Prudential Regulation Authority Rulebook

3.1

Article 275(1)( c) and (2) of the Solvency II Regulation requires Solvency II firms to apply specific arrangements to ‘the administrative, management or supervisory body, persons who effectively run the undertaking or have other key functions and other categories of staff whose professional activities have a material impact on the undertaking’s risk profile’.

3.2

In order to satisfy the scope of this Solvency II staff identification requirement, the PRA expects the following individuals to be identified as being subject to Article 275(2) (‘Solvency II staff’):
• board members;
• Executive Committee members;
• Senior Management Function (SMF) holders with PRA or FCA supervisory pre-approval and Significant Influence Functions (SIF) holders with Financial Conduct Authority (FCA) supervisory pre-approval;
• Key Function Holders (KFH) reported to the PRA; and
• Material risk takers (MRTs).

3.3

As the Senior Managers Regime (SMR) applies to senior decision makers and those who manage the firm or who are responsible for key functions, it is important for these individuals to be identified as Solvency II staff. Identification should include SMF, SIF and KFH identified at a regulated entity level as well as at the higher group level.

3.4

The EIOPA Guidelines^[5] consider risk management, compliance, the actuarial and the internal audit function to be key functions. This is supported in the definition of ‘key function’ contained in the PRA Rulebook Glossary. Individuals are considered to be holders of key functions if they are responsible for functions of specific importance for the Solvency II entity in view of its business and organisation. Consequently, the PRA expects those with significant levels of responsibility for risk management, compliance, actuarial and internal audit functions (ie not only heads of function at group level) to be identified as Solvency II staff at regulated entity level. The same applies across material business lines given the wholly different businesses of many subsidiaries and branches within group structures. The PRA has been clear that key functions should not necessarily be restricted to these four areas^[6] with firms expected to consider whether there are any additional key functions of specific importance to the sound and prudent management of their business, such as the investment function, IT function or a claims management function.

3.5

As part of the supervisory review process and consistent with Article 275(1)(c), the PRA expects firms to be able to demonstrate that employees carrying out activities which have a material impact on the risk profile of the firm have been appropriately identified as MRTs. The PRA does not intend to mandate the specific arrangements and processes that firms should put in place. Rather it is the responsibility of firms to develop consistent materiality thresholds across their identification process. For example, one approach may be setting a quantitative risk threshold (monetary or other metrics) to identify underwriters with significant underwriting limits relative to the firm’s overall risk tolerance, or investment managers able to commit to significant credit risk exposures and market risk transactions above a certain material threshold.

3.6

Based on the risk profile specific to the firm, to meet the PRA’s expectations, firms should seek to:

(i) Identify staff members able to take material risks.

Key factors to consider

o The firm should take into account the types and severities of risks to which it is exposed as well as its aggregated risk appetite when assessing whether the activities of the individual could have a material impact on the risk profile of the firm.

o Staff members operating within the constraints of committee-set limits on their authority should not systematically be excluded from identification. The risk taking authority and level of decision-making responsibility attached to the role should still be properly assessed for materiality. For example, if having taken into account the extent of management supervision prior to an underwriter being able to commit the firm, there is still the potential for their decisions to significantly increase the risk of harm to the firm in reasonably foreseeable adverse scenarios, they should be identified.

(ii) Identify staff members able to influence material risk taking.

Key factors to consider
o Senior staff members working within key functions (not necessarily the key function holder)^[7] with significant levels of responsibility for monitoring adherence to the risk appetite and framework should be identified, particularly if they have overall responsibility for their function within a material division or business line.

o Voting members of committees responsible for the oversight of risk-taking activities (eg setting risk appetite limits) across the firm, or group, or material business lines should be identified.

3.7

Senior staff members should be categorised as Solvency II staff and subject to the specific remuneration arrangements set out in Article 275(2) of the Solvency II Regulation where they perform activities on behalf of a Solvency II firm, that have a material impact on the risk profile of either: (i) that firm and/or another a Solvency II entity within the group; or (ii) the group as a whole.

3.8

Firms can engage with their supervisors prior to finalising their approach for identifying MRTs. The PRA expects all Solvency II firms to keep a record of the assessment criteria applied and the final list of staff identified as Solvency II staff for each performance year.