FCA proposes exempting legal heads from senior managers regime

The announcement is one of several proposed amendments and enhancements to the SMCR set out in a new FCA consultation paper. The FCA is seeking views on its proposed changes by 23 April 2019.

Financial regulation expert David Heffron of Pinsent Masons, the law firm behind Out-Law.com, said that the proposal would be welcomed by firms' general counsel and heads of legal.

"Many in-house lawyers were concerned that as senior managers, to avoid personal liability for regulatory issues arising within the legal team, they would have to disclose legally privileged advice to regulators," he said. "This would have created a conflict between their obligations to the FCA and the Prudential Regulation Authority (PRA), and their professional obligations as solicitors."

"However, it's important to note that this proposal just relates to the head of legal role – it is not proposed that lawyers should be exempt from being senior managers. If a lawyer has a role other than head of legal which is in scope, such as head of compliance, then they will be subject to the regime," he said.

The SMCR was introduced to banks, building societies and dual-regulated investment firms in March 2016, and to insurers in December 2018. It will be extended to cover all FCA solo-regulated financial firms in December 2019. The rules set out a number of 'senior management' functions for which staff must be approved by the FCA; and firms themselves are required to assess the fitness and propriety of staff in 'certified' roles. The regime also incorporates additional conduct rules, applicable to all staff other than those in ancillary roles.

The FCA issued a discussion paper in September 2016 seeking views on how heads of legal should be treated under the SMCR. It has now concluded that their inclusion under the senior managers' strand of the regime would be inappropriate as "the laws of legal privilege may restrict [the FCA], in practice, from using our powers over senior managers and carrying out our usual supervisory processes", even in relation to the 'management' parts of that individual's job.

"As a result, the benefits that normally result from applying the SMR will be substantially reduced so that any remaining benefits are not sufficient to justify applying it," the FCA said in its new paper.

"Almost all respondents recognised that in-house lawyers would already be subject to the individual conduct rules. The head of legal will also fall under the certification regime as either a material risk taker or significant management function … Including the head of legal in the certification regime and applying our conduct rules delivers most of the benefits of including these individuals within the SMR, without compromising the laws of legal privilege," it said.

The FCA is proposing new handbook guidance covering this point, which it has set out in full in the consultation paper.

Another important area for firms that the FCA is also proposing to amend is the 'client dealing' function in the certification regime, which was based on the 'CF30' customer function under the approved persons regime. While CF30 covered advice and investment activity in a retail context, this was expanded in the certification regime to include individuals dealing with professional clients and eligible counterparties.

The FCA has since received feedback requesting clarification on whether the new function, as drafted, captures staff who interact with clients in a purely administrative capacity in their firm's advisory and investment activities. Staff  in such administrative roles are unlikely to cause harm to consumers and the FCA is therefore proposing to amend the rules to exclude individuals "who have no scope to choose, decide or reach a judgement on what should be done in a given situation, and whose tasks do not require them to exercise significant skill". Firms would be required to exercise their own judgement on whether a particular role is within the client dealing certification function or not.

"The FCA helpfully clarifies the point for firms by describing that simpler more automated roles, rather than those where there is scope for exercising discretion or judgement, are outside the client dealing certification function," said David Heffron. "Such pointers from the FCA will be welcomed by firms preparing to enter the regime in December 2019."