A Section 166 skilled Person review is often viewed negatively by regulated firms. It is always better to avoid having a Section 166 review imposed by the FCA. However, if it cannot be avoided, with better understanding and positive engagement in the process, a Section 166 review may ultimately prove to be beneficial to a firm.
The Section 166 skilled person review is just one of several tools the FCA uses to supervise firms. It is often referred to as a Section 166 report and is commissioned by the FCA when they are concerned about aspects of a regulated firm’s activities and want further analysis. The third party, known as a skilled person is appointed through a selection process to provide an independent view in the form of a report. In this article, we will explore the common triggers for Section 166 reviews and provide insights on how to effectively respond if your business becomes the subject of this type of review.
FCA Approach to Supervision
The FCA is tasked by Parliament to regulate the conduct of the UK’s financial services with a single strategic objective to ensure that relevant markets function well. They have three operational objectives to protect consumers, enhance market integrity, and promote competition. Thus, supervision is the oversight of firms and individuals to reduce actual and potential harm to consumers and markets.
The FCA take a forward-looking approach to supervisory work and seek to take a proportionate approach to supervising firms. Their approach includes looking at the conduct of individual firms and more widely at how retail and wholesale markets are evolving. The FCA know the culture of a firm can shape outcomes for consumers and markets and will assess the firm’s leadership, purpose, governance, and approach to managing. In recent years, most reviews commissioned by the FCA have been in two main categories for Conduct of Business and in Controls and Risk Management.
Identifying Common Triggers of a Section 166
Understanding the common triggers for Section 166 reviews is crucial for businesses aiming to minimise the potential for a costly and resource-intensive examination. While these reviews are not punitive, they are designed to enhance the regulator’s comprehension of operational intricacies and regulatory compliance. Here are six common triggers:
- Regulatory Vigilance: In the presence of concerns about a firm’s adherence to regulatory requirements, the initiation of a Section 166 review becomes imperative. This process aims to meticulously evaluate the situation, prioritizing the safeguarding of consumer interests.
- Conduct Scrutiny: Instances of regulatory breaches necessitate a comprehensive investigation to uncover the root cause and institute corrective measures for any identified misconduct.
- Risk Oversight: A deficiency in risk management and internal control mechanisms serves as a trigger for an in-depth review. This assessment aims to gauge the effectiveness of a firm’s risk management framework and governance structure.
- Financial Health Check: When uncertainties arise concerning a firm’s financial reliability, risk exposures, solvency measures, and overall liquidity, a thorough review is prompted. The objective is to mitigate risks and ensure seamless functionality under diverse circumstances.
- Adherence to Regulations: As regulatory landscapes evolve, the imperative for annual audits and transparent data reporting becomes more pronounced. Failure to comply may result in the initiation of a Section 166 report.
- Market Abuse: In the presence of suspicions surrounding market abuse or misconduct, a review is triggered to validate the absence of malpractice. This process ensures the maintenance of market integrity and ethical business conduct.
Remaining Compliant: A Proactive Approach
Given the diverse triggers for Section 166 reviews, businesses must ensure that regulatory compliance processes are robust. Controls should be aptly designed and effectively operational. Promptly addressing any issues, utilizing internal audit mechanisms, conducting risk assessments, and maintaining oversight frameworks are critical measures to remain compliant.
The board plays a pivotal role in embedding a risk management culture and actively supporting compliance processes across all departments. By fostering a culture of vigilance and responsiveness, businesses can proactively address potential triggers for Section 166 reviews.
How to Respond Effectively
If your business becomes the subject of a Section 166 review, a proactive and constructive approach is essential. Engaging with the appointed skilled person throughout the process is paramount. In some rare instances, the FCA will contract directly with a skilled person, but usually the FCA will allow the regulated firm to propose their preferred choice for FCA approval based on their expertise and required skill sets.
Maintaining transparency by providing full access to documentation, information, and personnel is crucial. Promptly responding to queries and, if necessary, allocating resources to address identified deficiencies are key steps in managing the review process. Documentation of activities and maintaining effective records are vital for regulatory review.
In conclusion, facing a Section 166 review should be approached with a positive outlook. Rather than viewing it as a negative or regulatory rebuke, consider it a mechanism that provides an organization-specific benchmark for long-term excellence and adds value to the overall organization. Embracing this perspective can turn a regulatory challenge into an opportunity for organisational improvement.
Get In Touch Today
Don’t navigate the regulatory maze alone. Email Thomas Salmon at thomas.salmon@complyport.co.uk to book a consultation on how we provide you with robust and effective internal audit.
About Complyport
Complyport is a market-leading consulting firm supporting the UK financial services industry for over 22 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.
Complyport can assist with the preparation of a GAP analysis and impact assessment on the investment firm’s capital adequacy and risk management framework of the Company under the regulatory framework.
We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice.
- Skilled Person Reviews and Regulatory Investigation
- Prudential support, IFPR, ICARA and financial resilience advice
- Financial Crime support and Forensics
- Compliance managed services and resourcing compliance personnel
- Consumer Duty implementation advice
- Operational resilience & Cybersecurity advice
- Financial Promotions guidance, support, and management software solutions
- CASS advice and protections of client assets
- Comprehensive compliance work-flow management software
Contact Thomas Salmon in our Regulatory Solutions team via email at: thomas.salmon@complyport.co.uk to book a free consultation.
