FCA Skilled Persons Reviews – Can Your Insurance Help?

Anecdotally and statistically^[1], the number of FCA Enforcement Investigations has been reducing.  At the same time, the FCA has indicated that supervisory and pre-enforcement tools will be utilised more broadly^[2].  Front and centre of that FCA armoury is section 166 or skilled persons reviews, which are on the rise^[3].  But what is a section 166 / skilled persons review, and are related costs covered under insurance?

What is a Section 166?

The process is referred to as a section 166, as that is the section of the Financial Services and Markets Act 2000 (FSMA) that provides the FCA with the power to order a regulated entity to appoint (or for the FCA to appoint directly) a skilled person to produce a report.  The ‘skilled person’ is often a legal or accountancy firm, and whoever does the appointing, the regulated entity is obliged to pay for the report – the costs of which can be substantial.  Reviews are an aspect of the FCA’s supervisory authority, and often required on issues such as systems and controls, risk framework, governance, client money and financial crime.  A final report will contain recommendations for improvement (if appropriate).

The scope of the review, and timeframe, may be negotiated. The skilled person procedure will involve reviewing documents and emails and may include interviews of key personnel.  Once recommendations are provided, the entity will be expected to implement changes and provide evidence of having done so.

Am I covered?

The appetite to cover section 166 varies between different insurers and in different sections of the market, so there is no single answer.  Given the nature of section 166 reviews, the investigation cover (or pre-investigation or other regulatory trigger) under a professional indemnity (PI) or civil liability policy is the place to start.  Without specific reference to section 166 or skilled persons reviews, however, it may be difficult to argue that a general investigations trigger is sufficient to incorporate these processes, particularly where that cover is confined to formal regulatory investigations.  There may also be a specific exclusion for section 166.  As ever, it depends on the wording.

Whose costs?

A section 166 results in several sources of cost for an impacted business, with different outcomes for coverage:

• Work of the skilled person – generally covered under insurance if there is express section 166 cover.
• Work of professional services firms in providing support (e.g. negotiating the scope of the section 166, preparing people for interviews, responding to document requests) – generally covered as part of ‘pre-investigation’ or other early regulatory crisis event coverage, and/or if there is express section 166 cover.
• Additional internal costs (e.g. overtime, new hires) – generally not covered, but worth discussing with your broker if it results in a saving to external support costs.
• Work in implementation of skilled person recommendations – not covered, as a business cost.

FCA numbers indicate an average cost of a skilled person of around £500k^[4].  Support costs can outstrip those, and the average includes many relatively small reviews.  The potential overall cost of a skilled person exercise, therefore, can run into the low millions.

Policy pitfalls

It is crucial to obtain insurer consent to costs. There is unlikely to be any negotiating on the fees of the skilled person itself, but there may be scope to negotiate with those providing support on hourly rates and caps. Having some clear direction over which fee earners will do what work and why is also important in demonstrating to insurers that costs are appropriate.

Detailed narratives of work done by supporting firms is also required, to allow insurers to verify that these costs fall for cover (a sometimes frustrating, but unavoidable process).  Lawyers are generally accustomed to providing detailed narratives to support billings, with time allocated to specific tasks. That process is not as ingrained in some other professions, and so it is worth establishing what is needed at the outset. It is far easier to record details of work done on a contemporaneous basis, as opposed to reconstructing based on emails and other work product. Your insurance broker can assist in explaining what is required.

The line between what is a support cost (covered) and what is an implementation cost (not covered) can also be a fine one, and narratives help in allocating costs appropriately.

Learning the lessons

Skilled persons reviews perform a crucial role in identifying issues and allowing firms to put them right. Failure to implement recommendations of or learn lessons from a skilled persons report is also a pathway to enforcement and more severe consequences. Whilst the costs of a skilled persons report can be covered under insurance, FCA fines cannot be insured^[5], meaning any enforcement fines will hit a company harder. Cover for skilled persons report will depend both on the scope of the policy and compliance with policy terms. As ever, early engagement with your insurance broker is key.

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