The FCA’s Investment Firm Prudential Regime (IFPR) was introduced on the 1st of January 2022 to enhance the prudential supervision of investment firms.
One year on, are firms Internal Capital Adequacy and Risk Assessments (ICARAs) and supporting documentation and processes meeting FCA expectations and standards?
This articles aims to cover some of the critical considerations firms should be thinking about. Failure to complete a compliant and proportionate ICARA can lead to material capital/liquidity impacts and regulatory scrutiny.
FCA IFPR implementation observations
After completing the first phase of their multi-firm ICARA reviews (the so-called ‘SREPs’), the FCA published their initial observations on 27th Feb 2023 (see here). The purpose of these observations was to assist firms in understanding and meeting IFPR requirements and enhancing their ICARA processes.
In this article, we summarise some of the key FCA feedback and provide some of our own unique insights based on our work with firms and our SMEs involvement in the recent SREP reviews.
1. Treatment of investment firm groups
For firms who opted to complete a ‘group ICARA’ process, there was insufficient consideration of firm-specific risk and harms. Among investment firm groups who completed an ICARA process on a ‘consolidated basis’, the FCA noted that it is a requirement to also operate solo ICARA processes.
2. The ICARA Process
Unexplained capital reductions:
In many cases, firms had reduced their capital requirements compared to their previous ICAAP submission without sufficient explanation. Unless business models have changed, firms will continue to be exposed to the same risks. Firms should be taking account of and documenting all material risks they face including those from non-regulated and non-MiFID activities, and risks and harms not specifically covered by K-factor calculations.
Previous FCA feedback not acted upon:
In some cases, firms had not addressed previous FCA SREP feedback. It is important to note that despite the IFPR being a new regime, previous relevant FCA feedback should not be ignored. Indeed, this is often the first thing that is checked during the SREP process.
Insufficient governance and Board and Executive involvement in ICARA:
The FCA expects the Board and senior management to provide sufficient challenge and oversight over key elements of the ICARA process. In depth training on IFPR enables Boards and committees to provide suitable challenge to the ICARA.
3. Wind down plans
The FCA observed weak wind-down planning assessments in terms of scope and quantification. It is essential that firm’s wind-down plans are updated, relevant and comprehensive. Effective wind-down plans enable firms to fail or exit the market in an orderly way with limited harm to clients and markets, a key FCA objective.
4. Reporting data quality
The FCA has seen inconsistent and inaccurate data submitted in regulatory reports. The FCA expects firms to ensure that all data submitted is accurate and of high quality. Missing or poor quality data submissions will be viewed as indicators of weaknesses in firms’ systems and controls and emblematic of poor governance. We know that the prudential data submissions are being actively used to monitor financial resilience.
Firms are required to produce their ICARA to reflect the requirements of both MIFIDPRU regulations and previous FCA publications. We highly recommend that firms should at least take into consideration FG20/1 – Assessing adequate financial resources, the FCAs wind down planning guide, TR22/1 and recent IFPR guidance (summarised above).
We expect the FCA to continue reviewing the embeddedness of the IFPR regulation through more SREPs, thematic reviews and prudential data monitoring. A strong ICARA process can save precious capital and liquidity in times of scarce financial resources.
How can Alpha help
Alpha’s team includes leading prudential specialists and ex regulators that played a critical role in the FCAs current and future prudential and IFPR strategy.
We can help firms assess if they are holding the right level of capital and liquidity and determine if their ICARA process meets regulatory standards. We have been helping firms with Board training, independent ICARA reviews, SREP preparation, validation of operational risk models and technical advice on capital and liquidity optimisation.
If you would like to find out further information or to have an initial discussion, please reach out to Dr Awat Rahimi or Bernardo Castel-Branco or get in touch here.