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Financial Institutions: 5 Ways to Check if You’re Prepared for the New Senior Managers Regime

Posted by Eleni Petros 24 March 2016

The Senior Managers Regime (SMR), a new regulatory framework for financial institutions, came into force on 7 March 2016. Designed to strengthen accountability, the regulations apply to the UK banking sector (including UK branches of foreign banks, building societies, credit unions, and Prudential Regulatory Authority-approved investment firms).

To deal with the new rules, your company should consider what operational processes and systems it has in place to comply with the new regime and whether your insurance will respond adequately.  We’ve put together a list of five points to check:

1. Will your company indemnify senior managers for the costs of defending claims made against them and, if so, on what basis?

The new Senior Managers Regime will result in increased regulatory scrutiny, leaving senior managers more likely to face regulatory investigation and prosecution. If they need to access legal costs to defend themselves, senior managers should first look to their company to pay these fees. Senior managers may look to establish a deed of agreement with their companies, under which they are contractually entitled to claim indemnity from the company for legal expenses, rather than leave it to the company’s discretion.

2. Is access to your company’s directors and officers (D&O) liability policy dependent on whether the company indemnifies you as a senior manager?

Senior managers should check the interplay between the company’s indemnification process and D&O policy coverage. Some D&O policies require the company to indemnify an individual to the fullest extent permissible in law before cover under the D&O policy is available. Where a company chooses not to indemnify a senior manager for reputational reasons (such as where a senior manager has been accused of severe misconduct), the senior manager should ensure that the D&O policy will cover legal costs instead.

3. Does your company’s D&O policy expressly extend to cover senior managers and/or certified persons? If so, how?

Senior managers should ensure that they are expressly covered under their companies’ D&O policies and that the policies provide the same breadth of cover as they do for directors and officers, such as full limits cover for all legal expenses, and investigation and pre-claim inquiry costs.

4. How does the D&O policy respond to conflicts of interest between the company and a senior manager?

Conflicts of interest may arise between the company and a senior manager under the new regime, particularly concerning issues of fitness and propriety of the senior manager. Individuals should check their D&O policies to ensure that they have a direct right of access under them and that they are entitled to cover for the cost of independent legal advice.

5. Is your D&O policy limit shared with other members of your organisation and, if so, are the limits sufficient?

The greater the pool of individuals sharing the policy limit, the more likely that it will be reduced, or exhausted and unavailable for a claim against a senior manager facing enforcement proceedings with regulators. Senior managers may wish to request that their companies purchase additional insurance cover to ring-fence their specific regulatory liabilities resulting from the senior managers regime in the event that a claim is made against them in their personal capacity.

Considerations such as these should help firms to put in place the necessary infrastructure to support the changes required and ensure that policy terms and conditions will respond adequately to the risks faced by management under the new laws.

For more information about the Senior Managers Regime, please read our Adviser.

Eleni Petros