How to Shape a Section 166 Scoping Response That Holds

A Section 166 notice rarely arrives as a surprise, but the scoping phase is almost always underestimated. The draft terms of reference will shape costs, management time, remediation obligations, and the supervisory narrative about your firm for the next eighteen months. Getting the scope right is not about shrinking it. It is about making it precise, evidenceable, and aligned to the actual concern the regulator is trying to resolve.

Start with the supervisor's actual concern, not the draft wording

The draft terms of reference are a proxy for a supervisory judgement. Before responding, work out what that judgement is. Read the Dear CEO letters, recent correspondence, thematic review outputs, and any supervisory meeting notes from the last twelve months. If the concern is about governance over a specific product line, the scope should reflect that, not a generic governance review. If the concern is a control failure identified in a past incident, the scope should test whether that failure is systemic, not reopen every adjacent control.

What good looks like: a scoping response that opens by restating the supervisory concern in your own words, confirms you take it seriously, and then proposes terms of reference that would actually answer it.

Engage with the Skilled Person candidate early

Once the firm is on notice, the regulator will usually consult on the Skilled Person. Use this properly. The right firm matters less than the right lead partner: someone with subject matter depth in the specific issue, not a generalist. A lead partner who understands the domain will write tighter terms of reference, ask better questions, and produce findings that are defensible. A generalist will expand scope to compensate for unfamiliarity.

Propose precise terms of reference, with testable questions

Where draft terms use open language ("assess the effectiveness of...", "review the adequacy of..."), propose testable reformulations. Good terms of reference specify:

• The population and time period under review
• The specific controls, processes, or decisions being tested
• The standard against which they are being tested (handbook rule, internal policy, defined good practice)
• The outputs expected (findings, root cause, recommendations)

Vague scope is the single biggest driver of mid-review expansion. A Skilled Person who cannot define "effectiveness" at the outset will define it through fieldwork, and the firm loses control of the frame.

Separate diagnostic from remediation

Skilled Person reviews that combine diagnosis and remediation design in a single Lot tend to produce broader remediation than necessary. Where the facts allow, propose a Lot structure that separates the diagnostic review from any follow-on remediation work. This preserves firm ownership of remediation design and avoids the Skilled Person becoming the author of changes they later validate.

Address what you already know

If the firm has already identified the issue, started remediation, or commissioned internal work, say so in the scoping response. Attach the work. This does two things: it demonstrates the firm is not waiting to be told what is wrong, and it allows the scope to focus on validation and gap analysis rather than discovery. Supervisors read a firm that already understands its own problem as materially different from one that does not.

What most firms get wrong

The common failure is treating the scoping response as a negotiation to shrink the review. Supervisors read this immediately, and it hardens the scope. The firms that come out of Section 166 reviews well are the ones that engaged with the concern honestly, proposed scope that would genuinely test it, and demonstrated in the response itself that they were capable of running the review as serious counterparties.

The decision point

Before submitting the scoping response, ask one question at board or ExCo level: if the review finds exactly what the supervisor suspects, are we ready to act on it? If the answer is no, the priority is not the scoping response. It is the remediation work that should already be underway.

Frequently Asked Questions

Should we use external counsel to draft the scoping response?

Yes, for anything material. Counsel will frame the response in a way that preserves privilege where appropriate and ensures the firm's position is coherent across correspondence. But counsel should draft with the business, not for it. A scoping response that reads as lawyered reads as defensive.

Can we object to the Skilled Person candidate?

You can raise concerns about independence, capacity, or expertise. You cannot realistically object on the basis that the candidate will be rigorous. Focus on substantive fit: sector expertise, prior conflicts, and lead partner quality.

How detailed should the scoping response be?

Detailed enough to show you understand the concern and have thought seriously about how it should be tested. Short responses signal disengagement. Over-long responses signal defensiveness. Ten to twenty pages is typical for a material review.

What if the regulator rejects our proposed scope?

That is their prerogative. The value of a well-constructed scoping response is not that it is accepted wholesale. It is that it shifts the conversation onto specific, testable terms and demonstrates the firm as a credible participant in the review.

When should the board see the scoping response?

Before it is sent. Section 166 reviews are a board-level matter. The accountable SMF should own the response, but the board should have seen the proposed terms of reference and understood the implications.