13th February 2019
Compliance in relation to the rules covering pricing, distribution and internal governance will be the most significant issues for companies
Nayna Vilas, legal counsel – Davies Insurance Services
There will be no let-up in terms of regulatory issues affecting managing general agents (MGA’S) in 2019. The list of compliance issues continues to grow and are driven by regulatory changes, in particular by the Insurance Distribution Directive (IDD), the Senior Managers and Certification Regime (SMCR), the Financial Conduct Authority’s (FCA) thematic study on pricing and its follow-up to the Dear CEO letter.
What this means for MGAs is they cannot afford to relax efforts to meet those regulatory requirements. While firms should by now have ensured they are compliant with changes made to the FCA Handbook to implement IDD, a significant new requirement under IDD is the “customer best interest rule”, which is aimed at ensuring firms act honestly, fairly and professionally in accordance with the best interests of policyholders.
What has to be remembered is this rule applies even where firms are not dealing directly with the policyholder/ Firms will need to document and evidence how they comply with this rule in their internal policies and procedures.
Dear CEO letter
In the FCA’s Dear CEO letter issues following its thematic study on pricing the regulator’s chief executive, Andrew Bailey drew attention to these rule changers, including provisions relating to product oversight and governance and in particular the customer best interest rule, highlighting the requirement for firms to demonstrate compliance with these provisions.
Specifically there is a focus in relation to pricing activities but also more generally in ensuring firms comply with their regulatory obligations to customers. Bailey also referred to the upcoming SMCR, which is due to apply to insurance intermediaries from December 9, 2019.
The SMCR will require MGAs to examine their internal structures and leadership team; given there will be a requirement for senior management to be deemed suitable for the roles they undertake.
The SMCR will replace the Approved Persons Regime (APR). Under the Senior Managers Regime anyone holding a prescribed senior management function will need to be approved by the FCA before they take on the role, as is the case under the APR at present.
Non-executive directors (except in the case of a chairperson) are outside the scope of SMCR. In addition, each senior manager will be required to have a statement of responsibilities, which will need to be provided to the FCA when application for approval is sought and whenever significant changes are made to these responsibilities.
The certification rules will apply to employees of firms who are not senior managers but whose roles mean that these individuals could potentially cause significant harm to the firm or its customers.
Such employees will not need to be approved by the FCA, firms will however need to certify on an annual basis they are fit and proper for the role they are performing. There are enhanced requirements for large firms whose annual regulatory income is £35m ($45.3m) or more.
The test as to what is deemed to be significant harm will vary from firm to firm and is such MGAs would be wise to ensure they understand the roles their employees undertake and the impact they may well have on their business.
Firms will need to undertake a considerable amount of preparatory work and planning to transition from the APR to the SMCR by December 9, 2019. MGAs should ensure they put in place governance and control structures with clear lines of accountability. From identifying and allocating senior manager functions and mapping management responsibilities to putting a process in place to certify relevant individuals within the firm and ensuring they are fit and proper. This is required by SMCR.
While there is much companies in the market, and MGAs in particular, need to navigate in the year ahead as the market looks to technology and future underwriting strategies, they cannot afford to ignore the need to continue building on their risk and compliance initiatives to meet changing regulatory requirements.
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