Vaughan: Co-author
The decision by the Financial Conduct Authority (FCA) to exclude in-house lawyers from its senior managers and certification regime (SMR) has damaged the authority they have in their organisations, academics have argued.
They said the exclusion was based on a “flawed” view which failed to take into account the “significant levels of responsibility and influence in-house lawyers actually carry in regulated organisations in the financial sector”.
In an article published by the journal Legal Ethics, four academics took issue with the FCA’s decision in 2019, supported by the Law Society, not to include in-house lawyers in the SMR.
The academics − Trevor Clark, lecturer at Leeds University school of law and a former Linklaters partner, Richard Moorhead, professor of law at Exeter University, Steven Vaughan, professor of law and professional ethics at University College London (UCL) and Alan Brener, lecturer at UCL – said the decision “further insulates in-house lawyers in the financial sector” from accountability.
“The risk is that they continue to surrender their professional autonomy, having ceded their discretionary powers to managers/executives, undermining the legitimacy of their decision-making and the range of other discretionary activities in-house lawyers are routinely involved in within the organisation.
“This lack of accountability therefore damages the authority of in-house lawyers within the organisation.”
The academics said inclusion in the SMR “would have sent a strong signal, both internally and externally, that the head of legal leads an activity which is critical to the organisation”.
The academics said external accountability of in-house lawyers to professional regulators such as the Solicitors Regulation Authority was “currently insufficient as a means of encouraging in-house lawyers to participate in and therefore enhance the good governance and ethical leadership of regulated organisations”.
They said there was “some evidence” that the SMR had “itself contributed to a strengthening of ethical culture in the financial sector”.
At the same time, there was a “trend towards more ethical business lawyering” in private practice”, with large corporate law firms claiming “to have placed ethics and values at the heart of their organisational strategy”.
The FCA failed to take into account the way in which the role of in-house lawyers in the financial sector has expanded to “encompass elements of governance, compliance, business, strategy, and ethics”, the article argued.
Beyond involvement in strategic and governance matters, in-house lawyers in the financial services sector “also play a more subtle role as influencers, for example, in ‘blessing’ transactions”.
The relationship of in-house lawyers with their client was unlike that of the private practice lawyer, increasing their influence “well beyond the mere provision” of legal advice.
“The problem is that corporate lawyers tend to have a poor understanding of these professional duties, and may even be prone to believe (wrongly) that public interest duties do not apply to them, given they act for corporate clients and not individuals.”
They were “increasingly expected to be ‘commercial’ and to ‘add value’, whilst battling a perception that they are ‘deal blockers’”.
The academics said the FCA’s decision to exclude the head of legal from the SMR was based on a “flawed” view of lawyers.
“It is defective both from a theoretical perspective, since it portrays in-house lawyers as neutral legal technicians, who should be unaccountable for their conduct, and from a practical standpoint, since it fails to comprehend the significant levels of responsibility and influence in-house lawyers actually carry in regulated organisations in the financial sector.
“In squandering this opportunity to reinforce the ethical infrastructure of regulated organisations in the financial sector through the strengthening of the independence, authority and influence of in-house lawyers, the FCA has both undermined the purposes of the SMR and fallen out of step with the positive broader trends towards both ethical business and ethical lawyering.”
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