The FCA has produced a response to its sixteen-month-old consultation on the relationship between the Senior Manager Regime and the legal function. It is another consultation. In it, they propose “excluding the Legal Function from the Overall Responsibility Requirement.” The reasons for so doing, appear to centre on:
- The bulk of respondents to their last consultation regarding the in-house role as purely advisory (we are not told who these respondents are, though I was one).
- It would or might undermine legal professional privilege, particularly legal advice privilege. Or, legal professional privilege would inhibit the effectiveness of the senior manager regime being applied to legal.
- It might undermine independence. Some consultees argued, “Personal liability may affect lawyers’ judgement, making legal teams more conservative and less likely to pro-actively offer advice. This may also cause them to avoid asking necessary questions or investigating matters if information that comes to light increases their personal exposure under the SMR.”
- Adequate protection was provided by Individual Conduct Rules and the Head of Legal falling under, “the Certification Regime as either a Material Risk Taker or Significant Management Function”.
A more detailed analysis of the consultations arguments will have to wait for another day. But it is worth mentioning an example to challenge the strength of these arguments. That example comes from the ongoing trial of Barclays executives. In a recent report in the FT it is reported that, “The UK’s Serious Fraud Office alleges that four defendants, including John Varley, the bank’s chief executive at the time, secretly paid £322m to Qatar in return for its investment in two capital calls, which prevented Barclays from needing a UK government bailout. The SFO says that “advisory services agreements”, or ASAs, struck with Qatar at the time were just a “smokescreen” to funnel extra money to the Gulf state.”
I noticed this brief passage from the same report:
Judith Shepherd, an in-house lawyer at Barclays, warned another of the four defendants, Richard Boath, that unless Sheikh Hamad could show what services he could provide to the bank, “you are going to end up in front of the Fraud Squad explaining why”.
Mr Boath, who at the time was Barclays’ investment bank’s European head of financial institutions, replied: “No, I’ve got a house in Brazil. There’s no extradition treaty. I’m off.”
I make no criticism at all of Ms Shepherd. We do not know what happened next. She may have raised her concerns with the proper organs of the company. The circumstances of the deal may have been properly investigated before the contract was drafted and signed. And so on.
That said, other parts of the story raise questions about a memo the prosecution allege was “seriously misleading” Although it is not clear who drafted the memo a different in-house lawyer was, we are told, involved in finalising the ASA signed by John Varley. They asked a senior executive at the Bank to sign it. This lawyer is reported as saying this, again from the prosecution case:
I said well we’ll fill in the number when it’s agreed,” the lawyer said in a phone call to Mr Boath. He replied: “I hope that never emerges.”
Again, we should not rush to judgment on the lawyers (who are not on trial). That point is underlined by the prosecution alleging the, “defendants misled their internal lawyers and colleagues to get sign-off on the ASAs, pretending that it was a “standalone” agreement.” (See here).
What these stories should do, however, is give pause for serious thought about whether diminishing the Senior Managers regime’s purchase on the legal function is a wise step. Think back to the argument made above: “Personal liability may affect lawyers’ judgement, making legal teams more conservative and less likely to pro-actively offer advice. This may also cause them to avoid asking necessary questions or investigating matters if information that comes to light increases their personal exposure under the SMR.” In this case, I would suggest, such liability might have made proactivity and care in the papering of any deal more not less of a likelihood.
As I say, detailed consideration of the arguments and counter-arguments for SMR accountability are for another day, but the idea that the lawyers in the above case might have behaved a bit more cautiously, a bit more conscious of the risks of the behaviours attached to the Quatari deal, and thought long and hard before papering an allegedly misleading deal might well be strengthened by a clear line of accountability over the legal function. Even when advising one is also assisting. The claim that the legal function is purely advisory is an illusion. And in this case there is no doubt: lawyers helped paper the deal – ain’t nothing purely advisory about that. They may well not have done anything wrong on this deal, still less anything criminal, but a reasonable starting point is that someone senior should certainly be accountable for the legal work done on it. Interestingly, if the defendants are innocent – as we should presume they are, a more independent, accountable legal function may have helped them avoid their current predicament too.