SUP 5
Reports by skilled persons
SUP 5.1
Application and purpose
- 01/12/2004
Application
SUP 5.1.1
See Notes
- 21/06/2001
SUP 5.1.2
See Notes
- 21/06/2001
Purpose
SUP 5.1.3
See Notes
The purpose of this chapter is to give guidance on the FSA's use of the power in section 166 of the Act (Reports by skilled persons). The purpose is also to make rules requiring a firm to include certain provisions in its contract with a skilled person and to give assistance to a skilled person. These rules are designed to ensure that the FSA receives certain information from a skilled person and that a skilled person receives assistance from a firm.
- 21/06/2001
SUP 5.2
The FSA's power
- 01/12/2004
Who may be required to provide a report?
SUP 5.2.1
See Notes
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SUP 5.3
Policy on the use of skilled persons
- 01/12/2004
SUP 5.3.1
See Notes
The appointment of a skilled person to produce a report under section 166 of the Act (Reports by skilled persons) is one of the
FSA's
regulatory tools. The tool may be used:
(1) for diagnostic purposes, to identify, assess and measure risks;
(2) for monitoring purposes, to track the development of identified risks, wherever these arise;
(3) in the context of preventative action, to limit or reduce identified risks and so prevent them from crystallising or increasing; and
(4) for remedial action, to respond to risks when they have crystallised.
SUP 5 Annex 1 gives examples of circumstances in which the FSA may use the skilled persons tool.- 21/06/2001
SUP 5.3.2
See Notes
The decision to require a report by a skilled personwill normally be prompted by a specific requirement for information, analysis of information, assessment of a situation or expert advice or recommendations. It will usually be part of the risk mitigation programme applicable to a firm, or the result of an event or development relating or relevant to a firm, or prompted by a need for verification of information provided to the
FSA
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SUP 5.3.3
See Notes
When making the decision to require a report by a skilled person, the FSA will have regard, on a case-by-case basis, to all relevant factors. Those are likely to include:
(1) circumstances relating to the firm;
(2) alternative tools available, including other statutory powers;
(3) legal and procedural considerations;
(4) the objectives of the
FSA's
enquiries;
(5) cost considerations; and
(6) considerations relating to
FSA
resources.
SUP 5.3.4 G to SUP 5.3.10 G give further guidance on these listed factors.- 21/06/2001
Circumstances relating to the firm
SUP 5.3.4
See Notes
The
FSA
will have regard to circumstances relating to the firm, for example:
(2) history of similar issues: whether similar issues have arisen in the past and, if so, whether timely corrective action was taken;
(3) quality of a firm's systems and records: whether the
FSA
has confidence that the firm has the ability to provide the required information;
(4) objectivity: whether the
FSA
has confidence in the firm's willingness and ability to deliver an objective report;
(5) conflicts of interest: whether the subject matter of the enquiries or the report involves actual or potential misconduct and it would be inappropriate for the
FSA
to rely on the firm itself to enquire into the matter; and
(6) knowledge or expertise available to the firm: whether it would be appropriate to involve a third party with the required technical expertise.
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Alternative tools available, including other statutory powers
SUP 5.3.5
See Notes
The
FSA
will have regard to alternative tools that may be available, including for example:
(1) obtaining what is required without using specific statutory powers (for example, by a visit by
FSA staff or a request for information on an informal basis);
(2) requiring information from firms and others, including authorising an agent to require information, under section 165 of the Act (Authority's power to require information);
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Legal and procedural considerations
SUP 5.3.6
See Notes
The
FSA
will have regard to legal and procedural considerations including:
(1) statutory powers: whether one of the other available statutory powers is more appropriate for the purpose than the power in section 166 of the Act (Reports by skilled persons);
(2) subsequent proceedings: whether it is desirable to obtain an authoritative and independent report for use in any subsequent proceedings; and
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The objectives of the FSA's enquiries
SUP 5.3.7
See Notes
The
FSA
will have regard to the objectives of its enquiries, and the relative effectiveness of its available powers to achieve those objectives. For example:
(1) historic information or evidence: if the objectives are limited to gathering historic information, or evidence for determining whether enforcement action may be appropriate, the FSA's information gathering and investigation powers under sections 165 (Authority's power to require information), 167 (Appointment of persons to carry out general investigations) and 168 (Appointment of persons to carry out investigations in particular cases) of the Act are likely to be more appropriate than the section 166 power (Reports by skilled persons); and
(2) expert analysis or recommendations: if the objectives include obtaining expert analysis or recommendations (or both) for diagnostic, monitoring, preventative or remedial purposes, the section 166 power (Reports by skilled persons) may be an appropriate power to use, instead of, or in conjunction with, the
FSA's
other available powers.
- 21/06/2001
Cost considerations
SUP 5.3.8
See Notes
In accordance with its general policy the
FSA
will have regard to the question of cost, which is particularly pertinent in relation to skilled persons because:
(1) if the
FSA
uses the section 166 power (Reports by skilled persons) the firm will appoint, and will have to pay for the services of, the skilled person;
(2) if the
FSA
uses its other information gathering and investigation powers, it will either authorise or appoint its own staff to undertake the information gathering or investigation (or both), or it will pay for the services of external competent persons to do so; in either case the costs will be recovered under the FSA's general fee scheme.
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SUP 5.3.9
See Notes
In having regard to the cost implications of using the section 166 power (Reports by skilled persons) alternative options (such as visits) or other powers, the
FSA
will take into account relevant factors, including:
(1) whether the firm may derive some benefit from the work carried out and recommendations made by the skilled person, for instance a better understanding of its business and its risk profile, or the operation of its information systems, or improvements to its systems and controls;
(2) whether the work to be carried out by the skilled person is work that should reasonably have been carried out by the firm, or by persons instructed by the firm on its own initiative; for instance a compliance review or the development of new systems;
(3) whether the firm's record-keeping and management information systems are poor and:
(a) the required information and documents are not readily available; or
(b) an analysis of the required information cannot readily be performed without expert assistance;
(4) whether the firm appears to have breached requirements or standards under the regulatory system or otherwise put the interests of consumers at risk, and it is unable or unwilling to review and remedy the matters of concern, or the
FSA
considers that it cannot rely on the firm to do so; and
(5) the perceived probability and seriousness of possible breaches of regulatory requirements and the possible need for further action.
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Considerations relating to FSA resources
SUP 5.4
Appointment and reporting process
- 01/12/2004
Scope of report
SUP 5.4.1
See Notes
The FSA will send a notice in writing requiring the person in SUP 5.2.1 G to provide a report by a skilled person on any matter if it is reasonably required in connection with the exercise of its functions conferred by or under the Act. The
FSA
may require the report to be in whatever form it specifies in the notice (SUP 5 Annex 2 summarises the appointment and reporting processes).
- 21/06/2001
SUP 5.4.2
See Notes
As part of the decision making process the
FSA
will normally contact the person in SUP 5.2.1 G to discuss its needs before finalising its decision to require a report by a skilled person. This will provide an opportunity for discussion about the appointment, whether an alternative means of obtaining the information would be better, what the scope of a report should be, who should be appointed, and the likely cost.
- 21/06/2001
SUP 5.4.3
See Notes
The
FSA
will give written notification to the person in SUP 5.2.1 G of the purpose of the report, its scope, the timetable for completion and any other relevant matters. The
FSA
will state the matters which the report is to contain as well as any requirements as to the report's format. For example, a report on controls may be required to address key risks, key controls and the control environment. The
FSA
attaches importance to there being a timetable for each report and to the skilled person, with the cooperation of the person in SUP 5.2.1 G, keeping to that timetable.
- 21/06/2001
SUP 5.4.4
See Notes
The written notification in SUP 5.4.3 G may be preceded or followed by a discussion of the
FSA's
requirements and the reasons for them. This may involve the
FSA, the person in SUP 5.2.1 G and the person who has been, or is expected to be, appointed as the skilled person. The
FSA
recognises that there will normally be value in holding discussions involving the skilled person at this stage. These discussions may include others if appropriate.
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SUP 5.4.5
See Notes
- 21/06/2001
Appointment process
SUP 5.4.6
See Notes
The
skilled person is appointed by the person in SUP 5.2.1 G. The FSA will normally seek to agree in advance with the person in SUP 5.2.1 Gthe skilled person who will make the report. The Act requires that the
skilled person be nominated or approved by the
FSA:
(1) if the
FSA
decides to nominate the skilled person who is to make the report, it will notify the person in SUP 5.2.1 G accordingly; and
(2) alternatively, if the
FSA
is content to approve a skilled person selected by the person in SUP 5.2.1 G, it will notify the latter person of that fact.
The
FSA
may give the person in SUP 5.2.1 G a shortlist from which to choose.- 21/06/2001
SUP 5.4.7
See Notes
A skilled person must appear to the
FSA
to have the skills necessary to make a report on the matter concerned. A skilled person may be an accountant, lawyer,
actuary or person with relevant business, technical or technological skills.
- 21/06/2001
SUP 5.4.8
See Notes
When considering whether to nominate or approve a skilled person to make a report, the FSA will have regard to the circumstances of the case, including whether the proposed skilledperson appears to have:
(1) the skills necessary to make a report on the matter concerned;
(2) the ability to complete the report within the time expected by the FSA;
(3) any relevant specialised knowledge, for instance of the person in SUP 5.2.1 G, the type of business carried on by the person in SUP 5.2.1 G, or the matter to be reported on;
(4) any professional difficulty or potential conflict of interest in reviewing the matters to be reported on, for instance because the matters to be reported on may involve questions reflecting on the quality or reliability of work previously carried out by the proposed skilled person; and
(5) enough detachment, bearing in mind the closeness of an existing professional or commercial relationship, to give an objective opinion on matters such as:
(a) matters already reported on by the skilled person (for example, on the financial statements of the person in SUP 5.2.1 G or in relation to their systems and controls);
(b) matters that are likely to be contentious and may result in disciplinary or other enforcement action against the person in SUP 5.2.1 G, its management, shareholders or controllers; or
(c) matters that the skilled person has been involved in, in another capacity (for example, when a skilled person has been involved in developing an information system it may not be appropriate for him to provide a subsequent opinion on the adequacy of the system).
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SUP 5.4.9
See Notes
In appropriate circumstances, it may be cost effective for the
FSA
to nominate or approve the appointment of a skilled person who has previously acted for, or advised, the person in SUP 5.2.1 G. For example, the
FSA
may nominate, or approve the appointment of, the auditor of a person in SUP 5.2.1 G to prepare a report taking into account, where relevant, the considerations set out in SUP 5.4.7 G.
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Reporting process
SUP 5.4.10
See Notes
The FSA will normally require the person in SUP 5.2.1 G to appoint the skilled person to report to the FSA through that person. In the normal course of events the FSA expects that the person in SUP 5.2.1 G will be given the opportunity to provide written comments on the report prior to its submission to the FSA (SUP 5 Annex 2 summarises the reporting process).
- 21/06/2001
SUP 5.4.11
See Notes
The FSA may enter into a dialogue with the skilled person, and is ready to discuss matters relevant to the report with him, during the preparation of the report. Such discussions will normally involve or be through the person in SUP 5.2.1 G.
- 21/06/2001
SUP 5.4.12
See Notes
The FSA will normally specify a time limit within which it expects the skilled person to deliver the report. The
skilled person should, in complying with its contractual duty under SUP 5.5.1 R, take reasonable steps to achieve delivery by that time. If the skilled person becomes aware that the report may not be delivered on time, he should inform the
FSA
and the person in SUP 5.2.1 G as soon as possible. If the skilled person becomes aware that there may be difficulties delivering the report within cost estimates, he will no doubt wish to advise the firm.
- 21/06/2001
SUP 5.4.13
See Notes
The FSA may meet with the person in SUP 5.2.1 G and the skilled person together to discuss the final report. The FSA may also wish to discuss the final report with the skilled person present but without the person in SUP 5.2.1 G.
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SUP 5.5
Duties of firms
- 01/12/2004
Contract with the skilled person
SUP 5.5.1
See Notes
When a firm appoints a skilled person to provide a report under section 166 of the Act (Reports by skilled persons), the firm must, in a contract with the skilled person:
(1) require and permit the skilled person during and after the course of his appointment:
(a) to cooperate with the
FSA
in the discharge of its functions under the Act in relation to the firm; and
(b) to communicate to the
FSA
information on, or his opinion on, matters of which he has, or had, become aware in his capacity as skilled person reporting on the firm in the following circumstances:
(i) the skilled person reasonably believes that, as regards the firm concerned (A) there is or has been, or may be or may have been, a contravention of any relevant requirement that applies to the firm concerned; and (B) that the contravention may be of material significance to the
FSA
in determining whether to exercise, in relation to the firm concerned, any functions conferred on the
FSA
by or under any provision of the Act other than Part VI. (Official Listing); or
(ii) the skilled person reasonably believes that the information on, or his opinion on, those matters may be of material significance to the
FSA
in determining whether the firm concerned satisfies and will continue to satisfy the threshold conditions; or
(iii) the skilled person reasonably believes that firm is not, may not be or may cease to be a going concern;
(2) require the skilled person to prepare a report, as notified to the firm by the
FSA, within the time specified by the FSA; and
(3) waive any duty of confidentiality owed by the skilled person to the firm which might limit the provision of information or opinion by that skilled person to the
FSA
in accordance with (1) or (2). (See also SUP 5.5.13 G and SUP 5.6)
- 21/06/2001
SUP 5.5.2
See Notes
In complying with the contractual duty in SUP 5.5.1 R (1) the
FSA
expects that a skilled person appointed under section 166 of the Act (Reports by skilled persons) will cooperate with the
FSA
by, amongst other things, providing information or documentation about the planning and progress of the report and its findings and conclusions, if requested to do so. A firm should therefore ensure that the contract it makes with the skilled person requires and permits the skilled person to provide the following to the
FSA
if requested to do so:
(1) interim reports;
(2) source data, documents and working papers;
(3) copies of any draft reports given to the firm; and
(4) specific information about the planning and progress of the work to be undertaken (which may include project plans, progress reports including percentage of work completed, details of time spent, costs to date, and details of any significant findings and conclusions).
- 21/06/2001
SUP 5.5.3
See Notes
If the
FSA
is considering asking for the information specified in SUP 5.5.2 G it will take into consideration the cost of the skilled person complying with the request, and the benefit that the
FSA
may derive from the information. For example, in most cases, the
FSA
will not need to request a skilled person to give it source data, documents and working papers. However, the
FSA
may do so when it reasonably believes that this information will be relevant to any investigation it may be conducting, or any action it may need to consider taking against the firm.
- 21/06/2001
SUP 5.5.4
See Notes
In complying with the contractual duty in SUP 5.5.1 R, the
FSA
expects that, in the case of substantial or complex reports, the skilled person will give a periodic update on progress and issues to allow for a re-focusing of the report if necessary. The channel of communication would normally be directly between the skilled person and the
FSA
. However, the
FSA
would also expect firms normally to be informed about the passage of information, and the skilled person would usually be expected to keep the firm informed of any communication between the skilled person and the
FSA.
- 21/06/2001
SUP 5.5.5
See Notes
A firm must ensure that the contract required by SUP 5.5.1 R:
(1) is governed by the laws of a part of the United Kingdom;
(2) expressly
(a) provides that the
FSA
has a right to enforce the provisions included in the contract under SUP 5.5.1 R and SUP 5.5.5 R (2);
(b) provides that, in proceedings brought by the
FSA
for the enforcement of those provisions, the skilled person is not to have available by way of defence, set-off or counterclaim any matter that is not relevant to those provisions;
(c) (if the contract includes an arbitration agreement) provides that the
FSA
is not, in exercising the right in (a), to be treated as a party to, or bound by, the arbitration agreement; and
(d) provides that the provisions included in the contract under SUP 5.5.1 R and SUP 5.5.5 R (2) are irrevocable and may not be varied or rescinded without the
FSA's
consent; and
(3) is not varied or rescinded in such a way as to extinguish or alter the provisions referred to in (2)(d).
- 21/06/2001
SUP 5.5.6
See Notes
The Contracts (Rights of Third Parties) Act 1999, or Scots common law, enables the
FSA
to enforce the rights conferred on it under the contract against the skilled person.
- 21/06/2001
SUP 5.5.7
See Notes
If the
FSA
considers it appropriate, it may request the firm to give it a copy of the draft contract before it is made with the skilled person. The
FSA
will inform the firm of any matters that it considers require further clarification or discussion before the contract is finalised.
- 21/06/2001
SUP 5.5.8
See Notes
The
FSA
expects the firm, in complying with Principle 11, to give the
FSA
information about the cost of the skilled persons report. This may include both an initial estimate of the cost as well as the cost of the completed report. This information is required to help inform the
FSA's
decision making in the choice of regulatory tools. Information about the number and cost of reports by skilled persons will be published by the
FSA.
- 21/06/2001
Assisting the skilled person
SUP 5.5.9
See Notes
A firm must provide all reasonable assistance to any skilled person appointed to provide a report under section 166 of the Act (Reports by skilled persons).
- 21/06/2001
SUP 5.5.10
See Notes
In providing reasonable assistance under SUP 5.5.9 R, a firm should take reasonable steps to ensure that, when reasonably required by the skilled person, each of its appointed representativeswaives any duty of confidentiality and provides reasonable assistance as though SUP 5.5.1 R (3) and SUP 5.5.9 R applied directly to the appointed representative.
- 21/06/2001
SUP 5.5.11
See Notes
Reasonable assistance in SUP 5.5.9 R should include:
(1) access at all reasonable business hours for the skilled person to the firm's accounting and other records in whatever form;
(2) providing such information and explanations as the skilled person reasonably considers necessary or desirable for the performance of his duties; and
(3) permitting a skilled person to obtain such information directly from the firm's auditor as he reasonably considers necessary or desirable for the proper performance of his duties.
- 21/06/2001
Responsibility for delivery
SUP 5.5.12
See Notes
In complying with Principle 11, a firm is expected to take reasonable steps to ensure that a skilled person delivers a report in accordance with the terms of his appointment.
- 21/06/2001
Assistance to skilled persons from others
SUP 5.5.13
See Notes
Section 166(5) of the Act (Authority's power to require information) imposes a duty on certain persons to give assistance to a skilled person. The persons on whom this duty is imposed are those who are providing, or have at any time provided, services to any person falling within SUP 5.2.1 G. They include suppliers under material outsourcing arrangements.
- 21/06/2001
SUP 5.6
Confidential information and privilege
- 01/12/2004
Confidential information
SUP 5.6.1
See Notes
Within the legal constraints that apply, the
FSA
may pass on to a skilled person any information which it considers relevant to the skilled person's function. A skilled person, being a primary recipient under section 348 of the Act (Restrictions on disclosure of confidential information by Authority etc.), is bound by the confidentiality provisions in Part XXIII of the Act (Public record, disclosure of information and cooperation) as regards confidential information he receives from the
FSA
or directly from a firm or other person. A skilled person may not pass on confidential information without lawful authority, for example, where an exception applies under the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001 (SI 2001/2188) or with the consent of the person from whom that information was received and (if different) to whom the information relates. The
FSA
will indicate to a skilled person if there is any matter which cannot be discussed with the person in SUP 5.2.1 G
- 21/06/2001
Banking confidentiality and legal privilege
SUP 5.6.2
See Notes
The limitations in the following sections of the Act are relevant to this chapter:
(1) section 175(5) (Information and documents: supplemental provisions) under which a person may be required under Part XI of the Act (Information Gathering and Investigations) to disclose information or produce a document subject to banking confidentiality (with exceptions); and
(2) section 413 (Protected items), under which no person may be required to produce, disclose or allow the inspection of protected items.
- 21/06/2001
SUP 5 Annex 1
Examples of when the FSA may use the skilled person tool (This Annex belongs to SUP 5.3.1G)
- 01/12/2004
See Notes
| Toolkit purpose | Purpose for use of tool | Examples of reasons for use of tool |
| Diagnostic | • To find out more about a concern (e.g. the result of a visit, risk assessment, or notification) and determine whether action is needed to mitigate a risk to the regulatory objectives or to determine whether there may have been a breach of a rule or of a threshold condition. • To assess the implications of, and firm's* response to, a change of circumstances e.g. - proposed entry into new business area; - new control structure; - merger or take-over; - new IT system; or - launch of an E-Commerce venture. | • Concern about effectiveness of the firm's* internal audit department. • Concern about reliability of submitted financial returns. • Inability of a firm* to quantify its current financial position. • Assessment of consequences of incomplete customer files. • Concern about quality of systems and controls. • Indication of financial crime or money laundering. • Concern about a firm's* controller. • Assessment of control structure when a bank (specialising in consumer lending) diversifies into commercial lending. |
| Diagnostic/monitoring | • To verify information provided to the FSA. | • Verification of a specific return to give the FSA assurance of the quality of information provided. |
| Monitoring | • To review systems and controls • To complement baseline monitoring | • Assessment of systems and controls in firms* where identified as a risk mitigation priority. • In-depth review of part of a firm* which is material to the firm's risk profile but of which the FSA does not consider it has an adequate, up-to-date understanding. |
| Preventative | • To gather and analyse information on an identified risk and develop recommendations for resolution. | Review of identified control weaknesses over client money to obtain recommendations to ensure compliance with the relevant rules. |
| Remedial | • To assist in the design of a customer redress programme. • To assist in the design of a remedial action plan. • To oversee and report on remedial action plan. | • Where possible, the
FSA
has identified possible losses from failure to reconcile assets or from mis-posting of transactions to the general ledger. • To report on quality of work undertaken and adherence to milestones in the action plan. |
| * or, where applicable, the other persons in SUP 5.2.1 G. | ||
- 21/06/2001
SUP 5 Annex 2
An overview of the appointment and report development process
- 01/12/2004
See Notes
An overview of the appointment and report development process
- 21/06/2001