We've supported a variety of MiFID Investments firms, helping them to implement their ICARA process efficiently. In this insight, we share some key aspects of MIFIDPRU 7 that should be applied to ensure that you're meeting the FCA’s expectations.

The ICARA process should take a ‘proportionality’ approach based on the size and complexity of your business model. Nonetheless, all investment firms must consider the current economic climate where a new surge of challenges surrounds us in the form of rising inflation, growing interest rates and the threat of a long-term recession; taking this into account, how can you ensure that your ICARA is a ‘comprehensive document’ that meets the FCA requirements?

Too much or too little?

The baseline obligations under MIFIDPRU 7 expect firms to discuss at least the following within their ICARAs:

• a clear description of your business model and strategy

• an explanation of the activities you carry out, with a focus on the MIFID permissions held and currently used by your firm

• an analysis of the effectiveness of your risk management processes and appetite for risk

• a detailed overview of the governance structure, linking this to the SM&CR

• a summary of the material harms your firm faces and the controls and mitigations in place

• an analysis of your capital and liquidity planning

• a summary of your compliance with the overall financial adequacy rule

• the outcome of stress testing you have conducted and managements response to these scenarios

• an overview of your wind-down planning, including the financial assessment of winding down your regulated business

Combining all the above in a document is the first part of the process. The next step is for your firm to adopt the ICARA as a process rather than a document.

What’s the best way to achieve that?

The ‘Overall Financial Adequacy Rule’ (OFAR)

Within the OFAR, you are required to hold sufficient capital and liquidity to cover your ‘own funds threshold requirement’ and ‘liquid assets threshold requirement’. When calculating the thresholds your firm must take into account the risks it incurs from ongoing operations and the assessment from wind down. A successful method is to integrate the OFAR monitoring into your monthly management processes, for example including capital and liquidity adequacy calculation in the management accounts.

Projections and wind down costs

This can be an extremely valuable tool for anticipating any capital or liquidity shortfalls in your business and to ensure that timely action is taken before nearing a regulatory deficit. Forecasting can also help you appraise new business opportunities with the assurance you will be meeting your regulatory requirements. This also applies to your wind down costing if indeed there have been significant changes to staffing or lease or any other supplier contracts that could alter your fixed cost base.

Assessment of harms

Establishing a detailed risk matrix which analyses the harms that your firm poses to itself, your clients, and the wider market. Understanding these harms and mapping your controls to them enables you to properly monitor your risk environment and implement improvements and updates where necessary. External factors which are beyond your control could have a substantial impact on your operational resilience, financial performance, and liquidity levels, therefore consideration of macro-economic events helps to create a more robust assessment of harms.