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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

FCA consultation on further amendments to the SMCR: Head of Legal function excluded

On 23 January 2019, the Financial Conduct Authority (FCA) issued a consultation paper (CP19/4 – Optimising the Senior Managers and Certification Regime and feedback to DP16/4) on amendments and clarifications to the Senior Managers and Certification Regime (SMCR). Importantly, the FCA proposes to exclude Heads of Legal at regulated firms from the requirement to be approved as a Senior Manager. The paper also sets out several other clarifications and enhancements to the SMCR, as preparation for the extension of the regime to FCA solo-regulated firms on 9 December 2019 begins.

Legal function

The FCA has confirmed that it intends to exempt the Head of Legal function from the SMCR. The announcement follows considerable debate, including a Discussion Paper launched in September 2016 (DP16/4 – Overall responsibility and the legal function) considering the FCA's views on whether the legal function should be caught under the SMCR as part of the 'Overall Responsibility' requirement.

Following substantial feedback to its DP16/4, the FCA now proposes that Heads of Legal will not fall within scope of the SMCR. A key reason behind the decision is the fact that so much of the Head of Legal's work relates to legal advice, meaning that the laws of legal privilege may restrict the FCA from exercising its usual supervisory powers over Senior Managers.

The FCA notes that in-house lawyers would already be subject to the Individual Conduct Rules and that Heads of Legal will also be included in the Certification Regime as either a Material Risk Taker or Significant Management Function.

The FCA stresses that there may be cases where the Head of Legal performs another Senior Management Function (such as Chief Operations Officer or Head of Compliance), and this will still require authorisation. The paper also makes clear that the exclusion does not create an opportunity for Senior Managers responsible for other functions to avoid their responsibilities, including disclosing information of which the regulators would expect notice under Senior Manager Conduct Rule 4, and taking reasonable steps to confirm that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system under Senior Manager Conduct Rule 2.

Next steps

The consultation is open for responses until 23 April 2019. The FCA plans to publish its final rules and guidance in a Policy Statement in Q3 2019, with changes to take effect before the SMCR extension comes into force on 9 December 2019.