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The Internal Capital Adequacy and Risk Assessment (ICARA) under the UK Investment Firm Prudential Regime (IFPR)

16 August 2021

The IFPR comes into force on 1 January 2022.  It builds on the FCA’s financial resilience framework of FG20/1, and additionally the FCA's two Consultation Papers (CPs) on IFPR and near-final rules as contained within the FCA Policy Statement PS21/6, with another CP and two further Policy Statements and rules to be published in 2021. The IFPR will affect all current BIPRU, IFPRU, matched principal brokers and exempt-CAD firms, amongst others.  This article considers the ICARA which replaces the current ICAAP (and ILAA/ILSA) process for firms caught within the scope of IFPR.

Central to a firm’s risk management framework under IFPR is the ICARA, which is not only integral to how the firm manages risk, but is also central to how the FCA manages the risk of the firm that it supervises.  The ICARA will replace the ICAAP for firms currently subject to IFPRU and BIPRU requirements.  Similarly, liquidity risk management processes, the ILAA/ILSA, will also be incorporated within the ICARA.

The ICARA should not be treated as a once a year process with mere senior management sign-off, as is currently the case for many firms under the ICAAP process, rather senior management should drive and be fully involved in the ICARA process.

The focus of a firm’s risk management framework and ICARA is more on harms as opposed to simply risks to the firm; this harm-led driven approach looks at the identification, mitigation and monitoring of harms posed to consumers, clients and markets, as well as to the firm itself.

The ICARA also considers business model planning and forecasting, recovery and wind-down planning as well as assessing the adequacy of financial resources (capital and liquidity) throughout the economic cycle (i.e. including under stressed conditions).  For larger or more complex businesses, firms would also need to conduct reverse stress testing.

The FCA have stated that they expect that firms will recognise, monitor, control and mitigate the risks to which they are exposed, and the potential harm their activities pose to consumers and markets.  The FCA will hold senior management and governing bodies responsible for this, which will tie in with risk management responsibilities under the Senior Manager and Certification Regime (SM&CR).

The FCA also expects all IFPR firms to do recovery planning, which includes both quantitative and qualitative indicator that provide an early warning that the firm is running into capital and/or liquidity/funding difficulties.  By having these indicators, it is envisaged that it will help firms avoid a breach of the Overall Financial Adequacy Rule (OFAR), and restore compliance with the OFAR where it is breached.

The key stages of a firm’s ICARA process should be as follows:

  • Identify and monitor harms: Operate systems and controls to identify and monitor all material potential harm.
  • Undertake harm mitigation: Consider and put in place appropriate financial and non-financial mitigants to minimise the likelihood of crystallisation and/or impact of the material harm.
  • Undertake business model assessment, planning and forecasting: Forecasting capital and liquidity needs, both on an ongoing basis and were they to have to wind-down.  This must include expected and stressed scenarios.
  • Undertake recovery planning: Determine appropriate and credible recovery actions to restore own funds or liquid resources where there is a risk of breaching threshold requirements tied to specific intervention points.
  • Undertake wind-down planning: Set out entity-level credible wind-down plans, including timelines for when and how to execute these plans.
  • Assess the adequacy of own funds and liquidity requirements: Where, in the absence of adequately mitigating risks through systems and controls, the firm assesses that additional own funds and liquid assets are required to cover the risk.

Have you assessed the impact of the ICARA under the IFPR on your business? Do you know the harms your firm poses to consumers and markets, as well as to your own firm?  If you have not already considered the impact of the ICARA on your firm, the clock is ticking to the IFPR implementation date on 1 January 2022.  The ICARA is not just a simple name change process of the ICAAP.

DWF is able to provide you with guidance, impact assessments and gap analyses on all matters relating to IFPR. Please contact Andrew Jacobs for further details or to arrange a discussion on IFPR.

Further Reading

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