10.3 Authorisation, Conduct Rulebooks and Solvency

Authorisation Under FSMA

A person becomes authorised by obtaining permission under Part 4A FSMA 2000 to carry on one or more regulated activities. The FCA and the PRA each have jurisdiction over different categories of firm. An insurer (a firm whose regulated activity includes effecting and carrying out contracts of insurance as insurer) is dual-regulated: the PRA grants the permission for the prudential side, while the FCA regulates conduct. Insurance brokers and most intermediaries are authorised by the FCA alone.

Threshold Conditions

To be authorised, a firm must satisfy the threshold conditions set out in Schedule 6 FSMA. The FCA and PRA publish their interpretation in their respective Handbooks. The key conditions are:

For insurers, the PRA also applies its own prudential threshold conditions, including the requirement to hold capital sufficient to meet the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) discussed below.

Regulatory Principles

Both regulators must have regard to the regulatory principles in section 3B FSMA when discharging their functions. These include:

• the need to minimise the adverse effects on competition of regulatory action;
• the principle that regulation should be proportionate;
• the principle that regulators should be transparent and accountable;
• the principle that any burden or restriction should be proportionate to the benefits; and
• the need to have regard to the principles of good regulation.

Both regulators also have regard to the secondary competitiveness and growth objective added in 2023, particularly relevant to the design of the Solvency UK regime.

The Rulebooks

The FCA and PRA publish their rules in their respective Handbooks. For insurance, the most important FCA Handbook sourcebooks are:

• ICOBS — the Insurance Conduct of Business Sourcebook. ICOBS sets the conduct rules for the design, sale and administration of insurance products. It applies to insurers, intermediaries and appointed representatives involved in insurance distribution. ICOBS is the central conduct rulebook for IF1 and is covered in detail in Chapter 11.
• SYSC — the Senior Management Arrangements, Systems and Controls sourcebook. SYSC sets the rules on governance, senior manager responsibility (including the Senior Managers and Certification Regime — SM&CR), risk management and compliance.
• TC — Training and Competence. The TC sourcebook (and the FCA's broader rules on competence) requires firms to ensure their staff are trained and competent to carry on the activities for which they are responsible.

The PRA Rulebook contains the prudential rules for insurers, including the Solvency UK rules described below.

Training and Competence

The FCA requires authorised firms to ensure that their employees and representatives are competent to perform their roles. The obligations include:

• assessing competence before an individual deals with customers without supervision;
• monitoring ongoing competence, including through continuing professional development (CPD);
• ensuring staff understand the products they sell and the regulatory rules that apply; and
• maintaining training records that can be inspected by the FCA.

IF1 itself is part of the competence framework: most regulated firms require customer-facing staff to hold a qualification such as the CII's Award in Insurance or Certificate in Insurance, of which IF1 is a unit. Failure to maintain competence can result in supervisory action against the firm and, for senior managers, personal accountability under the SM&CR.

Solvency Requirements for Insurers

Insurers must hold sufficient capital to absorb losses and meet their obligations to policyholders. The UK's prudential framework for insurers was historically set by the EU Solvency II directive, which came into force across the EU on 1 January 2016. Following the UK's withdrawal from the EU, the PRA and HM Treasury rewrote the rules for the UK market. The rewritten regime is known as Solvency UK.

Solvency II — The Foundation

Solvency II is built on three pillars:

The Relationship Between SCR and MCR

The SCR is the higher, risk-sensitive threshold. If an insurer's capital falls below the SCR, the regulator will require a recovery plan or impose a capital add-on (under Solvency UK, a requirement to hold additional capital), but the firm can continue to trade. The MCR is the absolute floor — the minimum amount of capital an insurer must hold to retain authorisation. If capital falls below the MCR, the regulator can withdraw authorisation and trigger a winding-up process. The MCR is calibrated at between 25% and 45% of the SCR.

Solvency UK — The UK Rewrite

The PRA's review of Solvency II, delivered through a series of policy statements (notably PS2/24 published in February 2024 and PS15/24 published in November 2024), adapts the regime to the UK market. Key changes include:

• a reduction in the risk margin for long-term and general insurance business, freeing up capital;
• broader Matching Adjustment eligibility, allowing long-term insurers to invest in a wider range of long-term assets such as infrastructure;
• simplification of the Transitional Measures on Technical Provisions (TMTP), with a run-off to zero by 2032;
• reform of internal models (streamlined tests and standards, new safeguards);
• greater flexibility in group SCR calculation; and
• a new mobilisation stage for new insurers, with a lowered MCR floor of £1 million.

The reforms came into force in phases: risk margin and certain reporting changes on 31 December 2023; Matching Adjustment reforms on 30 June 2024; and the bulk of the regime (internal models, group SCR, third-country branches, mobilisation, thresholds, currency redenomination) on 31 December 2024. The PRA continues to refer to the regime as "Solvency II" in many policy materials, with the Solvency UK name to be rolled out across all materials.

The Role of the PRA

The PRA is responsible for setting and supervising the solvency regime for UK insurers. It grants internal model approvals, sets capital add-ons, supervises group solvency and intervenes when an insurer's capital falls below the SCR or MCR. The FCA has a more limited role, focusing on conduct issues that may have prudential implications (for example, poor claims handling that creates reputational and balance-sheet risk).

Key Takeaways

• Authorisation is granted under Part 4A FSMA; firms must meet threshold conditions (resources, fitness and propriety, close links, systems and controls, suitability).
• The FCA Handbook contains the conduct rules; ICOBS is the key sourcebook for insurance conduct of business, SYSC for governance and systems, and TC for training and competence.
• The FCA requires firms to ensure staff are trained and competent, to monitor ongoing competence (including CPD), and to maintain training records available for inspection.
• Insurers must hold capital at least equal to the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) under a three-pillar regime (quantitative requirements, governance, reporting).
• The UK's rewritten regime, Solvency UK, came into force in phases through 2024 (risk margin on 31 December 2023, Matching Adjustment on 30 June 2024, the bulk on 31 December 2024) and is supervised by the PRA.