1The purpose of this chapter is to give guidance on the FCA’s use of the powers in section 166 (Reports by skilled persons) and section 166A (Appointment of skilled person to collect and update information) of the Act as applied by section 312P (Information gathering and investigations) of the Act.

1The purpose is also to make rules requiring a critical third party to give assistance to a skilled person and, where a critical third party is required to appoint a skilled person, to include certain provisions in its contract with a skilled person. These rules are designed to ensure that the FCA receives certain information from a skilled person and that a skilled person receives assistance from a critical third party.

1. (1)

   1It is possible that section 166 (Reports by skilled persons) or section 166A (Appointment of skilled person to collect and update information) of the Act may apply to a critical third party directly rather than through section 312P (Information gathering and investigations) of the Act.

2. (2)

   For example, section 166 might apply because the critical third party is a member of the same group as an authorised person.

3. (3)

   SUP 5 (Reports by skilled persons) applies when section 166 or section 166A applies directly rather than through section 312P of the Act.

1If the FCA uses the powers in section 166 (Reports by skilled persons) or section 166A (Appointment of skilled person to collect and update information) of the Act in respect of a critical third party, it will normally make it clear whether it does so:

1. (1)

   under the regime for critical third parties (that is, under section 312P (Information gathering and investigations) of the Act);

2. (2)

   directly under section 166 or section 166A; or

3. (3)

   under both (1) and (2).

1 CTPS 12 deals with certain aspects of the costs of skilled persons reports.

1Under section 166 (Reports by skilled persons) as applied by section 312P (Information gathering and investigations) of the Act, the FCA may, by giving a written notice, itself appoint a skilled person to provide it with a report, or require any of the following persons to provide it with a report by a skilled person:

1. (1)

   a critical third party;

2. (2)

   a member of a critical third party’s group;

3. (3)

   a controller of the critical third party;

4. (4)

   a person mentioned in Part 1 of Schedule 15 to the Act (for example, an employee or agent of the critical third party); and

5. (5)

   a person who has at any relevant time been a person falling within (2) to (4).

1Under section 166A (Appointment of skilled person to collect and update information) as applied by section 312P (Information gathering and investigations) of the Act, the FCA may require a critical third party to appoint, or may itself appoint, a skilled person to collect or update information.

1The appointment of a skilled person to produce a report under section 166 (Reports by skilled persons) of the Act is one of the FCA’s regulatory tools. The tool may be used for any matter including:

1. (1)

   for diagnostic purposes, to identify, assess and measure risks;

2. (2)

   for monitoring purposes, to track the development of identified risks, wherever these arise;

3. (3)

   in the context of preventative action, to limit or reduce identified risks and so prevent them from crystallising or increasing; and

4. (4)

   for remedial action, to respond to risks when they have crystallised.

1The use of the tool could be prompted by any matter, including:

1. (1)

   a specific requirement by the FCA for information;

2. (2)

   an analysis of information undertaken by the FCA;

3. (3)

   an assessment of a situation by the FCA;

4. (4)

   expert advice or recommendations received by the FCA; or

5. (5)

   a decision by the FCA to seek assurance in relation to a regulatory report or its compliance with any part of CTPS.

1The tool may also be used as part of the oversight programme applicable to a critical third party. It may be prompted by an event or development in relation to a critical third party or by a need for verification of information provided to the FCA as part of ongoing monitoring of a critical third party.

1The FCA encourages a critical third party to speak to its overseers before commissioning any external review on subject matters which may be of interest to the FCA. This may avoid the critical third party incurring unnecessary costs where the FCA wishes to make use of skilled persons on the same, or broadly the same, matter.

1The appointment of a skilled person to collect and update information under section 166A (Appointment of skilled person to collect and update information) of the Act is another one of the FCA’s regulatory tools. It may be used where the FCA considers that a critical third party has failed to collect, or keep up to date, information required by the FCA.

1When making the decision to require a report by a skilled person under section 166 (Reports by skilled persons) or the collection or updating of information by a skilled person under section 166A (Appointment of skilled person to collect and update information) of the Act, the FCA will have regard, on a case-by-case basis, to all relevant factors. Those are likely to include:

1. (1)

   circumstances relating to the critical third party;

2. (2)

   alternative tools available, including other statutory powers;

3. (3)

   legal and procedural considerations;

4. (4)

   the objectives of the FCA’s enquiries;

5. (5)

   cost considerations; and

6. (6)

   considerations relating to the FCA’s resources.

1 CTPS 13.3.8G to CTPS 13.3.14G give further guidance on the factors in CTPS 13.3.6G.

1The FCA will have regard to circumstances relating to the critical third party, including, for example:

1. (1)

   attitude of the critical third party: whether the critical third party is being cooperative;

2. (2)

   history of similar issues: whether similar issues have arisen in the past and, if so, whether timely corrective action was taken;

3. (3)

   quality of a critical third party’s systems and records: whether the FCA has confidence that the critical third party has the ability to provide the required information;

4. (4)

   objectivity: whether the FCA has confidence in the critical third party’s willingness and ability to deliver an objective report;

5. (5)

   conflicts of interest: whether:

   1. (a)

      it would be inappropriate for the FCA to rely on the critical third party itself to enquire into the matter because, for example, the subject matter of the enquiries or the report involves actual or potential misconduct; or

   2. (b)

      the subject matter of the report is such that the critical third party and the FCA would benefit from an external third party; and

6. (6)

   knowledge or expertise available to the critical third party: whether it would be appropriate to involve a third party with the required technical expertise.

1The FCA will have regard to alternative tools that may be available, including, for example:

1. (1)

   obtaining what is required without using specific statutory powers (for example, by a visit by staff of the FCA or a request for information on an informal basis);

2. (2)

   requiring information from critical third parties and others, including authorising an agent to require information, under section 165 (Power to require information) of the Act;

3. (3)

   appointing investigators to carry out general investigations under section 167 (Appointment of investigator in general cases) of the Act if that power applies; and

4. (4)

   appointing investigators to carry out investigations in particular cases under section 168 (Appointment of investigator in specific cases) of the Act.

1The FCA will have regard to legal and procedural considerations, including:

1. (1)

   statutory powers: whether one of the other available statutory powers is more appropriate for the purpose than the power in section 166 (Reports by skilled persons) or section 166A (Appointment of skilled person to collect and update information) of the Act;

2. (2)

   subsequent proceedings: whether it is desirable to obtain an authoritative and independent report for use in any subsequent proceedings; and

3. (3)

   application of the Handbook rules: whether it is important that the relevant rules in the Handbook should apply, for example CTPS 13.5.1R, which obliges the critical third party to require and permit the skilled person to report specified matters to the FCA.

1The FCA will have regard to the objectives of its enquiries, and the relative effectiveness of its available powers to achieve those objectives. For example:

1. (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 FCA’s information gathering and investigation powers under section 165 (Power to require information), section 167 (Appointment of investigator in general cases) (if that power applies) and section 168 (Appointment of investigator in specific cases) of the Act may be more appropriate than the power in section 166 (Reports by skilled persons) or section 166A (Appointment of skilled person to collect and update information) of the Act if they are available; and

2. (2)

   expert analysis or recommendations: if the objectives include obtaining expert analysis or recommendations (or both) for diagnostic, monitoring, preventative or remedial purposes, the power in section 166 (Reports by skilled persons) may be an appropriate power to use, instead of, or in conjunction with, the FCA’s other available powers.

1In accordance with its general policy, the FCA will have regard to the question of cost, which is particularly pertinent in relation to skilled persons because:

1. (1)

   if the FCA uses the power in section 166 (Reports by skilled persons) or section 166A (Appointment of skilled person to collect and update information) of the Act, either:

   1. (a)

      the critical third party will appoint, and will have to pay for the services of, the skilled person; or

   2. (b)

      the FCA will appoint, and will require under FEES 3.2.7R(zp) or FEES 3.2.7R(zq) that the relevant critical third party pays for the services of, the skilled person; and

2. (2)

   if the FCA uses its other information gathering and investigation powers, it will either:

   1. (a)

      authorise or appoint its own staff to undertake the information gathering or investigation (or both); or

   2. (b)

      pay for the services of external competent persons to do so,

   and in either case the costs will be recovered under the FCA’s general fee scheme.

1In having regard to the cost implications of using the power in section 166 (Reports by skilled persons) or section 166A power (Appointment of skilled person to collect and update information) of the Act, alternative options (such as visits) or other powers, the FCA will take into account relevant factors, including:

1. (1)

   whether the critical third party 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. (2)

   whether the work to be carried out by the skilled person is work that should otherwise reasonably have been carried out by the critical third party, or by persons instructed by the critical third party on its own initiative; for instance, a compliance review or the development of new systems;

3. (3)

   whether the critical third party’s record-keeping and management information systems are poor and:

   1. (a)

      the required information and documents are not readily available; or

   2. (b)

      an analysis of the required information cannot readily be performed without expert assistance;

4. (4)

   whether the critical third party appears to have breached requirements or standards under the regulatory system or otherwise put the integrity of the UK financial system at risk, and it is unable or unwilling to review and remedy the matters of concern, or the FCA considers that it cannot rely on the critical third party to do so;

5. (5)

   the extent to which there appear to be risks that could threaten the FCA’s objectives; and

6. (6)

   the perceived probability and seriousness of possible breaches of regulatory requirements and the possible need for further action.

1The FCA will have regard to FCA-related considerations, including:

1. (1)

   whether the FCA has the necessary expertise; and

2. (2)

   whether the resources required to produce a report or to make enquiries, or to appoint a skilled person itself are available within the FCA, or whether the exercise will be the best use of the FCA’s resources at the time.

1When the FCA is contracting directly with a skilled person it will itself appoint the skilled person.

1Where the skilled person is appointed by the person in CTPS 13.2.1G or CTPS 13.2.2G, the Act requires that such skilled person be nominated or approved by the FCA:

1. (1)

   if the FCA decides to nominate the skilled person who is to make the report or collect or update the information, it will notify the person in CTPS 13.2.1G or CTPS 13.2.2G accordingly; and

2. (2)

   alternatively, if the FCA is content to approve a skilled person selected by the person in CTPS 13.2.1G or CTPS 13.2.2G, it will notify the latter person of that fact.

1Where the person in CTPS 13.2.1G or CTPS 13.2.2G is selecting the skilled person, the FCA may give that person in CTPS 13.2.1G or CTPS 13.2.2G a shortlist from which to choose.

1Where a critical third party is contracting with a skilled person, it remains the critical third party’s responsibility to assess the individual appropriateness of the skilled person.

1As part of the decision-making process, the FCA will normally contact the person in CTPS 13.2.1G or in CTPS 13.2.2G to discuss its needs before finalising its decision to require a report or the updating or collection of information by a skilled person. This will provide an opportunity for discussion about:

1. (1)

   the appointment;

2. (2)

   whether an alternative means of obtaining the information would be better;

3. (3)

   what the scope of a report should be;

4. (4)

   who should be appointed;

5. (5)

   who should appoint; and

6. (6)

   the likely cost.

1A skilled person must appear to the FCA to have the skills necessary to make a report on the matter concerned or collect or update the relevant information. A skilled person may be an accountant, lawyer, compliance consultant, actuary or person with relevant business, technical or technological skills.

1When considering whether to nominate, approve or appoint a skilled person to make a report or collect or update information, the FCA will have regard to the circumstances of the case, including whether the proposed skilled person appears to have:

1. (1)

   the skills necessary to make a report on the matter concerned or collect or update the relevant information;

2. (2)

   the ability to complete the report or collect or update the information within the time expected by the FCA;

3. (3)

   any relevant specialised knowledge, for instance, of:

   1. (a)

      the person in CTPS 13.2.1G or CTPS 13.2.2G;

   2. (b)

      the type of business carried on by the person in CTPS 13.2.1G or CTPS 13.2.2G;

   3. (c)

      the services provided by the critical third party; and

   4. (d)

      the matter to be reported on or information to be collected or updated;

4. (4)

   any professional difficulty or potential conflict of interest in reviewing the matters to be reported on, or the information to be collected or updated, for instance because it may involve questions reflecting on the quality or reliability of work previously carried out by the proposed skilled person; and

5. (5)

   enough detachment, bearing in mind the closeness of an existing professional or commercial relationship, to be able to collect or update the information or to give an objective opinion on matters such as:

   1. (a)

      matters already reported on by the skilled person; or

   2. (b)

      matters that are likely to be contentious and may result in disciplinary or other enforcement action against the person in CTPS 13.2.1G or CTPS 13.2.2G, its management, shareholders or controllers; or

   3. (c)

      matters that the skilled person has been involved in, in another capacity (for example, when a skilled person has been involved in developing aspects of a systemic third party service, it may not be appropriate for them to provide a subsequent opinion on the adequacy of that service).

1In appropriate circumstances, it may be cost effective for the FCA to nominate or approve the appointment of, or appoint itself, a skilled person who has previously acted for, or advised, the person in CTPS 13.2.1G or CTPS 13.2.2G.

1The FCA may require a report by a skilled person under section 166 (Reports by skilled persons) of the Act on any matter if it is reasonably required in connection with the exercise of the FCA’s functions conferred by or under Chapter 3C (Critical Third Parties) of Part XVIII (Recognised Investment Exchanges, Clearing Houses, CSDs and Other Parties) of the Act.

1If the skilled person appointed to make a report under section 166 (Reports by skilled persons) of the Act is appointed by the person in CTPS 13.2.1G, the FCA may require the report to be in whatever form it specifies in the notice to the person concerned.

1The FCA will give written notification to the person in CTPS 13.2.1G or CTPS 13.2.2G of the purpose of the report or collection or updating of information, its scope, the timetable for completion and any other relevant matters. The FCA will state the matters which the report is to contain, or the information which is to be collected or updated, as well as any requirements as to the report’s format.

1The FCA attaches importance to:

1. (1)

   there being a timetable for each report or collection and updating of information; and

2. (2)

   the skilled person, with the cooperation of the person in CTPS 13.2.1G or the critical third party in CTPS 13.2.2G, as relevant, keeping to that timetable.

1The written notification in CTPS 13.4.11G may be preceded or followed by a discussion of the FCA’s requirements and the reasons for them. This may involve the FCA, the person in CTPS 13.2.1G or in CTPS 13.2.2G and the person who has been, or is expected to be, appointed as the skilled person. The FCA recognises that there will normally be value in holding discussions involving the skilled person at this stage. These discussions may include others if appropriate.

1The FCA will wish to conduct the discussion with the critical third party, the skilled person and any others within a timescale appropriate to the circumstances of the case.

1Where enforcement action is anticipated as a likely outcome, the FCA would normally signal this to the skilled person prior to work commencing as this would impact the type of evidence which should be provided in support of the findings in the skilled person report.

1Where the skilled person is appointed by the person in CTPS 13.2.1G or CTPS 13.2.2G, the FCA will normally require the skilled person to be appointed to report to the FCA through that person.

1Where the skilled person is to be appointed by the FCA itself, the skilled person will report directly to the FCA.

1Regardless of how the skilled person is appointed, they will usually be in regular contact with the FCA throughout the process.

1. (1)

   1The FCA expects the skilled person normally to give a periodic update on progress and issues during the engagement, the frequency of which is to be discussed with the FCA. This should allow for a re-focusing of the report if necessary.

2. (2)

   Where the skilled person is appointed by the person in CTPS 13.2.1G or CTPS 13.2.2G:

   1. (a)

      the channel of communication would normally be directly between the skilled person and the FCA; and

   2. (b)

      the skilled person would usually be expected to keep the critical third party or other person informed of any communication between the skilled person and the FCA.

1It may be appropriate for the skilled person to communicate matters of material significance to the FCA set out in CTPS 13.5.1R(1)(b) without first informing the critical third party. The same applies to equivalent material in the case of another person in CTPS 13.2.1G or CTPS 13.2.2G.

1If the FCA is considering asking for additional information during the engagement, it will take into consideration the cost of the skilled person complying with the request and the benefit that the FCA may derive from the information.

1. (1)

   1In most cases, the FCA will not need to request a skilled person to give it source data, documents and working papers.

2. (2)

   However, the FCA 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 consider taking against the critical third party or other person.

1. (1)

   1The FCA will normally specify a time limit within which it expects the skilled person to deliver the report or collect or update the relevant information.

2. (2)

   The skilled person should take reasonable steps to achieve delivery by that time. Where the skilled person is appointed by the critical third party, this will be part of its contractual duty under CTPS 13.5.1R.

3. (3)

   If the skilled person becomes aware that the report may not be delivered, or collection or updating of the relevant information may not be on time or within cost estimates, the skilled person should inform as soon as possible:

   1. (a)

      the FCA; and

   2. (b)

      if the skilled person is appointed by the person in CTPS 13.2.1G or CTPS 13.2.2G, that person.

1. (1)

   1This paragraph applies where the skilled person is appointed by the person in CTPS 13.2.1G or CTPS 13.2.2G.

2. (2)

   In the normal course of events, the FCA expects that the person in CTPS 13.2.1G or CTPS 13.2.2G will be given the opportunity to provide written comments on the report or the collection of the relevant information prior to its submission to the FCA.

3. (3)

   The skilled person is expected to provide the FCA with identical copies of any draft report or relevant information at the same time they are issued to the person in CTPS 13.2.1G or CTPS 13.2.2G.

1The FCA may meet with the person in CTPS 13.2.1G or CTPS 13.2.2G and the skilled person together to discuss the final report.

1The FCA may also wish to discuss the final report with the skilled person present but without the person in CTPS 13.2.1G or CTPS 13.2.2G.

1The Contracts (Rights of Third Parties) Act 1999, or Scots common law, enables the FCA to enforce the rights conferred on it under the contract required by CTPS 13.5.1R against the skilled person.

1If the FCA considers it appropriate, it may request the critical third party to give it a copy of the draft contract required by CTPS 13.5.1R before it is made with the skilled person. The FCA will inform the critical third party of any matters that it considers require further clarification or discussion before the contract is finalised.

1The FCA expects a skilled person to clarify or discuss any matters that are raised by the FCA regarding a contract before it is finalised.

1Reasonable assistance in CTPS 13.5.9R should include:

1. (1)

   access at all reasonable business hours for the skilled person to the critical third party’s accounting and other records in whatever form;

2. (2)

   providing such information and explanations as the skilled person reasonably considers necessary or desirable for the performance of their duties; and

3. (3)

   permitting a skilled person to obtain such information directly from the critical third party’s auditor as they reasonably consider necessary or desirable for the proper performance of their duties.

1In respect of the appointment of a skilled person under section 166 (Reports by skilled persons) of the Act, section 166(7) (as applied by section 312P (Information gathering and investigations) of the Act), 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 CTPS 13.2.1G.

1In respect of the appointment of a skilled person under section 166A (Appointment of skilled person to collect and update information) of the Act, under section 166A(5) (as applied by section 312P (Information gathering and investigations) of the Act), a skilled person may require any person to provide all such assistance as the skilled person may reasonably require to collect or update the information in question.

1Within the legal constraints that apply, the FCA may pass on to a skilled person any information which it considers relevant to the skilled person’s function.

1A skilled person, being a primary recipient under section 348 (Restrictions on disclosure of confidential information by Authority etc.) of the Act, is bound by the confidentiality provisions in Part XXIII (Public record, disclosure of information and cooperation) of the Act as regards confidential information received from the FCA or directly from a critical third party or other person.

1A skilled person may not pass on confidential information without lawful authority. Lawful authority may exist, 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.

1The FCA will indicate to a skilled person if there is any matter which cannot be discussed with the person in CTPS 13.2.1G.

1The limitations in section 413 (Protected items) of the Act are relevant to this chapter. This section provides that no person may be required to produce, disclose or allow the inspection of protected items.

1In respect of the appointment of a skilled person under section 166A (Appointment of skilled person to collect and update information) of the Act, a contractual or other requirement imposed on a person to keep any information confidential will not apply if:

1. (1)

   the information is or may be relevant to anything required to be done as part of the skilled person’s appointment under section 166A of the Act;

2. (2)

   a critical third party or a skilled person requests or requires the person to provide the information for the purpose of securing that those things are done; and

3. (3)

   the FCA has approved the making of the request or the imposition of the requirement before it is made or imposed.

1A critical third party may provide information that would otherwise be subject to a contractual or other requirement to keep it in confidence if it is provided for the purposes of anything required to be done in respect of the skilled person’s collection or updating of information under section 166A (Appointment of skilled person to collect and update information) of the Act.