In this second part of our coverage of Daren Allen's advice about how to deal with regulatory enforcement efforts, we concentrate on the pitfalls into which a firm that is being inspected can fall.

Allen submitted his recipe for a relatively trouble-free 'skilled persons visit' by referring to some of the 'howlers' he had witnessed at firms in his own capacity as a 'skilled person' as defined by section 166 Financial Services and Markets Act. This article follows on from Monday's discussion of s166 reviews initiated by the Financial Conduct Authority.

Seven steps to salvation

* Choose the skilled person you want, if possible. Allen said that it was quite legitimate for the company being investigated - which, after all, was paying for the s166 review - to try to find people with the right skills to do the job. He said that this stipulation sounded like a truism but it was surprising how many firms made the wrong choices. He related one instance in which a firm asked some non-lawyers to give it their views about legal matters, especially "whether legal risk had crystallised." The resultant report made no reference to case law or statute. Regarding cases where the regulators appointed someone inappropriate, he added: "YOU should do the choosing! You're the ones who are paying! It is definitely appropriate for you to push back [against the regulators] if you don't want him."

* Obtain proposals from several firms. Allen made the obvious point that it was wise for a firm facing an investigation to shop around for help.

* Define the scope of the review carefully and, if necessary, challenge it. He also enjoined the audience to "challenge the definitions used" and elaborated on this by referring to the same example, saying: "What does 'crystallised money-laundering risk' mean? It was not defined during that review. Does it mean that actual money-laundering has taken place at the bank? Or that someone has failed to send off a suspicious transaction report? Or just that the firm has exposed itself to money-laundering?"

* Ensure that the letter of engagement is clear and 'reflects' [presumably this means 'uses the same language as' or 'is in some sort of agreement with'] the 'requirement notice.'

* Find out the basis on which the skilled person is judging the firm. Allen said: "This is a really key consideration. Is he judging the firm by reference to the FCA's rules, or to its guidance, or to industry guidance, or to good practice, or to best practice? I once saw a 'skilled person' firm having to withdraw [from a review] because the one man with the right expertise [for that particular kind of review] had just left."

* Agree timetables for various things. Allen thought that this, too, was crucial, remembering that in one case in his experience the 'skilled person' firm had finished its report on a Thursday, presented the board with it on a Friday, leaving the directors only one day to evaluate it, and sent it off to the FCA the following Monday. This was a problem because the board vehemently disagreed with it and lacked the time to add any caveats or make any further representation to the regulator. Everyone concerned must therefore set timetables for the following.

• A review of documents.
• Interviews of key staff members. In preparation for this, Allen said that the firm ought to identify the staff members who are likely to undergo interviews.
• Reviews of systems.
• Regular review meetings. He added: "Have someone taking notes of the meetings with the skilled person."
• The delivery of a draft report and time to respond.
• A process by which people can 'challenge' facts and opinions. Allen said: "YOU will know your business better than the skilled person does. In my example, the management were right to complain but by then the FCA had got the skilled persons report and it was a big ask to convince them that they'd got it wrong."

* Find out whether the firm under investigation is allowed to send its own people to meetings between the FCA and the skilled person.

First impressions

As the old saying goes, nobody gets a second chance to make a first impression. Allen thought that this was important in s166 reviews as well. He said that the firm under investigation ought always to ensure that the skilled person sees that it is efficient and well-run in everything it does to help him: "The way a firm organises itself at the outset creates an impression. As a skilled person, my expectation is that it'll do the right thing. If I find the opposite, I'll expect the worst."

In some cases, the skilled person should never be allowed to rove about on his own. Allen drew attention to the concept of a "shadow skilled person" that the host firm might appoint, saying: "Ask a third party to shadow the s166 person. This is quite common now and it pays dividends. The person can help him throughout the process. [You mustn't forget that] a s166 visit is really [the same thing as] a visit from the regulator."

Other preparations

Even before the skilled person sets foot in the building, the firm must make some crucial preparations. For one thing, it must anticipate the interview process. The skilled person is bound to talk to people who have never dealt with a regulator before and might blurt out embarrassing facts that might inspire the skilled person (or the regulators once they have received his feedback) to widen his search for information and the subject of the review. Here Allen said: "There is a risk of being overly casual with documents and interviews, [and this is damaging] as it's a formal disiciplinary process. Ensure that staff members are properly prepared for interviews and find out what records of interviews will be made."

The preparation of documents is important also, because some may carry legal privilege.

When the board of a firm prepares its riposte to the draft report, assuming that the skilled person has given it time, it is imperative for the directors to avoid using the kind of language that they might place in advertorial about their firms' compliance efforts. Allen remembered one instance in which the senior managers wrote such things as "our controls are second to none!" The audience laughed, a telltale indication that such puffery might provoke equal mirth if the regulators at Canary Wharf were to read it in a report.