Sounds like there should be an obvious answer to the question in my headline? Instead in the case of U.K. financial institutions it may turn out to be a case of “be careful what you wish for”.
Make no mistake; if the Financial Conduct Authority decides to create a new senior management function for legal departments, the implications for personal accountability of lawyers could be significant. We are back in familiar territory here with the U.K. Senior Managers Regime (SMR) and a new discussion paper released by the FCA on 28th September 2016 discussion paper . Its aim, in the words of the FCA, is to:
clarify how and why the legal function is currently captured under the SMR, and to consider whether the legal function should continue to be part of the SMR going forwards.
How we got here
The background to this is of course the introduction on 7th March 2016 of the SMR for banks and certain other types of financial institution. Under the regime, in order to ensure clear lines of accountability, one of the core principles is that a senior manager must be responsible for each area of the firm’s business i.e. there must be no gaps. Because no specific management function had been designated under SMR for head of the legal function, it was typically addressed by firms (if at all) under SMF 18 which is a catchall for “other overall responsibility functions”.
In January 2016 the FCA published a statement recognising that uncertainties existed and that concerns had been expressed by the legal profession as to whether the legal function was one that should appropriately fall under the SMR at all. In these circumstances, the statement allowed firms that had made decisions on this issue “in good faith” to stand by them until such time as the FCA had published its position after consultation. In other words, as things stand there is no clear answer to this important question.
The September 28th discussion paper is an important element of that consultation. In it the FCA sets out the reasons for and against inclusion of the legal function as a new specific senior management function. The main ones are summarised below.
The case against extending SMR to include the legal function
The legal function is an advisory one and not one which is therefore suitable for designation under the SMR. The discussion paper references the November 2013 debate in the House of Lords over the inclusion of relevant firms’ legal functions in the SMR, citing Lord Newby who stated that
it is… highly unlikely that the regulators would designate being a legal adviser as an SMF because giving advice does not constitute management as set out in the definition of senior management.
Legal professional privilege
There are a variety of concerns expressed under this heading. These include the concern that a general counsel may need to rely on privileged material in order to defend himself or herself from disciplinary action by demonstrating that the legal advice given was appropriate. This would mean that the ability of the lawyer concerned to defend himself or herself may depend on the firm’s willingness to waive privilege.
Readers will remember that this is a theme of waiver of privilege is one to which I have drawn attention often in the past.
Independence of the legal function
There would be a threat to the way in which the firm engages with the general counsel and the legal function in general if it was felt that advice the legal function provides could be disclosed to the regulators. This in turn could affect the way that lawyers themselves deal with the regulators.
That seems to be a particularly knotty issue. On one view it would simply compound and magnify a problem that already exists. This problem stems from the reality that the company’s lawyer can and must only ever give advice and act in what he or she considers to be the company’s best interests.
The case for extending SMR to include the legal function
To say the FCA gives short shrift to these objections would be unfair. Indeed this is only a consultation paper and the FCA has yet to decide on its approach.
That having been said, if one reads the paper one cannot help feeling that the FCA remains, as yet, quite unpersuaded by the arguments summarised above. For example, the FCA:
- Expressly agrees with the “no gaps” approach to all key responsibilities at a senior level
- Believes there to be a valid distinction between management of the legal function and the provision of legal advice
- Considers that adequate protection for the principle of legal professional privilege may already be enshrined within existing checks and balances
- Believes that SMR allows flexibility such that the head of the legal function could be designated to the CEO or another director or embedded in another department
All to play for…
Responses are invited by 9th January 2017. At this stage we certainly cannot rule out the possibility that the SMR will be extended to those individuals with ultimate responsibility for the legal function.
Whether the FCA will prescribe that general counsel must themselves fulfill this role or whether it is left to firms to designate appropriate individuals is less clear.
What is plain though is that there is no let-up in the commitment by the FCA to make SMR fully operational.
In another consultation paper published on the same day as this one, Consultation Paper (CP16/27), the FCA sets out its intention to apply individual rules of conduct to all directors including all non-executive directors, irrespective of whether they perform a senior manager role or another controlled function.
Watch this space!