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FSMA S166 Guide For Senior management

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An FSMA Section 166 (S166) Skilled Persons Report request from the FSA can be a bombshell and extraordinarily expensive if you do not follow some simple rules and create a different mindset to most. …

An FSMA Section 166 (S166) Skilled Persons Report request from the FSA can be a bombshell and extraordinarily expensive if you do not follow some simple rules and create a different mindset to most. This can work in a positive way and the costs over time will be negligible. Alternatively, you can avoid them completely.

Call us on 0207 097 1434 or Email on info@complianceconsultant.org

What is a FSMA Section 166 Skilled Persons Report?
A key part of the process is a Section 165 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 your firm for whatever may follow; which on occasions is nothing.

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. FCA/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.

Call us on 0207 097 1434 or Email on info@complianceconsultant.org

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  • 1. A Guide for Senior Management to Stay On-Track
  • 2. “… is like a car crash in slow motion, the right compliance consultant is your ABS brakes. You don’t know where you will end up but at least you can steer through it!” Tony Woodward Chartered Fellow of the CISI
  • 3. S166 Reports are often required by the regulator on a single or sometimes multiple subjects where they feel that the regulated firm may have shortcomings or failings.
  • 4. Tony Woodward, a former CEO of a city firm explains; “Between November 2007 and June 2008 the City stock broking firm that I presided over as CEO was visited by the FSA. What followed was a strong attack by the regulator using a section 166, which cost in excess of £500,000 to defend and an immeasurable cost in lost management time, staff time and productivity. During this period the venom of the attack was at times unfathomable, we engaged experts who in turn had ex-FSA staff who seemed to be as stumped as we were about the regulator’s concerns and objectives.”
  • 5. Tony goes on to say, “Senior Management in regulated firms typically believe they are doing the right thing and that they can explain to the FSA why they do certain things and they will understand, they are very highly mistaken. I do not work as a compliance consultant, I work with senior managers on a peer-to-peer basis, sharing real life experience to underline the genuinely valuable and rare advice I impart. I fully understand and communicate to senior management how the FSA want to see financial firms run and, in a macro view, the organisational structures required to run effective compliance without creating enormous compliance departments which drag on profitability.”
  • 6. A key part of the process is a Section 165 which is a written notice for specified documentation to be provided to the FCA 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 Compliance Consultant at the same time, so as to prepare your firm for whatever may follow; which on occasions is nothing.
  • 7. 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.
  • 8. Tip 2 Compliance Consultant should be engaged to help you read between the lines. FCA code needs to be deciphered by a consultant experienced in the workings of the FCA. Reality Check - You may not know what FCA 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.
  • 9. If the discussions with the FCA 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 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 staff.
  • 10. 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, asking Compliance Consultant to conduct a Compliance Health-Check now is a small fraction of the costs of a S166. Reality Check - During a S166, the FCA can summon your S166 consultant and/or your auditor to attend their offices at your cost, whenever they wish
  • 11. 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 2012/13 year there were 113 S166 requests made and, costs ranged from £6,475 to £40m, up by 465%, with the average cost in excess of £1.56M each. 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.
  • 12. Does the FSA have the right to appoint the big accountancy firms? The simple answer is yes. Under S166 of FSMA 2000, the FSA 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. Since April 2013 they now have a panel of firms set to carry out this work. This will mean that the costs are likely to be higher than before, but this can be reduced considerably if you engage Compliance Consultant to carry out pre-S166 Preparation Planning with your firm. By having the right material ready For the S166 Auditor, you can save tens of thousands of pounds.
  • 13. Tip 5 The first thing that you need to do is issue a companywide document preservation order, this ensures that everyone knows not to conceal, delete, destroy, shred or in any way dispose of any document as these may help you in your new circumstances. Reality check - Under FSMA Section 177 it can be a criminal offence if a person destroys any documents suspecting an investigation.
  • 14. There are several points to consider here, when preparing your list of Skilled Person nominees; • Does the Consultancy have the right experience and skill set available? There is no point in using a consultancy that has exclusively dealt with mortgage brokers or stockbrokers, if you are an IFA firm. • Is the Consultancy staffed by adequately qualified people with broad professional and life-sense experience to provide a balanced view point? • Is the Consultancy familiar with the FSA and their ways of working? • Do they have the capacity to ramp up quickly if the FSA change the scope to require a project based S166 for larger samples of cases or a more detailed analysis of your systems and controls? • Are they committed to professionalism, quality and accurate representation?
  • 15. You only get a one chance with this. Do not treat the bidding process like a car insurance quote. The cheapest is just that, cheap and with no frills. Quite often single consultant deals can be dangerous if their views are jaundiced for some reasons or focussed in one particular area. Without a sanity check of an external person they could be inadvertently wandering off scope or not have the support to reinforce their conclusions.
  • 16. Tip 6 The FCA have appointed a panel of respected and competent firms to act on their behalf. These are the larger consultancies that normally perform audit and past business review work. This is a more expensive but less time consuming exercise than pre FCA.
  • 17. Compliance Consultant are experienced, skilled, and flexible. They always have a Quality Assurance and Project Oversight who provides this sounding board and independent viewpoint.
  • 18. What happens when you get your allocated audit firm? Nobody likes strangers poking about in their affairs for too long. You need to be prepared for some uncomfortable news, but do not see it as a fight or justification exercise, the auditors are there to obtain facts and evidence. To do this work correctly, the files, systems and controls, policies and governance, TCF or whatever aspect of review has been instructed has to be done properly for your own sake. Good preparation by Compliance Consultant can save you £££’s
  • 19. 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?
  • 20. • 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?
  • 21. Any external consultant who proposes to review more than 4 differing and varied cases per day (or 2 pension cases) from a cold start, is misleading you or selling you short and making uninformed decisions and conclusions that are sent to the FCA on your behalf. What value is your business worth to you over the next 12 months, five or even ten years?
  • 22. Tip 7 It is worth getting a thorough and professional job done while you have the chance, the cost of FCA scrutiny, defending your firm with appointed auditors and lawyers the cost of fines or loss of livelihood is exponentially greater. Reality check - After all, we are aware that if you choose well or choose badly, you may only have one chance at this.
  • 23. Price should be viewed in the round. If FSA decide 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.
  • 24. We do not keep staff around in case of suitable work and deploy them when and if the need arises, we only use experienced and qualified compliance staff that are specific to the project needs. There will only be the required people working on the report that needs to be there at any one time this focused approach keeps the cost to your firm at the level required and nothing else. Quality Assurance is always carried out independently and we will assist you with the details when you are invited to provide management responses to the auditors findings.
  • 25. Once you appoint us, we will discuss with you and the FCA the scope of the scrutiny that you face and iron out any anomalies and wrinkles. It has been known for the regulators to get mixed up. We will identify the initial documents required as best we can and make any preparations for the additional resource we may need to allocate so that they can work immediately on day 1 to conduct their part of the work efficiently and effectively in preparation for the S166 auditors. Reality check - Compliance Consultant Consultants will always conduct a review of your systems and controls before accepting you as a client (obviously an exception in a S166 exercise) and will provide you with recommendations for improvements.
  • 26. “Had I had the guidance of an expert, with the experience I now have today, my company and our board would have saved hundreds of thousands in costs, a similar amount in lost productivity and we would have reduced our personal and corporate risk.”
  • 27. We have published EBooks to help UK Authorised firms in Compliance and Risk areas. Our Compliance Managers Guidebook and Reference Manual suits any small or medium sized enterprise. Our Analysis & Risk Management System (ARMS™) Book is also targeted at small and medium sized enterprises helping them identify and evaluate, test and report their risks in accordance with FSA Handbook SYSC 4.1.1R
  • 28. Compliance Consultant Call (UK) 07801 864980 (Int) +44 7092 289901 www.complianceconsultant.org