22nd May 2019

The Senior Management and Certification Regime: Is your insurance up to date?


Tagged: D&O Liability

As a specialist business insurance broker with most of our customers regulated by the Financial Conduct Authority (FCA), we all know that 09 December 2019 will be a crucial date.

The Senior Managers and Certification Regime (SM&CR) will come into force for non-bank firms that are regulated by the FCA and authorised under the Financial Services and Markets Act 2000 (FSMA). SM&CR will therefore replace the Approved Persons Regime (APR) for all firms, meaning that by the end of this year, every solo-FCA regulated firm, no matter how large or small, will fall under these new rules.

If your company is subject to the Regime, one of the key issues you will need to consider is how SM&CR will affect your business insurance requirements, specifically when it comes to Directors' and Officers' Insurance (D&O).

Why is this happening?

As a response to the 2008 financial crisis, SM&CR was initially created to improve standards in the banking sector. It came into effect on 07 March 2016 for UK banks, UK branches of foreign banks, building societies, credit unions, and investment firms. These rules were then extended to insurers on 10 December 2018 and will finally reach all non-bank FCA regulated firms on 09 December 2019, completely changing the way the FCA will regulate individuals working in financial services.

The purpose of SM&CR is to improve the culture across the financial services sector through encouraging staff to take personal responsibility for their actions. Firms and staff need to clearly understand and show who is responsible for which aspect of the business, so when an issue arises the individuals responsible will no longer be able to hide behind the ‘corporate veil’ as regulators and firms can clearly identify who they are and hold them to account. The aim is to reduce potential harm to consumers and strengthen market integrity.

Breaching the new conduct rules or failing to have reasonable preventative measures for such a breach, will lead to a personal fine for the individual accountable designed to act as a stronger deterrent than a fine imposed on their firm.

How will the FCA identify ‘senior managers’?

The SM&CR defines senior managers as employees of financial services firms whose roles pose a risk of significant harm to their employer or its customers if they breach their duties. The FCA defines these roles as Senior Management Functions (SMFs). Importantly, these individuals may now include non-executive directors (NEDs) as well as directors.

How will this affect my business insurance?

Senior Managers’ protection

These significant changes could potentially lead to additional regulatory investigations by the FCA and a greater risk of senior managers being subjected to fines and suspensions, possibly even lifetime bans. There is also concern that SM&CR could create a rise in whistleblowing. If senior managers find themselves under prosecution or investigation, then they will probably want to dispute any allegations against them to protect their reputation. In this case they would want their employers to provide them with the necessary insurance to cover them for any subsequent costs that may be incurred.

Increased run-off

It is also important to note that the time limit for regulators to take disciplinary action against senior managers for misconduct has been extended from three years to six years. This can be significant from a run-off standpoint. If the firm was to let their insurance policy lapse or close the business, SM&CR may prove a greater incentive to take out run-off coverage for the firm’s previous operations.

Adequate insurance cover and gaps

As an FCA regulated business, you would need to consider the following questions:

  • Does your company have adequate D&O insurance in place to reflect the impact of the SM&CR’s implementation?
  • Is there a sufficient D&O limit available to allow for potential defence costs arising from an FCA investigation and/or a legal prosecution - particularly in the case of an aggregate limit where multiple senior managers are involved?
  • Prior to SM&CR, NEDs were not subject to regulatory investigations or penalties which will change once SM&CR goes live. Therefore, does your existing D&O insurance policy provide adequate cover for non-executive directors?
  • Firms will also need to consider any potential gaps in cover between their Professional Indemnity (PI) and D&O insurances, to the extent that a regulatory investigation of senior managers is deemed to concern professional services that may well be excluded from cover under D&O policies

Speak to us

The best way to ensure that you have adequate cover in place is to speak to a member of the team at Protean Risk who should be able to help you in evaluating any potential gaps between your existing D&O and PI cover and any areas where your insurance policies may not protect you. Examples include situations where aggregate limits are purchased or determining whether coverage is included for NEDs. Failure to clarify this with your broker could lead to your business having to pay out substantial defence costs for any senior managers facing prosecution, or under investigation, if you have contractually agreed to indemnify them.

Last but not least – know the rules

We work with many FCA regulated entities and we believe that the SM&CR is a positive step forward. Whilst the regime does give the regulators a stronger ability to punish firms and their senior managers if things go wrong, it’s not designed to set firms up for a fall. It will help firms move away from corporate bureaucracy and internal compliance procedures being a ‘box-ticking exercise’ and instead move towards a stronger corporate culture of responsibility and accountability with senior managers having clearer objectives. This can only lead to better communication, greater efficiencies and a greater likelihood of long-term success for FCA regulated businesses.

Visit the FCA’s Senior Managers & Certification Regime for more information, including the new conduct rules and who it applies to: 

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