The FCA has announced that it is to consult on whether an individual in charge of the legal function at a bank, building society or credit union will require regulatory pre-approval under the new Senior Managers Regime (SMR). The FCA has recognised that there is currently “significant uncertainty” in this area and has sought proactively to address this
The current position
Under the SMR the FCA and the PRA designated a number of Senior Management Functions (SMFs). SMF 18, the other overall responsibility function, requires a person who is allocated overall responsibility for one of the firm’s activities, business areas or management functions to be pre-approved, if the individual has not already been identified as performing a specific SMF (SMF 1 – 17).
The FCA has provided a non-exhaustive list of a bank’s main business activities and functions in order to assist firms in ensuring that they have allocated each overall responsibility. Responsibility for the legal function was not included in this list and the current uncertainty has arisen in relation to whether overall responsibility for the legal function comes within the definition of an SMF 18 and consequently whether the General Counsel or Head of Legal will require regulatory pre-approval.
Given the current uncertainty highlighted by the FCA, a number of banks have clearly taken the decision that overall responsibility for the legal function does come within the definition of an SMF 18 and as such the individual with overall responsibility for this function will be subject to the SMR, which will include both the individual and senior manager conduct rules.
Many of these rules will be familiar in nature to in-house legal counsel; they are not dissimilar to the SRA Code of Conduct Principles which also require individuals to act with integrity and to observe a standard of conduct befitting of the industry in which they serve. It will be interesting to see how the FCA will approach a potential dual-regulatory burden if they decide to extend the SMR to all in-house legal counsel.
The FCA has stated that there has been a concern in the banking industry as to whether a General Counsel may need to disclose legally privileged information to the FCA, under Senior Manager Conduct Rule 4 – “you must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.” While firms may choose to share privileged information with their regulators on the basis of a limited waiver, privilege is a vital principle of the administration of justice which is also recognised by FSMA. The FCA will need to ensure that this privilege is not undermined by any potential new requirements.
The SMR will come into force on 7 March 2016 and the FCA will therefore not have enough time to consult fully on this issue beforehand. Consequently the FCA have said that any firm that has made a decision in good faith about whether or not the individual in charge of the legal function requires approval need not change their approach.
Whilst the consultation focuses solely on in-house legal counsel within the banking sector, it is likely that the outcome of the FCA’s findings may have a wider application to insurers and other financial services firms regulated by the FCA.
Many aspects of the Senior Insurance Managers Regime (SIMR) have derived directly from the SMR, applicable to the banking sector. Insurers should be aware of the FCA’s approach to in-house legal counsel under the SMR as they may adopt a similar approach in the insurance sector.
In addition, the SMR is to be extended to all firms regulated by the FCA (including insurers) from a date (yet to be announced) in 2018.