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FCA clarifies expectations for ICARAs, wind-down plans and governance relating to IFPR

18 Sep 2023

By Harry Barnes, Senior Compliance Consultant

With the FCA’s new Investment Firm Prudential Regime (IFPR) having been in place for over a year, the FCA has published its observations on IFPR implementation and clarified its expectations for firms in a number of areas relating to IFPR. Here, we summarise the key clarifications and how firms may be impacted.


A more active role for senior managers – challenging and scrutinising

As part of the obligations under the Senior Managers and Certification Regime (SMCR) introduced in 2019, Senior Managers of a firm are required to provide adequate support and exercise appropriate diligence in relation to their firm’s governance processes. This extends to prudential regulation and the FCA expects to see Senior Managers and members of a firm’s governing body take a more active role in their firm’s internal capital and risk assessment (ICARA) process and wind-down planning.

The expectation is that Senior Managers should be able to suitably challenge and scrutinise to ensure that processes and planning are accurate, are reflective of risks faced by the firm and have accurate assumptions.

In-depth training required

The FCA understands that many Senior Managers or members of a firm’s governing body might not have the necessary expertise to be able to hold their ICARA process and wind-down plan to account. In order to ensure that Senior Managers and governing body members are able to provide adequate scrutiny, the FCA believes it best practice for firms to provide in-depth IFPR training.

ICARA process

Acknowledge all relevant risks in a holistic approach

The FCA noted that some firms significantly reduced their requirements under operational risk, credit risk and market risk – or removed them altogether – without adequate explanation as to why the firm no longer faced those risks. It is the FCA’s view that unless adequate explanation is given, firms will still face these same risks and so they should be captured in the ICARA process and feed into the firm’s fund and liquid asset requirements.

The FCA also noted that some firms only considered risks covered directly by K-factor formulas. Firms are required to consider and document all material risks they face from their activities. This extends to risks from unregulated and non-MiFID activities as well as risks from MiFID activities that are not covered by the K-factors.

The FCA identified a lack of coherence in some ICARA processes; for some firms the various elements of the ICARA did not align. Firms are expected to consider all elements of the process holistically and each element should feed into the others.

Intervention points with clear actions and timeframes

Firms are required to set trigger points and early warning indicators under MIFIDPRU. These points are meant to allow firms to take effective steps to prevent problems, rectify them before they occur, and be prepared to initiate recovery or wind-down plans as necessary. The FCA noted that many firms were not adequately considering their risk profile when setting these thresholds; in some cases just using the triggers defined within MIFIDPRU without any consideration of the firm’s particular circumstances.

The FCA also noted a lack of clarity regarding what the intervention points would lead to, with a lack of specific actions or understanding of the timeframe for when action would need to be taken. This is particularly the case where there are thresholds driven by wind-down cost – i.e. once that threshold is crossed, the need to wind down becomes urgent. The intervention points set should bear this in mind and be designed to give the firm sufficient time to take actions to avoid a wind-down.

Wind-down planning

Wind-down plans require greater attention

The FCA has identified a general lack of attention given to wind-down planning by firms with weak adoption of the FCA guidance. Under MIFIDPRU, firms are required to have sufficient capital and liquid resources to be able to wind down in an orderly manner, therefore wind-down planning forms an essential part of the ICARA process.

The FCA noted that the assessment of capital and liquid resources required was far less robust than it should be, with many firms not conducting an assessment of the cost of an orderly wind-down and what resources would be required.

Consider a stressed backdrop, consider the wider group

When considering the backdrop of the wind-down, some firms were not considering a stressed situation. It is the FCA’s expectation that a wind-down is most likely to occur during or after a period of stress, and this should be factored into every element of the wind-down plan.

For instance, clients might transfer away from the firm at a faster rate than anticipated, counterparties and clients might default, the sale of assets may take place under fire-sale conditions and the triggering of credit clauses could cause additional liquidity strain.

There was also a lack of group consideration by firms, particularly as regards dependencies on other group entities or group service companies. Firms should assess the impact of group-wide stress and the impact this would have on the firm’s ability to carry out an orderly wind-down.

Follow the published guidance

The FCA has noted that many firms are not completing their wind-down planning in line with the FCA’s wind-down planning guidance and in FG20/1, leading to incomplete analyses of the requirements.

The key elements of this guidance:

  • Identification of financial and non-financial resources required to facilitate an orderly wind-down
  • Identification of any gaps compared to the required resources
  • Allocation of wind-down actions
  • Identification of potential wind-down triggers and any likely recovery actions
  • Creation of any communication plans and allocation of responsibility for communications
  • Assessment of the impact of the wind-down on stakeholders such as clients, counterparties and employees
  • Group considerations
  • Realistic assumptions, particularly as relates to the revenue of the firm from its activities and the sale of assets (firms should assume fire sale conditions for the sale of assets and factor in that counterparties and clients might default during a stressed scenario)

Group ICARA processes

Process to be conducted at both group and individual firm level

Most firms that were part of an investment group chose to complete a group or consolidated ICARA process as a single process, analysing all the risks at a group level only. The FCA has made clear that the rules require the ICARA process to be conducted at a firm level for each individual firm, in addition to the group level ICARA process.

All of the requirements of MIFIDPRU must be met at both a group level and an individual firm level at the same time. The FCA raised some issues around groups not allocating resources to allow each firm to meet its individual requirements at all times, as is required under MIFIDPRU.

What needs to be done?

From the above, there are two key actions for firms to take:

  • Review their ICARA processes to ensure they are meeting the FCA’s expectations, and update these processes as necessary
  • Ensure their senior executives, governing bodies and committees have been given in-depth training on the requirements of IFPR

How IQ-EQ can help

We have created updated templates and guidance to assist firms in the completion of their ICARA processes and wind-down planning in line with what the FCA expects.

We are able to offer in-depth tailored training to firms’ governing bodies to enable them to meet the requirements under SMCR and give scrutiny to their ICARA processes.

Our expert team is also able to assist in the preparation of MIFIDPRU 8 disclosures and with the new MIFIDPRU regulatory reporting requirements.

To discuss the FCA’s new expectations or find out more about the support available from IQ-EQ’s expert compliance consulting and technical regulatory reporting teams, contact us today.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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