The FCA’s Investment Firm Prudential Regime (IFPR) feels like a victory for common sense to the Asset Management sector and a step in the right direction. Not exactly a fully tailored suit, but reasonably well-fitting compared to the current hand me down from the banking sector rule set.
That said, it’s swings and roundabouts; the recent 6-month delay to implementation creates more preparation time but what are the regulatory expectations in the run-up to go-live? Brexit has given the FCA scope to tailor to the UK market but how will the EU treat regulatory differences? There are significant improvements to the proposed Risk Management approach but is the sector mature enough to deliver the benefits?
IFPR will fundamentally change the way our industry manages risk. Introducing new mandatory processes gives the FCA a powerful tool to effectively manage threats to the market, customers and individual firms. People at all levels at all Investment Firms will need to be more conversant in this different approach to Risk Management, changing the way risk exposures are considered.
It's time for action
The FCA’s recent 6-month delay to implementation makes what looked like a near-impossible implementation window more achievable, while still challenging! The FCA’s rules will now come into effect from January 2022 and we expect to hear more on requirements in a Consultation Paper in the coming months. Acting now will pay dividends in the new year and key activities in the coming months include:
- Impact assessment of current processes and assigning responsibility for compliance;
- Briefing stakeholders on changes and establishing senior sponsorship;
- Undertaking 2020 / 21 ICAAP (Internal Capital Adequacy Assessment Process) against both current and IFPR requirements; and
- Identifying required new processes to support compliance.
There are wide-ranging and challenging changes to be made. Investment Firms need to act now and three areas we see as needing most urgent attention are:
1. Group Consolidation
Unregulated parents of regulated entities will fall under IFPR’s capital and liquidity requirements. The FCA have indicated that existing prudential consolidation waivers will be rolled over, but there is little detail, and the Investment Association has asked the FCA for clarity in their DP response.
Firms should assess the extent they may be impacted and consider any extraterritoriality implications as a result of Brexit. They should also prepare for the Group Capital Test, which requires parents to hold minimum own funds linked to group holdings.
2. Risk Management
Subtly but importantly, the FCA have moved the language and focus of risk management in IFPR to risks impacting Clients, Markets and Firm. Changes to the Risk Management Framework will be needed with increased monitoring of both capital and liquidity using a series of K-factors. The shift from ICAAP to ICARA (Internal Capital and Risk Assessment) introduces a new process with a legally enforceable capital requirement.
All firms will need to change the traditional language of risk management (Credit, Market, Operational risk etc.) to consider Client, Market and Firm. Senior Managers must implement processes to regularly monitor and maintain Regulatory Capital and liquidity as part of their responsibilities under SM&CR. Completing the ICARA requires a largely new process, drawing upon new, current and historic data points; training and increasing awareness should be a priority for investment firms in the new year.
IFPR’s remuneration requirements bring Investment Firms closer to those for Investment Banks, however, there is scope for firms to apply policy they deem ‘appropriate’ which may limit the impact. Firms must set an appropriate ratio between variable and fixed remuneration, which supports decision making aligned to good risk management. Firms should assess those who fall in-scope and review role descriptions to ensure the application of new requirements is accurate and limited.
How can Alpha help?
There is a clear expectation from the regulator that assessing the impact of these changes should be underway. Engagement from the Board down on how the Risk Management Framework will need to change and implementing new processes will be a significant undertaking in the next 12 months. We provide the subject matter expertise to support investment firms deliver this, from impact assessment through to embedding change and assessing the outcomes achieved. We would welcome the opportunity to discuss how you can do this.