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S166 costs soar to £176m due to interest rate swaps review

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The total cost of skilled persons reports soared to over £176m in 2012/13 in the wake of the FSA’s review into interest rate swap misselling.

Skilled persons reports, also known as section 166 reports, check for weaknesses or failings in a firm’s practices. The regulator orders these reports to be carried out where it has concerns, and firms have to meet the cost of carrying out the report.

The FSA’s final annual report, published this week, shows the number of s166 reports remained flat in 2012/13 at 113, compared to 111 in 2011/12.

But the total cost to firms of s166 reports jumped dramatically to £176.4m, a massive 465 per cent from £31.2m in 2011/12. One significant s166 report has been excluded from total costs as the FCA does not have reliable cost estimates in relation to this case.

The costs per report in the year to the end of March ranged from £6,475 to £40m, compared to a range of between £2,975 and £3m in 2011/12.

S166 costs were pushed up by the FSA’s review into interest rate swaps, which is forcing 10 banks to review their sales of interest rate swaps and pay redress where these products have been missold.

Interest rate swaps accounted for £141.5m of the total s166 costs in 2012/13, and 14 of the 113 cases. The products are designed to protect consumers against increases in interest rates. An FSA review found last February that based on a sample of 173 sales, over 90 per cent did not comply with regulatory rules. Around 40,00 interest rate swaps have been sold since December 2001.

Excluding interest rate swap cases, total s166 costs rose 12 per cent from £31.2m to £34.9m.

The reports focused on regulatory concerns around past business reviews and quality of advice; systems and controls; senior management and governance; financial crime; client money; and effectiveness of control functions.

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