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Suitability crackdown gathers pace as FSA issues 166s in wake of Dear CEO letter

Suitability crackdown gathers pace as FSA issues 166s in wake of Dear CEO letter

After warning that wealth managers may face tougher scrutiny over record keeping and suitability, the Financial Services Authority (FSA) has issued a clutch of Skilled Persons reports in the wake of its most recent Dear CEO letter.

The FSA said at the time Skilled Persons reports, also known as Section 166 orders, had been issued in response to the failings it went public with in August, however it did not reveal how many.

But a Freedom of Information (FOI) request found the watchdog has used its Section 166 powers three times in direct response to the findings it outlined in the letter sent to the bosses of regulated firms.

Skilled Persons reports are typically issued as a means of asking firms to undertake independent reviews of their operations, but while many in the industry support more robust regulation, a previous FOI revealed banks, fund and investment managers served with a Section 166 order could face a bill of up to £2 million.

Moreover, according to the Investment Management Association, there have been cases of Skilled Persons reports swallowing up 500 hours of staff time, and there are fears that more reports may be in the pipeline as the FSA overhauls supervision in time for its transformation into the Financial Conduct Authority (FCA).

This move, which next year will see the FCA take charge of consumer interests and the Prudential Regulation Authority overseeing banks, has prompted the FSA to abolish its use of relationship managers in favour of upping the FCA’s Section 166 powers.

According to an earlier FOI submitted by Wealth Manager, the FSA used its Section 166 powers 114 times in the 15 months running from January 2011, compared to 90 reports being ordered over the eight months to December 2010 and 88 the year before. 

The majority of these were submitted to wholesale and retail banks, wealth advisers and platforms, which accounted for 44% of the total figure.

Wealth managers, stockbrokers and investment managers accounted for 15%, while the remainder comprised insurers, intermediaries and corporate finance firms.

Wealth Manager's most recent FOI about the prevalence of Section 166 orders focused specifically on the number of reports ordered as a direct result of the regulator's Dear CEO letter issued last June, and its follow-up correspondence issued in August that warned of failings in record keeping and suitability.

Robert Hupe, a compliance consultant at investment regulation service provider Knadel, said that firms he works with typically highlight reporting as a weak spot.

He said: ‘The FSA will normally have concerns about documentation and demonstrating repeatability of processes across client portfolios and that the company management have clear reporting lines to ensure client outcomes are repeatable.’

The Association of Private Client Investment Managers has previously said its members are concerned Skilled Persons reports were no longer reserved for high risk operations.

‘Section 166s appear sadly to have become a way of life across the industry as a tool used by regulators. This not only increases costs to firms, but it is typically a cost that has not been budgeted,’ a spokesperson said.

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