Heads of legal will not be included in a new accountability regime for top executives, the City watchdog has decided. The Law Society has welcomed the decision.

The Financial Conduct Authority parked plans to include GCs in its Senior Managers Regime last year. However, today the watchdog proposed excluding the head of legal from the requirement to be approved as a senior manager.

The regime, which came into force in 2015, 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. The FCA admitted in a discussion paper in 2016 that its previous communications were unclear about the extent to which the legal function is included in the regime.

In a consultation paper today, the FCA says: 'As so much of the head of legal’s work relates to legal advice, the laws of legal privilege may restrict us, in practice, from using our powers over senior managers and carrying out our usual supervisory processes relating to senior managers, even in relation to the management parts of their job.' 

The proposal to include the legal function in the regime has met with overwhelming opposition, including from the Law Society, which warned that it had the potential to put the lawyer in a conflict of interest with their employer, and could affect the lawyer’s ability to provide full and frank advice.

The watchdog received 33 responses to its discussion paper. Five argued that the legal function should be included in the regime, 24 argued against and four provided a 'mixed response'.

The FCA said today almost all respondents recognised that in-house lawyers will already be subject to individual conduct rules. The head of legal will also fall under the watchdog's certification regime either as a 'material risk taker' or 'significant management function'.

The watchdog said: '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 laws of legal privilege. We believe the protections under these elements of the [regime] will be sufficient to drive up standards of conduct and ensure the fitness and propriety of legal staff.'

Responding, the Law Society said in-house legal teams would greet the FCA's decision with a 'sigh of relief'.

'This [decision] will ensure lawyers remain free to provide full and frank advice to their employer without the risk of a conflict of interest emerging,” vice president Simon Davis said. 'We opposed these proposals because not only would they put in-house counsel at risk of a conflict of interest with their employers, they would also have meant counsel were answering to two regulators, increasing the cost of doing business.'

He added: 'If investigated, in-house lawyers could have been uniquely unable to provide evidence to the FCA that they had acted properly, because the advice they give their employer is privileged. A logical outcome of this could have been organisations no longer seeking the advice they need from their own legal teams.'