The number of independent investigations ordered by UK regulators into financial institutions has risen for the first time in four years, driven by concerns around money-laundering and white-collar crime, according to new data.
Regulators demanded 51 so-called skilled persons’ reports in the 2018-19 financial year, a 16 per cent increase on the previous 12 months. The reports, undertaken typically by a law or accountancy firm, are ordered when the Financial Conduct Authority or the Bank of England have particular concerns about an element of a financial company’s business.
The company under scrutiny typically has to pay for such investigations, which can cost upwards of £100,000, even if no breach is found.
The aggregate number of reports ordered has been gradually dropping off since the high of 140 in 2010-11 in the wake of the financial crisis but the most recent figures herald a halt to that decline.
BDO, the accountancy firm that gleaned the data, expects more such reviews in the coming months. Concerns about the City’s controls against financial crime have been a particular focus, with 14 of the 51 reports relating to failings in this area.
“Regulators have been increasingly using these reviews to crack down on companies where there is a higher risk of money-laundering activities,” said Fiona Raistrick, a BDO partner.
“Online trading firms have come under particular pressure from regulators in this area. The FCA has urged them to tighten transaction monitoring to help reduce their exposure to potential money laundering and fraud.”
The FCA and BoE declined to comment.
Skilled persons’ reports, also known as Section 166 reviews, serve as an initial exploratory step and as such are typically kept confidential but can be used by the regulators to launch full enforcement investigations.
Such reports gained notoriety after a scandal at Royal Bank of Scotland’s now-defunct restructuring division GRG. The FCA bowed to political pressure last year and handed the 166 report into GRG to the Treasury select committee, which published the report detailing “certain widespread inappropriate treatment of SME customers” between 2008 and 2013 that “should also be considered to be systematic”.
Ultimately RBS escaped an FCA penalty because, the regulator argued, commercial lending is unregulated.
Section 166 reports have become an increasingly important weapon in the FCA’s arsenal. When the FCA took over from the Financial Services Authority in 2013 it also gained the power to appoint directly the expert to lead such reports, rather than leaving it up to the companies involved in some cases.
That led to an increase in law and accountancy firms jostling to win a coveted position on the regulator’s approved panel of experts. The fees earned by the experts can range from £4,000 to £4.4m, with costs for large financial institutions typically in the upper range.
