Route 166: How to navigate a Section 166

In the first quarter of 2020, 24 Section 166 notices (s166s) were issued by the FCA. This is over double the average issued per quarter in 2019 (FCA Number of Reports Commissioned). The sharp rise in s166s can be attributed to two main factors: Their effectiveness in focusing financial services firms’ attention on high-risk issues, and the publicity and media attention that can also accompany their publications. The impact of the COVID-19 outbreak on individual investment portfolios, pensions and lending has also prompted regulators to issue s166s to ensure firms are taking steps to mitigate the financial impact caused by the crisis.

What is an s166?

Whilst the FCA ultimately commissions the report, when an s166 is served, the FCA will nominate, or ask the firm to nominate, a Skilled Person to undertake the review and investigate the firm. A skilled person review is an independent review of a regulated firm, usually focusing on specific issues where the regulator wishes to investigate a firm’s activities. The report produced will establish the extent of any problems and/or the degree of any customer detriment. It also allows the FCA to determine if any remedial action needs to be undertaken, the ongoing supervisory relationship required and whether enforcement action should be taken.

Issued with an s166 notice. What next?

As well as financial strain, s166 reviews can be a cause for unwanted media attention and reputational damage. Understanding how to manage these reviews in the most efficient and effective way is crucial to limiting the financial and reputational impact. However, managed in the right way, an s166 can be translated into an opportunity to demonstrate the progress a firm has made against its peer group, particularly when thematic reviews are undertaken across several competing firms.

Project Managing an s166

The firm undertaking the review, i.e. the skilled persons, require access to significant volumes of documentation in order to conduct their review, such as organisational charts, governance structures, meeting minutes, etc. Obtaining these documents and ensuring they have been thoroughly reviewed and presented in a consistent manner can be very time-consuming. It is common for documents to go through several internal reviews, particularly for older documentation, to ensure they are consistent with the key messages and is presented in a clear format. It is fundamental for firms to control the flow of information to ensure the review does not uncover any surprises. The skilled person will often request a ‘walkthrough’ of the documentation with the document owner, to talk through any queries they may have and to understand more about the roles of specific individuals.

Being prepared, keeping a comprehensive audit trail and showcasing consistency and reliability throughout the review is pivotal to its success. Working through an s166 can take several months and is hugely time-consuming for impacted functions. Effective project management not only reduces the impact on BAU staff, but it is also crucial to ensuring all documents and interviews requested by the regulator or skilled person are addressed promptly and to a consistent standard. Many firms nominate individuals to fulfil this role full time, to act as the gatekeeper of information and managing the flow of inbound requests.

Fundamental project management tasks such as keeping logs of the incoming requests, creating a thorough plan detailing what is required by when and monitoring any associated risks or issues are simple, but essential components to a successful response. Keeping senior management up to date via regular status reports and meetings also ensures visibility and necessary escalation paths are adopted as required. This is even more important with the current crisis-induced remote working situation, where effective communication and audit trails are more important than ever.

Relationship with skilled person & regulator

The relationship between the firm in question, the skilled persons firm and the regulator is often referred to as ‘trilateral’, whereas the direct relationship between the firm and the skilled person is referred to as ‘bilateral’. Managing both of these relationships and even internal relations (i.e. messaging to senior management) helps build confidence between all parties that the s166 is being executed and remediated with integrity and efficiency.

In particular, maintaining a good relationship with the regulator can help to close out the s166 with minimal disruption and reduce the extent of remedial action, if trust has been established through the effective resolution of the identified issue/theme. This will be determined by the level of transparency i.e. documents shared and the level of communication undertaken throughout the review process. Scheduling intermittent checkpoints with the regulator is essential to shaping the outcomes of the review and is often organised by a firm’s regulatory relations team. Managing key relationships effectively should not be underestimated; successful meetings with important parties take time, preparation and experience to be executed successfully. The recent move to virtual meetings calls out for even more care and attention in this regard.

Conclusion

Navigating a Section 166 review is by no means an easy undertaking and the numbers issued appear to be increasing year on year. Significant pressure can build up when s166 requirements are added to an already stretched BAU team. This has been further exacerbated by the current environment and the additional strain of remote working. Investing in professional support to help coordinate and manage the s166 to relieve some of this pressure and help to keep communication channels open with the regulator can prove a wise investment.

At BCS Consulting we work with our clients to help manage complex responses to regulator requests and to help ensure they achieve a successful response without stretching the bandwidth of their BAU staff. We have specialists in all areas engaged in a s166 review, particularly in Project Management and Regulatory Change. Please contact us for more information on our experience in s166 responses.