The FCA has announced in a statement that it will consult on the extent to which a person in charge of a firm’s legal function should require approval from the FCA under the Senior Managers Regime (SMR). In its statement the FCA recognises that it has become aware of significant uncertainty as to how its ‘Other Overall Responsibility Function’ applies to the head of a firm’s legal function. The FCA also acknowledges ‘a range’ of market opinion as to whether it is desirable to subject senior lawyers to the SMR, given tensions with the principles of legal privilege.
The FCA’s interim position until the consultation completes
Having overall responsibility for a firm’s legal function was not included in the list examples of activities and responsibilities that could fall under the “Other Overall Responsibility Function” (SMF18). In its statement the FCA reminds firms that these examples are only indicative and that having responsibility for the legal function is not necessarily excluded from the scope of SMF 18.
It is difficult to draw too much from the FCA’s brief statement, but there appear to be two practical questions that we can anticipate the FCA addressing in its consultation:
- The potential for distinction between the person responsible for giving advice to the Board and the person that has ultimate responsibility (under the governing body) for managing or supervising the legal function. This may play out in terms of a distinction between a General Counsel role and a Head of Legal role.
- The extent to which it can be said that the role of overall responsibility for the legal function is already subsumed within a wider area of responsibility (e.g. Head of Operations, Head of Risk). If a person is already approved for that wider role, it may be that no additional person needs to be approved as a SMF 18 in respect of the legal function.
For the time being, the FCA recommends that where firms have already applied their minds as best they can to this question, they do not change their current course, stating that “any firm that has sought to make a decision in good faith about whether or not the individual in question requires approval, on the basis of the published rules and our other communications, should not need to change their approach in the interim”.
Subjecting Heads of Legal to the SMR – striking the right balance
The Financial Services and Markets Act 2000 (Section 413) limits the regulators’ ability to compel those subject to investigation to produce, disclose or permit the inspection of “protected items”, including communications that are subject to legal advice privilege and litigation privilege. The purpose of this framework is to enable businesses to obtain effective legal advice.
The FCA’s proposed oversight of individuals with overall responsibility for a firm’s legal function has the potential to conflict with the principles of legal privilege and potentially with other concepts of client / lawyer relationship. This manifests itself at a conceptual level – how do the entitlements of privilege sit against the obligations of transparency that those subject to the SMR regime will be subject to? It could also manifest itself at a practical level, in terms of, for example, a supervisory initiative or investigation by the FCA into how an SMF with responsibility for the legal function addressed a particular matter being dealt with by that function.
Look out for the FCA’s Consultation Paper
The Senior Managers Regime goes live on 7 March 2016 and firms subject to it should take note of this FCA statement and the FCA’s interim position, and be prepared to respond to the consultation paper once published with views as to whether and if so how, persons with overall responsibility for the legal function should fall within the SMR.