Sun. Aug 18th, 2019

Planet Compliance

Innovation & Regulation in Finance

FCA clarifies overall responsibility of legal function under Senior Managers regime

5 min read

The FCA has published a statement to clarify its supervisors intentions with regard to the overall responsibility for the legal function under the Senior Managers Regime. The statement describes the FCAs plans to consult on this area; it also makes clear that firms that have sought to make decisions in good faith about whether or not approval is needed, on the basis of the FCAs published rules and other communications, should not need to change their approach in the interim.

The Regulator outlines in its statement that “in July 2015 we, the FCA, made final rules for a new accountability framework for individuals working in banks, building societies and credit unions. In our commentary on the new Handbook text, in CP15/22, we 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). We described someone with ‘overall responsibility’ in terms of 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.’

We also made clear that it will be important for firms 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 that we prescribe. With this in mind, we explained that ‘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.’

Since publishing our final rules, it has come to our attention that significant uncertainty exists in the market regarding one particular area for which an individual might have overall responsibility: a firm’s legal function. While we had not included such a role in our indicative list of business activities and functions, responsibility for the management of the legal function was not excluded, and we took the view 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.

We now recognise that some confusion exists in this area and our communications have not necessarily been sufficient to ensure that firms have full clarity. For example, when discussing this issue at events, we have sometimes talked about the activity of providing legal advice to a firm’s Board – a task which would not automatically bring a General Counsel within the scope of the new accountability regime. Rather we should focus attention on individuals having overall responsibility for a firm’s legal function.

It has also been brought to our attention that there are a range of opinions on how desirable it would be for someone with overall responsibility for a firm’s legal function to be brought within the Senior Managers Regime (for that particular role). For example, if individuals are approved for the role, we know that some industry participants are concerned about a possible perception that a General Counsel might be required or pressured by regulators to disclose privileged information. We recognise both that uncertainty exists and that there is a need to consider the range of views as to what the scope of the regime should be in this particular area.

With that in mind, we plan to issue a consultation paper openly seeking views on the pros and cons of capturing individuals with overall responsibility for the legal function within the regime. But, as there will not be time to consult properly on this before the regime comes into force, it is also important to clarify our expectations in the interim.

We recognise that at least some firms may not be in a position to make a decision, with full certainty, about whether or not they need approval for the individual in charge of their legal function. While in some cases, the individual in question may clearly require approval – for example, if they have responsibility for another area that is clearly captured, such as risk management – in other cases, it will be less clear. With that in mind, any firm that has sought to make a decision in good faith about whether or not the individual in question requires approval, on the basis of the published rules and our other communications, should not need to change their approach in the interim.

Once our consultation is complete, we will seek to ensure that it is entirely clear what is required in this area – and we will provide information on any transitional measures that may be needed for firms to adjust their arrangements. In the interim, it is our intention that this statement should provide firms with sufficient clarity about our supervisory expectations as to allow us to take the time required to consult fully on this issue.”

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