Heads of legal not caught under Senior Managers regime, FCA confirms

Out-Law News | 29 Jul 2019 | 4:13 pm | 2 min. read

The UK’s Financial Conduct Authority (FCA) has confirmed that heads of legal for FCA solo-regulated firms will not have to be approved as ‘senior managers’ under the Senior Managers and Certification Regime (SMCR).

In its final rules for firms regulated by the FCA which will join the SMCR in December 2019, the FCA said heads of legal would fall under the certification regime and would be subject to the FCA’s conduct rules as a result.

Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: “These rules give such firms greater certainty and clarity as to the final requirements and relevant forms to complete – all  welcome news for  firms’ project teams, as they approach the final stages of their implementation process.”

Budd said it was good to resolve the “much debated” question over the requirements for heads of legal.

“The FCA has clarified that the procedure to certify the head of legal will be the same as for other certified staff, so firms have a year to do so and must ensure that their certification is carried out annually as for other certification function holders,” Budd said.

The FCA said it found that it was not possible to effectively apply senior manager rules to heads of legal due to the laws governing legal privilege. However, heads of legal would be identified as a senior manager if they performed another senior management function, such as chief operations officer or head of compliance, and lawyers are not excluded from performing such a role.

It disagreed with some respondents to its consultation on the rules, who thought that applying certification or conduct rules to the head of legal would put a firm under “improper” pressure to disclose privileged material, as the relevant senior manager conduct rule does not require the disclosure of privileged communications and heads of legal would not be considered as senior managers.

The rules, published as a policy statement (348 page / 4.8MB PDF) also clarify the requirements and scope of the certification regime and extend Senior Manager Conduct Rule 4 (SC4) to all directors in ‘limited scope’ firms.

SC4 requires senior managers to “disclose appropriately any information of which the FCA or PRA would reasonably expect notice” and will apply to all non-SMCR approved non-executive directors.

In limited scope firms – including sole traders, limited permission consumer credit firms and other businesses which are not primarily financial – executive directors will not need to be approved as senior managers. As a result SC4 would apply to non-executives but not executive directors in these firms.

The FCA said it was important for both executive and non-executive directors to disclose issues to support the effectiveness of the SMCR and reduce of harm to consumers, firms and market integrity.

Firms affected by the changes will move to the SMCR on 9 December. For claims management companies operating on a temporary permission at that date, the rules will apply from the date the firm is fully authorised.

Budd said the FCA announcement was also a reminder to banking firms that certification function staff, which now will include heads of legal, must be fully certified by 9 December.