Earlier this week, the Financial Conduct Authority (FCA) published its latest figures relating to the use of Skilled Persons Reviews, with the data demonstrating a substantial increase in the use of this ‘supervisory tool.’ With this in mind, we thought it would be useful to outline some of the trends, our observations and how firms can best prepare themselves should they be subject to a skilled person review.
Some background before diving into the data
Skilled person reviews are a tool used by the FCA to assess specific areas of concern within a regulated firm, such as conduct, financial controls, systems and controls, or governance. When the FCA contracts with a Skilled Person, it gives them a formal direction to investigate, review, or report on specific issues, and these findings are used to inform regulatory decisions. Depending on the findings, the FCA may require the firm to take remedial actions, which could range from improving internal controls to altering business practices. In some cases, the findings could lead to enforcement actions, including fines or restrictions on business activities.
The FCA data
Our analysis of the data highlights a total of 80 Skilled Person reviews commissioned across all sectors, which represents a 70% increase in the number of Skilled Person reviews commissioned this year, compared to 2022/23 when 47 were commissioned. This is the highest number ever commissioned since the inception of the FCA in 2013 reflecting the FCA’s more assertive and data led supervision strategy. More on that to follow..
In the detail of the data, 54 of the 80 reviews commissioned cover Lots C (Controls and Risk Management Framework) and Lot E (Financial Crime) with the bulk of these within Retail Banking and Payments (20) and Retail Investments (22). Given the rise in APP scams and payment fraud, and the control failings that we have observed across firms (many of which are leading to large scale remediation exercises), this is not altogether surprising. That said, given the introduction of the Payment Services Regulator’s ‘mandatory reimbursement measures’ that are effective from 7 October, this may well lead to a reduction in Lot E commissioned reviews going forward.
Whilst reviews were conducted within the Retail Lending sector, the numbers remain low (6). This is consistent with previous reporting periods, although, our expectation is that we will see a significant increase in the number of skilled person reviews within retail markets in future, noting the FCA’s priority and focus on embedding all aspects of the Consumer Duty.
And finally, the number of Conduct of Business (Lot D) reviews account for just 20%.This number has remained relatively static over the last 5 years although interestingly, there has been a marginal reduction since the implementation of Consumer Duty While this may seem surprising given it’s a year since the implementation of the Duty, we expect to see this rise over the next few years as the FCA’s turns its focus on firms’ embedding of the Duty including its planned review of a selection of firms’ Board Reports. As such, it’s crucial that firms critically look at their embedding of the Duty and their associated conduct related controls across all three lines of defence.
What’s behind this approach and what should firms be doing?
The Financial Conduct Authority (FCA) has adopted a more assertive strategy as part of its 2022-2025 plan. This approach is designed to enhance its regulatory effectiveness and better protect consumers. The focus of its works is clear:
- Identifying and mitigating risks before they cause significant harm. This includes taking swift action where risks are identified, and
- The raising of the bar for regulatory standards, ensuring that firms meet higher expectations in terms of conduct and consumer protection. The Consumer Duty is a critical part of this strategy.
We know through our support of firms and our wider industry engagement the volume of issues firms are currently dealing with are extensive. Critical areas of regulatory focus include affordability and responsible lending, ensuring customers received fair value, supporting customers in financial difficulty, complaints, evidencing outcomes and firms ability to evidence robust governance.
A critical part of the FCA’s work going forward will be to test firm’s enhanced policies, procedures, and ways of working against the new standards imposed by the Consumer Duty. Firms will also be subject to ongoing data requests as the FCA continues to implement is ‘data led’ approach.
Conclusion
This assertive strategy reflects the FCA’s commitment to being a proactive and adaptive regulator in a rapidly changing financial landscape. The increase in the number of reviews commissioned also highlights FCA’s strengthened regulatory oversight and proactive approach to regulation since the introduction of the Consumer Duty, aiming to prevent issues before they escalate, ultimately ensuring a fair, transparent, and secure financial market for consumers and businesses.
For firms, this update serves as a reminder to maintain robust systems and processes ensuring they can meet the FCA’s requirements and protect consumer interests as expected as part of the Consumer Duty requirements. Where firms fail to meet the requirements, particularly in the new world of Consumer Duty, the FCA will use its power under Section 166 of FSMA to get an independent view of aspects of a firm’s activities that cause them concern or if they require further analysis.
The consequences of a Skilled Person Review, both operationally and commercially can be significant for firms and that’s why you need to think carefully about who you choose as Skilled Person. In the event that you are required to appoint a skilled person, consider what additional advisory expertise may be required to support the appointment and timely execution of the in scope deliverables outlines in the Requirement Notice.
How can Square 4 help?
At Square 4 we specialise in regulatory compliance across the FCA agenda throughout the Wealth and Retail Lending sectors. Our specialist consultants can support as a skilled person or supporting your in-house team to deliver against the Requirement Notice, mitigating costs and damage to your reputation.
Please contact us at hello@square4.com should you wish to discuss how we might be able to support your firm further.
