United Kingdom
FSA Skilled Persons Reports – are they really a precursor to enforcement action? - Fiona Raistrick
For those of you operating under the regulatory regime of the Financial Services Authority, you will most likely be aware of the FSA’s tougher more intrusive approach to supervision and enforcement. This arose as an outcome of the credit crisis and the FSA’s own admission of its failings as a regulator prior to that time.
One supervisory tool we have seen being used much more frequently since the birth of this new intrusive approach has been the FSMA s166 Skilled Persons Reports. This approach enables the FSA to gain much more in depth analysis and investigation into firms, without bearing any of the costs.
The use of s166 Skilled Persons Reports has increased by nearly 500% in the last four years, and is expected to increase by a further 200% in the coming year.
S166 Skilled Persons Reports were previously seen in the market as precursor to enforcement action, with those being unfortunate enough to be issued with such a report ‘request’ most likely to end up subject to an enforcement action. They are now seen by the FSA as part of their supervisory toolkit to drive change in numerous areas.
Some of the key areas of focus of the s166 Skilled Persons Reports over the past year have been:
- Systems and controls – a wide ranging topic which can be used as a catch all where initial system and control weaknesses are identified;
- Corporate Governance – the FSA has focused on the adequacy of corporate governance structures and the roles, responsibilities and competence of key individuals for a number of years now, and this topic still features heavily in s166 Skilled Person Report requests;
- Suitability of advice – still a hot topic of the FSA given variable findings across the market over the quality of advice and level of appropriate documentation around risk assessments and client take on procedures;
Emerging areas which will be of no surprise are on the role and competency of the risk function and client assets which have been on the FSA’s agenda following the review of the Lehman collapse.
In the coming year we can expect the FSA to issue more s166 Return Assurance Report (“s166 RAR) requests, to identify weaknesses in regulatory return submissions. Engagement with the audit profession and the Institute of Chartered Accountants of England & Wales is currently taking place to more clearly define the scope, expected opinions and expectations of these reviews and develop a more consistent approach to this type of review.
The s166 Skilled Persons Reports do still link to enforcement, in enabling the FSA’s enforcement division to decide whether internal investigations should be started and they can also link in to existing enforcement cases to help the FSA make informed decision making. The s166 Skilled Persons Reviews will therefore, although not necessarily leading to enforcement action, are likely to follow the robust, intrusive and in-depth nature of an enforcement investigation, to ensure any findings can, where necessary, be used in any potential future enforcement case.
Irrespective of the topic or underlying reasons for the s166 Skilled Persons Report, the key to a ‘successful’ one is clear upfront and continuing engagement between all three parties, the FSA, the regulated firm and the Skilled Person. This engagement will help deliver a clear and agreed upon scope, a mutually acceptable methodology that will achieve the objectives of the FSA while remaining proportionate and efficient, and sound practical conclusions which will improve the operation or risk management of the regulated entity whilst satisfying the FSA’s regulatory concerns.
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