The Financial Conduct Authority (FCA) employs skilled person reviews, also known as Section 166 reviews, to assess and rectify concerns within financial institutions. Recent data reveals a significant uptick in these reviews, especially in the retail banking and payments sectors. In this guide, we discuss the dynamics of skilled person reviews, providing insights into effectively navigating this intricate regulatory landscape.
Skilled person reviews are an integral component of the FCA’s regulatory toolkit, initiated to obtain an independent and expert assessment of a firm’s activities. These reviews play a crucial role in identifying potential risks, ensuring regulatory compliance, and safeguarding the integrity of financial markets.
Recent increase in skilled person reviews
Recent data from the FCA indicates a shift in the utilisation of skilled person reviews in the retail banking and payments sectors. The FCA’s published figures for Q1 2023/24 (April – June 2023) showed no S166 reports were commissioned in the banking/payments sector. However, in the subsequent quarter (Q2 2023/24, July – September 2023), a total of 18 cases were reported, with the majority, eight cases, observed in the retail banking and payments sectors. These reviews mainly focused on areas related to financial crime, controls, risk management, and business conduct, prompting firms to proactively evaluate their practices in these domains.
Focus areas of recent reviews
- Financial crime: One of the primary focuses of recent skilled person reviews has been on evaluating a firm’s framework for combating financial crime. This includes assessing the effectiveness of anti-money laundering (AML) measures, fraud prevention, and adherence to relevant regulations.
- Controls: The scrutiny of internal controls has been heightened to ensure they are robust and capable of effectively managing risks. Skilled person reviews in this area delve into the design and operational effectiveness of controls to safeguard against financial irregularities.
- Risk management: Effective risk management is critical in the financial sector. Recent reviews have placed a spotlight on how firms identify, assess, and manage risks. This encompasses not only financial risks but also operational and compliance-related risks.
- Business conduct: Ethical business conduct is a cornerstone of regulatory compliance. Recent reviews have examined whether firms are adhering to fair and transparent business practices. This includes assessing how a firm interacts with clients, manages conflicts of interest, and ensures fair treatment.
Reasons for commissioning a skilled person review
The FCA initiates a skilled person review to diagnose, monitor, reduce, or prevent identified risks. This may be triggered when an authorised firm contravenes a requirement to collect and keep up-to-date specific information as per regulatory rules. Financial crime, conduct of business, and client assets are frequent areas prompting such reviews.
Expectations from a skilled person report
A skilled person report, similar to a compliance audit, follows stages such as pre-audit documentation review, walkthroughs, testing, draft report, and final report. The FCA issues a requirement notice defining the review’s scope, and firms submit proposals for appointing a Skilled Person. The report can lead to the removal of sanctions or enforcement action.
Navigating skilled person reviews effectively
- Proactive evaluation: Firms should proactively evaluate practices in areas vulnerable to reviews, addressing potential weaknesses before regulatory scrutiny intensifies.
- Collaboration with experts: Engaging external experts, like compliance consultants, provides independent assessments aligned with the spirit of skilled person reviews.
- Continuous compliance monitoring: Implementing robust compliance monitoring ensures consistent alignment with regulatory expectations, identifying and rectifying potential issues promptly.
- Documenting processes: Comprehensive documentation of processes related to financial crime prevention, controls, risk management, and business conduct is essential. This aids day-to-day operations and serves as evidence of due diligence during regulatory reviews.
- Training and awareness programs: Investing in training programs enhances staff awareness of regulatory requirements, ensuring a commitment to compliance during skilled person reviews.
The importance of audits
For financial services firms audits have always been an important part of ensuring regulatory compliance. With the increase in FCA scrutiny, and in particular the increasing number of skilled person reviews within payments and e-money, audits are one of the essential tools firms have to ensure their compliance and regulatory operations are up to scratch and to limit their risk from potential scrutiny.
Every audit is different; the needs and concerns of the business dictate the breadth and scrutiny needed.
Some firms prefer to undergo annual or bi-annual audits that cover all of their regulatory compliance and AML operations. Others prefer to use audits targeted on specific areas of concern, priorities of the regulator or to check their implementation of recent changes to regulation and guidance. At Neopay, our consultants can help you identify the appropriate audit scope to meet your business priorities.
The benefits of regular audits
The right audit will not only reduce your risk of FCA scrutiny, enforcement action and penalties, but also increase the effectiveness of your compliance, raising profitability.
Your consultants should not only highlight gaps and suggest remedial actions, but they should also make you aware of the priorities and risks associated with any gaps.
With the increase in new FCA guidance and requirements, as well as their change in approach, it is vital that firms ensure their compliance frameworks and processes are keeping up to date. Regular audits are more important than ever.
How Neopay can help
As firms face intensified scrutiny through skilled person reviews, Neopay offers strategic support. Our expertise in compliance solutions, including comprehensive audits, training, and strategic consulting, equips firms to navigate the complexities of skilled person reviews effectively.
We also offer rolling audit contracts through one of our Virtual Compliance Service modules. This allows firms to take a practical, phased approach to reviewing their compliance whilst spreading the cost over the course of a year.
Contact our team to explore how we can support your business in achieving and maintaining regulatory compliance.
