UK Financial Conduct Authority Discusses the Application of the Senior Managers Regime to a Firm's Legal Function

The Financial Conduct Authority published a discussion paper about how and why the legal function currently falls within the Senior Manager & Certification Regimes and whether it should continue to do so. In the lead up to implementation of the SM&CR in March 2016, the FCA became aware of significant uncertainty amongst firms as to whether an individual responsible for the management of a firm's legal function would require approval as a Senior Manager. Where heads of legal are responsible for compliance, there is a clear need to register, but the position is less clear for heads of legal who do not hold this additional function. The FCA published a statement on January 27, 2016, advising that firms that have sought to make decisions in good faith about whether an individual needs approval in their firm for this responsibility, based on the current rules and guidance, should not need to change their approach.

The FCA is seeking to clarify its approach and policy rationale behind applying the SM&CR to the legal function and engage with the legal profession further so that it can better understand the concerns that have been raised. The FCA sets out certain arguments that have been made as to why the legal function should or should not fall within the scope of the SMR, the most important of which relate to professional privilege and the ability to provide independent advice. The FCA's view appears to be that an individual needs to be responsible for the management of the legal function and that such management is separate from the function of providing legal advice. The FCA's SMR is intended to prevent any gaps in key responsibilities within a firm because if a systemic failing in the management of the legal function occurs, that could create risks that impact the wider business and result in a regulatory failing within the firm. However, if an in-house lawyer is designated as a Senior Manager with responsibility for the management of the legal function, situations may arise where that individual needs to defend his actions under the duty of responsibility which could entail needing to disclose privileged advice. The privilege that attaches to the advice is the firm's to waive and not the individual's which raises conflicts of interest issues too.

The FCA would like feedback on whether there are any policy arguments for and against inclusion of the management of the legal function in the SMR that it has not considered in the Discussion Paper and whether the SM&CR should include a requirement to allocate overall responsibility for the management of the legal function to a Senior Manager. The consultation closes on January 9, 2017.

View the FCA's discussion paper on the legal function under the SM&CR.