Under the new regulatory regime, the number and scope of Skilled Person appointments is expected to increase further. The government intends to extend the regime with specific new powers in the Financial Services Bill for the PRA, FCA and 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 UKLA regime and RIEs and RCHs. The PRA insurance team has already warned that it may make even more use of these powers than FSA.
Whatever FSA may say in its Enforcement Guide and other statements, our experience is that FSA appoints a Skilled Person where two criteria are met. The first is that there is an apparent serious breach of some technical rules. The second is that FSA does not have sufficient confidence in management, and especially risk management, to investigate and resolve the matter satisfactorily themselves. This typically indicates a key point – the need for the firm to ensure that FSA is able to regain confidence in management and its judgement.
Our overall approach to a Skilled Person report is in principle to assist the firm to the fullest extent in managing the process, helping the firm to respond promptly and optimally to information requests, ensuring that adverse findings are reduced to an absolute minimum and in seeking to minimise the extent of future or retrospective remedial work.
The first step in assisting a firm is to seek to enable it to satisfy FSA that the appointment of a Skilled Person is unnecessary. 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 FSA as to why an alternative means of obtaining the information would be better. This can in our experience be done by satisfying FSA on what may be termed the “three dimensions” of the issue that has arisen:
- The firm notifies FSA promptly and in a manner giving confidence that it has properly scoped the issue
- The firm advises FSA what remedial action is required, giving a clear timetable
- The firm making clear that senior management will lead on the necessary remedial work, and that the key focus is that customers are not disadvantaged.
This approach is intended to reassure FSA that senior management are in command of the situation, and we have helped firms to use this formula on a number of occasions to good effect. Sometimes it is necessary to support this approach with an offer by the firm to commission their own report from us or an independent party. This is preferable to the formal s166 appointment 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 FSA proceeds with the appointment, it will usually allow the firm to choose the Skilled Person. FSA sometimes requires that the firm prepares a shortlist of three and then makes a choice, justifying its selection. On other occasions FSA requires the firm to make a choice from FSA’s own list of two or three firms.
In either case the firm must make its choice very carefully. It should scope the appointment (recognising that 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”). In many cases we have worked with the Skilled Persons being proposed and can assist in the choice of Skilled Person.
The Skilled Person process
Where FSA perseveres with the proposed appointment, there are four elements to managing a Skilled Person investigation:
- To agree the terms of reference.
- To manage the investigation effectively, so that the Skilled Person does not form an incorrect or unfair view of the matter under investigation.
- To review the draft report, seeking amendments as to findings of fact, judgements and conclusions.
- To assist the firm in preparing a management response to the final report and with any remedial actions that are required.
Agreeing terms of reference
While 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:
- The period under review. This should not extend back too far, nor should it continue after system changes or procedural enhancements were adopted.
- How the Skilled Person is to work. If a selection of files is to be reviewed, systems interrogated or staff interviewed, then the basis and method of this work should be clearly stated.
- The criteria. Whether the Skilled Person is reviewing records of retail sales, client money, equity execution, governance structures or financial resources, the scope of the appointment should clearly state the standard of review. For example “the Skilled Person shall review equity trades between 1st to 7th July for compliance with PRIN 2, SYSC 4.1 and COBS 11.1” is preferable to “the Skilled Person shall perform an examination of current processes around the sales process” or “a past business review of derivatives trading identifying customer detriment”. These latter examples are loosely worded and will enable the Skilled Person to judge not just against the rules but against wide concepts such as good industry practice, its view of a notional ideal position as well as FSA guidance and material in consultation papers and Dear CEO letters.
- The focus. The scope should ideally state that the Skilled Person is reviewing for material divergence from the stated standard (for example PRIN 2, SYSC 4.1 and COBS 11.1) and is required to identify where in consequence a customer has suffered or been exposed to the risk of material disadvantage. This formulation is intended to ensure that the Skilled Person does not produce an endless list of minor and potential faults, but instead concentrates on real customer disadvantage.
- The remedy. Where the Skilled Person is required to advise on redress, the formula should be stated in the scope at this stage, if possible, rather than left to later determination by FSA.
- The timetable and reporting process. FSA will normally specify a time limit within which it expects the Skilled Person to deliver the report and may provide for regular or interim reports to be made. The timetable should be reasonable and allow the firm sufficient time to review and respond to drafts.
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:
- Appoint a project team led by a senior manager to co-ordinate the firm’s cooperation with the Skilled Person.
- When documents are provided to the Skilled Person, ensure that they are in good order and accompanied by a clear explanation.
- When staff are to be interviewed, ensure that they are thoroughly prepared and briefed, accompanied to interview and a note taken. Any inconsistencies or misunderstandings can in this way be swiftly identified and remedied.
- Resisting “scope creep”. While a firm cannot prevent a Skilled Person from widening the scope of its report at FSA’s request, or if it detects further issues, a firm must be vigilant in keeping the Skilled Person within the bounds of its appointment. A question to be asking at each point is “How does this fit within the agreed scope?”
- Keeping abreast of developments. The firm must maintain a continual dialogue with the Skilled Person, seeking weekly updates and understanding its concerns and gauging its reaction and, if adverse, seeking to address it. The firm must ensure that it is the first to hear “bad news”, and not FSA.
- Receiving preliminary drafts. The firm should insist on receiving early drafts of all work streams so that it has an adequate opportunity to review and respond to work in progress. This will enable it to identify problems such as misinterpretation of data, unfavourable assumptions, biased sampling and scope creep. The Skilled Person should also agree to consider and provide a reasoned response to the firm’s comments on its preliminary drafts. Waiting for the draft overall report is usually waiting too long.
- Maintaining a dialogue with FSA. The Skilled Person will be required to make regular reports to FSA, and the firm must also ensure that it has open communications with FSA. In this way it can seek to maintain “symmetry of information” as between it, the Skilled Person and FSA. FSA also expect firms normally to be informed about the passage of information, and the Skilled Person would usually be expected to keep the firm informed of any communication between it and FSA. However, we have found that in practice this requirement is often overlooked by the Skilled Person and FSA. Where this is not done, the risk is that the Skilled Person and 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 as outlined above, 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. Our overall experience in recent months in relation to Skilled Person appointments is that it is necessary for the firm to be very alert to the risks of poor execution, over-zealous extension of remit, judgemental findings and conclusions overly influenced by FSA’s rather than the Skilled Person’s judgement. We seek to protect firms in this position by the following steps – some of which are equally applicable to earlier stages in the process:
- To check that the Skilled Person has not exceeded its terms of reference. In a current matter we have successfully pushed back on a number of adverse findings that fell outside the terms of appointment.
- To review for factual accuracy. In a number of draft Skilled Person reports we have helped the firm to eliminate material inaccuracies that pointed towards adverse findings.
- To review for representativeness of sampling. Where a period has been selected for review, or certain transactions chosen for scrutiny, we will review to ensure that any conclusions drawn are truly representative of the underlying position.
- To check that judgements are sustainable. In many cases a Skilled Person will form a view based on what it considers to be good industry practice, or will make its own interpretation of FSA rules or guidance. In other cases a Skilled Person may misunderstand the sales process, overlook or misinterpret disclosure documents or reach an incorrect view on an individual sale. We will often be able to challenge these judgements on the basis of our own or the firm’s knowledge of industry practice and FSA requirements.
- To ensure that extrapolations are fully grounded. Findings about the adequacy of senior management systems and controls, suitability of sales or overall governance, are likely to be derived from case reviews. We will ensure that these are fully grounded, and have in the past often and successfully challenged instances where they are not.
- To ensure that FSA has not unduly influenced the conclusions. Our recent experience is that FSA is increasingly pressurising a Skilled Person to reach views that are favourable to its position. If this happens we help the firm to resist the imposition of FSA’s views on the Skilled Person.
- To check that the conclusions are sustainable. The Skilled Person’s conclusions and recommendations should be soundly based on the facts, take full account of both FSA’s requirements and good industry practice, and be realistic. In every case we assist the firm to review conclusions and recommendations, and to challenge where they deviate from these norms.
Assisting with the management response and any 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/or may require or expect the firm to take additional remedial action or carry out a PBR. We can assist the firm with its response and help it to demonstrate a proactive attitude thus helping the firm to maintain a constructive relationship with FSA for the future and ensure it has put the past behind it.
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. FSA will often seek to rely on the Skilled Person report as its investigation. We seek to protect firms in this position by:
- Helping the firm draft the management response so that it is fair and robust by recognising any areas for improvement or where there have been failings but also addressing any areas where the findings are unjustified or unfair and setting out the action the firm has or will be taking.
- Helping the firm prepare for (or attending with the firm) follow up meetings with FSA. Our experience helps us to judge whether the firm is succeeding in getting back on track with FSA and we can help the firm present its actions so as to achieve this. In the past we have helped firms to successfully convince FSA not to refer them to enforcement.
- Helping the firm scope and carry out (or appoint another party to assist in) remedial action and/or any PBR to ensure it is reasonable and fair and in keeping with the firm’s regulatory responsibilities.
- Representing the firm should it be referred to enforcement. We have represented over 250 firms and individuals in enforcement proceedings and through our involvement and knowledge of the Skilled Person process we will be uniquely placed to help the firm defend and mitigate any enforcement action.