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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

The FCA's latest published figures show that skilled person reviews remain a key supervisory tool

Section 166 reviews are likely to be an attractive means to assist regulators in assessing the impact of the pandemic.

Earlier this month, the FCA published its latest disclosure relating to skilled person reviews under section 166 of the Financial Services and Markets Act 2000 (FSMA). The FCA commissioned twelve such reviews between April and June 2020. Of these, eight were in the Retail Investments sector and the Retail Banking and Payments sector, and key areas of focus included client assets (three reviews), controls and risk management frameworks (three reviews), conduct of business (three reviews) and financial crime (two reviews).

This is lower than the number of reviews commissioned by the FCA from January to March 2020, perhaps in part attributable to initial disruptive effects of the pandemic. However, in general the figures are consistent with a recent increase in the use of section 166 reviews by the FCA and the PRA. The number of reviews initiated in 2019/20 rose considerably when compared to previous years (see the attached graph of the numbers of reports commissioned from 2013 to 2020), with the number of FCA and PRA reviews almost doubling compared to the previous year. Notably, the PRA announced earlier this year that it had initiated ten section 166 reviews between December 2019 and February 2020 alone.

Although the FCA and PRA disclosures are limited in detail, the statistics suggest that the FCA's increased use of section 166 reviews may in part be driven by a greater focus on financial crime in recent years, with 28% of FCA reviews in 2019/2020, 41% of reviews in 2018/19 and 38% of reviews in 2017/18 all relating to financial crime issues. The PRA has attributed its more recent increase use of section 166 reviews to a growing emphasis on the accuracy of firms' regulatory returns, in light of its "Dear CEO" letter in October 2019 and its imposition on Citibank of a £43.9m fine for control and governance failures in connection with PRA regulatory reporting requirements in November 2019.

We might expect another increase in section 166 reviews as the FCA and PRA assess how firms have responded to the challenges of COVID-19. Throughout the pandemic, both the FCA and PRA have requested information from firms to understand COVID-19's effect on their operations. Although the FCA has accepted that the financial services industry has responded well, both the FCA and PRA have made it clear that they expect firms to have adequate operational resilience and financial resilience measures in place to deal with the disruptions raised by the pandemic. In addition, the regulators have made multiple pronouncements of their expectations on issues such as treating customers fairly through issues caused by the pandemic and the proper supervision of staff who are working from home.

In circumstances where the FCA and PRA are themselves dealing with operational issues caused by the government's lockdown measures, section 166 reviews are likely to be an attractive tool to assist them in assessing such issues.