The SM&CR is a regulatory framework introduced by the Financial Conduct Authority (FCA) in the UK. Launched in 2016, the SM&CR initially applied to banks, building societies, credit unions and PRA-designated investment firms. Insurers were brought fully into the regime in December 2018, and a year later it was extended to cover all solo-regulated firms except benchmark administrators, which were included in December 2020. [1]
The Society of Lloyd's and Lloyd's managing agents are dual regulated under the UK's regulatory structure. The Prudential Regulation Authority (PRA) regulates them for prudential purposes and the Financial Conduct Authority (FCA) supervises their business conduct.
The FCA, the PRA and Lloyd's have common objectives in ensuring that the Lloyd's market is appropriately regulated. To minimise duplication, there are arrangements with Lloyd's for co-operation on supervision and enforcement.
The SM&R (Senior Managers and Certification Regime) is designed to enhance accountability, transparency, and market integrity within financial institutions. Here is a brief outline of how it aims to achieve this:
Accountability:
Clearly defines responsibilities for senior managers.
Requires firms to allocate specific responsibilities to individuals.
Introduces "duty of responsibility" for senior managers.
Transparency:
Mandates clear organisational structures and reporting lines
Requires firms to maintain and submit "Responsibilities Maps.”
Introduces annual "fitness and propriety" assessments for key staff.
Market Integrity:
Implements conduct rules applicable to all financial services staff.
Encourages a culture of personal responsibility and ethical behaviour.
Aims to restore public trust in the financial sector.
Applicability to Lloyd’s of London:
Lloyd’s of London, as a unique insurance market, has a distinct structure because it operates as a marketplace where multiple syndicates underwrite insurance risks. Insurance businesses operating within the Lloyd’s marketplace include managing agents, brokers, and underwriters who still have to operate within the parameters of the FCA regulations of the SM&CR.
The SM&CR applies differently to various entities within Lloyd’s:
Given the unique structure and operations of the Lloyd's market. Here are a couple of examples of how the SM&CR applies.
The SM&CR applies directly to the Corporation of Lloyd's, which oversees and regulates the Lloyd's market. For example, the Chief Executive Officer of Lloyd's would be a designated Senior Manager under the regime, responsible for the overall management and performance of the Corporation.
Managing agents, who manage Lloyd's syndicates, are also subject to the SM&CR. For example, the Chief Underwriting Officer of a managing agent would typically be a Senior Manager, responsible for the underwriting strategy and performance of the syndicate(s) they manage.
The SM&CR sets out certain prescribed responsibilities which must be allocated to Senior Managers within Lloyd's and managing agents. For example, the responsibility for compliance with the Lloyd's requirements would be assigned to a specific Senior Manager, the Chief Risk Officer, or Compliance Officer. Each Senior Manager has specific responsibilities and is accountable for their area of control. **
To summarise.
Senior Managers are individuals with considerable influence over a firm’s activities.
At Lloyd’s, this includes roles such as the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other key positions.
Each Senior Manager has specific responsibilities and is accountable for their area of control.
Certification Regime
It will apply to employees who are not Senior Managers (or NEDs) Staff in roles that could pose a risk of significant harm to the firm, or customers must be certified as fit and proper annually.
Example: Underwriters at managing agents who have authority to bind significant risks would fall under the Certification Regime. Every managing agent will be required to issue certificates each year to individual employees in such roles, to show that the managing agent is satisfied that the individual is fit and proper to perform that role, or, where a certificate is not provided, what steps the firm proposes to take in relation to the person as a result of the decision. Firms must then keep a record of all such valid certificates. [2]
In the FCA's view, the most important considerations will be the person’s honesty, integrity, and reputation. Competence and capability; and financial soundness. [3]
A firm assessing the fitness and propriety of staff being assessed under FIT should consider:
(1) the nature, scale and complexity of its business, the nature and range of financial services and activities undertaken in the course of that business; and
(2) whether the candidate or person has the knowledge, skills, and experience to perform the specific role that the candidate or person is intended to perform.
Lloyd's and managing agents must provide and obtain regulatory references when hiring for certain roles. For example: When a managing agent hires a new Chief Financial Officer, they must obtain references covering the last six years of employment.
To summarise.
The Certification Regime covers employees in roles that could significantly impact / cause detriment to a firm or its customers.
Lloyd’s managing agents, and other relevant staff, fall under this category.
Firms must assess and certify these individuals as fit and proper to perform their roles.
Conduct Rules
The Conduct Rules apply to all employees within Lloyd’s and Managing Agents, except for ancillary staff. All employees, from senior executives to administrative staff, must act with integrity and treat customers fairly.
These rules set out expected behaviours and actions, emphasising integrity, honesty, and professionalism. There are five conduct rules:
You must act with integrity.
You must act with due skill, care, and diligence.
You must be open and cooperative with the FCA, the PRA and other regulators.
You must pay due regard to the interests of customers and treat them fairly.
You must observe proper standards of market conduct.
In July 2023, the Consumer Duty came into force. This sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first.
The Duty includes a sixth individual Conduct Rule requiring all Conduct Rules staff to ‘act to deliver good outcomes for retail customers’ where the activities of the firm fall within the scope of the Duty.
To summarise.
· The five core rules of Conduct Rules apply broadly within Lloyd's.
· All Lloyd's employees except ancillary staff must follow these rules covering integrity, skill, regulatory cooperation, customer treatment, and market conduct.
· The Consumer Duty added a sixth Conduct Rule requiring firms to prioritise customer needs and deliver good retail customer outcomes where applicable.
Culture and Accountability
The SM&CR encourages a culture of responsibility and accountability. Firms must document responsibilities, allocate Senior Manager Functions (SMFs), and ensure clear reporting lines.
The FCA recommend regular training and awareness programs promote compliance with the SM&CR.
The SM&CR's emphasis on responsibility and accountability applies to Lloyd's of London in the following ways:
Documentation of responsibilities: Lloyd's Corporation and managing agents must clearly document the responsibilities of their senior leaders. This typically involves creating detailed "Statements of Responsibilities" for each Senior Manager, outlining their specific areas of accountability within the Lloyd's market structure.
Allocation of Senior Manager Functions (SMFs): Lloyd's must designate specific individuals to hold Senior Manager Functions. For example, the CEO of Lloyd's would hold the SMF1 (Chief Executive) function, while the Chief Risk Officer might hold the SMF4 (Chief Risk) function. Similarly, managing agents must allocate SMFs to their key executives.
Clear reporting lines: Lloyd's and its managing agents are required to establish and maintain clear organisational structures with well-defined reporting lines. This is particularly important given the complex nature of the Lloyd's market, ensuring transparency in how decisions are made, and responsibilities are delegated across the Corporation, managing agents, and syndicates.
What if something goes wrong?
Senior Managers have a duty of responsibility, meaning they could be held accountable if a breach occurs in their area of responsibility. For example, if there is a significant breach in underwriting guidelines leading to large losses, the Chief Underwriting Officer could be held personally accountable if they did not take reasonable steps to prevent it.
To summarise.
· Lloyd's Corporation and managing agents must clearly document senior leaders' responsibilities through detailed "Statements of Responsibilities" that outline specific areas of accountability within the Lloyd's market structure.
· Specific individuals must be designated to hold Senior Manager Functions (SMFs), such as the CEO as SMF1 and the Chief Risk Officer as SMF4, with similar allocations required for managing agents' key executives.
· Lloyd's and its managing agents are required to establish and maintain transparent organisational structures with well-defined reporting lines, crucial for decision-making clarity and responsibility delegation across the complex Lloyd's market ecosystem.
Strengthening Your Compliance Strategy in the Lloyd's Market
We are deeply familiar with the intricacies of the London insurance market, and we urge you to make sure that your compliance and governance meets the requirements of the SM&CR whether you are new to the market or been trading for a while.
The SM&CR marked a significant shift in regulatory expectations. Fostering a culture of accountability will strengthen your position in the market. Remember, in the event of a regulatory breach, your ability to demonstrate proactive compliance efforts could be crucial.
But do not wait for a crisis to act. The time to reinforce your compliance framework is now.
Your reputation, and potentially your personal liability, depend on it.
*Specifics may vary based on Lloyd’s organisational structure and individual roles.
** The provisions of the Approved Persons Regime still apply to Appointed Representatives (ARs). Principal firms remain fully responsible for their ARs adherence to the FCA’s rules.
Sources:
[3] – FCA Handbook - https://www.handbook.fca.org.uk/handbook/FIT.pdf
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