SMR legal function U-turn threatens implementation

Author: Tom Young | Published: 9 Feb 2016
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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 legal privilege.

“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.

FCA lobby
Is its consultation too little too late?
 “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.

KEY TAKEAWAYS

  • 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;
  • Some market participants were raising the issue privately with the FCA as early as November 2014.

Timing

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 in-scope firms.

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 legal role.

“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.

See also

Banks divided over senior managers seeking legal advice

How to comply with Senior Managers Regime