Skilled Persons Reviews: Looking into the crystal ball

Ciara Russell contributed to the writing of this blog post

The Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) are now in their second year of existence, as is the Skilled Persons Panel set up in 2013 to be used as independent experts for carrying out Skilled Persons Reviews (SPRs). On May 20, the regulators called on the Skilled Persons Panel for a briefing to review the first year and provide some insight as to what to expect in the coming year.

In this blog, we present the activity of SPRs over 2013/14 and comment on what can be seen when looking into the crystal ball.

Activity over 2013/14

The main conclusions to be drawn from the statistics for 2013/14 are:

• there has been a decrease in the number of SPRs from 113 in 2012/13 under the FSA to 85 in 2013/14 under the FCA and PRA
• the number of insurance companies being asked for a SPR has increased from 17 to 24
• governance, controls and risk frameworks are the topics giving rise to most reviews

(Graphs summarising the 2013/14 statistics are provided at the end.)

Although the number of reviews has decreased, the FCA and PRA expect this to fluctuate and note that it does not imply a trend of falling use. They do not have a central expectation on the number they expect to issue each year. The key is proportionality and only using them where they are deemed necessary or useful.

There still remains a substantial increase in the number of SPRs compared to before the global financial crisis. In 2006/07 – the quiet before the storm - the FSA carried out a mere 18 reviews.

Insights for 2014/15

With Andrew Bailey coming in to address the Skilled Persons Panel, it would appear that SPRs are being taken seriously by the regulator. He is keen to move away from the view that they arise from a firm “doing something bad” to the industry seeing them as a useful tool for their judgement based supervision.

The PRA stated that despite areas for improvement in the reports from SPRs, they are much happier with the quality than in previous years. This suggests more usability for the reports and confidence from the regulator on their effectiveness. We could see a trend towards these being a more commonly used tool.

Whilst the regulators did state that any insights they have are a bit of crystal ball gazing, we think they are quite insightful.

There is potential for an increase in the number of SPRs for insurers. As the Solvency II preparatory phase gets underway, the regulators will be keen to ensure firms are progressing towards full implementation. This could lead to deep dives to understand the preparedness of insurers. The number of smaller insurers being asked for a SPR may also increase.

The FCA and PRA have the power to decide which firm from the Skilled Persons Panel will lead the review. The number of reviews being contracted this way may increase compared to reviews where the firm being asked for a SPR appoints the independent expert themselves. One reason for this could be the regulators’ increased familiarity with the appointment process using the panel, as this has now been in force for a full year. Additionally, they would like more control and involvement in the process. Particular situations where we might see this increase is for small firms or firms who have a difficult relationship with the regulator.

The FCA recently published their business plan which includes a list of thematic reviews we can expect to see in the coming years. Details of these can be found in our blog . We expect these thematic reviews could lead to more SPRs in that particular area. In 2013/14, we saw the thematic review on the governance of unit-linked business leading to three firms being required to perform a SPR. Possible areas to look out for this year are:

• the fair treatment of long-standing customers in life insurance
• governance of with-profits funds

Concluding remarks

The industry can try to use our crystal ball to infer what is coming but it is no surprise that the future is uncertain. With an insurance industry moving towards risk based capital requirements, this seems the obvious topic for reviews.

Our advice to firms would be to follow this process:

• consider if any upcoming thematic reviews are applicable to you, e.g. preparedness for Solvency II or those mentioned above
• identify the gaps between your current position and where you need to be
• take the steps necessary to remove these gaps

Being one step ahead of the game could reduce the likelihood of being asked to do a SPR. 

Summary of statistics over 2013/14

The following graph compares the number of SPRs in previous years.

The next graph provides a detailed breakdown of the number of SPRs by business type and regulator for the 2013/14 financial year.

The chart below shows a detailed breakdown of the number of SPRs by Lot and regulator for the 2013/14 financial year. 

Source: Figures from the FCA and PRA