Insurance Implications of the Senior Managers & Certification Regime

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Following our recent update on the Senior Managers & Certification Regime (SM&CR), this article considers the insurance implications which need to be addressed by affected businesses.

The SM&CR comes into force on 9 December 2019 for all non-bank firms that are solo-regulated by the FCA (except for benchmark firms). If your business will be subject to the regime, it is important to ensure now that your D&O insurance will be adequate once the regime is in place.

Businesses should consider:

  1. How does your policy define "Directors and Officers"? Will the definition adequately cover all "Senior Managers" under the new regime? Under the SM&CR, "Senior Managers" may include directors, non-executive directors and any other employee who performs "Senior Management Functions". D&O policies typically limit cover to directors and employees, some do not even provide cover for employees who are not directors, and many do not extend to non-executive directors. Some policies provide additional, ring-fenced limits which only apply to board members.
  2. Bearing in mind any necessary extension of cover to additional individuals, is your policy limit sufficient to cover the potential defence costs that might arise from an FCA investigation and/or legal prosecution of "Senior Managers" in your business?
  3. Do you require cover for the costs of mitigating any reputational damage in the event of a regulatory investigation and/or enforcement action?
  4. Does your D&O policy include a "professional services exclusion"? This exclusion typically provides that cover does not extend to claims "based upon, attributable to, arising out of or in any way involving the performance of or failure to perform professional services". If so, how does this exclusion operate in conjunction with your Professional Indemnity cover? Regulated businesses, whose primary function is often the provision of services to customers, can be exposed to a potential coverage gap whereby their D&O insurance excludes claims arising from the provision of those services, but their PI cover defines the company's services narrowly so as not to include claims arising from wrongful acts by employees/directors. It is essential to ensure that no such gap exists, especially if your D&O and PI insurers are different.

If you would like to discuss the issues raised in this article further, please contact Garbhan.Shanks@michelmores.co.uk or Harriet.Chopra@michelmores.co.uk