06 October 2016 - Post by:Calum Burnett
Earlier this year, the UK Financial Conduct Authority (the FCA) announced that it was considering whether General Counsel and Heads of Legal should be designated as Senior Managers for the purposes of the new Senior Managers and Certification Regime. The FCA has now published a Discussion Paper on this topic, which sets out arguments for and against including General Counsel and Heads of Legal in the Senior Managers Regime.
In a press release issued in February 2016, the FCA acknowledged that there was ‘significant uncertainty’ as to whether firms’ General Counsel and Heads of Legal should be designated as Senior Managers and that its previous public communications ‘have not necessarily been sufficient to ensure that firms have full clarity’. The FCA noted that there was no specific Senior Manager Function or Prescribed Responsibility dedicated to this role, nor was the legal function included in the FCA’s (non-exhaustive) list of Key Business Functions for which responsibility needed to be allocated to a Senior Manager.
The FCA promised to consult on the issue of whether General Counsel and Heads of Legal should be Senior Managers.
The FCA’s suggestion that General Counsel and Heads of Legal might be caught by the Senior Managers Regime was met with opposition. The Association for Financial Markets in Europe and the British Bankers Association teamed up to write a letter to the FCA , which expressed concern at this prospect. In particular, the letter expressed concerns that making General Counsel and Heads of Legal into Senior Managers ‘could have considerable potentially adverse implications for culture within banks and for the in-house Legal profession’.
The FCA (re)ignites the debate
The FCA has published a Discussion Paper on this topic: ‘Overall responsibility and the legal function’. The purpose of this Discussion Paper is stated as being ‘to clarify how and why the legal function is currently captured under the [Senior Managers Regime], and to consider whether the legal function should continue to be part of the [Senior Managers Regime] going forwards’.
In short, the FCA’s Discussion Paper sets out arguments in favour of and against including General Counsel and Heads of Legal in the Senior Managers Regime.
FCA arguments against requiring General Counsel and Heads of Legal to be Senior Managers
The FCA puts forward the following potential reasons for excluding General Counsel and Heads of Legal as Senior Managers:
- Scope: The legal function is not an ‘activity, business area or management function’ of a firm which (according to the rules set by the FCA) needs to be allocated to one or more Senior Managers.
- Nature of the role: The role played by a General Counsel or a Head of Legal is an advisory one and not one that involves management of a firm’s affairs. This argument is supported by comments made in the House of Lords in late 2013, when it was stated that ‘it is… highly unlikely that the regulators would designate being a legal adviser as a [Senior Manager Function] because giving advice does not constitute management as set out in the definition of senior management’.
- Independence and impartiality: Designating a General Counsel or Head of Legal as a Senior Manager may impact their (and their function’s) ability to provide impartial and independent legal advice to the business. In particular, the FCA speculates that making a General Counsel or Head of Legal a Senior Manager could mean that they and the lawyers who work for them are incentivised to provide legal advice that protects their own interests, as opposed to the interests of the firm.
- Privilege: Requiring General Counsel and Heads of Legal to be Senior Managers could prejudice legal privilege. In particular, if a General Counsel or Head of Legal was a Senior Manager and found themselves being investigated for a potential breach of the Duty of Responsibility, the only way for that Senior Manager to defend the allegations against them would be to demonstrate that they had taken reasonable steps. This may mean that the Senior Manager would need to rely on privileged material (and this privilege would belong to the firm, not the Senior Manager). In addition, Senior Manager Conduct Rule 4 (the requirement for a Senior Manager to disclose any information of which the FCA or PRA would reasonably expect notice) could be seen as cutting across the principle of legal privilege.
- Overlap with other regulations: The FCA acknowledges that many General Counsel or Heads of Legal will be regulated by the Solicitors Regulation Authority or the Bar Standards Board, or equivalent regulators in other jurisdictions. These regulators impose their own ethical and conduct standards on lawyers. Requiring General Counsel and Heads of Legal to be Senior Managers could overlap or conflict with these other regulators.
- Insufficient benefits: General Counsel and Heads of Legal are already subject to the Certification Regime (provided they meet the FCA and/or PRA criteria) and will, in any event, be subject to the regulators’ Conduct Rules. As a result, there is no significant benefit to including them in the Senior Managers Regime.
FCA arguments in support of requiring General Counsel and Heads of Legal to be Senior Managers
The FCA puts forward the following potential reasons for including General Counsel and Heads of Legal as Senior Managers:
- Scope: Although senior management responsibilities have been expressed by the FCA as responsibilities relating to an ‘activity, business area or management function’, this covers everything that a firm does, including internal-facing functions such as legal. Although the provision of legal advice does not constitute ‘management’, it would be the management of a legal function (and not the provision of legal advice) that would bring a General Counsel or Head of Legal within the scope of the Senior Managers Regime.
- Wider impact of the legal function: The FCA noted that ‘systemic failings in the management of the legal function, as well as in other internal functions… could create risks that can in turn impact the wider business and result in a failing within the firm’.
- Operational management: The FCA’s focus in relation to the Senior Managers Regime is not on the provision of legal advice, but on the effective management of the legal function. In light of this, there is an argument that privileged material would not be needed in order to demonstrate that a General Counsel or Head of Legal who is a Senior Manager had taken reasonable steps and discharged the Duty of Responsibility.
- Privilege: The FCA responds to the potential difficulties that General Counsel and Heads of Legal may have if required to demonstrate that they took reasonable steps and discharged the Duty of Responsibility, namely that to do so they may need to rely on privileged information. The FCA points out that this would be no different if a General Counsel or Head of Legal was required to defend themselves in relation to an alleged breach of the Conduct Rules (to which they will be subject now if designated as a Certified Person or otherwise from 7 March 2017). The FCA also requests feedback on whether to include express guidance stating that the Senior Managers Regime (including Senior Manager Conduct Rule 4) would not require a Senior Manager to disclose privileged information.
- Flexibility: The FCA has stated that overall responsibility does not necessarily have to be allocated to the General Counsel or Head of Legal. Rather, it could designate another individual as having this responsibility (provided that this is consistent with their responsibilities in practice).
- Conflict with other regulations: Although lawyers are regulated by other regulators who have their own ethical and conduct standards, the FCA notes that its expectations of Senior Managers and individuals who are subject to the Conduct Rules are not inconsistent with those existing standards. In addition, the FCA points out that a number of other Senior Managers fall within the scope of other regulators, such as those for accountants and actuaries.
The FCA has asked for comments on its Discussion Paper by 9 January 2017. In particular, the FCA has asked for feedback on it arguments in favour of and against including General Counsel and Heads of Legal in the Senior Managers Regime, as well as whether these individuals should be designated as an other overall or significant responsibility Senior Manager (SMF18 for UK firms, SMF22 for non-EEA branches).
The FCA maintains a largely neutral stance in its Discussion Paper, making it difficult for us to judge which side of the debate the FCA will end up coming down on. However, clearly there is a desire on the part of the FCA to explore this topic further following its press release earlier this year.
This latest publication from the FCA has been met with further concern from the legal profession, with the Law Society stating that including General Counsel and Heads of Legal in the Senior Managers Regime would give rise to a risk of there being a conflict of interest between in-house lawyers and their employers, and the erosion of legal professional privilege.
In the meantime
We are unlikely to get clarity from the FCA on this issue until mid-2017, once it has had a chance to consider the feedback received in response to its Discussion Paper. However, in the meantime firms should ensure that at least one of their current Senior Managers has – and knows that they have – responsibility for their legal functions, regardless of whether those Senior Managers are General Counsel, Heads of Legal or whether they hold other positions.