Though one is always on dangerous ground in suggesting that anything was clear or uncomplicated in the Financial Services Authority’s Handbook and its successors, one could comfortably say that in-house lawyers were not regarded as significant influence function-holders requiring approval under the Financial Services and Markets Act (FSMA) 2000.
They were not specifically named as holders of a ‘controlled function’ and would not be regarded as holders of a ‘significant management function’, the characterisation of which required a person to be a ‘senior manager’ of a significant business unit reporting directly to the governing body or the chief executive or the equivalent. The in-house lawyer’s role was not managerial and supervisory, but advisory and privileged.
The thinking never developed much beyond this. Providing contractual advice in the context of a specific transaction could not, by any stretch of the imagination, be regarded as a managerial function. The issue could be muddied if the legal and the compliance function were joined. But most large organisations averted the problem by separating the two. But what of general counsel, reporting directly to the board? Or senior lawyers on governance committees? None were deemed to be included.
The extent to which the Financial Services (Banking Reform) Act 2013 has changed matters is a moot point. The aim of the new regime has been to reduce in scope those covered by the senior managers regime. The venom visited upon the banking industry by the Parliamentary Commission on Banking Standards did not spread to the in-house legal community. In the parliamentary consideration of the definition of ‘senior management’ function, the government responded that the regulator would be highly unlikely to designate legal advisers as senior managers ‘simply because giving legal advice does not constitute management as set out in the definition of senior management’.
But the words ‘highly unlikely’ and the circularity of the reasoning should send a little bit of a shiver down the spine of even the most robust senior lawyer. According to section 59ZA FSMA, the senior management function embraces those responsible for ‘managing one or more aspects of the authorised person’s affairs’ relating to its regulated activity and ‘managing’ includes ‘taking decisions, or participating in the taking of decisions, about how one or more aspects of those affairs should be carried on’.
In advising at, say, board level, is the lawyer participating in decisions as to how an aspect of the business should be carried on? Or is the lawyer the one person around the table immune from senior manager responsibility? Can you, in reality, isolate that which is legal advice from that which is commercial or managerial? And how will all that play out in the context of confidential privileged communications? Interesting questions – and no clear answers: not even from the lawyers.
Tony Woodcock heads the banking and financial services regulatory litigation group at Stephenson Harwood