SMCR: FCA Proposes to Exclude Heads of Legal from Senior Manager Approval

The UK Financial Conduct Authority has proposed to exclude the head of legal function from the requirement to be approved as a senior manager under the Senior Managers Regime. It has also made further proposals in its consultation paper to optimise the Senior Management and Certification Regime, including by amending the intermediary revenue criterion for enhanced-tier firms, amending and clarifying the application of the Certification Regime, and extending the application of Senior Manager Conduct Rule 4.

The Financial Conduct Authority (FCA) has published a consultation paper dated 23 January 2019 in which it proposes, among other things, to exclude the head of legal function from the requirement to be approved as a senior manager under the Senior Managers Regime (SMR). The consultation closes on 23 April 2019.

Head of Legal

The FCA’s consultation paper has been issued further to its September 2016 discussion paper, which examined the issue of balancing the legal function’s independence and ability to offer legally privileged and impartial advice with the principles of accountability under the SMR. The consultation paper provides feedback and details the FCA’s proposal to exclude the head of legal function from the requirement to secure senior manager approval. Reasons for this proposal include the following:

• The benefits that normally result from applying the SMR to senior managers are diluted when the SMR is applied to the head of legal function because the laws of legal privilege—which limit the FCA’s access to privileged advice and other documents—restrict the FCA from carrying out its usual supervisory processes.
• The application of the SMR to the head of legal function may compromise the head of legal function’s independence because the potential imposition of personal liability may influence the contents of advice or coerce firms into waiving legal privilege over certain documents in order to demonstrate compliance. 
• The duty under Senior Manager Conduct Rule 4 (SC4) to notify the FCA of anything of which it would reasonably expect notice could conflict with the head of legal function’s duties to uphold confidentiality and act in the best interest of the client under the Solicitor Regulation Authority (SRA) Code of Conduct. 
• In-house lawyers are already regulated separately by the SRA and are subject to the FCA’s Individual Conduct Rules, and the head of legal function also falls under the FCA’s Certification Regime, meaning that most of the benefits of the SMR are already being delivered.

In making this proposal, the FCA makes it clear that it is not proposing to exclude lawyers from performing other senior management functions, such as the roles of chief operations officer or head of compliance. In those instances, the SMR and all obligations thereunder would still apply to that individual to the same extent.

Other Proposals

The FCA’s consultation paper also sets out its proposal to

• amend the intermediary revenue criterion for the enhanced regime, which would involve the introduction of a notification requirement for certain firms that do not submit RMA-B and have more than £35 million in relevant business revenue; and
• make certain amendments to the Certification Regime, including to
  • exclude from the client-dealing function individuals whose roles are simple or largely automated, such that they have no scope to choose, decide, or reach a judgement on what should be done in a given situation; and
  • introduce a new certification function to cover individuals performing systems and controls functions under the Approved Persons Regime, but who no longer require approval under the Senior Management and Certification Regime.

Finally, the consultation paper details the FCA’s proposal to extend the application of SC4, which requires those subject to it to disclose appropriately any information of which the FCA or Prudential Regulation Authority would reasonably expect notice. SC4 currently applies to senior managers and all nonexecutive directors, and will be extended to include nonapproved executive directors of UK limited-scope firms. This would ensure that all directors of these firms are subject to equivalent requirements.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Simon Currie
Louise Skinner
William Yonge
Steven Lightstone