Jean-Yves Gilg

Editor, Solicitors Journal

The risks of over-engineering the SMR for in-house lawyers

The risks of over-engineering the SMR for in-house lawyers


Iain Miller discusses the FCA's proposals to widen SMR culpability to a profession bound by professional privilege and overburdened by regulation

The Financial Conduct Authority (FCA) openly admits there is a lack of clarity over the role of in-house lawyers in its new senior managers regime (SMR).

The City watchdog talks about 'confusion' and 'uncertainty' about whether or not the person in charge of the legal function should be regulated as part of a new policing policy targeted at key decision-makers in financial sector organisations.

The SMR comes in the wake of the 2008 banking crisis, and puts in place a certification process to ensure that executives are 'fit and proper', and to hold 'those responsible' to account.

There is now a lack of clarity because - then as now - key decisions by financial sector firms are invariably taken in the full knowledge of (or with advice from) in-house lawyers.

So, the FCA has started consulting on what to do. But there are some clear risks of over-engineering regulation:

  • Members of the legal profession are already subject to their own codes of conduct and enforcement - will these be consistent with yet another layer of regulation?

  • When the legal profession itself is trying to evolve to higher standards of ethical behaviour, will the SMR just be another exercise in 'tick-box' compliance?

  • As advisers, should lawyers be subject to the same regulatory environment as the executive?

  • Is it desirable to subject senior lawyers to a new regulatory regime, given the principles of legal privilege?

Code of conduct

The SMR consultation could result in financial sector lawyers finding themselves in the regrettable situation of being answerable to two different sets of regulators.

In-house lawyers - be they solicitors or barristers - have personal responsibilities through their professional regulators, the Solicitors Regulation Authority (SRA) or the Bar Standards Board.

It is implicit in the FCA's consultation that it does not consider the existing regulation of legal professionals adequate for its purposes, and that if the legal profession had an improved sense of ethical conduct, the FCA may not have felt the need to consider regulation.

However, we are about to see significant changes in the approaches to regulation in the legal sector; the SRA is consulting on a new code of conduct, which is likely to be more ethics-based, which will put into practice the SRA's competence statement, published last year.

At its heart is the re-emphasis of personal responsibility of lawyers for their own conduct and indeed their own competence. It is hoped that the changes will go a long way to over-turning the tick-box culture of compliance.

Who is the decision-maker?

In most cases, lawyers are advisers who provide a range of options and outcomes to executives.

Many will be keen to say they are therefore not part of the C-level suite that makes the final decisions around strategic direction or financial matters, and should not face more regulation.

The SMR will need to tackle any ambiguity over role titles and decision-making within legal job titles; whoever is charged with responsibility for giving advice to the board (for example, the general counsel) may be entirely different to the person who has ultimate responsibility for managing or supervising the legal function (and who may have other areas of responsibility, such as head of risk).

Legal privilege

FCA regulation of those with overall responsibility for a firm's legal function has the potential to conflict with the principles of legal professional privilege (LPP) - and potentially other concepts of the relationship between a lawyer and the client.

While other senior managers could be required to show that they took reasonable steps in situations when a company may have breached its obligations - perhaps by providing evidence from emails or board meeting minutes - complying with the statutory duty of responsibility will be significantly more difficult for lawyers.

There would, therefore, appear to be significant problems in aligning the entitlements of privilege against the SMR's primary objective of transparency.

A number of initiatives mean that 2016 will be a landmark year for legal regulation, and it is far from clear whether the FCA's approach to in-house lawyers will reflect the level of regulation they already have.

Senior lawyers may also face the added hurdle of having to restructure their in-house teams - and create separate investment and retail legal teams to conform to new Bank of England regulations.

The SMR went live this month, and the FCA consultation paper looks set to follow soon. A wide range of market opinion is expected in response to the paper once published.

In the interim, no changes have been made, and it has been left to firms to decide 'in good faith' whether or not their top lawyers should be certified under the regime. SJ

Iain Miller is head of regulation at the law firm Bevan Brittan