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Last updated: 14 Oct 2021
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What does the ICARA process mean for your firm?

As we continue to support FCA regulated businesses with the implementation of IFPR, a significant challenge is the preparation of the 'Internal Capital Adequacy and Risk Assessment’ (ICARA) document and demonstrating it is a ‘process’ rather than just a document.

ICARA must very clearly articulate the following:

  • a clear description of its business model and strategy
  • an explanation of the activities it carries out, with a focus on the most material activities
  • an explanation of why it has concluded its ICARA is fit for purpose. Or, where this is not the case, an explanation of the deficiencies identified, the steps taken to remedy them, and who is responsible for implementing any remedies
  • an explanation of any other changes to the ICARA process that have occurred following the review and the reasons for those changes
  • an analysis of the effectiveness of its risk management processes during the period covered by the review
  • a detailed overview of the governance structure linking to the SM&CR compliance
  • a summary of the material harms it has identified and any steps taken to mitigate them
  • an overview of its business model assessment and capital and liquidity planning
  • an explanation of how it’s complying with the OFAR.  This should include a clear break-down at the review date of available own funds, available liquid assets, and its assessment of its threshold requirements
  • a summary of any stress testing and reverse stress testing it has carried out
  • an overview of its wind-down planning, including any key assumptions or qualifications

While all of the above sounds manageable, and firms who have previously prepared ICAAPs will note some similarities, the key change is the assessment of the ‘Overall Financial Adequacy Rule’ (OFAR), the calculation of the ‘own funds threshold requirement’ and the calculation of the ‘liquid assets threshold requirement’. 

About the author

Priya Mehta

+44 (0)20 7556 1372
mehtap@buzzacott.co.uk
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ICARA must very clearly articulate the following:

  • a clear description of its business model and strategy
  • an explanation of the activities it carries out, with a focus on the most material activities
  • an explanation of why it has concluded its ICARA is fit for purpose. Or, where this is not the case, an explanation of the deficiencies identified, the steps taken to remedy them, and who is responsible for implementing any remedies
  • an explanation of any other changes to the ICARA process that have occurred following the review and the reasons for those changes
  • an analysis of the effectiveness of its risk management processes during the period covered by the review
  • a detailed overview of the governance structure linking to the SM&CR compliance
  • a summary of the material harms it has identified and any steps taken to mitigate them
  • an overview of its business model assessment and capital and liquidity planning
  • an explanation of how it’s complying with the OFAR.  This should include a clear break-down at the review date of available own funds, available liquid assets, and its assessment of its threshold requirements
  • a summary of any stress testing and reverse stress testing it has carried out
  • an overview of its wind-down planning, including any key assumptions or qualifications

While all of the above sounds manageable, and firms who have previously prepared ICAAPs will note some similarities, the key change is the assessment of the ‘Overall Financial Adequacy Rule’ (OFAR), the calculation of the ‘own funds threshold requirement’ and the calculation of the ‘liquid assets threshold requirement’. 

Types of information to be reported within MIF007

The step by step process of undertaking the OFAR assessment is complex but essential. If you are unfamiliar with it, the FCA has set out guidance for the assessment, in the form of two detailed flowcharts, within the MIFIDPRU 7 (part of the proposed Handbook text on IFPR). We know first-hand from working with our clients that the flow charts depicting the process can be challenging to follow. Regardless, the FCA expects firms to fully comply with the OFAR. 

Firms should consider this as an important requirement to demonstrate compliance with the OFAR. Going forward this will need to be integrated into an appropriate monitoring mechanism linked to management accounts preparation and internal management information process. Meeting the requirements of the OFAR is the primary evidence to demonstrate that the ICARA itself has been implemented as an on-going process as opposed to a document to be updated annually. 

Further, firms should take note of the regulatory return MIF007 – ICARA questionnaire, this will need to be submitted to the FCA on an annual basis. The content of this return which is spread over 71 exhaustive questions almost brings to life the intensity of the work that will be expected to be done through the ICARA.

Types of information to be reported within MIF007:

Relating to ‘Assessing and monitoring the adequacy of own funds’  Relating to ‘Assessing and monitoring of liquid assets held’ 
  • Own funds held as at the ICARA process reference date
  • Own fund threshold requirement – identified through the ICARA process
  • Additional own funds requirement specified by the FCA
  • Breakdown of additional own funds requirement to address risks from ongoing activities
  • Breakdown of additional own funds necessary for orderly wind-down (Non-SNI and SNI)
  • Liquid assets held as at the ICARA process reference date
  • Liquid assets threshold requirement
  • Additional liquid assets required to fund ongoing business operations projected over the following four quarters
  • Additional liquid assets required to start wind-down
  • Meeting debts as they fall due 

Other questions:

  • relating to MiFID investment services and activities
  • other business activities 

With less than three months remaining to the implementation date, we urge all firms to start working on the key aspects of the regulation as they’re likely to be some significant gaps in the documentation and monitoring that will need to be addressed. 

Find the latest on IFPR, and how it will impact your firm here:

IFPR - are you ready?

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