II review, which confirmed that the post-Brexit Solvency II framework should be better aligned to the structural features of the UK insurance sector. The changes should also support the Government’s aim of encouraging insurers to provide more long term capital to the UK economy.

CP19/23 outlines how the PRA proposes to pull off a magic trick of sorts: allowing insurers freedom to invest in riskier assets without increasing the risk that those same insurers will run into financial difficulties.  A lot is riding on this. The Government is hoping that the Solvency II reforms, of which this consultation is a significant part, will free up billions of pounds of capital for investment. It is hoped that those investments will spur growth in the UK’s economy, and so be good for everybody in the UK.

As is generally the case with regulatory reform of this importance, the changes that insurers, and others, will welcome come with significant strings attached. There is a lot to work through in the consultation, and insurers will need to establish whether the increased costs are proportionate to the additional returns (and risks) that might accrue.

We look forward to working with insurers and our clients more generally to help them consider the proposals. The potential prize on offer is significant, and the deadline for feedback on the proposals is 5 January 2024. Now is the time to consider whether the proposals need to be changed, such that the aim of unlocking large amounts of capital to help grow the wider economy can be realised.

In our publication here, we discuss the proposed regulatory changes in further detail and provide our thoughts on the impact that these changes are set to have on insurers, as well as potential recipients of insurer finance.

 

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

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

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.

Continue reading

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

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