On 27 February, the FCA published their ‘initial’ observations on how firms are implementing requirements on the internal capital adequacy and risk assessment (ICARA) process and reporting under the IFPR. Priya Mehta outlines the review here.

This is the first part of a multi-firm review and those firms who were included in this initial part of the review process have received written feedback letters. The FCA intend to follow up with them through their usual supervisory activities.

The IFPR introduced a requirement for all firms in scope of the regime to complete an internal capital adequacy and risk assessment (ICARA) process. Through the ICARA process, firms are expected to identify the risk of harm in their operations and provide appropriate resources to mitigate harm, whether as a going concern or when winding down. The FCA’s review was focused on capital adequacy, liquidity adequacy and wind-down planning under the ICARA process, as well as regulatory reporting. 

Concerns

Key issued explained by the FCA are:

• Insufficient consideration of firm-specific risk and harms in the assessment of threshold requirements of individual firms required by MIFIDPRU

• Inadequate integration of the firm’s approach to managing financial resources to mitigate the risk and harms from its operations within the assessments made as part of the ICARA process

• Lack of comprehensive own funds and liquid assets triggers and inadequate explanations where there was a reduction in risk capital.

• Incorrect implementation of the ‘group ICARA process’ without an appropriate ‘Voluntary Requirement’ approval obtained from the FCA 

• Unsatisfactory governance and Board & Executive involvement in ICARA

• Weak wind-down planning assessments in terms of scope and quantification, reflecting an incomplete understanding of the purpose of the exercise and of guidance previously provided.

• Inconsistent and inaccurate data submitted in regulatory reports.

Reminder

The FCA have also taken this opportunity to remind firms of the following:

"IFPR refocuses prudential requirements and expectations beyond the risks the firm faces, to also consider and look to manage the potential harm the firm itself can pose to consumers and markets.

Under IFPR, firms must hold sufficient financial resources to support on-going activities and wind-down in an orderly manner, as required by the Overall Financial Adequacy Rule (OFAR). Firms are further directed to complete an ICARA process to check whether it complies with the OFAR.

The ICARA process brings together our requirements for business model analysis, stress-testing, recovery planning and actions, and wind-down planning. Through the ICARA process, firms assess their risk of harm and produce reasonable estimates of own funds and liquid assets threshold requirements to mitigate harm. Firms must hold financial resources to meet these requirements at any given time, to comply with the OFAR. The ICARA process may be assessed by our supervisory review evaluation process.

For firms which are part of an investment firm group, an overall group-wide view of risks and harms remains essential in assessing threshold requirements and in managing the financial resources of each individual entity. Without this, the individual entity’s understanding of its risks and the harms from its operation is incomplete.

Under MIFIDPRU, we also set out new guidance on intervention points, the actions we expect of firms in certain situations and what they can expect from us."

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Over the past year, we have conducted many independent reviews of regulatory returns and ICARAs which has led to substantial corrections and enhancement of the documents. As much as it has been a learning curve for us, we have developed a wealth of experience in peer-benchmarking and thorough understanding and application of the rules. If you believe a ‘regulatory health check’ could strengthen the quality of your documents, please feel free to contact us.