Leading academics at University College London (UCL) have clashed with the Law Society over a proposal by the Financial Conduct Authority (FCA) to exclude heads of legal from its new framework for individual accountability in the finance sector.
The academics, among them Richard Moorhead, professor of law and professional ethics, said accountability under the regime “may encourage senior in-house lawyers to act with more appropriate levels of caution” when managing risk and potential wrongdoing.
The Law Society, which strongly opposes the inclusion of heads of legal in the senior managers and certification regime (SM&CR), welcomed the FCA’s decision as a “step in the right direction”.
However, the UCL academics said: “Incidents of major misconduct in the corporate and financial services sectors often involve the passive acceptance or even the active participation of in-house lawyers.
“The collapse of Enron featured a governance failure by its head of legal, resulting from an eagerness to appease management.
“The banking sector has experienced numerous instances of lawyer involvement in wrongdoing in recent years.
“In-house lawyers played a key role in the design and implementation of complex financial instruments that were a prominent feature in both the collapse of Enron, and in the global financial crisis.”
The SM&CR was adopted by the banking sector in 2016 and insurance sector in December 2018. It is scheduled to apply to all FCA-regulated firms by December this year.
In a discussion paper published by the FCA in September 2016, the regulator indicated its intention to include heads of legal in the new regime.
However, in a consultation paper published in January, the FCA said it had changed its mind, citing a concern raised by the majority of respondents to the discussion paper that there would be a conflict between senior managers’ duties and legal professional privilege (LPP).
The FCA cited a further concern that including heads of legal would cause them to be more conservative and withhold advice, bringing them into conflict with principle 4 of the SRA code of conduct, which obliges solicitors to act in the best interests of clients.
Respondents also complained that making heads of legal, who were already regulated by the SRA, subject to the new regime would lead to unnecessary duplication of rules and regulations.
The UCL academics – Trevor Clark, Steven Vaughan, Alan Brener, and Professor Moorhead – said that despite all of this, “certain large financial institutions” had already given their heads of legal ‘senior manager’ responsibility – a fact not mentioned in the FCA’s consultation paper.
They argued that including heads of legal would “reinforce and strengthen” their ability to comply with their professional duties.
“When faced with an ethical dilemma or potential regulatory breach, they should not simply see their role as to say ‘yes’, and to ‘creatively engineer’ a way in which to comply.
“In-house lawyers can and should act as ‘gatekeepers’ of the firm, counselling and challenging but also sometimes calling a halt to misconduct by withholding co-operation and/or approval.”
The academics said all solicitors had “potentially conflicting duties” and the FCA was wrong to suggest that they should “lean towards clients” in the event of a conflict.
They said the “downplaying of rule of law and public interest considerations” in emphasising solicitors’ duties only to their clients was a “dangerous side-effect of the FCA’s current position”.
The academics said arguments that the new regime risked eroding LPP were “overstated” and LPP could deter a firm from properly investigating alleged breaches.
“The legal duties of in-house lawyers, such as LPP and confidentiality, have never been absolute, having been regularly overridden on policy grounds.
“Lawyers already have specific legal duties under legislation to report certain types of misconduct by their clients: for example, suspicious transactions under anti-money laundering and terrorism financing legislation, and tax avoidance, where in-house lawyers are increasingly being asked to judge their client’s behaviour.”
They argued that dual regulation would not be “unduly burdensome” as it would apply only to heads of legal and not to other in-house lawyers, and the SRA’s code of conduct, which was “seldom enforced” against in-house lawyers, contained “minimal requirements” on supervision and accountability.
The Law Society welcomed the exemption for heads of legal as “a step in the right direction” and apparent acceptance of concerns raised by the society “and many other respondents” that the senior manager regime risked “direct conflict” with professional obligations.
The society said “significant areas of ambiguity” remained, which required additional guidance, for example an assurance that non-disclosure of legal advice would not give rise to “adverse inferences or suggestions that the firm or individual in question is not acting co-operatively”.
Meanwhile, Professor Moorhead is leaving UCL in September to become head of law at Exeter University.
He said: “A globally engaged, digitally-aware, evidence-based focus to legal education and scholarship is critical to the excellence of law students and law schools. Exeter is already building in these areas on strong foundations of mainstream commercial and European legal thought and history.”