FCA announces consultation on role of GCs in regulated firms

29 January 2016

We are so accustomed to dissembling by politicians and others in public life that it is heartening to see individuals or institutions that are prepared to acknowledge responsibility for their mistakes.

Perhaps even more remarkable is the sight of individuals or institutions that are prepared to acknowledge responsibility for their mistakes.

It is therefore encouraging that the FCA has recently announced, in the context of the responsibility for legal functions under the senior managers regime (SMR), that "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." Whilst firms are entitled to expect the regulator to be open and co-operative with them, it is still laudable that the FCA has been so candid as to its responsibility for the confusion in this area.

The statement

The FCA explains in its announcement that in the light of this perceived confusion it has decided to issue a statement to clarify its "supervisory intentions" concerning the "overall responsibility for the legal function under the Senior Managers Regime".  The FCA goes on to state that "… 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". The FCA also acknowledges "…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".

The statement concludes by noting that "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." The FCA confirmed that in the interim "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"

Wider application

No doubt GCs in those firms caught by the SMR will closely watch how the FCA's consultation develops.  However GCs in firms across financial services should be aware of the implications of this consultation because, as of 2018, the SMR will apply to all firms that are regulated by the FCA.  

It is intended that the FCA will apply SMR in a proportionate way when it is extended to other firms from 2018. As yet there is no clarity as to what that might mean, particularly in the context of the allocation of regulatory responsibility for legal functions within regulated firms, but it does leave open the possibility that the SMR will look considerably different for smaller firms. Consequently it may be that GCs across financial services find that their roles are not automatically brought within the SMR. 

That may not be the end of the story. Unlike GCs in large banks who are likely to have just one role, GCs in other firms may well be undertaking other roles that bring them within the SMR. Additionally, and even if they do not need to hold a specified Senior Manager Function, GCs may still be caught by the certification regime (which is also being extended in 2018 from deposit takers to everyone else).

Insurers and SIMR

The FCA's announcement was solely focussed on SMR. However insurers should be aware that the FCA's evolving thinking in this area and the output from the consultation could feed into its approach to the application of its approved persons regime for the insurance sector (which is designed to support the introduction of the Senior Insurance Managers Regime (SIMR)).  This may be particularly significant in firms where the legal function has some responsibility for activities such as claims handling.  Moreover insurers will need to be aware that as with all firms the SMR will extend to the insurance market at some point in 2018.

The impact of GCs on conduct activities

Most developments concerning the introduction of the SMR or SIMR have been announced by the PRA and FCA at the same time.  It is therefore notable that the PRA has not made an announcement in conjunction with the FCA on this topic. Whilst that may be because the PRA does not feel culpable for any confusion in the market, it may also be because the PRA does not perceive that the role of a GC is one that has a prudential impact.  The inference is that the FCA believes that the role of a GC is one that has, or at least has the potential to have, an impact upon conduct activities.  Ultimately it may well be this potential impact upon conduct activities that will be a determinative factor in deciding whether a GC will be caught by the SMR now or in the future.

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