Section 166 skilled persons reviews: what to expect and how to prepare
Section 166 of the Financial Services and Markets Act 2000 grants the FCA the power to require an authorised firm to appoint a skilled person (an independent expert approved by the regulator) to produce a report on specified matters. The power is used both as a supervisory tool — to obtain information or an independent assessment — and as an early-stage enforcement measure where the FCA has concerns about a firm's compliance but has not yet formed a view that formal action is warranted. The number of s.166 reviews commissioned annually varies, but the FCA has consistently used the power across a range of sectors and subject matters, with financial crime, CASS, operational resilience, and conduct risk frameworks among the most common topics.
A s.166 review is formally initiated by the FCA writing to the firm to indicate that it requires a skilled person report and identifying the scope of review. The firm must then select and agree the identity of the skilled person with the FCA, and may be required to pay for the review directly. The scope of the review is set by the FCA through a 'Terms of Reference' document, which defines the questions the skilled person must address. Firms should seek legal advice on the Terms of Reference before agreeing to them, as the scope of the review will determine what documents the skilled person can access and what recommendations they may make. Once agreed, the Terms of Reference are difficult to renegotiate.
The skilled person has access to information, records, and personnel, and must act independently of the firm. The report is submitted to the FCA (not primarily to the firm), though the firm typically receives a copy and has an opportunity to comment on factual inaccuracies before finalisation. A critical point that is frequently misunderstood: the skilled person's report is not the end of the process. The FCA will use the report to determine whether further supervisory or enforcement action is appropriate, and a critical report will almost invariably result in requirements, restrictions, or the opening of a formal investigation.
Firms that believe they may be at risk of a s.166 review should consider undertaking a voluntary independent review of the areas of concern before a regulator-mandated review is initiated. A well-conducted voluntary review that identifies problems and presents a credible remediation plan can significantly improve a firm's relationship with the FCA and reduce the likelihood that a more formal intervention is required. Firms should also consider the reputational implications of a s.166 review — while the existence of a review is not automatically disclosed, it may become apparent to counterparties, auditors, and senior staff.
Practical preparation steps
If a s.166 review is notified, firms should immediately brief senior management and legal counsel, review the proposed Terms of Reference carefully, consider the selection of the skilled person (the FCA maintains an approved panel, but firms have some input), and prepare a document management plan that ensures relevant records are preserved and accessible. Cooperation with the skilled person is mandatory, but this does not prevent firms from having legal counsel present at key meetings or from responding formally to draft findings.