Are general counsel in danger of becoming victims of their own success? Over the years they have fought hard to be trusted advisers, not just colleagues who says ‘no’ to everything because it is too risky. But such is their growing importance and influence, the Financial Conduct Authority is pondering whether GCs in financial services should be subject to greater accountability.
The City watchdog’s consultation on including the head of the legal function in its Senior Managers Regime (SMR), which came into force last year, closed in January. At present the regime – which holds top executives responsible for failures on their watch – applies to banks, building societies and credit unions. It will be extended to all regulated financial services firms from 2018.
The authority is expected to announce its decision in early summer. However, Chris Whittaker, an associate at international firm DLA Piper, told a regulatory compliance conference in London last week that his firm expects that GCs will be included in the regime – although he predicted the FCA will adopt a ‘more tailored approach’.
That is a potentially ominous straw in the wind.
The Law Society has warned that including the legal function in the SMR has the potential to put the lawyer in a conflict of interest with their employer, and could affect the lawyer’s ability to provide full and frank advice. In some circumstances GCs may, by virtue of their inclusion, feel obliged to disclose legally privileged information. The regulatory burden on in-house solicitors would thereby multiply, as they would have to comply with FCA regulations as well as be accountable to the Solicitors Regulation Authority.
The Association of Corporate Counsel Europe, an international body with more than 40,000 members, notes that European lawyers may also be subject to the Council of Bars and Law Societies of Europe code of conduct.
Senior managers will be significantly less likely to bring matters to the GC’s attention for fear the GC feels the information has to be disclosed. A lawyer’s concerns about personal liability can affect their judgement, and make them less likely to ‘proactively’ offer advice, the association adds, warning that the regime would create an ‘overall climate of inhibition of legal advice’.
Echoing the Society’s concerns about legal professional privilege, the Building Societies Association says it would be ‘inappropriate to risk the foreseen (and potentially unforeseen) consequences of a regulatory change that could jeopardise a centuries-old fundamental principle of law’.
The association acknowledges that the fact a fundamental principle is longstanding does not make it sacrosanct – but ‘it does mean that we should tread carefully before we amend it or take steps that might have the unintended consequence of prejudicing it’.
In a joint response, the Association for Financial Markets in Europe (AFME) and the British Bankers’ Association (BBA) say their members continue to believe the requirement to designate the individual responsible for the management of the legal department as a senior manager ‘is plainly not justified by law nor by policy considerations’.
The associations welcome the FCA’s recognition that section 413 of the Financial Services and Markets Act 2000 protects legal privilege by providing that no power under the act can be used by the authority to require the disclosure of ‘protected items’. The application of the regime ‘does not and cannot remove legal privilege’, the FCA says in its discussion paper.
But they are also confused: ‘If the FCA accepts that the activity of giving legal advice is one that is protected from its scrutiny for fundamental reasons of public policy recognised by the courts and explicitly endorsed by parliament in the regulatory context, it is unclear why the FCA considers there to be any justification for requiring an individual to be personally accountable to it for the oversight of that activity.’
It is notable that arguments in favour of including the legal function in the regime appear only to be found in the FCA’s discussion paper.
The FCA says the words ‘activity, business area or management function’ in the FCA handbook cover everything that a firm does, including internally facing functions such as legal. Systemic failings in the management of the legal function could create risks that, in turn, impact the wider business. The FCA insists it does not need to have access to legally privileged material to include the head of the legal function in the regime.
So what happens if GCs are included? They would be subject to regulatory vetting, Whittaker explained. ‘The FCA would consider an applicant for the role of GC and make a decision on whether that person is fit and proper for that role,’ he said.
GCs would also be required to produce a ‘statement of responsibility’, clearly listing all the areas for which they are responsible. There are concerns about what would be included and excluded from this statement, Whittaker noted.
The AFME and BBA believe certain protections are ‘critical’ to mitigate the significant risks that would arise.
They say the FCA should ‘clearly accept’ that it does not have the power to and will not seek to regulate the substance of legal advice given by the legal department or a bank, or any other lawyer.
The authority should make it clear that the senior manager is accountable for the adequacy of the resourcing of the legal function but not for the oversight of the protected activity of giving legal advice. And it should undertake not to use privileged material against an in-house lawyer in an enforcement case where the bank chooses to waive privilege.
It should make it clear that it will not put pressure on a bank to disclose privileged material, and will not draw adverse inferences against individuals – in particular against the senior manager accountable for the legal department – where a bank chooses not to waive privilege.
The authority should make clear it has no intention of undermining the duty under the SRA Code of Conduct for lawyers to act in the best interest of their clients.
Finally, the associations highlight the lack of FCA guidance that GCs and others can use to understand what the watchdog expects of the senior manager accountable for the bank’s legal department, ‘given the historical recognition of that department as falling outside the scope of regulation’.
However, even if the authority chooses not to designate the GC as a senior manager, they are still caught in its certification regime. This applies to ‘material risk-takers’ (staff subject to the Dual Regulated Firms Remuneration Code and other staff who pose a risk of significant harm to the firm or any of its customers). All employees in the legal department, except ancillary staff such as personal assistants, are now subject to the authority’s conduct rules.
‘Sadly, this is not a light-touch regulatory regime in the slightest,’ Whittaker said.
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