The UK's Financial Conduct Authority has published new rules to change the existing Approved Persons Regime for Solvency II firms and extend the new "individual accountability regime" to the British branches of foreign banks.

In March the FCA and Prudential Regulation Authority jointly published proposals in line with the FCA's new "individual accountability regime" for people who work in the British branches of overseas banks (which the regulator calls "incoming branches"). Now the consultative process is over, the FCA has published "near-final rules" on the subject. The effective date is dependent on some secondary legislation that HM Treasury drafted up last month to expand the definition of the term "relevant authorised person" to include incoming branches. By publishing these near-final rules before the new legislation comes into force, the regulator aims to give firms as much time as possible to prepare for the changes.

The individual accountability regime was already designed to apply to British banks, building societies, credit unions and PRA-designated investment firms (UK relevant firms) and the proposals were aimed at amending the FCA rulebook (notably the Conduct Rules sourcebook or COCON) to apply the regime to incoming branches. The FCA was worried about regulatory arbitrage between incoming branches and the main mass of regulated firms, hence the new rules.

The FCA and PRA have simultaneously issued a policy statement about changes to the Approved Persons Regime for Solvency II firms (named after the European Union directive of 2009 that standardises EU insurance regulation), inventing a new word in the process - 'consequentials'. This word does not appear in the Oxford English Dictionary, but to the FCA it means "consequential amendments across the FCA Handbook." These are expected to be minor and to include a few transitional arrangements.

The rule-changes that it maps out apply to all firms to which the PRA has applied the Solvency II regime, including insurance special purpose vehicles (ISPVs), the Society of Lloyd’s, managing agents, the British branches of foreign firms (regulated by the FCA), and approved persons within those firms. It is irrelevant to "approved persons of appointed representatives" of these firms, which are outside the ambit of the reforms.

The relevant policy statement, PS15/21, covers:
• changes to the reach of the FCA’s approved persons regime;
• changes to its assessments of the fitness and propriety of candidates for Significant Influence Functions (SIFs) to bring the UK into line with Solvency II and guidelines issued by the relatively inexperienced European Insurance and Occupational Pensions Authority;
• new 'conduct' rules for approved persons in Solvency II firms to encourage appropriate behaviour by staff, with a heavy emphasis on treating customers fairly and responsible delegation by senior staff; and
• changes to 'governance' arrangements, particularly to make senior staff more accountable.

Michael Ruck, the regulatory expert at the City Law firm of Pinsent Masons, told Compliance Matters: "The SMR (which is intended to replace APER, the old approved persons regime) was originally designed for banks and the regime for banks will come into effect in March next year. Then there is the Senior Insurers' Management Regime  which comes into force on 1st January.”

"The odd discrepancy between these two is that the bankers' regime will hand out certificates to people below senior management (instead of making them perform "approved functions") but insurers under the SIMR will be subject to an odd hybrid in some ways. It will still have people below the senior managers operating under the old APER rules.”

"It is also noteworthy that a consultative exercise is still going on with regard to the regime being extended to wholesale traders and asset management firms. It would appear that the content of the banking regime is being extended but it is not absolutely clear if all elements of the banking regime will be applied. I have not seen any specific date for this extension to be implemented. My guess - and it is a guess - is that the regulator will want to start this regime on the same date as the banking regime.”

"Originally, the SMR was just destined for banks. Why did the regulator not design it for the whole financial services industry at the outset, instead of extending it from the banks to the other firms later as it has done in almost piecemeal fashion? Nobody knows the answer to this, but now we are going to have a slightly disjointed regime with the regulator having to impose different rules on the banks, the insurance companies and potentially the asset managers. In the banking regime, for instance, there is going to be a reverse burden of proof. In the insurance regime there is no specific reference to a reverse burden of proof but the regulator might infer it because the regime talks all the time about increasing accountability. The whole set-up might therefore become unwieldy."

Compliance Matters will be digesting all the ramifications of these extensive reforms in the coming weeks, quoting from our panel of experts.

* Michael Ruck is a senior associate at Pinsent Masons. He can be reached on +44 020 7490 6970 or at michael.ruck@pinsentmasons.com