UK: CP19/4 – The Long-Awaited FCA Proposals On Treatment Of The Legal Function Under SMCR

Last Updated: 29 March 2019
Article by Daren Allen, Celyn Armstrong and Katharine Harle

Banks, insurers and enhanced solo-regulated firms that will become subject to the Senior Managers and Certification Regime (SMCR) (Affected Firms) will be interested in the FCA's long-awaited proposals regarding treatment of the legal function as set out in Consultation Paper 19/4 (CP19/4).

CP19/4 has been portrayed as a victory for those who lobbied for the legal function to be out of SMCR but a more detailed reading of the proposed draft rules suggests the FCA's concession may not apply consistently depending on how firms are structured. If this is the case, it may still give rise to concerns around privilege in some instances and this potentially merits further clarification.

From the position taken by the FCA in the body of CP19/4 it would appear that the FCA intends (i)for the Head of Legal not to have to be a Senior Manager; and (ii) responsibility for the legal function to be allocated to a Head of Legal who is certified. For those Affected Firms whose Head of Legal also performs other SMFs this leaves considerable uncertainty around whether or not they will be subject to the duty of responsibility in respect of that function.

Background

The detailed background to this is set out in a previous note. In short, two years ago, in response to significant industry uncertainty, the FCA issued a statement and then a discussion paper (DP16/4) regarding how SMCR applies to the legal function and in particular whether a firm's Head of Legal should be approved as a Senior Manager. Confusion had arisen from the existence of the "no gaps" principle, which requires Affected Firms to identify all "business areas, activities or management functions" and allocate responsibility for them to a Senior Manager. The "Other Overall Responsibility Function" (SMF18; SMF22 for overseas firms) was created as a catch-all for those individuals who held such a responsibility but did not otherwise hold an SMF. It was not clear whether or not responsibility for the legal function needed to be allocated to a Senior Manager. The legal function was not included in the extensive, though non-exhaustive, list set out by the FCA at SYSC 25 Annex 1G, suggesting that the FCA had intended not to require its allocation.

DP16/4 generated widespread interest and opposition, including from The Law Society, which published an extensive response expressing serious concerns that including the legal function could lead to the "erosion of legal professional privilege" and "in-house lawyers being placed in positions of conflict with their employers". The deadline for comments on DP16/4 was 9 January 2017 but Brexit and other more urgent SMCR work (coupled possibly with the difficult points this issue raises1) meant it has taken until now for the FCA to set out its proposals in CP19/4.

Why does this matter?

For those who have not read the detailed papers and responses it could be easy to categorise concerns around this issue as special pleading by lawyers keen to avoid being regulated by the FCA.

In essence, understanding the issues this matter raises depends on an appreciation that: (i) lawyers owe professional duties – not merely contractual ones – to act in their client's best interests; and (ii) the privilege in legal advice "belongs" to the client and cannot be waived by the adviser.

Once this is appreciated it is clear that if a Senior Manager, subject to the duty of responsibility with individual responsibility for failings in their areas of responsibility, is responsible for the legal function this has the potential to compromise that individual's ability to demonstrate that they took reasonable steps in the event of a failing regarding the legal function. For example, that person might need to rely on privileged advice to prove they acted reasonably but this may be in conflict with their duty to act in the firm's best interests and, in any event, it would be up to the firm whether to waive privilege. This in turn has the potential to impact on the relationship between in-house legal advisers and their employer firms, which should be of interest and concern to firms as well as lawyers.

Current proposals

As noted already the current proposals in CP19/4 do not entirely address the issue. What the text of the CP and the draft rules indicate is:

  • The head of a firm's legal function (Head of Legal) is expressly carved out of the scope of the SMF18 function (and equivalent SMF22 for overseas firms).
  • Local or overall responsibility for the SMCR Legal Function is included in the list of suggested responsibilities that should be allocated in SYSC 25 Annex 1G but may be allocated to someone who is not approved as performing an SMF.
  • The definition of SMCR Legal Function is convoluted but appears intended to cover the provision of legal services (advice, representation, dispute resolution etc) to the firm or its group as well as support services (e.g. training, CPD) which both (i) directly support provision of these services; and (ii) are the responsibility of the Head of Legal. Where a legal department is split and has co-heads they will all be excluded from SMF18/22.

Based on the above it appears that the FCA continues to be of the view that Affected Firms should, consistent with the "no gaps" principle, allocate responsibility for provision of legal services.

One concession it has made is to make clear that, where a firm has a Head of Legal or equivalent, they do not need to hold the SMF18 function or be approved as a Senior Manager solely by virtue of that role and:

  • they will need to be certified (as performing either a Material Risk Taker or a Significant Management Function); and
  • the firm may allocate responsibility for the SMCR Legal Function to them without offending the "no gaps" requirements.

Where a firm has a Head of Legal who also performs other functions or has other responsibilities which require them to be approved as a Senior Manager they will still need to be approved as such (i.e. being Head of Legal only exempts them in relation to that responsibility, and not more widely). As noted above, responsibility for the SMCR Legal Function will still need to be allocated (and logically it would be allocated to them).

However, we query whether this is really what the FCA intends. If so, if those Heads of Legal who are otherwise approved as SMFs are allocated responsibility for the SMCR Legal Function (as they surely will be) they will potentially be subject to the duty of responsibility in relation to that function. This gives rise to the same concerns around privilege (noted above) as the FCA appears to seek to remedy in the body of the CP19/4 consultation. It surely cannot be the FCA's intention that, where an individual is Head of Legal and responsible only for the legal function, they are not subject to the duty of responsibility whilst Heads of Legal who are Senior Managers by virtue of other responsibilities would be. It may be that the intention is that, if individuals are approved as Senior Managers for other reasons, in relation to any allocation of responsibility for the legal function they would be treated as Certification Staff and not subject to the duty of responsibility. We suggest this is a point that would benefit from further clarification, especially for those Affected Firms whose Head of Legal is likely to require approval as a Senior Manager for other reasons.

Next steps

The deadline for comments on CP19/4 is 23 April 2019. The FCA will consider feedback and publish final rules and guidance in Q3 2019 with the effective date of the changes being at some point prior to SMCR coming into force for solo-regulated firms (i.e. 9 December 2019).

In the meantime, over the next few months, Affected Firms that are already subject to SMCR need to revisit what they originally decided in relation to their Head of Legal:

  • For those who sought approval for their Head of Legal for other SMFs because of other responsibilities and roles they have, this is unlikely to result in any change. It is likely that the individual will also need to be certified by the firm in relation to their suitability to perform the Head of Legal role where that role is "significantly different" from the role for which they are approved as a Senior Manager.
  • For any Heads of Legal who were not approved because they are Head of Legal but who may be performing other SMF roles (e.g. director), consideration needs to be given to this and an application for approval for those other roles submitted as soon as possible if it is determined that they meet the criteria for an SMF. As above they may also need to be certified.
  • For those Heads of Legal who were approved as SMF18s or SMF22s solely due to their responsibility for the legal function, this approval is likely to be able to be removed but they will instead need to be added to the firm's category of Certification Staff and treated accordingly.
  • For those Heads of Legal who were not approved as SMF18s or SMF22s and whose only potential Senior Manager role concerned their legal function, no change is needed. If they are not currently treated as Certification Staff then they should be assessed and certified and then treated as such going forward.
  • In each of the above cases firms should confirm that associated documents such as terms of reference for committees and job descriptions are consistent with the approach taken.
  • Subject to further clarification of the issue noted above around how the duty of responsibility applies to this responsibility, it will also be necessary to: (i) add this to Statements of Responsibility in the section covering Other Overall Responsibilities; and (ii) update Management Responsibilities Maps to include allocation of this responsibility.
  • For those individuals who are changing to a different category (i.e. Senior Manager to Certification) they will need to be appropriately trained and the firm's records updated.

For Affected Firms that are not yet subject to SMCR, they will, as part of their implementation process, need to consider who is responsible for provision of legal services and what other roles and responsibilities they have:

  • Individuals who only perform the Head of Legal role can be included in the Certification Staff pool.
  • Individuals who are Head of Legal, but also (i) perform other roles (e.g. Head of Compliance) which meet the definition of an SMF or (ii) hold other responsibilities which would require their approval as an SMF18/22, should be treated as needing approval as such. As noted above, where the Head of Legal role is "significantly different" from their Senior Manager role they may need to be certified for it. In terms of whether individuals will be subject to the duty of responsibility in respect of responsibility for the legal function clarification is needed, but in the meantime it may be best to assume they will.
  • In both cases firms should check that associated documents such as terms of reference and job descriptions are consistent with the approach above.

Footnote

1 FCA CEO Andrew Bailey publicly acknowledged on 9 April 2018 that this "isn't an easy question".

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions