What is a s166 notice?
A s166 notice is a notice issued by the Financial Conduct Authority (FCA) under s166 of the Financial Services and Markets Act 2000 requiring a firm to carry out a “skilled person review”. The FCA serves around 50 a year.
A skilled person review is an independent review of a regulated firm, usually focusing on specific issues where the regulator wishes to delve deeper into a firm’s activities. The report will generally establish the extent of any problems and/or the degree of any customer detriment and required remedial action. The skilled person review may be used by the FCA to determine the ongoing supervisory relationship that the FCA has with the firm, and/or whether the FCA will undertake any enforcement action against the firm.
It is the FCA that commissions the report, but the FCA will nominate, or ask the firm to nominate (with the agreement of the FCA), a skilled person to undertake the skilled person review. The costs of the skilled person review are generally borne by the regulated firm, and may be substantial.
Who is the skilled person?
The skilled person is an independent person with the skills necessary to make a report on the matters concerned. The FCA maintains an approved "Skilled Persons Panel" for eight different regulatory areas (eg, client assets, financial crime), known as "Lots". The Lots are mostly made up of well-known firms of solicitors and accountants. Where the FCA nominates the skilled person, it will do so from the approved panel. Where the regulated firm nominates the Skilled Person, it is generally also necessary to do so from the approved panel as the firm’s nominee will need to be approved by the FCA, and the FCA has made clear that it expects selections to be made from the panel, where possible.
What steps should you take?
The specific steps a firm should take will depend on the circumstances, but if your firm is served with a s166 notice, or if it may soon be served with one, you should consider the following:
- There will often be an opportunity to consult the FCA before a s166 notice is served. According to the FCA Handbook, the FCA’s decision making process will normally involve contacting the firm to discuss its needs before deciding to require a skilled person review. You should prepare for this consultation with the FCA thoroughly, as it will provide an important opportunity to discuss, and to potentially influence, the FCA on key matters such as whether there is an appropriate alternative means of obtaining the information, the scope of any skilled person review, who should be appointed, who should appoint and the likely cost.
- It may, for example, be possible to persuade the FCA that another process, such as investigation and reporting by the firm itself, should be carried out before a decision is made as to whether a skilled person review is needed. If it is clear that a skilled person review will be required it may be possible to agree reductions to the scope of that review (e.g. the topics to be addressed, or time period to be covered).
- You should consider whether you wish to nominate the skilled person, or whether you are content to leave the appointment to the FCA. There may be pros and cons of each but it will usually be to the firm’s interests to nominate the skilled person. One key advantage of appointing the skilled person is that the skilled person will be required to deliver the report to the firm, giving the firm an opportunity to comment on the report before its submission to the FCA. Where the FCA appoints the skilled person the report is submitted directly to the FCA.
- It is a good idea to engage a lawyer with experience of the s166 process. Lawyers can assist in discussions with the FCA, or brief witnesses before they meet the skilled person to ensure that the witness knows what to expect and how to prepare. Lawyers may also be able to help you carry out your own investigation of the matters that will be looked into by the skilled person so that the firm is in the best position to comment on the skilled person’s report and to negotiate with the FCA on any potential enforcement action once the skilled person review is complete.
Summary
A s166 notice provokes fear in the hearts of financial organisations as it indicates that your firm’s risk and compliance monitoring has gone awry in the eyes of the FCA.
The FCA serves around 50 a year, so you are not alone. It should not be considered a punitive measure, but is more often diagnostic, preventative and corrective.
Take the notice seriously. Not only does it give the FCA an indication of the sort of firm you are, but it is sometimes possible to rebut the concerns of the FCA.
Most firms prefer to appoint the Skilled Person to prepare the report. You will have to cover the costs either way. Prudent firms appoint lawyers to help.
Finally, see it as a warning to tread carefully from then on. The FCA will be watching you.
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