Fintech. Mind the gap. Next stop, SM&CR

Last week, HM Treasury issued a new consultation that is of vital interest to all Fintech businesses.

The consultation aims to address a number of themes, most notably a push for Payment Institutions (PIs) and Electronic Money Institutions (EMIs) to fall within the Bank of England’s jurisdiction on the “same risk, same regulatory outcome” principle. The consultation states that adopting this principle will help to underpin a coherent regulatory framework in the UK, in response to modularisation, the rise of Big Tech and shifting consumer preferences and behaviours.

There is plenty to consider here, with any changes likely to take time to make themselves known. However, one aspect of the consultation could be closer on the horizon - and this change will impact how Fintechs approach their directors’ and officers’ liability insurance requirements.

What is SM&CR?

The Senior Managers and Certification Regime (SM&CR) sets minimum standards of behaviour for practically all employees of an organisation. Further conduct rules apply for those performing the most senior roles within a business who must be approved by the FCA and have a statement of responsibilities setting out what they are responsible for. Firms must also certify that individuals performing other specified functions are fit and proper to perform their roles.

SM&CR currently only applies to entities authorised under the Financial Services and Markets Act. To date, this has meant that payment institutions and e-money institutions – which are authorised under the Payment Services Regulations and Electronic Money Regulations respectively – have not had to apply SM&CR. However, the FCA is proposing an extension of SM&CR to include companies in the payments and e-money sector.

Back in October 2021, in the FCA’s latest Perimeter Report, the regulator stated that it “sees value” in extending SM&CR to these firms. With this latest update it is apparent that the Treasury agrees. The next step is the consultation in October 2022 on how SM&CR should apply to payments and e-money firms before legislation is drafted.

What action can Fintechs take now, before the legislation is updated?

The likely extension to SM&CR poses pertinent questions to fintechs that should be addressed when directors’ and officers’ liability insurance (D&O) cover is renewed, or new cover is placed. Fortunately, there are things you can do to get ahead of this legislation change, including the following:

Check your level of cover

The majority, if not all senior managers, would expect their employees to pick up the tab on their D&O insurance, so it falls on them to ensure that an appropriate level of cover is in place to ensure that all valid claims can be paid.

By widening the scope of SM&CR, more individuals within a fintech organisation will apply to the regime. As a result, if employers are not increasing their limit in conjunction with SM&CR, individuals run the potential risk of being underinsured.

Check the definitions

SM&CR is not new. Since the regime came into effect in 2019 for entities authorised under the Financial Services and Markets Act, insurers have been hot on the fact that their definitions should be broad enough to cover individuals that fall under the umbrella of SM&CR. This goes beyond directors and officers, to include senior managers, those carrying out Certified Functions, non-executive directors and even retired directors.

If you have D&O cover in place, it is worth checking that your policy definitions are up to scratch before the legislative change comes into effect.

How SuperscriptQ can help

Directors' and officers' insurance reflects the fact that any director or officer could find themselves under prosecution or investigation and could find themselves facing unlimited personal liability for their actions.

At SuperscriptQ we have dedicated experts to help businesses, including fintechs, understand their insurance needs. If you’re looking to renew or update your D&O cover - or even if you’re new to this type of insurance - you can book a call with one of our dedicated account managers. We’ll help you understand what you might need and whether your current policy is appropriate moving forward.

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