02 February 2016

Hot on the heels of our previous SM&CR update in the Winter edition of Authorised Fund Horizons, we bring you further news on this topic, specifically in relation to individuals with overall responsibility for a firm’s legal function. For many firms, this is the ‘General Counsel’ or ‘Head of Legal’. There are of course, firms where the overall responsibility for the legal function sits with the ‘Head of Risk’ or ‘Head of Compliance’ or in some cases, the ‘Head of Finance’ or the ‘Chief Executive’ - all of whom will be performing some senior management functions (SMFs) under the SM&CR.

What’s new?

The FCA has published a statement on its website confirming that:

  • it plans to consult on the pros and cons of capturing individuals with overall responsibility for the legal function within the regime; and
  • firms that have sought to make decisions in good faith about whether or not approval is needed for such individuals, on the basis of the FCA’s published rules and other communications, should not need to change their approach in the interim.

Why has the FCA published the statement?

In short, the legal function was neither included nor excluded in the list of prescribed SMFs that require pre-approval. This has caused some uncertainty. The FCA stated that, ‘While we had not included such a role in our indicative list of business activities and functions [that require pre-approval as SMFs], responsibility for the management of the legal function was not excluded”, and that the FCA “… took the view that many firms would need to identify the role as an overall responsibility SMF [an SMF 18] when allocating senior management responsibilities if it was not covered by another specific SMF in the firm.”

What’s the confusion?

The FCA is aware that significant uncertainty exists in the market and that for example, if individuals are approved for a SMF role, some industry participants are concerned about a possible perception that a General Counsel (GC) might be required or pressured by regulators to disclose privileged information. In other words, there is a possible tension between the GC’s duty to their client (their employer) and the GC’s duty to the regulator.

What’s next?

The FCA stated that, as there will not be time to consult properly on this issue before the regime comes into force (on 07 March 2016 – for banking firms), it is important for the FCA to clarify its expectations in the interim; that “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 the consultation is complete, the FCA will “seek to ensure that it is entirely clear what is required in this area” and will “provide information on any transitional measures that may be needed for firms to adjust their arrangements.”

How will this affect firms and GCs/Heads of Legal?

The banking SM&CR will come into force on 07 March 2016 and the government intends to extend the SM&CR to all authorised firms during 2018. The role of GC/Head of Legal is likely to come into sharp focus. It will be interesting to see how the relationship between the GC, the firm and the FCA is played out - and whether this leads to a shift in how some firms structure their decision making processes (and how the GC participates in that process) or whether this leads to firms seeking to restructure the roles or reporting lines of senior in-house counsel.

Watch this space

GCs and non-lawyers with overall responsibility for firms’ legal functions will no doubt watch the developments with interest. The FCA consultation will be a great opportunity for GCs to engage with the FCA and the industry on the role of the GC.

If you would like any further advice or assistance in relation to the SM&CR please send your queries to Victor Ondoro or James Green in the first instance.

Key contact

Tom Dunn

Tom Dunn Partner

  • Head of Regulated Funds and Financial Services
  • Regulated Funds
  • Financial Services

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