The prospect of a Financial Conduct Authority (FCA) Skilled Persons Review may not fill regulated firms with glee but the end goal is improvement, say its proponents. What does a review entail and what are the possible outcomes?
A skilled persons, or section 166 (s166), review is a key tool in the financial services regulatory armoury – and one that regulated firms will want to avoid if they possibly can. Historically rooted in section 39 of the 1987 Banking Act, and revived by the Financial Services and Markets Act 2000, s166 gives the FCA or the Prudential Regulation Authority (PRA) the power to obtain an independent review of any aspect of a firm’s activities that is causing the regulators concern.
It is a power exercised reasonably regularly: in the year to April 2014, 83 reports were commissioned, 50 of which were by the FCA and the remainder by the PRA. So far, the FCA has only released statistics for three quarters of the year to April 2015, at which time it had already commissioned 39 reports with a further 42 asked for by the PRA. The most common reason for commissioning s166 reports is governance, which accounted for 38 of the total in 2013/2014, and 33 of the current year’s total so far. The PRA is generally responsible for reports on prudential issues involving banks, building societies and other systemically important firms. However, if the issue relates to the conduct of business, it always falls under the remit of the FCA.
Independent reviewerAn s166 report will be commissioned under one of eight ‘lots’ – or categories of business – including Client Assets, Data and IT Infrastructure, and Financial Crime. A description of the lots is available on the FCA’s
website. While they are commissioned by the appropriate regulator, they are carried out by an independent reviewer chosen from a panel of around 30, mainly consultants and lawyers, with expertise in one or more of the lots: a full list of those authorised to carry out the reviews is available
here.
Douglas Cherry is a solicitor at law firm Eversheds and a former regulator who now conducts s166 reviews and regularly assists clients in dealing with reviews carried out by other skilled persons. Cherry explains that the use of independent skilled persons means that the FCA and PRA can avoid using their own resources, and gain the benefit of access to a wide range of experts in the various regulatory disciplines. The s166 review will nearly always be conducted in private and will only become public if the eventual outcome is an enforcement action or sanction, as might be deemed appropriate by the relevant regulator.
The firm under investigation chooses a skilled person from the panel and, more importantly, has to foot the bill for the review. The terms of reference are, however, drawn up by the regulator. The costs will vary depending on the length of the investigation and the number of people involved: the FCA said in its 2013/2014
annual report that the median cost that year was £160,000, while the Bank of England
said the cost of its reports during that period ranged from £14,602 to £1.3m.
Trilateral meetings
Amarjit Singh, a partner at EY who has acted as a skilled person, says the process generally starts with a draft regulatory notice from the regulator to the firm, which requires a skilled person to be assigned within two weeks of receiving it. That notice also includes a timetable outlining when the report is required and is followed by a trilateral meeting with the firm, regulator and skilled person, at which the timescale, terms of reference and fees are also agreed. The skilled person uses their own staff but there are usually designated contacts from within the firm under investigation that they will liaise with. Singh says there are normally three trilateral meetings, at the beginning, middle and end of the review, but longer reviews could require additional meetings – for example a telephone update every two weeks.
54
The number of cases brought by the FCA for review in 2014/2015(1)
54%
The proportion of these cases relating to concerns about conduct of business(1)
2%
The proportion of reviews that resulted in enforcement action in 2013/2014
£145.7mn The total amount paid by financial firms for s166 reviews in 2013/2014*(2)
(1)Source: FCA
(2)Source: Parliament.uk
*2014/2015 total to be published this summer
'Not a horse-trading scenario'At the conclusion of the skilled person’s review, a draft report is typically sent to the firm and the regulator at around the same time and, while the firm does get the chance to comment before the final report is produced, Cherry explains that any changes are generally restricted to correcting factual inaccuracies in the draft and/or the impact of any findings or analysis flowing from any such inaccuracies. He says: “This is not a horse-trading scenario. The document is not broadly negotiable. It is saying, this is our view of the matters under review based on the facts as presented and considered by us as the skilled person. Usually, there would need to be a fundamental inaccuracy or other compelling issue to significantly change that view.”
An s166 review will not necessarily end in enforcement action. In fact, last year, only 2% of reviews led to such an action, throwing into question the scheme’s cost-effectiveness. But, the FCA says: “Most s166 reviews do not lead to referrals to enforcement – nor would we expect them to. Rather, s166 is a valuable tool that allows the FCA to apply its resources most effectively.”
Singh says the FCA and PRA can ask for a variety of different opinions – and the Institute of Chartered Accountants in England and Wales gives
guidance on how the review should be conducted and conclusions reported. These opinions include a ‘reasonable assurance’ that the rules have been complied with; ‘limited assurance’, which highlights areas of transgression; ‘review and recommend’; or ‘agreed upon procedures’, which cover only work carried out on a very limited set of procedures.
Improvement is the ultimate goalThe ultimate aim is usually improvement. Andrew Glessing, Managing Director, Advisory Services at The Consulting Consortium – which also sits on the s166 panel – says: “The process of reviewing and remediating poor practices, governance and controls means that firms can expect to develop more effective management frameworks and a better understanding of what is required to ensure fair treatment of consumers, and protect market integrity.”
But it can still be a painful experience for the firm involved. The review process is likely to be time-consuming and expensive, in terms of the extra hours of work required by in-house staff and external advisers, as well as the skilled person’s fee. And the reports often make for uncomfortable reading. “The report will not always please the firm,” said Cherry. “In most cases, it will have an element of criticism, for example of past or current procedures, of individuals or groups of people.”
Driving fairer outcomesCo-operation with the reviewer is, however, essential. “Any firm which finds itself facing a s166 should bear in mind that the FCA’s Principles for Businesses obliges firms to deal with regulators in an open and co-operative way,” said Glessing. “This can only benefit firms, as clear and continued dialogue between all three parties is integral to a fair and accurate s166 report.” He points out that there have been 13 reviews relating to the consumer credit market since the first quarter of 2014, “suggesting that consumer credit firms have more to do to meet the FCA’s requirements and expectations under the new regulatory regime. The FCA has highlighted that the consumer credit market poses a significant risk to consumers and market integrity, and is using s166 powers to drive fairer outcomes to consumers”.