The process typically begins with the FCA issuing a Draft Requirement Notice (“DRN”) to the firm, specifying the scope of the Review and providing timelines for appointment of the skilled person, the Review, and required report. Firms should carefully review the notice and seek advice to ensure that they fully understand the requirements.
What is a s166 Review?
with Novatus Global
Novatus Global supports firms through FCA-mandated s166 Reviews by acting as a skilled person, guiding firms through the process, and helping remediate findings.
A Complete Guide to FCA Skilled Person Reviews
The Financial Conduct Authority (“FCA”) plays a pivotal role in safeguarding the integrity and stability of the UK’s financial markets and has a number of tools in its supervisory arsenal to fulfil this mandate. Among the most serious is the Section 166 (“s166”) Review, commonly referred to as a skilled person Review; a mechanism for understanding and addressing concerns about a firm’s operations, systems, or controls. This process involves the appointment of an independent third party – referred to as a “skilled person” – to investigate specific areas of a regulated firm’s business and provide an objective assessment to the FCA.
For regulated firms, understanding the intricacies of s166 Reviews is essential to navigating regulatory challenges effectively. Failure to do so could result in fines and loss of clients, further regulatory scrutiny, reputational damage, and in the worst cases, loss of firm license.
Clarity in the process is essential – Novatus is on hand to support firms through the s166 process. If you would like to discuss, contact one of our experts.
Understanding the Purpose of a s166 Review
Regulatory Oversight
The s166 Review is rooted in s166 of the Financial Services and Markets Act 2000 (“FSMA”), which grants the FCA authority to require a firm to appoint a skilled person – or to appoint one directly – to examine specific aspects of a regulated business. The skilled person, who must be independent of the firm, is tasked with producing a report that provides the FCA with an impartial evaluation of the issues under scrutiny.
Diagnostic Tool
The FCA typically invokes s166 when it identifies significant issues during its supervisory activities or through other means, such as incident reports or whistleblowing allegations. The Review serves as a diagnostic tool, enabling the regulator to gain a deeper understanding of the extent of any problems and determine the appropriate course of action. This mechanism is not intended to be punitive but rather remedial, offering a pathway for firms to address regulatory concerns and improve their compliance frameworks.
The Consequences of Failing an s166 Review
Potential Impact
The outcome of a s166 review can have significant implications for a firm. If the skilled person identifies serious deficiencies, the FCA may take enforcement action, impose fines, or require the firm to implement remedial measures. In extreme cases, the FCA may restrict a firm’s activities or withdraw its authorisation altogether.
Remedial Purpose
However, it is important to recognise that the primary purpose of a s166 review is not punitive but remedial. The findings of the review provide a roadmap for addressing weaknesses and improving compliance. Firms that respond proactively and constructively to the Review’s recommendations can often rebuild trust with the regulator and enhance long-term resilience.
Ongoing Oversight
In some cases, the FCA may require the firm to undertake additional monitoring or reporting to ensure that the issues identified in the review are adequately addressed. This may involve regular updates to the FCA on the firm’s progress in implementing the skilled person’s recommendations, as well as ongoing oversight by the skilled person or another independent party.
When is a s166 Review Required?
A s166 Review is not a routine exercise; it is initiated when the FCA has substantial concerns about a firm’s practices. These concerns may arise from various sources, including supervisory findings, breaches of regulatory requirements, or significant incidents such as operational failures or customer harm. For example, if a firm is found to have inadequate anti-money laundering (“AML”) controls or a history of mis-selling financial products, the FCA may deem it necessary to commission a skilled person Review.
The decision to commission a s166 Review lies solely with the FCA, and firms are legally obligated to comply. While the prospect can be daunting, it is important to recognise that it is often a response to specific issues rather than a blanket indictment of a firm’s operations. By engaging constructively with the process, firms can demonstrate their commitment to addressing regulatory concerns and improving their compliance practices.
Exploring the Different Types of s166 Reviews
The scope of a s166 review is shaped by the specific concerns identified by the FCA and can, therefore, cover a wide range of issues. Each review requires a tailored approach, calling for an appropriate skilled person team that brings expertise to ensure an effective Review.
One common type of Review focuses on compliance with regulatory requirements, such as complaints handling rules or approach to providing investment advice. In these cases, the skilled person assesses whether the firm’s policies, procedures, and controls in practice are adequate to meet its regulatory obligations. This may involve a detailed examination of the firm’s client-facing staff, the compliance function, including its governance structure, reporting lines, and resource allocation.
Maintaining Compliance After a s166 Review
S166 Implementation
The conclusion of a s166 review marks the beginning of a new phase for the firm. To maintain compliance and prevent future issues, firms must take proactive steps to address the findings and embed improvements in their operational and compliance frameworks. This includes implementing the skilled person’s recommendations, enhancing governance structures, and providing targeted training to staff to ensure a real shift in culture and approach to risk management, benefitting the resilience of the firm. This embedding can take time, and the firm must ensure it can demonstrate there have been real operational changes in the control framework which have become part of business-as-usual.
Continuous Compliance
Ongoing monitoring is also critical to ensuring that the firm remains compliant with regulatory requirements. This may involve establishing mechanisms to detect emerging risks, conducting regular internal audits, and maintaining open lines of communication with the FCA. By adopting a forward-looking approach, firms can not only address the immediate issues identified in the review but also build a culture of compliance that supports long-term success.
Next Steps
Novatus has seen an increase in FCA use of s166 skilled person Reviews. Partnering with the right firm is integral to delivering a successful outcome and mitigating the risk of additional regulatory scrutiny.
The experience of our team has recently been recognised by our admission to the APCC’s Additional Skilled Person Suppliers list, demonstrating Novatus’ ability to deliver, or support firms undergoing, a s166.
Key members of our proposition team have made a video explaining the basics of a s166 and how firms can benefit from partnering with Novatus on these complex Reviews.
Novatus can support firms across three key activities, providing tailored and proportionate solutions, ensuring that you can return to BAU in a controlled manner as quickly as possible:
- Acting as the skilled person carrying out the Review
- Working to guide your firm through the Review
- Providing support to remediate findings
Contact one of our experts for more information.
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