Two years ago the FCA issued a statement regarding its supervisory intentions concerning whether an individual in charge of a firm’s legal function required approval under the Senior Managers’ and Certification Regime (SM&CR). Specifically, the statement was in response to firms asking the regulator how Senior Management Function 18 – Other Overall Responsibilities (SMF18) applies to the legal function. The FCA further considered this issue in September 2016 when it published Discussion Paper 16/4 (DP16/4). The response to DP16/4 showed widespread opposition to in-house lawyers falling within SMF18 with, for example, the Association for Financial Markets in Europe and the British Bankers Association (now UK Finance) issuing a joint letter to the FCA expressing serious concerns that such a move could “have considerable potentially adverse implications for culture within banks and for the in-house legal profession”. The deadline for comments on DP16/4 was 9 January 2017. Nothing was heard on the subject from the FCA until its press conference launching the 2018/19 Business Plan on 9 April this year. The FCA’s CEO, Andrew Bailey, gave the following reply to a question: “There has been a question raised in the context of the Senior Managers Regime about whether general counsel should be a responsible function. That isn’t an easy question, because obviously it raises big issues about the role of legal advice and so on in firms, but it has been raised, including by lawyers, I should say. We were going to do some work on that. We will do some work in the future on that, but it isn’t going to happen in the next year.”
However, the FCA has now published Consultation Paper 19/4 (CP19/4) which sets out details of the feedback received to DP16/4. The deadline for comments on CP19/4 is 23 April 2019. The FCA will consider the feedback received and publish final rules and guidance in Q3 2019 with the effective date of the changes being before implementation of the regime to the non-bank industry, namely before 9 December 2019 (Extension).
The regulator has proposed to exclude the general counsel and heads of legal from the requirement to be a senior manager. However, there are three important caveats:
- it is only when the individual is acting as general counsel / head of legal that they are excluded. If, for example, the individual has another role, e.g. Head of Compliance, they will be in scope for that other role;
- they need to be certified as they will either meet the test to be a Material Risk Taker or a Significant Harm Function. Most banks in the bank implementation certified their general counsel / head of legal so this should not be a new change; and
- they must comply with Senior Manager Conduct Rule 4 – the duty to disclose matters to the regulator when appropriate.
The comments of the FCA in CP19/4 raise some interesting points if they are proceeded with in the current form:
- the concept of the ‘other role’ comment means that general counsels / heads of legal may need to look at their current responsibilities and ensure that none of them give rise to an additional senior manager role. Similarly, they may need to ensure that their current responsibilities support that they have no additional roles. For example, most general counsels / heads of legal are also on a firm’s executive committee / management committee. This is usually in an advisory capacity however, on occasion, we have seen that the terms of reference of the committee does not make this clear. It would be prudent to ensure that is the case; and
- the ‘no gaps’ principle still applies for banks, insurers and will apply for enhanced scope firms in the Extension. As such, while the firm does not need to allocate responsibility for the advice given by the head of legal / general counsel, it seems sensible that responsibility for the legal function is still allocated, otherwise a gap is created. Most banks allocated responsibility for the legal function – which is responsibility for (a) having one, (b) taking steps to ensure it is appropriately resourced and (c) taking steps to ensure it has access to an appropriate budget in order to obtain external assistance.