With less than seven months to go until the FCA's new Senior Manager's and Certification Regime (SMCR) is brought into force for solo-regulated firms, determining which senior manager roles need to be filled and who to fill them is an increasing priority. In that respect, the regulator has issued a further consultation paper with a proposal to clarify its expectations regarding Heads of Legal at affected firms.
The proposal marks a departure from the FCA's September 2016 Discussion Paper 16/4 (DP 16/4) (which set out its intention to include the Head of Legal in the Senior Manager's regime (SMR)), with the Head of Legal now set to be excluded from the SMR.
- The SMCR will apply to all solo-regulated firms from 9 December 2019.
- A key facet of the regime is a requirement to designate Senior Management Functions (SMFs) to senior managers within the firm, ensuring clarity about who is ultimately responsible for key areas of business, governance and operation.
- The SMFs to be assigned vary by category of firm, and to find out what type of firm you are, use our free online tool.
The to-ing and fro-ing on whether the Head of Legal function should fall within the SMR reflects the variant views on whether it merits inclusion.
In response to DP 16/4, several respondents felt that including Head of Legal in the SMR was the correct position, the broad reasoning being:
- The legal function provides more than legal advice: The head of legal often operates as a 'first line of defence' in respect of compliance related issues at a firm, and can sometimes occupy a dual role as both decision maker and legal advisor to a decision making process.
- The Head of legal needs sufficient authority to perform their role: The Head of Legal requires a requisite level of authority to perform the role and inclusion in the Senior Manager's regime would reinforce this.
- The legal function has been involved in cases of misconduct/unethical practices in the past: The inclusion of the legal function into the Senior Manager's regime could potentially reduce the number of instances where lawyers were involved in unethical practices.
- Inclusion would improve independence: One respondent to DP 16/4 suggested that inclusion in the Senior Manager's regime would facilitate and improve the independence of the legal function from the board. The respondent felt that Senior Manager status could empower the Head of Legal to deliver more difficult messages to the board.
Notwithstanding the responses set out above, the FCA now proposes to exclude the Head of Legal from the Senior Manager's regime. The reasons for this proposal are fourfold:
- Legal professional privilege: A key concern raised by a majority of respondents to DP 16/4 was the conflict between the Duty of Responsibility, incumbent on all senior managers, and the rights to legal professional privilege that exist between a lawyer and their client. The requirement to show that a manager (ie the Head of Legal) had undertaken 'reasonable steps' could lead to an inappropriate or premature waiver of privilege. This could severely impede a Head of Legal's ability to serve as an advisor to the company.
- Independence of the legal function: The majority of respondents to DP 16/4 felt that including the legal function in the Senior Manager's regime would actually undermine its independence. Personal liability may prompt lawyers to be more conservative or withhold advice and furthermore, the requirement under Senior Manager Conduct Rule 4 to notify the FCA of anything that it would reasonably require notice of, conflicts with Solicitors Regulatory Authority Principle 4 that creates an obligation on solicitors to act in the best interests of their clients.
- Practical difficulties with separating 'management' of the legal function from the underlying advice: Poor management could manifest itself as poor legal advice, which would create difficulties for the FCA to deduce the actual quality (or deficiency) in any legal advice.
- Policy justifications: Lawyers are already regulated by the SRA and inclusion in the SMR would be unduly burdensome, and would lead to an unnecessary duplication of rules and regulation.
So in light of the reasons put forth by the majority of respondents to DP 16/4, the FCA now proposes to exclude the Head of Legal from the Senior Manager's regime. This proposal is still at the consultation stage. The consultation remains open until 23 April 2019 and the FCA expects to publish rules and guidance in Q3 of this year.
The clock is ticking in regards to compliance with the SMCR, with the roll-out date confirmed as 9 December 2019. Taylor Wessing is ideally placed to help solo-regulated firms prepare for the new regime, with experts in employment law, financial services and disputes. Please click here for more information, including our cutting edge web tool that allows you to determine the category of your firm for the purposes of the new regime.
In addition, you can join a panel of financial regulatory experts and employment law experts from Taylor Wessing on May 30 2019 for a timely webinar on the FCA's new SMCR which will set out the core principles that comprise the new regime, along with advice on what firms should be doing to prepare. Register your place here.