Increasing cost of financial services skilled person reports reflects "frightening trend" for firms, says expert

Out-Law News | 04 Sep 2014 | 12:03 pm | 2 min. read

Financial regulators are requiring fewer reports from senior persons at firms under regulatory investigation, but the cost to firms of these reports is soaring, according to recently-published letters from the Financial Conduct Authority (FCA).

In a letter to Treasury Select Committee chair Andrew Tyrie (11-page / 656KB PDF), the FCA's Martin Wheatley said that the regulator had no plans to "significantly increase" the use of its powers to order a report under section 166 of the Financial Services and Markets Act (FSMA). Both he and Andrew Bailey, of the Prudential Regulation Authority (PRA) at the Bank of England, were responding to requests from the committee on their use of these powers, their frequency and costs.

Analysing the figures set out in the letters, financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind, said that firms did not appear more likely to be made the subject of a s166 skilled person report than in previous years. However, he said that any such report would now cost them "a significantly larger amount of money".

"In 2011-12, each of the 111 skilled person reports completed cost an average of £281,081," he said. "In 2013-14, each of the 50 skilled person reports completed cost an average of £2.9 million. This represents an increase of more than 925% per report."

"Whilst this may be slightly skewed by the large cost of a small number of reports, it reflects a frightening trend for those firms who are made the subject of a s166 skilled person requirement," he said.

Since 2013, both the FCA and PRA have had the power to order a firm to carry out a skilled person report where they have concerns about potential weaknesses or failings in a firm's practices. These reports can cover areas such as compliance, fraud, products and capital adequacy. The cost of carrying out these reports must be met by affected firms. Previously, these reports were carried out by third parties on behalf of previous regulator the Financial Services Authority (FSA).

In a letter to both regulators, Tyrie said that he was "particularly concerned" about the use of report requests and about how much compliance was costing firms. In his response, Martin Wheatley said that industry concerns about the use of skilled person reviews were "not borne out by the facts".

"Over the past few years the number of skilled person reviews has not significantly increased, and it is not our strategic aim to significantly increase the use of s166s going forward," Wheatley said.

"In 2012-13 the FSA used skilled person reviews 113 times; this fell by more than a quarter in 2013-14 when the FCA and PRA used it in aggregate 83 times. Overall, for the period April 2013 to March 2014, we commissioned a skilled person review for only 0.2% of the firms we regulate," he said.

Wheatley was also asked what steps the FCA took in order to try to keep the cost of skilled person reports to firms to a minimum. He said that supervisors only ordered these reviews when it was "proportionate" to do so, and kept the terms and scope of reviews as narrow as it could. In cases where the FCA directly contracted a skilled person to carry out the review, it did so "following a competitive tendering exercise and during which the issue of cost is a key consideration in the evaluation and selection process", he said.

Financial regulation expert Michael Ruck said that the FCA had previously "stated its willingness to use management and firm resources to address concerns and issues".

"Therefore, firms should challenge the FCA strongly to use the firm's resources rather than incurring the external costs of a s166 skilled person," he said.