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FCA discussion paper on the impact of the senior managers regime on the in-house legal function

On 28 September 2016 the FCA published a discussion paper (DP16/4) on whether the person who has overall responsibility for the legal function (the GC) at a bank, building society, credit union or PRA-designated investment firm (a Regulated Firm) should be a Senior Management Function (SMF) and therefore subject to the senior managers regime (SMR). If a GC is held to be an SMF, GC appointments at Regulated Firms would be subject to regulatory pre-approval, this including an assessment of fitness and propriety. Once approved, the GCs of Regulated Firms would also have to comply with additional conduct rules to those they are already subject to under the Solicitors Regulatory Authority,  Bar Standards Board (or other local equivalents).

The SMR came into effect on 7 March 2016 to better hold the banking and financial services sector accountable for misconduct. One of the aims under this new regime is that it is now not only Regulated Firms that face being held to task for breaches of law, rule, conduct and regulation, but also those individuals who carry on an SMF within them. While these key individuals may previously have been held responsible for the decisions being made and actions being taken, it should now be simpler to also hold them accountable for them (for more information on the SMR, see Hot Topics: Senior managers regime (SMR) for banks and PRA-designated investment firms).

There are 17 prescribed SMF roles that have overall responsibility for specified activities, functions or areas of the business. These do not include the legal function. There is however a further category (SMF 18) for those individuals who have overall responsibility for an activity, function or area not otherwise included in the prescribed list. It is unclear whether the legal function should fall within this category for a number of reasons, neatly summarised in Edward Burrow’s recent article.

The FCA previously acknowledged this area of uncertainty in its statement of 27 January 2016, advising of its intention to publish the discussion paper and providing some level of comfort to those that could be affected by saying that

until policy around this is finalised, a firm that has sought to make a decision in good faith about inclusion of the GC or otherwise in this SMF18 category, need not change their approach

In the now published discussion paper, the FCA advises that it has received substantive and consistent feedback challenging the inclusion of the GC role in SMF18 and goes on to set out its views both for and against this. The key areas for consideration and their view in favour of inclusion are as follows:

  • The legal function is an ‘activity, business area or management function – a ‘senior manager must have overall responsibility for every activity, business area or management function in a relevant firm. This includes the legal function.’
  • Failings in the legal function can impact the wider business – ‘without complete coverage of a firm at the senior level, key responsibilities or accountabilities within it could remain unallocated which risked undermining the regime in the event of failings of a relevant firm.’
  • Operational management of the function – ‘As the focus and purpose of the SMR is on the responsibility for managing the function (rather than the advice that they provide), there is an argument that privileged material would not need to be disclosed in order to demonstrate reasonable steps in managing the function.’
  • Privilege and the duty of responsibility – ‘the duty of responsibility places the burden on the regulators to prove whether or not reasonable steps have been taken – not the senior manager. Typically, it would be extremely difficult for us to bring a successful action for a breach of duty of responsibility solely in reliance on privileged material, if the firm has chosen not to waive privilege over it.’
  • Privilege and independence – ‘the application of the SMR does not and cannot remove legal privilege.’
  • Flexibility to allocate ‘overall responsibility’ – ‘The SMR does not mandate who should be allocated overall responsibility for the legal function, firms have the flexibility to designate the most suitable person to have overall responsibility. For example, the Chief Executive Officer or another Director…’
  • No conflict with other regulation – ‘there is an argument that the approaches taken by the FCA and the counterpart regulators for the legal profession are consistent.’

The FCA are now seeking an open debate on this and in doing so are setting a positive example of law-making process around quasi-legislation.

The Law Society of England and Wales has already published its response, setting out its opposition to the GC role being considered an SMF, with Law Society Chief Executive Catherine Dixon saying:

The Law Society is clear that legal functions should not be included in the regime because it can create conflict and erode LPP. We welcome the opportunity to discuss our concerns with the FCA during their consultation.

You can also have your say and you have a brief window of time until the 9 January 2017 to make your comments.

 

Practical Law In-house Lynsey Poulton

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