The Financial Services Authority (FSA) has the power to require a firm to provide a report by a Skilled Person, and may use this power to support both its supervision and enforcement functions. The FSA is making increasing use of this power at significant cost to firms: in 2009-2010 the total costs to firms of these reports was £32.2 million, with each report costing the firm involved between £1,795 and £4 million. The FSA has made it very clear that it will continue this outsourcing of the investigative process, as they seek to develop a significantly more interventionist supervisory regime with a lower tolerance for consumer detriment.
Under the new regulatory regime, the number and scope of Skilled Person appointments is expected to increase further. The UK Government intends to extend the regime with specific new powers in the Financial Services Bill for the new Prudential Regulation Authority (PRA) and Financial Conduct Authority, as well as for the Bank of England. These will provide a specific power for Skilled Person appointments to deal with recovery and resolution planning. They will also apply to more firms including issuers under the UK Listing Authority (UKLA) regime, as well as recognised investment exchanges (RIEs) and recognised clearing houses (RCHs). The PRA insurance team has already warned that it may make even more use of these powers than FSA.
Whatever the FSA may say in its Enforcement Guide and other statements, experience shows that it appoints a Skilled Person where two criteria are met. The first is that there is an apparent serious breach of technical rules. Secondly, that the FSA does not have sufficient confidence in management, in particular risk management, to investigate and resolve the matter satisfactorily themselves.
Initially a firm should try to satisfy the FSA that the appointment of a Skilled Person is unnecessary. The FSA will normally contact the firm to discuss the issues before finalising its decision to require a Skilled Person report and this provides an opportunity for a discussion with the FSA as to why an alternative means of obtaining the information would be better. This can be done by satisfying the FSA on what may be termed the “three dimensions” of the issue that has arisen:
This approach is intended to reassure the FSA that senior management is in command of the situation. Sometimes it is necessary to support this approach with an offer by the firm to commission their own report. This is preferable to the formal “section 166 appointment”1 as the firm retains control and, in some circumstances, it is possible to ensure that the report is also protected by legal privilege which would not be the case with a Skilled Person report.
MAKING THE APPOINTMENT
Where the FSA proceeds with the appointment, it will usually allow the firm to choose the Skilled Person. The FSA sometimes requires firms to prepare a shortlist of three and then makes a choice, justifying its selection. On other occasions the FSA requires the firm to make a choice from its own list of two or three firms. In either case, the firm should scope the appointment (recognising that the FSA has the final say) and interview possible appointees, gauging their attitude to the task, experience and qualifications and meeting the staff who will be running the project (and not just the overall “client partner”).
THE SKILLED PERSON PROCESS
Where the FSA perseveres with the proposed appointment, there are four elements to managing a Skilled Person investigation. These are to:
AGREEING TERMS OF REFERENCE
While the FSA will typically prepare and insist on the adoption of its scope, there are a number of areas where a firm should protect its position. These include:
MANAGING AN INVESTIGATION
It is important that a firm remains firmly in charge of the process throughout the appointment. Steps that firms can take include the following:
Additionally, it is important to maintain a dialogue with the FSA. The Skilled Person will be required to make regular reports to the FSA, and the firm must also ensure that it has open communications with the regulator. In this way it can seek to maintain “symmetry of information” as between it, the Skilled Person and the FSA. The FSA also expects firms normally to be informed about the passage of information, and the Skilled Person would usually be expected to keep the firm apprised of any communication between it and FSA. However, in practice this requirement is often overlooked by the Skilled Person and the FSA. Where this is not done, the risk is that the Skilled Person and the FSA together form an adverse view that is only communicated to the firm when it has become a settled opinion and the consequent remedial or enforcement steps all but determined.
DEALING WITH A DRAFT REPORT
While a firm should have sought to influence the drafting throughout the process, the period between production of a draft report and its finalisation offers a key tactical opportunity for influencing the process and controlling its future direction. It is necessary for a firm to be very alert to the risks of poor execution, over-zealous extension of remit, judgemental findings and conclusions overly influenced by the FSA rather than the Skilled Person’s judgement. The following steps should be followed:
MANAGEMENT RESPONSE & REMEDIAL ACTION
The issue of the final report is often not the end of the regulatory process for the firm. Often the scope of the appointment requires the firm to produce a management response to the issues identified and may require or expect the firm to take additional remedial action or carry out a past business review (PBR). If there is the possibility of a referral to enforcement, the management response will also be of vital importance for defending and/or limiting the extent of any enforcement action. The FSA will often seek to rely on the Skilled Person report as its investigation. The firm’s position can be protected if it:
Alison McHaffie is a partner in the London office of CMS Cameron McKenna. Alison specialises in advising financial institutions on all types of regulatory contentious matters, including FSA investigations and enforcement actions, dealing with skilled persons appointments and handling commercial disputes and large scale litigation arising out of the provision of financial services. Telephone: +44 (0) 20 7367 2785; E-mail: Alison.email@example.com.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).