The Financial Conduct Authority’s (FCA) decision to consult
on capturing those with responsibility for a firm’s legal function within the
Senior Managers Regime (SMR) could disrupt the framework’s ultimate
implementation and threaten legal privilege, according to counsel.
The FCA released a statement on January
27 explaining the uncertainty among market participants over whether
general counsel at in-scope banks, building societies and credit unions should
be classified as responsible persons. Doing so would subject them to the
personal liability provisions of the regime.
As a result, the FCA said it planned to consult on whether
the regime should capture the role. But if general counsel are classified as senior managers, their obligations under the framework are expected to clash with
“It would be very difficult for a general counsel to be
hauled in front of a regulator to discharge their regulatory obligations as a
senior manager and then try and hide behind the cloak of legal privilege,” said
Sarah Henchoz, partner at Allen
& Overy in London.
“Similarly, it would
be very difficult for the general counsel to alert the regulator to wrongdoing
in the organisation without being in breach of the obligations they owe to the
company,” she added.
If an in-house counsel is classified as a senior manager, they become subject to the senior manager conduct
rule. This creates a personal
responsibility to notify breaches to the regulator.
This differs from the obligation on mere certified
persons who have to be open and cooperative with the regulator. According
to one London-based partner, the expectation within the latter role is that any issues are raised internally rather than externally.
Despite acknowledging the difficulty of legal privilege in
its statement, it is unclear how the FCA will solve the problem if it does
include the legal function in the SMR.
- The FCA released
a statement on January
27 explaining uncertainty among market participants over whether
general counsel should be classified as responsible persons;
- The move
to consult on capturing those with responsibility for a firm’s legal function
within the SMR could threaten legal privilege;
- It is
also expected to disrupt implementation, with the deadline for grandfathering
having passed on February 7 and the final deadline set at March 7;
market participants were raising the issue privately with the FCA as early as
The announcement comes less than a month before the SMR is due
to be fully implemented, on March 7, and is expected to cause confusion among
It is unlikely that the consultation will delay initial implementation
because entities have already filed grandfathering notifications for staff members who have either
been approved or whose approval is pending with the FCA or Prudential
Regulation Authority (PRA).
Instead, the FCA’s statement suggests that any firm that has
sought to make a decision in ‘good faith’ about whether an individual requires
approval, should not need to change their approach in the interim.
"We really noticed a difference between our clients who were US-headquartered versus those who were UK-headquartered"
But if the legal function role is included, in-scope firms
will have an additional compliance burden. Any company which has submitted a
management responsibilities map and statement of responsibility for a
non-legal figure to have the risk management function will have to remove that
from the senior manager they have already registered and re-configure it to the
“You can see people having to go back a step when the regime
has only been in place a few months,” said Henchoz.
This could prove frustrating for firms, especially
considering that some market participants were raising the issue privately with
the FCA as early as November 2014.
Market participants’ views on the issue have been influenced
by their location. The SMR applies to
all UK in-scope entities and also those with UK-headquarters. This is thought
to have led to disagreements within US banks with UK headquarters over whether
the general counsel role should be included.
“We really noticed a difference between our clients who were
US-headquartered versus those who were UK-headquartered,” said Henchoz. “I
think that’s because in the US they tend to see their general counsel as a
management or board-level role rather than acting in a risk management,
advisory capacity,” she added.
divided over senior managers seeking legal advice
to comply with Senior Managers Regime