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Senior insurance managers regime – proposals for NEDs

27 February 2015. Published by Jonathan Charwat, Senior Associate

Last year, we reported on proposals for a new senior insurance managers' regime ('Senior insurance managers - all change!').

At the time, the PRA and FCA had not yet consulted on how this would affect non-executive directors (NEDs) but have recently addressed this.

Under these proposals, the current PRA non-executive director (CF2) 'approved person' function would be replaced by: (i) PRA functions for NEDs who perform each of the following roles: chairman, senior independent director and chair of risk, audit and remuneration committees; and (ii) an FCA function for the NED who is chair of the nominations committee.
In this note we refer to these as 'pre-approved NEDs'.

Any NED outside of these roles (in this note referred to as a 'standard NED') would not require pre-approval. The proposals do however provide that such standard NEDs will be treated as 'key function holders' (described in our blog last year), and will consequently have to observe a number of the new 'Conduct Standards'. In addition, firms will be required, on an on-going basis, to assess such standard NEDs' fitness and propriety. See paragraphs 3.8 to 3.11 of the proposals for further detail on this.

The FCA had originally planned to include all NEDs in the pre-approval regime but rowed back on this, likely as a result of industry concerns that a blanket inclusion would encourage standard NEDs to take on a more executive role - and in turn impair their independence.

Furthermore, it is proposed that:

  • all Solvency II firms, other than incoming third country Solvency II branches (see below), will be required to have a chairman. They will only need to have other NED functions to the extent that function is required by other UK or EU legislation;
  • NEDs in third country Solvency II branches will not need to be pre-approved except where justified in light of the undertaking's business, organisation and management of its affairs;
  • employees and officers of group, holding or parent companies, who exercise significant influence on the affairs of the subsidiary firm, may also be subject to pre-approval as a group 'entity senior insurance manager'. An odd quirk to this is that a parent company NED, who exerts significant influence on a subsidiary firm would require pre-approval by the PRA, whereas an equally influential NED of the subsidiary firm may not.

Hence, on the one hand life may become arguably easier for standard NEDs who will no longer require pre-approval. On the other hand, life is set to become more difficult for those NEDs who will continue to require pre-approval, with a more defined roles and the revised conduct rules heightening the sense of regulatory scrutiny. Whilst no insurance NED will be subject to any principle of any presumption of guilt or "reverse burden of proof" as in the banking sector, they will feel increasingly exposed for perceived failures in their areas of responsibility.

The FCA and PRA have requested responses to the latest consultation by 27 April 2015. They intend to revert generally on both consultations in this area "in the coming months".