How will the SMCR affect in-house legal departments?

In December this year, the Senior Managers and Certification Regime (SMCR) will extend to all solo-regulated financial services firms. The regime has already been in force for insurers and reinsurers since December 2018, although many of the key compliance deadlines are set for later this year.

The SMCR is designed to improve accountability and the tone at the top at businesses following the global financial crisis. For a more comprehensive overview of the SMCR’s history and implementation, please click here.

However, the SMCR has proved controversial among in-house legal departments. Within the regime, ‘Senior Management Function 18 – Other Overall Responsibilities’ (SMF18) means a Senior Manager must be appointed to have responsibility over all areas of a business, including the legal function.

Unfortunately, this requirement creates significant difficulties for many in-house lawyers.

Why is SMF18 problematic?

The Law Society objected to the inclusion of in-house legal within the SMCR for three important reasons:

  1. The erosion of legal professional privilege; 
  2. The potential for conflict of interest between lawyers and their employers; and 
  3. Certain lawyers face double regulation. 

Businesses rely on professional privilege in order to freely consult with their lawyers while safe in the knowledge that any information they reveal can’t be used against them at a later date.

The Law Society argued that an FCA investigation could place lawyers under pressure to waive privilege, either as a regulatory obligation or to disclose documents that showed they acted appropriately as a Senior Manager.

The FCA admitted lawyers face unique challenges under the SMCR. Despite this, the regulator initially confirmed the legal department is a key management function, meaning Heads of Legal and GCs should be assigned as Senior Managers if they are accountable to the board for in-house legal actions.

This position was reaffirmed in a 2016 discussion paper, but the FCA committed to a consultation on the matter, which is currently underway.

What impact will the consultation have?

The FCA published the Optimising the SMCR and Feedback consultation paper last month. In welcome news for lawyers, the regulator has confirmed its intention to remove the legal function from the SMF18 requirement.

In other words, businesses will not have to approve Heads of Legal and equivalent roles as Senior Managers if the regulator’s current proposals are accepted. The FCA noted that in-house lawyers are already subject to the SMCR’s Individual Conduct Rules, providing the appropriate level of standards and propriety of staff without risking professional privilege or creating conflicts of interest.

The consultation paper is also exploring other proposals in efforts to optimise the regime, including:

  • Introducing a notification requirement for intermediaries that have regulated revenues of more than £35 million, bringing them into the scope of the enhanced regime; 
  • The inclusion of Systems and Controls functions within the Certification Regime; 
  • The exclusion of purely administrative roles that participate in investment activities; and
  • Applying Senior Manager Conduct Rule 4 to non-approved executive directors at Limited Scope firms. 

What happens now?

The FCA’s consultation will close on April 23rd, with a final policy statement scheduled for publication in Q3 2019. The new proposals for Heads of Legal are therefore not set in stone yet, but serious opposition to the changes is unlikely, given the regulator’s own switch in stance on the matter.

Indeed, the Law Society has already applauded the announcement, adding that in-house teams can now breathe a sigh of relief.

“We’re delighted that the FCA agrees with the Law Society that GCs should not be included in the SMCR. This will ensure lawyers remain free to provide full and frank advice to their employer without the risk of a conflict of interest emerging,” said Vice-President Simon Davis.

“We opposed these proposals because not only would they put in-house counsel at risk of a conflict of interest with their employers, they would also have meant counsels were answering to two regulators, increasing the cost of doing business.”

Nevertheless, legal functions must still educate themselves on their responsibilities under the SMCR. As mentioned, Individual Conduct Rules will apply, and appropriate training must be carried out before the relevant deadlines to ensure compliance.

Does your in-house legal department have the skills and experience to navigate regulatory changes on the horizon? Please contact me on 020 7936 2601 or via email at to discuss your recruitment needs.

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