On 27 January 2016, the FCA issued a statement to clarify an issue that there is uncertainty in the market as to whether an individual in charge of a firm’s legal function requires approval under the new Senior Managers Regime (SMR) when it enters into force on 7 March 2016. This statement describes the FCA’s plans to consult on this issue, and confirms that firms who have made decisions in good faith about whether or not an individual requires approval (on the basis of published rules and FCA communications), should not need to change their approach for the time being.
In July 2015, the FCA made final rules for the new SMR accountability framework for individuals working in banks, building societies and credit unions in a consultation paper (CP15/22). This consultation paper highlighted the importance of identifying those individuals who have ‘overall responsibility’ for activities, functions or areas of the business, and ensuring that they are pre-approved for Senior Management Functions (SMFs). The consultation paper described someone with ‘overall responsibility’ as being the person who has ‘ultimate responsibility, under the governing body, for managing or supervising a function; with direct responsibility for reporting to the governing body, and putting matters for decision to it.'
The FCA also set out that firms are to ‘identify any other individuals who have overall responsibility for an activity, function or area’, not just those individuals identified as performing one of the specific SMFs prescribed in the consultation paper: ‘while we have provided an indicative list of a relevant firm’s main business activities and functions, this is not a complete list of areas of responsibility that firms might need to cover.’
2. Uncertainty – firm's legal function
Since publishing the final rules, it has been noted that a firm’s legal function is not included in the indicative list set out in the consultation paper as one having overall responsibility. The FCA takes the view that this was not excluded, and that many firms would need to identify the role as an overall responsibility SMF when allocating senior management responsibilities if it was not covered by another specific SMF in the firm.
The FCA is now aware that this has led to confusion in this area, and that its communications to date have not given firms full clarity. An example that the FCA has given is in this context has been that of providing legal advice to a firm’s board, which does not necessarily bring legal function within the scope of the regime. Instead, the attention should be on those individuals who have overall responsibility for a firm’s legal function.
There are differing opinions on how desirable it would be for someone with overall responsibility for a firm’s legal function to be brought within the SMR, as that might bring about the circumstance where there is at least a perception that a General Counsel might be either required or pressured by the regulators to disclose privileged information.
3. Plans to consult and interim arrangements
The FCA, being aware that not all firms will be able to make a certain decision about whether they need approval for the individual in charge of their legal function, therefore plans to issue a consultation paper to consider the range of views as to what the scope of the regime should be in this particular area. However, as there will not be time to finish consulting on this point prior to the introduction of the regime, the FCA wishes to clarify current expectations, which are that those firms who have taken decisions in good faith about approval of an individual (or not, as the case may be), do not need to change their approach for the time being.
Once the FCA has completed its consultation on this issue, it will seek to ensure that it is clear what is required by firms in relation to their legal function, and states that it will provide information on any transitional measures that may be needed for firms to adjust their current arrangements.
4. What's next?
Following issuance of final rules on various outstanding issues, including regulatory references and wholesale activities, in the early part of 2016, the final date for notifications of approved persons being put forward as senior managers to the regulators is 8 February 2016, with the full SMR regime to enter into force for all relevant firms on 7 March 2016.
If you require further information on anything covered in this briefing please contact Julia Hartley (email@example.com; 020 3375 7551), Grania Baird (firstname.lastname@example.org; 020 3375 7443), Katy Ruddell (email@example.com; 020 3375 7343) or your usual contact at the firm on 020 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2016