FCA IFPR implementation observations: act now to avoid penalty capital buffers
In this latest publication the FCA provides initial observations on how firms are implementing the Internal Capital and Risk Assessment (ICARA) process and reporting in relation to the Investments Firms Prudential Regime (IFPR).
IFPR is a new prudential regime for MiFID investment firms that came into effect on 1 January 2022. The regime requires firms to complete an ICARA process to identify and mitigate the risk of harm in their operations. The FCA is supporting firms in adapting to the new regime through briefings, discussion forums, and a multi-firm review. Initial observations from the review suggest that while firms have made progress, there are areas for improvement which we summarise below.
Lack of adequate assessments of threshold requirements for individual investment firms within investment firm groups
Under MIFIDPRU regulations, investment firms are required to complete an ICARA process that assesses the risk of harm caused by its activities and risks sustained by its operations. Investment firm groups can choose to complete a 'group ICARA process,' but this must consider the risks of each individual firm in the group. There were challenges in how individual entity requirements were dealt with, with some assessments not fully considering the risks and harms sustained by each firm individually. An additional option is to invite or require an investment firm group to operate an ICARA process on a 'consolidated basis,' but each individual entity must still undertake a solo ICARA process.
Absence of unified and integrated assessments
Assessments conducted as part of some firms’ ICARA process were not linked and integrated with each other, leading to a lack of understanding of harms from the firm's operations and inappropriate mitigation measures. Some firms did not adequately assess the risks they face or use these assessments to inform elements of their ICARA process. The wind-down planning process was not integrated into the assessment of own funds and liquid assets, and some firms did not have comprehensive own funds and liquid assets triggers and limits framework. Some firms did not act fully on previous feedback around approaches to capital and liquidity. There were differing degrees of engagement by the Board and their delegated committees in the ICARA process. Firms demonstrating best practices aided their senior executive and boards by providing in-depth training on IFPR.
Wind down plan
The FCA has found that firms are not giving enough attention to their wind-down plans. Wind-down plans enable firms to exit the market with limited harm to clients and markets, and are required under MIFIDPRU. The FCA observed unrealistic assumptions, insufficiently detailed modelling, and poorly justified estimates of resources needed to support an orderly wind-down. Many firms completed wind-down planning estimates without considering a backdrop of stress, potentially underestimating the resources required. Group membership was also not considered in some wind-down plans, and the scope of the plan was not comprehensive with several elements missing in the analysis.
Data quality
Some firms provided inaccurate or incomplete data in their regulatory submissions, which indicates weaknesses in their systems and controls and may breach senior managers’ responsibilities under the SM&CR. Firms should ensure that their regulatory reporting submissions are accurate and consistent with other documents and consider whether their internal audit functions have adequate oversight of the regulatory reporting process and ICARA documents. Previous letters have outlined expectations related to data accuracy. The transition to IFPR is an opportunity for firms to review their regulatory reporting practices.
Next steps
The FCA has completed the initial part of its multi-firm review and has provided written feedback letters to the firms involved. The FCA will continue with the review and plans to publish a concluding report after completion. The FCA may also release further interim observations if deemed appropriate.
How Braithwate can support
Our expertise in conducting ICARA reviews covers both solo investment firms and investment firms that operate within complex international group structures. With our proven approach, we provide clients with the insights they need to make informed decisions about managing their financial resources and mitigating potential risks.
We have templates and documentation for each of the steps in the process:
We also have a track record of helping firms to achieve capital buffer reductions (freeing up valuable capital for business expansion or to return to shareholders) where the FCA has applied add-on capital buffer requirements as a result of risk management deficiencies.
Reach out to us today to discuss how we can help your firm enhance its risk management, prepare superior ICARAs and improve capital and liquidity efficiency.