This chapter (other than the rules, and guidance on rules, in SUP 5.5 (Duties of firms)) is also relevant to certain unauthorised persons within the scope of section 166 of the Act (Reports by skilled persons) (see SUP 5.2.1 G).

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.

Under section 166 of the Act (Reports by skilled persons), the FSA may, by giving a written notice, require any of the following persons to provide it with a report by a skilled person:

1. (1)

   a firm;

2. (2)

   any other member of the firm's group;

3. (3)

   a partnership of which the firm is a member;

4. (4)

   a person who has at any relevant time been a person falling within (1), (2) or (3);

but only if the person is, or was at the relevant time, carrying on a business.

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. (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.

SUP 5 Annex 1 gives examples of circumstances in which the FSA may use the skilled persons tool.

The decision to require a report by a skilled person will normally be prompted by a specific requirement for information, analysis of information, assessment of a situation,4 expert advice or recommendations or by a decision to seek assurance in relation to a regulatory return4. It may4 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, prompted by a need for verification of information provided to the FSA or part of the FSA's regular monitoring of a firm4.

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. (1)

   circumstances relating to the firm;

2. (2)

   alternative tools available, including other statutory powers;

3. (3)

   legal and procedural considerations;

4. (4)

   the objectives of the FSA's enquiries;

5. (5)

   cost considerations; and

6. (6)

   considerations relating to FSA resources.

SUP 5.3.4 G to SUP 5.3.10 G give further guidance on these listed factors.

The FSA will have regard to circumstances relating to the firm, for example:

1. (1)

   attitude of the firm: whether the firm 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 firm's systems and records: whether the FSA has confidence that the firm has the ability to provide the required information;

4. (4)

   objectivity: whether the FSA has confidence in the firm's willingness and ability to deliver an objective report;

5. (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. (6)

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

The FSA 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 FSA staff or a request for information on an informal basis);

2. (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);

3. (3)

   appointing investigators to carry out general investigations under section 167 of the Act (Appointment of persons to carry out general investigations) (see EG 32 for the FSA's policy on the use of this power); and

   2
4. (4)

   appointing investigators to carry out investigations in particular cases under section 168 of the Act (Appointment of persons to carry out investigations in particular cases) (see EG 32 for the FSA's policy on the use of this power).

   2

The FSA 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 of the Act (Reports by skilled persons);

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 Handbookrules: whether it is important that the relevant rules in the Handbook should apply, for example SUP 5.5.1 R which obliges the firm to require and permit the skilled person to report specified matters to the FSA.

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. (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. (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.

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. (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. (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.

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. (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. (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. (3)

   whether the firm'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 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. (5)

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

The FSA will have regard to FSA-related considerations including:

1. (1)

   FSA expertise: whether the FSA has the necessary expertise; and

2. (2)

   FSA resources: whether the resources required to produce a report or to make enquiries are available within the FSA, or whether the exercise will be the best use of the FSA's resources at the time.

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).

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.

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.

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.

The FSA will wish to conduct the discussion with the firm, its skilled person and any others within a timescale appropriate to the circumstances of the case.

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 G the skilled person who will make the report. The Act requires that the skilled person be nominated or approved by the FSA:

1. (1)

   if the FSA decides to nominate the skilled person who is to make the report report, it will notify the person in SUP 5.2.1 G accordingly; and

2. (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.

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.

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. (1)

   the skills necessary to make a report on the matter concerned;

2. (2)

   the ability to complete the report within the time expected by the FSA;

3. (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. (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. (5)

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

   1. (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);

   2. (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

   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 an information system it may not be appropriate for him to provide a subsequent opinion on the adequacy of the system).

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.

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).

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.

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.

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.

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. (1)

   interim reports;

2. (2)

   source data, documents and working papers;

3. (3)

   copies of any draft reports given to the firm; and

4. (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).

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.

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.

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.

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.

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.

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 representatives or, where applicable, tied agents1waives 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 or tied agent1.

Reasonable assistance in SUP 5.5.9 R should include:

1. (1)

   access at all reasonable business hours for the skilled person to the firm'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 his duties; and

3. (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.

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.

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.

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

The limitations in the following sections of the Act are relevant to this chapter:

1. (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. (2)

   section 413 (Protected items), under which no person may be required to produce, disclose or allow the inspection of protected items.

An overview of the appointment and report development process