FCA Skilled Person Reviews: Not necessarily a precursor to enforcement action

Sarah Hitchins

Many people consider Skilled Person Reviews commissioned by the UK Financial Conduct Authority (FCA) to be a precursor to the FCA exercising its formal enforcement powers. However, recent figures obtained by Allen & Overy from the FCA show that very few Skilled Person Reviews commissioned by the FCA since 2013 have actually led to any enforcement activity.

 

What are Skilled Person Reviews?

Under section 166 of the Financial Services and Markets Act 2000, the FCA may require a firm to instruct – or may instruct itself – a third party (a ‘Skilled Person’) to undertake a review of a particular issue or business area (known as a ‘Skilled Person Review’).

Skilled Person Reviews can often prove very expensive for firms, who are required to pay for the third party who is instructed to act as the Skilled Person. The total fees paid for all Skilled Person Reviews commissioned since the FCA was established in 2013 stands at over £500 million. In 2014/15, the average fees associated with a Skilled Person Review stood at £722,229, which dropped quite dramatically to £157,142 in 2015/16. However, the overall cost of a Skilled Person Review to a firm can be much higher, especially when you factor in senior management time and legal costs, as well as the cost of any remediation activities that follow.

 

shutterstock_57335779A one-way ticket to enforcement?

Although not officially part of the FCA’s enforcement toolkit, Skilled Person Reviews are seen by some as a precursor to the FCA exercising its formal enforcement powers. It is easy to see how people might think this. Skilled Person Reviews tend only to be commissioned if the FCA thinks that there is a problem and reports produced by Skilled Persons often highlight issues, weaknesses and even breaches of regulatory requirements. They often also include remediation recommendations.

So all in all, Skilled Person Reviews can provide the FCA with the information they need in order to refer a firm to enforcement. They may also point to where the FCA may be able to establish breaches of its rules, thereby potentially cutting down the amount of investigatory work that the FCA has to undertake itself in some cases.

 

But how many Skilled Person Reviews have actually resulted in enforcement activity?

The answer is not many. Since the FCA was established on 1 April 2013, it has required firms to commission – or commissioned itself – 190 Skilled Person Reviews. Of these Skilled Person Reviews, only 8% have led to any enforcement activity being undertaken (whether against the firm that was the subject of the Skilled Person Review, or anyone else).

The graph below shows how the number of Skilled Person Reviews commissioned over the past few years has fluctuated. However, the number of Skilled Person Reviews that have led to enforcement activity has remained consistently low.

 

SPR2

 

Minimising the chance of a Skilled Person Review leading to enforcement

To some extent, whether a Skilled Person Reviews leads to the firm concerned or connected individuals being referred to enforcement depends on the severity of the issues and findings in hand and the FCA’s appetite to take enforcement action in that particular area. It may therefore be inevitable that certain Skilled Person Reviews lead to enforcement activity.

However, one thing that firms can do to minimise the fall-out from a Skilled Person Review is to ensure that whatever issues a Skilled Person identifies during its Review are effectively remediated. In the recent enforcement action taken by the FCA against WH Ireland relating to market abuse controls, considerable emphasis was placed on the fact that WH Ireland had been required to commission a Skilled Person Review to look at its market abuse controls but that it had subsequently failed to properly implement the remediation recommendations coming out of that Skilled Person Review. WH Ireland’s failure to properly implement these recommendations contributed to the FCA increasing WH Ireland’s financial penalty by 20%.

As a result, having robust and realistic remediation plans in place following a Skilled Person Review will be vital for firms. Likewise, it is important that the progress of such plans is monitored to ensure things remain on-track, and that senior management with responsibility for the areas concerned are involved in the plan and kept aware of its status. We are expecting the FCA to increase its focus on the quality of firms’ remediation plans coming out of Skilled Person Reviews.

 

More Skilled Person Reviews in a post-Brexit world?

We recently commented on the impact that the UK’s vote to leave the European Union might have on the FCA’s approach to enforcement action. If as a result of Brexit we see a reduction in the amount of enforcement action against firms, the FCA may instead choose to use more Skilled Person Reviews as a way of getting to the bottom of potential issues within firms. Although the vast majority of these Skilled Person Reviews may not result in fines or public censures, they could nonetheless incur considerable costs (both financial and time) for firms.

 

Read comments below or add a comment

Leave a comment

Your email address will not be published. Required fields are marked *