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FSA's 166 rule: what lies behind its £114m cost to the industry?

FSA's 166 rule: what lies behind its £114m cost to the industry?

The Financial Services Authority (FSA) has ratcheted up its use of skilled persons reports since the financial crisis, with a detailed analysis revealing a 552% rise in the regulator’s use of the powers and a 743% spike in cost to the industry.

Piecing together information obtained via Right to Know rules and the regulator’s publications, reports and accounts, Wealth Manager has been able to gain an insight into the FSA’s use of skilled person reports, also known as Section 166 powers.

Skilled person reports often result from an FSA visit and are used to assess whether rules have been broken and what further action might be needed.

Since 2005, firms hit with these orders have seen their collective bill jump from £3.7 million to £114.2 million, looking at data up to 2012. Between January 2008 and November 2010, 16 firms had to commission more than one report and one firm had to produce four.

The FSA has already commissioned 82 skilled persons reports since last April, with banks and building societies accounting for roughly half of these and investment managers falling closely behind.

Previous investigations by Wealth Manager have found complying with a Section 166 order can cost in the region of £2 million, though in some years it has exceeded £4 million.

The most frequent regulatory concerns that drove the FSA to use its Section 166 powers included corporate governance, client money, systems and controls, reviews of past business and quality of advice.

Compliance experts warn the use of skilled persons reports in the shorter term is unlikely to have peaked.

‘The true picture is that Section 166 and the commissioning of these reports have increased, and the main reason is the FSA realised they are an effective tool,’ said Ian Stott, client services director at the Consulting Consortium.

Charles Meade-King, of regulatory consulting firm Ifact, said he also believes ‘shadow Section 166s’ – reports not labelled ‘skilled persons’ but outlining how specific concerns were being addressed – have been increasingly used.

‘When the credit crisis hit, the FSA had to apply its resources to ensuring systemically important firms were sound,’ Meade-King said.  ‘Given they had this power, they decided to expand it.’

The FSA said: ‘Section 166 of Financial Services and Markets Act gives the FSA the power to commission reports by ‘skilled persons’ as required.

‘We use this power to obtain an independent view of aspects of a firm’s activities that for example cause us concern or where we require further analysis.’

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