FCA discussion paper on Senior Managers and Certification Regime

The FCA has published a discussion paper about how those heading up the legal function in firms should be treated under the Senior Managers and Certification regime (available here). The FCA invited firms to make submissions on the questions posed in Chapter four of the discussion paper by 09 January 2017.

As part of the FCA’s engagement with industry, it has received feedback from firms questioning how "Senior Management Function 18 - Other Overall Responsibilities" (SMF18) applies to the legal function. Currently, a Senior Manager must have overall responsibility for all areas of the firm (including the management of the legal function) and this may mean appointing the head of the function as an SMF18 if they are not already captured as another Senior Manager (for example, as the Head of Compliance). Many firms felt that it had not been clear that a Senior Manager must be appointed for overall responsibility of the legal function, while others considered it inappropriate for the regime to apply to the legal function at all. Further, firms were concerned that the regime requires the General Counsel or Legal Director to be captured as a Senior Manager in their role in providing legal advice to the firm.

The purpose of the FCA discussion paper is to clarify how and why the legal function is currently captured under the SMR and to consider whether the legal function should continue to be part of the regime going forwards. The list of questions in Chapter four invite the industry to comment on the arguments for and against inclusion of the management of the legal function in the regime. In brief, the arguments (as set out in the discussion paper) are broadly as follows:

Reasons to exclude the head of legal function from SMR

• the legal function is not an “activity, business area or management function”
• the legal function is an advisory function
• flexibility to allocate “overall responsibility”
• legal professional privilege
• independence of the legal function
• overlap with other regulators (ie, the SRA), or
• insufficient benefits?

Reasons to keep the head of legal function in the SMR

• the legal function is an “activity, business area or management function”
• failings in the legal function can impact the wider business
• operational management of the function
• privilege and the duty of responsibility (ie did concerns about privilege arise as a response to the presumption, rather than the duty of responsibility?)
• privilege and independence
• flexibility to allocate “overall responsibility”, or
• no conflict with other regulation.

Legal privilege

The issue of legal privilege remains a continuing area of focus for our clients and we would draw your attention to the recent Law Society Consultation (issued 26 July 2016). One of the key arguments against the extension of the scope of SMF18 is the impact it would have on the ability of the firm and/or its Senior Managers to rely on its own privileged advice to demonstrate whether reasonable steps were taken (and for individual Senior Manager, in circumstances where a firm is not willing to waive its privilege). In addition the discussion paper highlights the need to balance the obligation to cooperate with the regulator (SM4, disclose any information which the FCA or PRA would reasonably expect notice of) with the principles of legal professional privilege.

Next steps

Simmons intend to submit a response to the discussion paper and would welcome your views (which we can incorporate on a no-names basis as required). If you would like to be involved in this consultation process or it would be helpful to discuss the above please contact Penny Miller or Andrea Finn.