When a Section 166 Review Forces a Change of SMF16 or SMF17
A skilled person review under section 166 of FSMA is one of the FCA’s most significant supervisory tools, and when the review looks at compliance or financial crime, it often ends up looking at the people too. Sometimes the right outcome is to support the existing compliance officer or MLRO; sometimes it is to replace them. This guide explains how that decision arises, how to make it fairly, and how to manage the change without leaving the function uncovered.
What a Section 166 Review Is
Under section 166 of the Financial Services and Markets Act 2000, the FCA can require a firm to appoint a skilled person to report on an aspect of its business, or appoint one itself. The firm pays. Reviews commonly cover financial crime controls, client money, governance, customer outcomes or regulatory reporting, and usually lead to a remediation programme that the skilled person may then check. The FCA explains how it uses the power on its skilled persons reviews page.
When the review is about compliance or financial crime, the SMF16 compliance officer and SMF17 MLRO are at the centre of it. The review will look at the framework they own, and its findings will often say something, directly or indirectly, about whether the function has been led effectively.
What the Skilled Person Will Look At
When a review covers compliance or financial crime, the skilled person will typically examine:
- the design of the framework and whether it matches the firm’s risks;
- whether controls actually operate as described, tested on samples;
- the quality of management information and reporting to the board;
- whether issues were identified, escalated and acted on, and by whom;
- whether the function has the people, skills and systems it needs.
Each of these points leads back to the people who own the function, which is why reviews so often raise questions about the SMF16 or SMF17.
How a Change of Holder Comes About
The decision to change a Senior Manager belongs to the firm. In practice, it usually arises in one of four ways:
- The findings point to leadership. The review finds failings that the SMF16 or SMF17 should have identified, escalated or fixed.
- Capacity. The holder may be capable but cannot run remediation and business as usual at the same time, particularly if they are fractional or combine both functions.
- Confidence. The board, the skilled person or the FCA loses confidence in the holder’s ability to lead the remediation.
- The holder’s own choice. Some holders decide to step aside, particularly if they inherited the problems or feel the role has changed.
The FCA expects firms to take ownership of these decisions. It will be interested in whether the firm has the right people in place to deliver the remediation, and in the reasons for any change.
Change or Support? Making the Decision Fairly
Replacing a compliance officer or MLRO in the middle of a review is not automatically the right answer. A new holder loses months learning the firm, and the remediation can stall. Before deciding, the board should ask:
- What do the findings actually say about the function’s leadership? Distinguish failings the holder caused or ignored from those caused by under-resourcing, poor systems or decisions above them.
- Did the holder raise the issues? If they escalated concerns that the business did not act on, the problem may lie elsewhere. Under the duty of responsibility, what they recorded matters.
- Can they lead the remediation with more support? An interim specialist, extra analysts or a remediation lead may be enough.
- Do they still have the confidence of the board and the regulator? Without it, the remediation will be harder to deliver.
- Is the holder still fit and proper? Firms must assess fitness and propriety on an ongoing basis. Record the assessment and the reasons. Our fit and proper assessment template helps.
Scenario: A skilled person review at a payments group finds that transaction monitoring alerts have built up for months. The MLRO had raised the backlog with the board twice and asked for more analysts, without success. The board keeps the MLRO, approves the analysts, and brings in an interim financial crime remediation lead to clear the backlog under the MLRO’s oversight. The skilled person’s follow-up review notes the improvement. At another firm, a similar review finds the MLRO had not identified the problem at all, and the board appoints an interim MLRO while it recruits a permanent replacement.
Managing the Change
If the board decides to change the holder, the function cannot be left uncovered, and the change must be handled properly with the regulator.
- Interim cover. Under the 12-week rule, someone can cover the function where the absence is temporary or reasonably unforeseen, and since April 2026 the firm has 12 weeks to submit an application for them. For a remediation, an experienced interim compliance officer or MLRO is often the best choice. See interim SMF16 and SMF17 cover.
- Nominated officer. If the MLRO changes, someone must receive internal suspicious activity reports from the first day. See our 30-day plan for when an MLRO leaves.
- Notifications. The departure is notified to the FCA, and the replacement needs approval. Our guide to the SMCR notification forms explains which forms apply.
- Regulatory references. Any reference the firm gives for the outgoing holder must be accurate and include relevant information. See regulatory references.
- Handover. The outgoing holder’s knowledge of the review is valuable. Agree a handover if you can; see what a good handover pack contains.
- Statements of responsibilities. Update them to reflect who is responsible for the remediation.
Recruiting the Replacement
The permanent replacement for a compliance officer or MLRO after a skilled person review needs a particular profile: someone who has led remediation before, can work constructively with the skilled person and the FCA, and can rebuild the function’s credibility inside the firm. Candidates will also do their own due diligence on the review, the findings and the board’s commitment. Firms should expect to share more than usual, under confidentiality, and our guide to due diligence before accepting an SMF role shows what strong candidates will ask.
The FCA will look closely at the approval application for a holder appointed during a review. A clear statement of responsibilities, a realistic plan and evidence that the candidate has done this before all help. Our guide to what goes wrong in Form A submissions covers the application, and staffing a section 166 remediation covers the wider team.
If You Are the Holder
If you are the compliance officer or MLRO at a firm under review, your records matter. Keep a clear account of what you identified, escalated and recommended, and of the board’s responses. Engage constructively with the skilled person, and take independent advice if your own position is in question. If you decide to move on, plan the handover carefully; how you leave will appear in your regulatory references.
Related Services and Guides
Senior Manager changes during remediation. Every search is run by our specialist team, with Adrian Lawrence FCA overseeing each mandate
Interim Cover
Compliance officers and MLROs, fast.
→ Interim SMF16 and SMF17 → Urgent SMF replacementThe 12-week rule →
Remediation
The team behind the programme.
→ Staffing a section 166 remediation → Financial crime leadershipFCA enforcement trends →
Permanent Hires
The replacement holder.
→ Compliance officer (SMF16) → MLRO (SMF17)CCO and head of compliance →
Accountability
What the regulator looks at.
→ Duty of responsibility → Fit and proper templateRegulatory references →
Every search is run by our specialist team, with Adrian Lawrence FCA overseeing each mandate
Frequently Asked Questions
Does a section 166 review mean the compliance officer or MLRO must go?
No. The decision belongs to the firm. In many cases the right answer is to support the existing holder with extra resources or an interim specialist.
Can the FCA require a firm to replace its MLRO?
The FCA expects the firm to have the right people in place and will want to understand any change. Decisions about individual appointments are normally the firm’s, informed by the review’s findings and its own fitness and propriety assessment.
How quickly can an interim MLRO start?
Often within days. Under the 12-week rule, an interim can cover while the firm submits an application for them.
Who pays for a skilled person review?
The firm.
About the Author
Adrian Lawrence FCA is the founder of SMF Capital. He is a Chartered Accountant and Fellow of the ICAEW, holds a practising certificate in his own name, and is a former listed-company Finance Director with a BSc from Queen Mary College, University of London. He founded FD Capital in 2018 and has since built a network of five specialist recruitment practices. He oversees every SMF Capital search. View Adrian’s ICAEW profile.
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Adrian Lawrence FCA is the founder of SMF Capital and a Fellow of the Institute of Chartered Accountants in England and Wales and holds an ICAEW practising certificate in his own name. He holds a BSc from Queen Mary College, University of London, and has over 25 years of experience working with boards, investors and business owners across the UK. He founded SMF Capital to help FCA and PRA-regulated firms appoint the Senior Managers the regulators expect, with the fit and proper assessment built into every search, and oversees every Senior Manager Function search.