Skilled person reports - Q4 2023/24

Focusing on the ‘Investment Management Sector’ 

‘Investment Management Sector’ supervision is mainly driven by the ‘Business Model’ approach taken by the FCA. Business models can create risks of harm to consumers or markets in several ways. A business model which is based on significant pressure for performance can create risks to consumers. For example, it may engage in higher risk lending or aggressive sales practices. This can lead to greater conduct risk or a high risk of disorderly failure, which may involve the loss of client money. 

Business model analysis helps the FCA understand risks of harm and identify actions it needs to take to address them. Furthermore, the FCA communicates its expectations and priorities and describes examples of good and poor practice in these portfolios. 

Four key concerns within the investment management sector from the FCA’s perspective are: 

1. Pricing and quality of investment products remains challenging 
2. Technological disruption from poor operational resilience or cybercrime can threaten market integrity and consumer confidence 
3. Investment in higher risk or less liquid assets can heighten the risk of disorderly markets 
4. Market abuse can cause losses to investors

‘Skilled Person reviews’ for FCA solo-regulated firms under ‘Lot H – Prudential – Adequate Financial Resources for FCA solo-regulated firms’ 

If the FCA was concerned about aspects of a regulated firm's activities, or needs further analysis, it can get a view from a third party (known as a 'skilled person'). This power is granted under the Financial Services and Markets Act (FSMA), as amended by the 2012 Act. 

They can commission two types of skilled person review: 

• s166 reports by skilled persons and,
• s166A appointment of skilled person to collect and update information.

The skills and knowledge expected from skilled persons representing ‘Lot H’ are as follows: 

"Advice, skills and technical expertise in evaluating whether solo-regulated firms are accurately assessing adequate financial resources to ensure they meet threshold conditions and on-going regulatory requirements.  

This will require skills, experience and expertise across different prudential regimes, the FCA Handbook, International Accounting Standards, International Financial Reporting Standards and UK Generally Accepted Accounting Practice.  

This should include but not be limited to knowledge of relevant regulatory requirements, standards, guidelines and industry best practice and experience and expertise in assessing:  

• Firm’s skills, systems and processes to calculate and hold appropriate level and type of capital and/or liquid resources to cover potential harm and to put things right when they go wrong.  
• Firm’s capacity and effectiveness of assessing the likelihood and impact of potential harm to consumer and markets; thereby determining the amount of financial resources (capital and liquidity).  The skills, experience and technical expertise should include but not be limited to:  

            -   Non-trading book: operational risk, credit risk, counterparty credit risk, credit valuation adjustment, settlement risk and/or the modelling of these risks, as well as regulatory reporting,  
            -   Trading book: market risk, settlement risk, large exposures and/or the modelling of these risks, as well as regulatory reporting,  
            -   Any other risks that are inherent to the firm’s business model and that can lead to impair its ability to compensate for harm done.  

• Firm’s skills, systems and processes to evaluate the viability and sustainability of their own business model and strategy; whereby firms consider forward-looking financial projections and strategic plans, under both business-as-usual and adverse circumstances that are outside their normal and direct control. The assessment of tail risk analysis should include elements like the stress test, reverse stress test and wind-down planning, together with the adequacy of the scenarios, its modelling and the governance of these areas."

Extracted from: Skilled Person Panel Lot Descriptions