A Section 166 which is a written notice for specified documentation to be provided to the regulator for their assessment and review. This will sometimes provide you with an idea of what they are looking for:
- Tip 1 – You should get your files reviewed, preferably independently by a compliance consultancy at the same time, so as to prepare.
Reality Check – There is no smoke without fire
The Section 166 also has to be in writing and may, or may not carry with it a Draft Requirement Notice. This notice sets out the skilled person requirements; scope of the report, considerations regarding calculating recompense and redress if required and provide an inkling as to the purpose, if you read between the lines.
- Tip 2 – Compliance Consultants should be engaged to help you read between the lines. Financial Conduct Authority (FCA)/Prudential Regulation Authority (PRA) “code” needs to be interpreted by a consultant experienced in the workings of the regulators.
Reality Check – You will probably not know what the regulators are driving at, it may not be what you think.
- Tip 3 – Too often, advisers see this demand by the regulator as a personal slight against them or their firm, the advice or the way their customer’s have been treated. An independent consultant’s view can provide an objective and interpretive view of the S166 Requirements Notice and the background to provide advice in how best to respond.
Reality Check – This is a highly stressful period for senior management; it is a threat to the firm and senior management careers!
If the discussions with the regulators have been focussed on the removal of your permissions, then there will likely be advice issues. If threats have been forthcoming regarding your continued trading as a whole, then there are likely to be advice or conduct issues. However, if they have reviewed some files and have asked for a sample to be reviewed by the “Skilled Person” as the subject of the report, it is more than likely that there are systems and controls worries; processes and procedures are not being followed either at all or consistently by one or more of your advisers. You would also have been expected to have picked this up for yourself with your ongoing monitoring plan. Areas that need reinforcement are not always obvious to firm’s management and often needs independent views on systems and controls
- Tip 4 – Money spent on ensuring you are compliant beforehand is a small fraction of the costs of a S166.
Reality Check – During a S166, the regulator can summon your S166 consultant and/or your auditor to attend their offices at your cost, whenever they wish.
Section 166 Statistics
In 2008/2009 there were 56 Section 166 Reports completed costing a total of £12,800,000. In 2010 -2011 the FSA ordered 95 FSMA S166 Skilled Person Reports for over £32.2M. In 2011/12 year there were 111 S166’s requests were made and, costs ranged from £2,975 to £3m with the average cost was still in excess of £280,000 each. 2012/13 saw 115 Skilled Person’s reports, mainly in the Banking Sector and costs are around £176m mainly due to the interest rate swaps mis-selling. In 2013-2014, the FCA commissioned 50 skilled person reviews at a cost of £145.7 million, from 1 April 2013 to 28 February 2014, the PRA commissioned 33 skilled person reviews at a cost of £11.4 million.
Compare this to 2005/2006 when 18 reports were completed and you will see the average number of cases and the costs have escalated, mainly due to the big consultancies charging into the area with their large teams of analysts and managers and partners.
Section 166 areas of concern
The areas covered in the latest year’s S166 reports were Conduct Risk and Prudential including Client Money/Assets, UCIS, Corporate Governance, Past Business Reviews, TCF, Systems and Controls, Regulatory Reporting and Market Abuse. Many of these resulted in headline fines as can be seen through the Final Notices on the regulator’s websites.
Who carries out S166?
Does the regulator have the right to appoint the big accountancy firms? The simple answer is yes. Under S166 of FSMA 2000, the regulators can then nominate a person to make a report who, in the authority’s view, has the skills necessary to make a report on the matter concerned.
There are two types of Skilled Person Review under FSMA as amended by the 2012 Act that gives the regulators the power to commission reviews by Skilled Persons as required:
- s166 Reports by Skilled Persons; and/or
- s166A Appointment of Skilled Person to collect and update information.
The regulators will appoint a Skilled Person from the Skilled Person Panel. To enable the regulators to use this new power in line with the European Procurement Directive and the Public Contracts Regulations 2006, a panel of Skilled Person Firms (‘the Panel’) has been developed. The Panel was effective from 1 April 2013 until 31 March 2017 and will be monitored on a regular basis.
Skilled Person Panel
FSMA as amended by the 2012 Act gives the regulators the power to contract directly with Skilled Person Firms in addition to the customary approach where the regulated entity enters the contractual arrangements. Rules have also been made to enable the costs of such Skilled Person Reviews to be payable as a fee by the regulated entity.
The Panel has been developed to ensure a consistent, high quality and transparent approach to conducting Skilled Person Reviews. It is expected that the Panel will also be used where the regulated entity contracts with the Skilled Person Firm, where appropriate. It remains the regulated entity’s responsibility to assess the individual appropriateness of the Skilled Person Firm for their particular requirements. The regulated entity should have consideration of the guidance in SUP 5.4 of the Handbook when appointing a Skilled Person Firm.
- Tip 5 – the first thing to do is obviously to read and understand what is causing concern for the regulator. If you are not sure, get experienced advisers to help you. Circulating it internally for other people’s opinions often serves to generate anxiety and fear as well as enormous (often incorrect) speculation or worry. Next thing is to issue a firm-wide document preservation order ensuring that no documents are disposed of, deleted, destroyed or otherwise disposed of until further notice. Normal archiving and BAU processes can of course continue, as long as the documents are retrievable.
Reality check – Under FSMA Section 177 it can be a criminal offence if a person destroys any documents suspecting an investigation.
Who do you get to help?
There are several points to consider here, when considering your options. The selection or choice of who may be used has now been taken away but there are many things that will need addressing. These things can be down and prepared in many ways and typically there is a great possibility of getting things wrong or not done effectively.
Time wasted with the appointed Skilled Person on-site is going to cost you dearly in management time, resource costs, money and credibility.
Responding efficiently and professionally to a Requirements Notice and ensuring that the process is adhered to and your responsibilities are discharged effectively as well as opening up to allow strangers into your inner workings, can be emotional and distressing for not only the owners but also a lot of staff. You may encounter staff sickness and possibly even needs for counselling if your firm gets a visit that goes badly. There are hidden costs of a S166 that are not obvious immediately, including the reputation management and official responses or communications that may be needed.
- Tip 6 – Getting Compliance Consultant in to assist in the preparation of a S166 and assist in the presentation and ongoing risk management program (RMP) solution can reduce the stress and allow you to remain in control, but with expert appreciation of the process.
The Issue of External Intervention from a Skilled Person: You need to be prepared for some uncomfortable probing and possibly some embarrassing findings, but it is vital that you do not see it this as a provocation for a fight or justification exercise, the skilled person and their team is there to obtain facts and evidence.
To do their work correctly, the files, systems and controls, policies and governance, Conduct Risk and TCF or whatever aspect of review has been instructed has to be done properly for your own sake.
You might try to see things from their perspective. Sit down and consider what would happen if you were new to your firm;
- How long would you want to understand the actual role you are going to perform, with all the parameters, guidelines and limitations?
- How long would you want to read the company policies and compliance manual?
- How long would it take you to write a report on ten or twenty files, meticulously reviewed and appraised, ensuring all the evidence is noted and identified?
- How long would it take to review that number of files properly, in detail, objectively and commercially?
- Would you consider it fair to prevent the firm from adding in their response to the report?
- How long would you like to spend on your report making sure that it fairly represents the evidence you have seen and taken into account the holistic view of each case?
With a Compliance Consultant they can pre-review anything the Skilled Person may require and ensure its completeness and integrity.
- Tip 7 – It is worth getting a thorough and professional job done while you have the chance, the cost of regulatory scrutiny, defending your firm with compliance consultants and lawyers the cost of fines or loss of livelihood is exponentially greater.
Reality check – The S166 is going to cost you not only hard cash but also management time, IT and back office time as well as the longer term impacts of training, process re-engineering and many other element. Depending on how you use this experience you may be left with a sour taste in your mouth or a platform to re-launch an effective and compliant business for the future. What value is your business worth to you over the next 12 months, five or ten years?
What is it going to cost?
Price should be viewed in the round. If the regulator decides you are guilty they will ask for your costs in conducting the s166 and keep this in mind when assessing the necessity for fines or the severity of fines. Therefore often a high cost of the s166 can mean a reduction in ultimate fine; the true cost of each purchasing decision will show itself over time. Cost issues continue to present themselves over the useful life of the product or service purchased, long after the purchase was actually made. If a report becomes long standing company history, the cost is minimal: if the company does not last the course, the cost far exceeds the price.
What can a Compliance Consultant offer?
Depending on the firm, they offer a complete service in pre or draft requirement notice receipt through to the final and embedded risk mitigation program completion. At LS Consultancy, we are focused approach keeps the cost to your firm at the level required and nothing else. Quality Assurance is always carried out independently and you are always encouraged, and invited to provide management responses to any findings.
Once appointed we will, alongside your CF10 discuss with the Skilled Person the scope of the document and iron out any wrinkles. We will identify the initial documents required as best they can and make any preparations for our staff (if needed) to start as soon as possible.
Reality check – A S165 documentation request is often followed by a S166 Requirements Notice. All S166’s tend to require a review of your systems and controls as part of the process. If you engage us proactively before any S166 is issued, we will be able to provide you with recommendations for improvements before anything else is scrutinised by any external party.
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