FCA confirms final SMCR rules regarding Head of Legal, scope of client dealing function and other matters
In PS 19/20, published on 26 July 2019, the FCA has confirmed the final rules that will exist in respect of the matters it consulted on in CP 19/4 and in each case, the FCA will be proceeding in accordance with its proposals.
(For more information regarding CP19/4, see our previous blog post: SMCR: narrowing the definition of the client dealing function.)
Excluding the Head of Legal from the Senior Managers Regime
The FCA has confirmed that it intends to proceed with its proposal to exclude the Head of Legal from the requirement to be approved as a senior manager. The FCA states that its view “remains that the benefits that normally result from applying the SMR will be substantially reduced by the restrictions arising from legal privilege. The remaining benefits are not sufficient to justify applying it.”
The FCA further notes that it considers that “including the Head of Legal in the Certification Regime and applying our Conduct Rules delivers most of the benefits of including these individuals within the SMR, without compromising the law of legal privilege.”
Defending alleged conduct rule breaches
The FCA states that it does not agree with concerns raised by some respondents that applying either Certification or Conduct Rules to the Head of Legal may put a firm under pressure to disclosed privileged material in order to enable the Head of Legal to defend themselves against an alleged conduct rule breach. The FCA notes that conduct rule SC4 (“You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice”) does not require the disclosure of legally privileged communications and will not apply to the Head of Legal since they will no longer be an SMF.
Banks subject to dual regulation
The FCA confirms that banks will have until 9 December 2019 to complete certification for the Head of Legal.
Key function holders within insurers
The FCA also confirms that, whilst it is removing the requirement for the Head of Legal to be approved as a Senior Manager, it will not be excluding lawyers from performing a Senior Management Function and notes that dual regulated insurers may wish to consult the PRA for guidance on whether or not the Head of Legal should be treated as a key function holder.
As we indicated in our previous blog, we agree with the FCA’s analysis regarding the challenges that legal privilege would present were the Head of Legal to be an SMF and as such, we welcome the FCA’s confirmation of its previously indicated view. Notwithstanding this, we would again highlight the potential challenge that an individual Senior Manager with line management responsibility for the Head of Legal may face in discharging their own duty of responsibility without breaching legal privilege.
Narrowing the scope of the client dealing function
The FCA has also confirmed that it will go ahead with its proposal to narrow the scope of the client dealing function such that it excludes those staff whose interaction with clients is in a purely administrative capacity.
The FCA states, however, that “the amended rule has been drafted in a way that provides firms with the flexibility to exercise judgment on whether a role requires certification.”
We remain of the view that this change is sensible, in that it limits the application of the certification regime to those individuals whose role has the potential to cause harm to the firm, its clients or the wider financial markets. However we would re-emphasise the points we made in our previous blog, namely that firms will need to:
- Manage the process of communication with impacted individuals carefully to as to avoid creating the impression that their roles are regarded as being of no importance;
- Ensure their control environment is sufficiently robust to prevent any individual who has been deemed to be outside the scope of the regime from inadvertently performing activities for which certification would be required;
- Consider whether there is a rationale for including individuals within the certification regime – for instance, in order to provide greater flexibility in resource planning.
Application of the Certification Regime to systems and controls roles
The FCA has confirmed that it will be proceeding with its proposed guidance for situations in which a Senior Manager holds an SMF and also performs a Systems and Controls role. The FCA notes that this change will only affect core and limited scope firms, as within an Enhanced regime firm, such an individual would need to hold the specific Systems and Controls SMF. The FCA is implementing this change through a revision to its rules so as to include the holder of CF28 (the current Systems and Controls function) as an example of an individual who performs a Significant Management Certification Function (that is, rather than creating a specific category of certified person).
This change provides additional clarity over the status of those individuals who currently hold CF28 and, given the importance of this role, it is hard to argue against the inclusion of these individuals within the Certification Regime.
The majority of firms are likely to have already completed (or at least be well advanced with) their population identification and mapping; this change will need to be factored in so as to ensure that such individuals are correctly categorised under the new regime.
Applying SC4 to non-approved Executive Directors at limited scope firms
The FCA is going ahead with its proposal to extend the scope of senior manager conduct rule SC4 (which, as noted above, requires the disclosure of information to the FCA or PRA of which they would reasonably expect notice) to non-approved Executive Directors at limited scope firms.
As we previously stated, this change is unlikely to present any significant concern or challenge for firms who have a culture of openness and honesty and who recognise and understand the drivers behind SMCR. Firms who are impacted by this change may, however, need to revise the content of training material aimed at non-approved Executive Directors such that it covers this change and clarifies the scope of the obligation to disclose information to the regulators.
Amending the intermediary revenue criterion for the Enhanced regime
The FCA is proceeding with its proposed change to one of the criteria that would bring a firm within the scope of the Enhanced regime. This change will apply to firms who do not currently complete an RMA-B return and who have over £35M in relevant business revenue.
This change will only impact on a small number of firms with specific permissions profiles and we agree that it makes sense to bring all firms within the same standard.
All firms who are subject to the Core regime will need to ensure they have a means of identifying when and if they are approaching a relevant threshold in order that they can notify the FCA as and when necessary and implement the additional measures necessary to ensure compliance with the Enhanced regime.