Further to our post yesterday, the FT Adviser has today published an article on this topic. It notes that the FSA had argued that direct appointment would help eliminate potential conflict of interest arising from firms appointing the people who already review the firm’s compliance with regulation. However, the FSA, both as SIB under the 1986 Act, and as FSA under FSMA, had the power to nominate or approve the skilled person, so it was always open to the regulator to refuse to accept a skilled person nominated by a firm on the basis of a conflict of interest.
Nevertheless, having a direct contractual relationship with the skilled person undoubtedly has advantages for the regulator, whose concern was that reports may occasionally have been “watered down” because of a perceived lack of objectivity with respect to the firm with which the skilled person had contracted. In appointing a skilled person, SUP 5.4.8G now provides that the regulator will have regard to any professional difficulty or potential conflict of interest which may arise if the skilled person undertakes the assignment and to whether the assignment can be performed with sufficient detachment, bearing in mind the closeness of an existing professional or commercial relationship.
However, the guidance goes on to note that it may in appropriate circumstances be cost-effective for the regulator to nominate or approve the appointment of, or appoint itself, a skilled person who has previously acted for, or advised, the authorised person/firm. Many of the firms on the new Panels have had active involvement in reviews of regulatory compliance for authorised firms.
Although cost is one of the matters to which the regulator will have regard in making a decision to appoint the skilled person, and the guidance indicates that the regulator will discuss the likely cost with the authorised person/firm before appointing a skilled person, SUP 5 provides little by way of explicit reassurance that the regulator will proactively control costs when it appoints the skilled person direct. Overall, the guidance is disappointingly thin in providing comfort to firms on how the regulators will monitor the quality and costs of skilled persons’ work, even though the establishment of a Panel and the formal appointment process clearly suggest that the regulators intend to do so.
SUP 5.4.12G notes that a skilled person appointed by the authorised firm who becomes aware that there may be difficulties delivering the report or collecting or updating the relevant information within cost estimates will wish to notify the firm. Although SUP 5 does not indicate whether an equivalent requirement to notify the regulator would be applied to skilled persons appointed by the regulator direct, this is unsurprising given that SUP 5 binds the firm, whereas the obligations owed by the skilled person to the regulator will be governed by contract.
As the guidance provides no reassurance that the firm will be notified of cost-overruns by skilled persons appointed by the regulator direct, it will be important, if issues regarding the quality and cost of regulator-appointed skilled persons reviews do arise, that firms engage proactively with the regulators on such issues, providing feedback after the completion of the skilled persons review.
It will be interesting to see whether the average, minimum and maximum costs of skilled persons reports change significantly following the establishment of the Panel. The total cost figure seems set to rise in tandem with the numbers of skilled persons reports commissioned.