Removing head of legal from the senior managers regime and other changes: new FCA consultation paper CP 19/4


Removing the requirement for the Head of Legal to hold a Senior Manager Function

The question whether a Head of Legal should hold a Senior Manager function was initially raised hiatus due to Brexitby the FCA in January 2016 but last year was put on a .

The FCA has now proposed that the Head of Legal will no longer be required to hold a Senior Manager Function. The proposal was primarily due to the conflict between privilege in a Head of Legal’s legal advice and a Senior Manager’s accountability for preventing a breach, but the FCA also considered the conflict between the SRA principle of confidentiality and the FCA’s Senior Manager Conduct Rule requiring notification.

However, if a Head of Legal holds other Senior Management functions, they may still be performing a Senior Management Function. For instance, if the Head of Legal is also Head of Compliance, the FCA expects there to be a clear demarcation of responsibilities between the two roles and for the Head of Legal to be considered a Senior Manager in relation to their role as Head of Compliance.

Further, the Head of Legal will still fall under the Certification Regime as either a Material Risk Taker or a Significant Management Function and so will still be required to undergo annual suitability assessments.

Amending the retail intermediary revenue criterion for Enhanced tier firms

SMCR applies differently to the three categories of firms: (1) Core firms, (2) Limited Scope firms, and (3) Enhanced firms, with additional rules and responsibilities applying to the latter.

To ensure that the Enhanced regime applies fairly to all relevant firms, the FCA proposes to extend the criteria for the Enhanced regime to include retail intermediaries with regulated revenue of more than £35 million (based on a three year rolling average) who do not complete the RMA-B regulatory return. Following an initial notification, firms will have 1 year to implement the requirements of the Enhanced regime.

All relevant firms will need to calculate whether they have over £35 million before 1 September 2019, and notify the FCA, if that is the case.

Amending the scope of the Client Dealing Function

When introducing the Certification Regime, the FCA broadened the scope of the Client Dealing Certification Function from the existing Customer Function (“CF30”) under the Approved Persons Regime. The CF30 function only covered advice and investment activity but this was broadened in the Certification Regime from a retail context to include individuals dealing with professional clients and eligible counterparties.

In this consultation, the FCA proposes to amend the scope of the Client Dealing Function further. The FCA proposes to exclude staff who interact with clients on a purely administrative capacity from the Client Dealing Function, provided they have no scope to choose, decide or reach a judgement on what should be done in a given situation, and whose tasks do not require the use of significant skill.

Applying disclosure rules to all executive directors at Limited Scope firms

Currently, under the rules that apply to Limited Scope firms, certain executive directors do not need to be approved as a Senior Manager. As a result, the current Senior Manager Conduct Rule 4 (“SC4”), which requires managers to disclose information to the FCA or PRA which they would reasonably expect to receive, applies to all non-executive directors of Limited Scope firms but not to the executive directors, who are usually more involved in running the business.

Consequently, to ensure a consistent standard between executive and non-executive directors, the FCA proposes that SC4 should apply to all directors at Limited Scope firms.

Next Steps

The consultation closes on 23 April 2019 and the FCA will is expected to publish its policy statement and rules in Q3 of 2019.

Co-authored by Fatima Butt