What does a "skilled person" mean to the insurance profession

February 23, 2012

This article was written for and first featured in Insurance Day

Whilst the FSA will not survive beyond the early part of 2013, when its responsibilities are passed to the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA), there are no signs that its intrusive approach to supervision and enforcement will diminish.  Recent reports on FSA supervisory activity suggest that firms need to take ever more care to ensure that their systems and controls are “fit for purpose”.

These concerns are real in light of the FSA’s increasing use of the “skilled person”.  Skilled Persons can be appointed by the FSA to prepare a report for four principal purposes; diagnostic; monitoring; as a preventative measure; and for remedial action.  The breadth and flexibility of this tool makes it highly attractive to the regulator.

But why should firms be worried about this?  Firstly, an appointment means the regulator has serious concerns about the firm’s business.  A report’s findings could also be a precursor to an extensive and costly remediation programme.  They could also lead to further matters being discovered and potential enforcement action.   

Secondly, the cost and disruption of the skilled person can cause harm to the firm.  Whilst the FSA directs the firm to appoint a skilled person, the firm itself bears the cost.  Whilst this is attractive to the FSA as it helps the regulator save its resource, this is certainly not the case for the firm.  The costs of a skilled person are also likely to be substantial.  In 2009 to 2010 it was reported in the FSA annual report that the cost of 95 skilled person reports for that year totalled £32.2 million.  The individual reports varied hugely in cost from a modest £1,795 to £4 million.  It is not inconceivable that for some small firms, the appointment and cost of a skilled person could pose a threat to the viability of the firm.

Most firms will consider that they are well organised and already seek to meet regulatory standards.  However it is important that if issues arise, thereby creating a risk that a skilled person will be imposed, then steps should taken to mitigate those risks.  This risk is one that insurance firms should be particularly alive to at present given that the FCA appears to be preparing to follow a similar intrusive approach to that of the FSA.  Further, for substantial firms the PRA’s insurance team has indicated that it may make even greater use of these powers.  Insurance firms should therefore be ever vigilant in this regulatory space.


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