Banks, insurers and enhanced solo-regulated firms that come within the Senior Managers and Certification Regime (SMCR) will be interested in the FCA's long-awaited proposals in Consultation Paper 19/4 (CP19/4) on treatment of the legal function and reducing the scope of the client dealing certification function.

The legal function

This note gives fuller background on this issue. In short, two years ago, the FCA issued a statement and a discussion paper (DP16/4) on:

  • how SMCR applies to an affected firm's legal function; and
  • whether a firm's head of legal should be approved as a senior manager.

DP16/4 generated widespread concern. The Law Society, for example, noted that including the legal function in SMCR could erode legal professional privilege and place in-house lawyers "in positions of conflict with their employers".

The key concern is lawyer senior managers being responsible for the legal function and having a duty of responsibility including individual responsibility for failings in the legal function. This could:

  • compromise senior managers' ability to show they took reasonable steps in the event of a legal function failing; and
  • limit their ability to perform their legal role in the best interests of their client (i.e. firms).

CP19/4 and the draft rules provide:

  • the head of a firm's legal function (Head of Legal) is expressly carved out of the scope of the SMF18 function (and equivalent SMF22 for overseas firms); and
  • overall responsibility for the SMCR Legal Function1 may be allocated to someone who is not approved to perform a Senior Manager Function.

It appears the FCA considers responsibility for providing legal services is a responsibility firms must allocate. However, the FCA has conceded:

  • firms can allocate this responsibility to their Head of Legal; and
  • despite holding that responsibility and although they must be certified, that Head of Legal need not hold the SMF18 function or be approved as a senior manager.

This seems helpful if a firm has a Head of Legal who is not otherwise required to be approved as a senior manager. Where, however, a firm's Head of Legal has other functions or responsibilities which require their approval as a senior manager, they will still need to be approved as such. It is not clear whether the FCA sees such individuals as also subject to the duty of responsibility in relation to their responsibility for the legal function. If so, that may give rise to the concerns around privilege noted above. It may also incentivise firms to structure themselves so that their Head of Legal is not a senior manager or lawyer. It may be the intention is that, if individuals are approved as senior managers for other reasons, the duty of responsibility will not apply to their responsibility for the legal function. We consider this point would benefit from clarification. For more detail on this issue see our fuller note: CP19/4 – the long-awaited FCA proposals on treatment of the legal function under SMCR.

Narrowing the "client dealing" certification function

CP 19/4 proposes another change concerning the scope of the "client dealing" certification function which will be of interest to banks and other firms already subject to SMCR as well as FCA-authorised firms in the process of implementing SMCR.

Under SMCR, individuals performing the customer function (CF30) under the approved persons regime do not (by virtue of that role) require FCA approval.

Instead, under the Certification Regime, these individuals fall within the "client dealing function", which also covers any person carrying out investment-related advising, dealing or arranging and connected functions with any person. Certified staff instead need to be certified annually by firms as fit and proper to perform their role.

Following much industry confusion and requests for clarification, the FCA now proposes excluding from the client dealing function any employees whose client interaction is in a "purely administrative capacity". Some firms were concerned such individuals could be in scope of the client dealing function given their role in the process of "managing" or "arranging". The FCA explains that, because their roles will require them to "follow a procedure with appropriate systems and controls in place", there will be no justification for them to be certified. This is a welcome clarification especially given the FCA's recent confirmation (in PS 19/7) that details of all certification staff be uploaded to a Directory.

The FCA proposes various tests for firms to apply in determining whether an individual should be certified for this function. The tests focus on whether the individual has scope to exercise judgement or discretion and the amount of skill and automation required in the role. Firms will need to ensure individuals assessed as out of scope do not stray into performing tasks involving exercise of discretion or judgement. Where that is difficult, firms should consider continuing to certify.

Banks or firms that have already informed staff they are or will be certified staff will need to consider to how to explain any changes in this situation so that they do not come across as a demotion.

Timing

The deadline for comments on CP19/4 is 23 April 2019. The FCA will publish final rules and guidance in Q3 2019 with the effective date of the changes being at some point prior to SMCR coming into force for solo-regulated firms (i.e. 9 December 2019).

  1. The definition of SMCR Legal Function appears to cover providing legal services (advice, representation, dispute resolution etc.) to the firm or its group as well as support services (e.g. training).