On 19 June 2014 the PRA published Supervisory Statement 7/14: ‘Reports by skilled persons’, which sets out (alongside the PRA Handbook section on skilled persons) how the PRA will make use of its powers under s.166 FSMA 2000 to require firms to provide skilled persons reports.
In Policy Statement 5/14, published the same day, the PRA noted that respondents to an earlier consultation had “commented that the use of skilled persons is now far more routine (rather than exceptional) and has subjected smaller firms to very considerable cost on top of the substantial fees already paid”.
What is the PRA’s power to require a skilled persons report?
To whom does this apply?
Under s.166 FSMA, the PRA can require a skilled persons report to be provided by
- an authorised firm;
- any other member of that firm’s group;
- a partnership of which that firm is a member; or
- a person who was one of the above (and carrying on a business) at any relevant time.
Alternatively, the PRA can commission a skilled persons report itself into one of the above – at the latter’s expense.
What is a skilled persons report used for?
- diagnostic purposes, such as identifying and assessing risks;
- monitoring purposes - to track risks;
- preventative action - to reduce risks;
- remedial action - to allow the PRA to respond to risks; or
- to verify information provided to the PRA as part of its regular supervisory activity.
How does the PRA decide when to require a skilled person report?
The PRA will consider:
- whether a firm is being co-operative;
- whether there is a history of similar issues, and if timely corrective action was taken;
- the quality of a firm’s systems and records;
- whether the PRA believes the firm can deliver an objective report;
- whether there would be any conflicts of interest in asking a firm to report on itself – e.g. because allegations of misconduct are involved; and
- whether a firm has sufficient knowledge and expertise.
The PRA will also be “mindful of costs”, considering:
- whether a firm might derive some additional benefit from the work;
- whether the work to be carried out ought reasonably to have been done by the firm itself;
- whether the firm’s record keeping and management information systems are poor;
- whether there appear to be risks threatening the safety and soundness of the firm, or (for insurers) the protection of policyholders;
- the probability of possible breaches of regulatory requirements, and the seriousness of such breaches.
The PRA notes that it will probably make use of skilled persons reports in cases requiring expert analysis and recommendations, or authoritative and independent reports. In cases involving the collection of historic information, or obtaining evidence for possible enforcement actions, the PRA will be more likely to use its other information-gathering powers instead (e.g. the s.165 power to require information, or ss.167-168 powers to appoint investigators).
How does the PRA appoint a skilled person?
Where the skilled person is appointed by the PRA directly
The PRA will conduct a tendering process (where appropriate), based on the PRA’s skilled persons ‘panel’. This is a list of skilled person firms arranged by specialisations (known as ‘lots’).
The decision will be based on such factors as: the skilled person’s skills and relevant specialised knowledge; whether they have the resources to carry out the work in the time required; and any potential conflicts of interest.
Once appointed, the skilled person will report directly to the PRA. The skilled person should keep the firm concerned abreast of its communication with the regulator – although this will not always be appropriate.
The PRA will specify a time limit within which the skilled person should deliver the report; the skilled person will also be expected to provide the PRA with periodic updates on progress.
Where a firm is required to appoint a skilled person itself
The PRA will “direct” the firm to look to its skilled persons panel, and ask the firm to submit a shortlist of nominees for it to approve. (It will, however, remain the firm’s responsibility to assess the appropriateness of those skilled persons.)
The PRA will give the firm written notice of the purpose, scope, content, timetable and format of the report. It will normally also contact the firm to discuss its requirements beforehand.
Once appointed, the skilled person will be expected to report to the PRA through the firm.
As above, the PRA will normally specify a time limit for the report. Under the new PRA rules, a firm “must take reasonable steps to ensure” a skilled persons report is delivered in a timely manner.
Firms’ co-operation with the skilled person
Firms are expected to provide ”reasonable assistance” to the skilled person, including:
- allowing access to accounting and other records;
- providing such information and explanations as the skilled person reasonably considers necessary; and
- permitting the skilled person to obtain such information from the firm’s auditor as the skilled person reasonably considers necessary.
The skilled person will be bound by the statutory confidentiality provisions in FSMA.
Appointment of a skilled person to collect and update information
Under s.166A FSMA, the PRA may require a firm to appoint a skilled person to collect or update information, where the PRA considers a firm has failed to do this as required. (Alternatively, the PRA can appoint a skilled person itself, as above.)