The legal function of banks and other financial institutions should be excluded from the accountability regime introduced for top executives following the 2008 crash, the Law Society said today. 

Chancery Lane was responding to a discussion paper published by City watchdog the Financial Conduct Authority on its senior managers regime (SMR), which came into force six months ago.

The SMR holds senior managers responsible for failures on their watch, exposing them to a fine or ban if they cannot justify the steps they took to prevent wrongdoing. 

In the paper, the FCA admits that its previous communications were not clear about to what extent the legal function is included in the SMR.

Currently, the FCA’s framework contains no requirement that the general counsel be designated a 'senior manager'. However, its rules require that a senior manager must have overall responsibility for every activity, business area or management function – including the legal function.

Acknowledging concerns about the inclusion of the legal function in the regime, the FCA is seeking views on the arguments for and against its current position, as well as views on whether the legal function should be included in the regime 'going forward’.

Society chief executive Catherine Dixon said Chancery Lane ‘is clear that legal functions should not be included in the regime because it can create conflict and erode legal professional privilege’.

The Society says inclusion could potentially put the lawyer in a conflict-of-interest situation with their employer and affect the lawyer’s ability to provide full and frank legal advice.

In some circumstances general counsel, by virtue of being included in the regime, could feel obliged to disclose legally privileged information, which could impact on the advice given and on the ability to ensure a fair trial, it added.

At the same time, the regulatory burden on GCs would double, as they would have to comply with FCA and Solicitors Regulation Authority rules.

As the Gazette has reported, as well as concerns about privilege the FCA’s regime could lead to GCs quitting financial institutions if they become accountable.

Highlighting reasons to keep the head of the legal function in the regime, the discussion paper states that, in the FCA’s view, the words ‘activity, business area or management function’ in its handbook cover everything that a firm does, including internally facing functions such as legal.

Systemic failings in the management of the legal function could create risks that can, in turn, impact the wider business and result in a failing within the firm.

The FCA maintains that it can effectively supervise the legal function without access to legally privileged material. It stresses that the Financial Services and Markets Act 2000 protects LPP by providing that no power under the act can be used by the watchdog to require the disclosure of ‘protected items’.

And, as the regime does not mandate who should be allocated overall responsibility for the regime, businesses have the flexibility to designate the most suitable person.

‘For example, the chief executive officer or another director may have overall responsibility for the legal function; or the function may be embedded in another department (eg compliance or human resources),’ the paper states.

FCA chief executive Andrew Bailey said firms are generally taking their responsibilities seriously and had broadly got the regime right.

He added: 'But we recognise culture change takes time and there is still more to do. So we have to keep a watchful eye on the progress firms are making.'

At present the regime applies to banks, building societies and credit unions. It will be extended to all regulated financial services firms from 2018.

The consultation on the legal function closes on 9 January.