7In respect of the FCA's power in section 166 of the Act (Reports by skilled persons), the guidance in this chapter applies to a recognised investment exchange in the same way as it applies to a firm.

2 SUP 5.5.1R and SUP 5.5.5R apply to former CBTL firms in relation to their CBTL business as guidance and as if:

1. (1)

   a reference to firm in those rules were a reference to a CBTL firm;

2. (2)

   section 166 of the Act were a reference to section 166 of the Act as applied by article 23(2)(b) of the MCD Order; and

3. (3)

   the word “must” were replaced by the word “should”.

2The guidance in SUP 5.2.1G, SUP 5.3, SUP 5.4 (except SUP 5.4.1AG), and SUP 5.5 (except SUP 5.5.10G and SUP 5.5.11G) applies to CBTL firms and former CBTL firms in relation to their CBTL business as if:

1. (1)

   a reference to firm in that guidance included a CBTL firm;

2. (2)

   a reference to a section of the Act were a reference to that section as applied by article 23 of the MCD Order if applicable; and

3. (3)

   a reference to the FCA's functions under the Act were a reference to the FCA's functions under Part 3 of the MCD Order.

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).

7The purpose of this chapter is to give guidance on the appropriate regulator's use of the power in section 166 (Reports by skilled persons) and section 166A (Appointment of skilled person to collect and update information) of the Act. The purpose is also to make rules requiring a firm to give assistance to a skilled person and, where a firm 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 appropriate regulator 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 appropriate regulator2 may, by giving a written notice, itself appoint a skilled person to provide it with a report, or 2require 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.

2Under section 166A of the Act (Appointment of skilled person to collect and update information), the appropriate regulator may require a firm to appoint, or itself appoint, a skilled person to collect or update information.

The appointment of a skilled person to produce a report under section 166 of the Act (Reports by skilled persons) is one of the appropriate regulator's6 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.

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

The decision by the appropriate regulator6 to require a report by a skilled person under section 166 of the Act (Reports by skilled persons) 6will 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 appropriate regulator6 or part of the appropriate regulator's6 regular monitoring of a firm4.

6The decision by the appropriate regulator to require the collection or updating of information by a skilled person under section 166A of the Act (Appointment of skilled person to collect and update information) will be prompted where the appropriate regulator considers there has been a breach of a requirement by a firm to collect, and keep up to date, information of a description specified in the appropriate regulator'srules.

When 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 appropriate regulator6 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 appropriate regulator's6 enquiries;

   6
5. (5)

   cost considerations; and

6. (6)

   considerations relating to appropriate regulator's6 resources.

   6

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

The appropriate regulator6 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 appropriate regulator6 has confidence that the firm has the ability to provide the required information;

   6
4. (4)

   objectivity: whether the appropriate regulator 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 appropriate regulator6 to rely on the firm itself to enquire into the matter; and

   6
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 appropriate regulator6 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 bystaff of the appropriate regulator6or a request for information on an informal basis);

   6
2. (2)

   requiring information from firms and others, including authorising an agent to require information, under section 165 of the Act (Power6 to require information);

   6
3. (3)

   appointing investigators to carry out general investigations under section 167 of the Act (Appointment of investigator in general cases)6 (see EG 32 for the appropriate regulator's6 policy on the use of this power); and

   626
4. (4)

   appointing investigators to carry out investigations in particular cases under section 168 of the Act (Appointment of investigator in specific cases) (see EG 32 for the appropriate regulator's6 policy on the use of this power).

   26

The appropriate regulator6 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;6

   6
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 person6 to report specified matters to the appropriate regulator.6

   66

The appropriate regulator6 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 appropriate regulator's information gathering and investigation powers under sections 165 (Power to require information), 167 (Appointment of investigator in general cases) and 168 (Appointment of investigator in specific cases) of the Act are likely to 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; and6

   6
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 appropriate regulator's6 other available powers.

   6

In accordance with its general policy the appropriate regulator6 will have regard to the question of cost, which is particularly pertinent in relation to skilled persons because:

1. (1)

   if the appropriate regulator6 uses the section 166 power (Reports by skilled persons) or the section 166A power (Appointment of skilled person to collect and update information), either 6the firm will appoint, and will have to pay for the services of, the skilled person, or the appropriate regulator will appoint, and will require under FEES 3.2.7 R (zp) or FEES 3.2.7 R (zq) that the relevant firm pays for the services of, the skilled person6;

   6
2. (2)

   if the appropriate regulator6 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 appropriate regulator's6 general fee scheme.

   66

In having regard to the cost implications of using the section 166 power (Reports by skilled persons) or the section 166A power (Appointment of skilled person to collect and update information) 6alternative options (such as visits) or other powers, the appropriate regulator6will 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 appropriate regulator6 considers that it cannot rely on the firm to do so; and

   6
5. (5)

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

The appropriate regulator6 will have regard to appropriate regulator6-related considerations including:

1. (1)

   appropriate regulator6expertise: whether the appropriate regulator6has the necessary expertise; and

   66
2. (2)

   appropriate regulator6resources: whether the resources required to produce a report or to make enquiries or to appoint a skilled person itself6 are available within the appropriate regulator6, or whether the exercise will be the best use of the appropriate regulator's6 resources at the time.

   666

Where the appropriate regulator requires a report by a skilled person under section 166 of the Act (Reports by skilled persons), the appropriate regulator2 will send a notice in writing requiring the person in SUP 5.2.1 G to provide a report by a skilled person, or notifying the person in SUP 5.2.1 G in writing of the appropriate regulator's appointment of a skilled person to provide a report,2 on any matter if it is reasonably required in connection with the exercise of its functions conferred by or under the Act. The appropriate regulator may require the report to be in whatever form it specifies in the notice.

2Where the appropriate regulator requires the updating or collection of information by a skilled person under section 166A of the Act (Appointment of skilled person to collect and update information), the appropriate regulator will send a notice in writing requiring the firm to appoint a skilled person, or notifying the firm of the appropriate regulator's appointment of a skilled person, to collect or update the relevant information.

As part of the decision making process the appropriate regulator2 will normally contact the person in SUP 5.2.1 G or in SUP 5.2.2 G2 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 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, who should appoint, 2and the likely cost.

The appropriate regulator2 will give written notification to the person in SUP 5.2.1 G or SUP 5.2.2 G2 of the purpose of the report or collection or updating of information,2 its scope, the timetable for completion and any other relevant matters. The appropriate regulator2 will state the matters which the report is to contain, or the information which is to be collected or updated,2 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 appropriate regulator2 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 or the firm in SUP 5.2.2 G, as relevant2, keeping to that timetable.

The written notification in SUP 5.4.3 G may be preceded or followed by a discussion of the appropriate regulator's2 requirements and the reasons for them. This may involve the appropriate regulator,2 the person in SUP 5.2.1 G or in SUP 5.2.2 G2 and the person who has been, or is expected to be, appointed as the skilled person. The appropriate regulator2 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 appropriate regulator2 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.

Where the2skilled person is appointed by the person in SUP 5.2.1 G or SUP 5.2.2 G, the appropriate regulator2 will normally seek to agree in advance with the person in SUP 5.2.1 G or SUP 5.2.2 G2 the skilled person who will make the report or collect or update the relevant information.2 The Act requires that such2skilled person be nominated or approved by the appropriate regulator:2

1. (1)

   if the appropriate regulator2 decides to nominate the skilled person who is to make the report or collect or update the information,2 it will notify the person in SUP 5.2.1 G or SUP 5.2.2 G2 accordingly; and

   2
2. (2)

   alternatively, if the appropriate regulator2 is content to approve a skilled person selected by the person in SUP 5.2.1 G or SUP 5.2.2 G,2 it will notify the latter person of that fact.

   2

The appropriate regulator2 may give the person in SUP 5.2.1 G or SUP 5.2.2 G2 a shortlist from which to choose.

A skilled person must appear to the appropriate regulator2 to have the skills necessary to make a report on the matter concerned or collect or update the relevant information.2 A skilled person may be an accountant, lawyer, compliance consultant,2actuary or person with relevant business, technical or technological skills.

When considering whether to nominate, approve or appoint a skilled person to make a report or collect or update information, the appropriate regulator will have regard to the circumstances of the case, including whether the proposed skilled person appears to have:2

1. (1)

   the skills necessary to make a report on the matter concerned or collect or update the relevant information;2

2. (2)

   the ability to complete the report or collect or update the information within the time expected by the appropriate regulator;2

   2
3. (3)

   any relevant specialised knowledge, for instance of the person in SUP 5.2.1 G or SUP 5.2.2 G2, the type of business carried on by the person in SUP 5.2.1 G or SUP 5.2.2 G, or the matter to be reported on or information to be collected or updated;2

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 it2 may involve questions reflecting on the quality or reliability of work previously carried out by the proposed skilled person; and

   2
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 or2 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 SUP 5.2.2 G2 or in relation to their systems and controls); or2

   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 or SUP 5.2.2 G2, 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 appropriate regulator2 to nominate or approve the appointment of, or appoint itself,2 a skilled person who has previously acted for, or advised, the person in SUP 5.2.1 G or SUP 5.2.2 G.2 For example, the appropriate regulator2 may nominate or approve the appointment of, or appoint,2 the auditor of a person in SUP 5.2.1 G or SUP 5.2.2 G2 to prepare a report or collect or update the information2 taking into account, where relevant, the considerations set out in SUP 5.4.7 G.

Where the skilled person is appointed by the person in SUP 5.2.1 G or SUP 5.2.2 G, the appropriate regulator2 will normally require the skilled person to be appointed to report to the appropriate regulator2 through that person. In the normal course of events the appropriate regulator2 expects that the person in SUP 5.2.1 G or SUP 5.2.2 G2 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 appropriate regulator.2

2Where the skilled person is to be appointed by the appropriate regulator itself, the skilled person will report directly to the appropriate regulator.

The appropriate regulator2 may enter into a dialogue with the skilled person, and is ready to discuss matters relevant to the report or the collection or updating of the relevant information2 with him, during the preparation of the report or the collection or updating of the relevant information.2 Such discussions may2 involve or be through the person in SUP 5.2.1 G or SUP 5.2.2 G.2

The appropriate regulator2 will normally specify a time limit within which it expects the skilled person to deliver the report or collect or update the relevant information. Where the skilled person is appointed by the person in SUP 5.2.1 G or SUP 5.2.2 G, the2skilled 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, or collection or updating of the relevant information may not be,2 on time, he should inform the appropriate regulator2 and the person in SUP 5.2.1 G or SUP 5.2.2 G2 as soon as possible. Where the skilled person is appointed by the person in SUP 5.2.1 G or SUP 5.2.2 G, if2 the skilled person becomes aware that there may be difficulties delivering the report or collecting or updating the relevant information2 within cost estimates, he will no doubt wish to advise the firm.

The appropriate regulator2 may meet with the person in SUP 5.2.1 G or SUP 5.2.2 G2 and the skilled person together to discuss the final report. The appropriate regulator2 may also wish to discuss the final report with the skilled person present but without the person in SUP 5.2.1 G or SUP 5.2.2 G.2

In complying with the contractual duty in SUP 5.5.1 R (1) the appropriate regulator4 expects that a skilled person appointed by a firm4 under section 166 (Reports by skilled persons) or section 166A (Appointment of skilled person to collect and update information) of the Act4 will cooperate with the appropriate regulator4 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 appropriate regulator4 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 appropriate regulator4 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 appropriate regulator4 may derive from the information. For example, in most cases, the appropriate regulator4 will not need to request a skilled person to give it source data, documents and working papers. However, the appropriate regulator4 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 appropriate regulator4 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 appropriate regulator4. However, the appropriate regulator4 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 appropriate regulator.4

The Contracts (Rights of Third Parties) Act 1999, or Scots common law, enables the appropriate regulator4 to enforce the rights conferred on it under the contract required by SUP 5.5.1 R4 against the skilled person.

If the appropriate regulator4 considers it appropriate, it may request the firm to give it a copy of the draft contract required by SUP 5.5.1 R4 before it is made with the skilled person. The appropriate regulator4 will inform the firm of any matters that it considers require further clarification or discussion before the contract is finalised.

The appropriate regulator4 expects the firm, including where applicable4 in complying with Principle 11, to give the appropriate regulator4 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 appropriate regulator's4 decision making in the choice of regulatory tools. Information about the number and cost of reports by skilled persons will be published by the appropriate regulator.4

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.

2 Section 166(7) of the Act (as applied by article 23(2)(b) of the MCD Order) imposes, in appropriate circumstances, a duty on CBTL firms to give the skilled person all such assistance as the skilled person may reasonably require. Where this duty applies to a CBTL firm, the FCA expects the CBTL firm to:

1. (1)

   take reasonable steps to ensure that, when reasonably required by the skilled person, each of its appointed representatives waives any duty of confidentiality;

2. (2)

   take reasonable steps to ensure that, when reasonably required by the skilled person, each of its appointed representatives complies with any duty under section 166(7) applicable to it, or provides assistance to the skilled person as though that duty applied directly to it;

3. (3)

   allow the skilled person access at all reasonable business hours to the CBTL firm’s accounting and other records in whatever form;

4. (4)

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

5. (5)

   permit the skilled person to obtain such information directly from the CBTL firm’s auditor as he reasonably considers necessary or desirable for the proper performance of his duties.

When a firm appoints a skilled person to provide a report under section 166 (Reports by skilled persons) or collect or update information under section 166A (Appointment of skilled person to collect and update information) of the Act,4 a firm is expected, including where applicable in complying with Principle 11,4 to take reasonable steps to ensure that a skilled person delivers a report or collects or updates information4 in accordance with the terms of his appointment.

In respect of the appointment of a skilled person under section 166 of the Act (Reports by skilled persons), section 166(7) of the Act4 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.

4In 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) 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.

Within the legal constraints that apply, the appropriate regulator2 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 appropriate regulator2 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 appropriate regulator2 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.

2In 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 (Appointment of skilled person to collect and update information) of the Act;

2. (2)

   a firm 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 appropriate regulator has approved the making of the request or the imposition of the requirement before it is made or imposed.

2A firm 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.