The Senior Managers Regime and the Legal Function – an argument for why the legal function shouldn't be exempt

By Catherine Davey

I must admit, reading the recent discussion paper from the FCA on the application of SMR to legal functions made me chuckle. It made me reflect on a recent discussion with a fellow lawyer about lawyers’ instinctive distrust for “process” and reminded me how disjointed “legal” and “the business” often still are.

This is an important debate for not just for financial services but in-house legal functions across the board and goes to the heart of the purpose of the legal function.

Given the "no gaps" principle, personally, I see no reason why the legal function should be afforded any “special status” under SMR or why the management of this function should not be under the same scrutiny as any other business support function. That is not to say the structure and approach must be the same as other functions but the legal function does need to be held to account for the standard of its skills, processes and resources in the same way as any other function would.

The role of the in-house lawyer continues to go through considerable change through developments in regulation and technology and the greater commercial skills and awareness of the current generation of lawyers. When I studied law over 20 years ago (now I feel old) the concept of practical commercial legal advice was still a novel one, now it is the norm and the debate has moved on to how we deliver that in the most effective way.

There is still a mystique about what lawyers do and to some extent that just reflects the individual skills and value that they bring to an organisation but why, as the FCA states, should that mean they are treated any differently to say accountants or HR professionals who also come with a duty to their regulatory body as well as the organisation that employs them and where necessary its regulator?

Which takes me to the point on legal professional privilege (LPP). This relates to the activities and the output from the legal function, not the governance and management of the function which is what SMR is really getting at. I may even be so bold as to argue that LPP is not relevant to the legal function at all but rather that it is really an issue for the rest of "the business". For non lawyers the privileged advice will likely go to the heart of how and why they did something. Their “reasonable steps” may surely include seeking and following the advice from the internal legal team. Does the FCA not then need some assurance that the legal team is being managed responsibly to ensure quality advice can be given, particularly as they have said they will not be reviewing the quality of the advice itself?

For me, the arguments put forward in the paper highlight the increasing need for legal functions to really know and understand what their role is (or roles are) in an organisation. Is it simply an adviser on legal matters or does it have a responsibility and accountability to ensure compliance with those legal requirements? Or, is it the policeman or overseer making sure laws are not breached, the teacher or trainer making sure others know what they should be doing? Is it the implementer that makes things happen, or the legally astute part of the business which efficiently helps the business to succeed by making sure that they provide the right input from the right people at the right time in the right way?

Whatever its role, it needs to make sure it has the right operating model to fulfil that role and have the right people, process and resources to carry it out to the best of its ability. Those are all management functions the “head of legal”, whoever that may be, should have a duty to ensure is fulfilled.

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