Coming into force on 7 March 2016, the Senior Managers Regime (SMR) swept aside the ‘Approved Persons Regime’ by creating a responsibility and 'accountability framework' within banks building societies and credit unions (Institutions) that was better suited to their committee-based decision making and matrix structures.
However, the run up to implementation has exposed a number of challenges and uncertainties regarding the SMR’s application to corporate governance practice and the role of the legal function. Most notably Institutions have been questioning whether General Counsel (GC) are included within the regime, and what effect such an inclusion would have on GCs.
On 27 January 2016 the FCA announced its decision to consult on the pros and cons of including the GC role within the SMR. Although a GC’s responsibilities are not expressly included in the list of 17 Senior Management Functions (SMF) under the regime, there is some uncertainty as to whether they are caught by the final, ‘catch-all’ provision of this definition, which applies the SMR to any person: "allocated overall responsibility for one of the firm’s business activities, business areas or management functions".
A person with "overall responsibility" is someone with "ultimate responsibility under the governing body, for managing or supervising a function; with direct responsibility for reporting to the governing body and putting matters for decision to it".
Whilst the GC is not included in the guidance’s list of an Institution’s main 'business activities' and 'business areas', this list is not exhaustive. Furthermore, the FCA has confirmed that GCs are not excluded from it, and that any comments previously made by the FCA to the contrary were aimed purely at individuals giving discrete legal advice to the board, rather than at the wider GC role.
Is the GC an SMF?
It is pretty clear that a GC has 'overall responsibility' for the legal department, it is unclear as to whether this qualifies them as a SMF. There is a suggestion that it should not qualify, as a legal department is arguably ancillary to the main services, business areas and activities undertaken by Institutions. Additionally, often a GC in a large organisation such as an Institution does not have an active executive decision-making role, in that they instead shape and inform strategy indirectly through legal advice. In this case it is questionable whether they should take responsibility for the impact of Institutions’ decisions that might result in an Institution’s failure, and which are outside the remit of their purely legal expertise. Would it be right to blame a GC for a failure to appreciate the non-legal related risks inherent in CMBSs in 2008?
What would be the effect of SMF status for a GC?
The response of most Institutions thus far has been to treat GCs as not being SMFs, where the GC’s responsibilities are limited to the legal function (but where the GC has additional responsibilities clearly this may impact the conclusion). However, the question arises as to what impact the application of the SMR to GCs would really have?
Under the SMR the principal obligations falling on Senior Managers are:
- Compliance with defined responsibilities (both (i) role specific responsibilities, and (ii) prescribed responsibilities under the SMR, eg ensuring an Institution’s compliance with the SMR)
- FCA/PRA pre-approval of an SM’s appointment, based on “fitness and propriety” for the post
- Compliance with the Conduct Rules.
Starting with point two above, the test for fitness and propriety is broken down into questions of an individual’s:
- honesty, integrity and reputation
- competence and capability, and
- financial soundness.
However, each of these requirements is already imposed to a significant degree by the SRA Code of Conduct (Code). For instance mandatory Principles 2, 3 and Outcomes 1.16, 5.1-5.5 variously require a solicitor to act honestly and with integrity, Principles 4, 5 and Outcomes 1.4 and 1.5 go to standard of service, and Principles 8 and 10, together with the Account Rules ensure financial responsibility.
In the same vein, it is questionable whether the Conduct Rules, referred to at point three above, would impose new behaviours which aren’t already covered by the Code and case law. For instance, in addition to the requirement to act with integrity (see above), the need to act with due skill care and diligence is covered by the duty of care owed by a solicitor to a client at common law. The requirement to be open and co-operative with the FCA and PRA is a natural extension of mandatory principle 7 and Chapter 10 of the Code, and the requirements to ensure effective control of the business and compliance with relevant regulation are covered by Principles 7 and 8, and in particular Outcomes 7.5 and 7.2. Obviously, however, the biggest worry for GCs will justifiably be the possible exposure to sanctions for breaching the SMR, including: public censure by the FCA, a ban from particular functions within regulated firms, an unlimited fine and criminal liability.
Concern has also been voiced in the legal community about the effect on privilege of the Conduct Rules’ requirement for 'appropriate disclosure' to the FCA or PRA. It is hard to imagine that this rule will apply over and above privilege, given the existing protections under s. 413 FSMA 2000 protecting privileged documents from disclosure to regulators, as well as the long established authority that privilege is a fundamental tenet of the administration of justice. However, this does not solve the potential issues relating to waiver of privilege, for example when a GC wishes to rely on a document but cannot, as it is privileged in favour of the Institution.
The extension of the SMR to the legal function may also have an adverse impact for Institutions, for by defining liability through a GC’s awareness of a given risk, they may well be disincentivised to ask necessary questions and investigate matters for fear that any consequent awareness may subsequently be held against them.
Equally the extension may lead to increased pressure on legal department budgets, due to the requirement that delegation by a GC be responsible, appropriate and effective, which could prompt a shift in recruitment towards more experienced lawyers, or an increased desire to obtain external advice.
This extension would also pose practical challenges in terms of implementation in relation to point one above, in that the question of defining the role of a GC in such a way as to be able to hold them individually responsible would by no means be easy. For a GC’s role is defined through contributions to multiple other departments and supporting SMFs: the role is collaborative in such a way as to arguably obviate any notion that they alone should be held responsible for any one of their acts. Careful thought will therefore need to be given as to the precise definition of the legal function if the extension goes ahead.
The argument can be invoked on both sides of the debate over extending the SMR to GCs that the effect of such an extension would be less a matter of new regulatory obligations and more one of increased accountability for a GC’s existing responsibilities. On the one hand the lack of multiple new and onerous obligations, set against the benefits of increased transparency and accountability may justify the extension. However equally, it raises the question as to why the SMR should tread ground already covered by the SRA Regulation, which already takes account of those with 'management responsibilities' and those without, and which is arguably better placed to regulate lawyers.
The FCA has yet to announce anything other than an intention to consult, and so we therefore need to wait for the next step of publishing a full consultation timetable.