GCs To Be Excluded from SMR : Unsurprising but Worrying

Trevor Clark


Following a consultation it launched in January of this year, the Financial Conduct Authority (FCA) has decided to exclude the Head of Legal of all of the banks, insurance companies and other financial institutions that it supervises from Senior Manager accountability under the Senior Managers & Certification Regime (SMR). You can access the FCA’s policy statement here: https://www.regulationtomorrow.com/eu/fca-policy-statement-19-20-optimising-the-senior-managers-certification-regime-and-feedback-to-cp19-4/

A group of us at UCL Laws submitted a detailed response to the consultation. In that response we objected to the proposal to exclude the Head of Legal from SMR. Our response paper drew on both our own research and learnings from other scholarship; we argued that inclusion would help strengthen the position of in-house lawyers within regulated financial firms and deliver benefits both for the firms themselves and for the economy and society. We found that the arguments made against inclusion during the consultation misunderstood the broad-ranging and significant role that most in-house legal departments play in those firms. The FCA’s grounds for exclusion were not in our view compelling, not least the argument that legal professional privilege should be given super-priority over the public interest arguments in favour of inclusion. You can read our detailed response here: https://www.ucl.ac.uk/laws/news/2019/apr/ucl-laws-academics-submit-response-fca-consultation-senior-manager-and-certification  and Richard’s earlier blog piece here: https://lawyerwatch.blog/2019/04/16/should-in-house-lawyers-hide-from-senior-manager-responsibility/

We lost. Our objection was in the minority. And we are not surprised at the outcome. However, we do not intend to let the matter rest here. We are currently reflecting on what we might do to keep the challenge alive. There are important issues of principle here that have not been given proper weight.

For today’s purposes I merely want to make a couple of observations about the consultation process itself:

1. The FCA’s Policy Statement (PS19/20) confirming its decision to exclude the Head of Legal from accountability under SMR is lacking in principled reasoning. The FCA gives minimal reasons for its decision, citing legal professional privilege (LPP) as the primary grounds for exclusion, without providing much further colour (albeit there is some limited treatment of the topic in the FCA’s consultation paper CP 19/4). This is notwithstanding the detailed case we made as to the problematic nature of LPP;  both generally as a principle and specifically in the context of in-house lawyers working in regulated financial firms.

2. The FCA has not responded to any of the arguments we made in our response paper. It simply notes that three responses disagreed with the proposal to exclude on “public interest grounds” without identifying or responding to those grounds. [So, two others agreed with us at least].

3. The Policy Statement says that those objecting to the proposal to exclude on public interest grounds were in the minority. See paragraph 2.13. Policy decisions on important matters that affect the public interest – in this case we are talking about a key measure introduced after the financial crisis to help ensure banks and other financial institutions were made safer by making their senior managers properly accountable for their conduct – should not be made on the basis of how many vote in favour of a proposal versus how many vote against.


4.There were 29 responses in all. 26 in favour, 3 against. So overwhelming support you might say. But we need to look closer at who responded. There are 24 names in the list of the non-confidential respondents attached to the Policy Statement. The majority of the non-confidential respondents – 13 – are organisations that represent financial institutions operating in particular segments of the financial markets. A quarter are organisations that represent lawyers; in the round, including the Law Societies of England and Wales and Scotland, or in-house lawyers, such as the Association of Corporate Counsel and the GC100. The others are individual financial institutions in the main. Only one non-confidential response (ours) came from an academic institution. We’ll leave the reader to decide if these are responses of poachers rather than gamekeepers.

We have concerns about the rigour and transparency of this process and the lack of a reasoned and principled conclusion. We find this particular outcome surprising from a process perspective given recent press reports drawing attention to concerns about regulatory capture. For an example:  https://www.ft.com/content/3d20082a-489c-11e9-bbc9-6917dce3dc62

As I have said, we are not surprised by the outcome. As the cliché goes, turkeys do not tend to vote for Christmas. However, the process needs to be as rigorous, principled and as transparent as possible, given the import of the issue at hand.

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