Alan Paterson
Daniel Keay
Asad Choudhary
Plenitude Insights
S166 Skilled Person
AML/CTF/CPFSince 2021, the Financial Conduct Authority (FCA) has shifted its focus towards a more assertive yet agile response. As the proportion of s166 reviews related to financial crime risks has remained steady between 2021 and 2023, it is clear that financial crime has and will remain a key concern for the regulators, with fraud and sanctions emerging as key areas of focus. According to the FCA 2022-23 annual report, the FCA commissioned a total of 47 Skilled Person Reports into firms, of which 10 pertain to failures in financial crime compliance, resulting in a total cost incurred by regulated firms of £35.1m. Over the past 12 months, the FCA has continued to issue fines to firms over failures under the anti-money laundering rules, with more attention paid to the role of intermediaries and brokers. These trends are early indicators of how the FCA’s assertive stance will shape up in the coming year.
As activity of the FCA’s enforcement arm has increased, so has that of the supervision arm in the form of the number of Skilled Person Reviews under section 166 of the Financial Services and Markets Act 2000 (FSMA), also known as a “Section 166” or “s166”. The FCA Handbook refers to an s166 in the following way: “Skilled person reviews are considered to be an effective regulatory tool and have a good record of mitigating risks to consumers.” Essentially, this means that Money Laundering Reporting Officers (MLROs – also known as the “SMF 17”) and senior management, including at board level, must ensure they implement a robust financial crime framework, systems and controls to effectively mitigate financial crime risk, taking into consideration the broader context of the FCA’s aims. These aims can be determined by examining feedback from the FCA previously provided to the firm, publicised FCA speeches, “Dear CEO” letters, and root cause issues highlighted in FCA notices.
Conclusion
In light of the current supervisory and data-led intelligence approach taken by the FCA, firms also need to be aware of the typical factors which might trigger a s166 and if a firm may become the subject of a Section 166, have a thorough understanding of the process and experience, including the oft-overlooked ‘human factor’. Ultimately, what it comes down to is the culture of compliance – all the way from board-level down to the employee (‘tone from the top’), and the tone from all employees themselves (‘tone from within’). This entails an understanding of the financial crime risks the firm faces, ongoing monitoring and testing to ensure the controls remain appropriate, and a commitment to meet regulatory obligations effectively and sustainably as part of a risk-based approach. However, the complex nature of the UK’s legal and regulatory framework, evolving regulations and the methods by which criminals seek to commit financial crime, all present significant challenges to firms in terms of their ability to effectively detect, deter and prevent financial crime, opening the door to potential regulatory scrutiny from the FCA.
In order to understand the pain points of a s166, it is useful to examine what steps might be taken to manage the process, such as how to deal with information requests, how to conduct meetings with a skilled person, and the governance, resource requirements and logistics involved.
