{"id":11710,"date":"2023-09-18T09:30:00","date_gmt":"2023-09-18T09:30:00","guid":{"rendered":"https:\/\/iqeq.com\/?p=11710"},"modified":"2023-09-16T21:16:46","modified_gmt":"2023-09-16T21:16:46","slug":"fca-clarifies-expectations-for-icaras-wind-down-plans-and-governance-relating-to-ifpr","status":"publish","type":"post","link":"https:\/\/iqeq.com\/insights\/fca-clarifies-expectations-for-icaras-wind-down-plans-and-governance-relating-to-ifpr\/","title":{"rendered":"FCA clarifies expectations for ICARAs, wind-down plans and governance relating to IFPR"},"content":{"rendered":"
\n
\n

By Harry Barnes, Senior Compliance Consultant<\/em><\/p>\n

With the FCA\u2019s new Investment Firm Prudential Regime (IFPR) having been in place for over a year, the FCA has published its <\/strong>observations<\/strong><\/a> 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.<\/strong><\/p>\n

Governance<\/h2>\n

A more active role for senior managers \u2013 challenging and scrutinising<\/h3>\n

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\u2019s governance processes. This extends to prudential regulation and the FCA expects to see Senior Managers and members of a firm\u2019s governing body take a more active role in their firm\u2019s internal capital and risk assessment (ICARA) process and wind-down planning.<\/p>\n

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.<\/p>\n

In-depth training required<\/h3>\n

The FCA understands that many Senior Managers or members of a firm\u2019s 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.<\/p>\n

ICARA process<\/h2>\n

Acknowledge all relevant risks in a holistic approach<\/h3>\n

The FCA noted that some firms significantly reduced their requirements under operational risk, credit risk and market risk \u2013 or removed them altogether \u2013 without adequate explanation as to why the firm no longer faced those risks. It is the FCA\u2019s 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\u2019s fund and liquid asset requirements.<\/p>\n

The FCA also noted that some firms only considered risks covered directly by K-factor formulas. Firms are required to consider and document all <\/em>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.<\/p>\n

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.<\/p>\n

Intervention points with clear actions and timeframes<\/h3>\n

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\u2019s particular circumstances.<\/p>\n

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 \u2013 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.<\/p>\n

Wind-down planning<\/h2>\n

Wind-down plans require greater attention<\/h3>\n

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.<\/p>\n

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.<\/p>\n

Consider a stressed backdrop, consider the wider group<\/h3>\n

When considering the backdrop of the wind-down, some firms were not considering a stressed situation. It is the FCA\u2019s 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.<\/p>\n

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.<\/p>\n

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\u2019s ability to carry out an orderly wind-down.<\/p>\n

Follow the published guidance<\/h3>\n

The FCA has noted that many firms are not completing their wind-down planning in line with the FCA\u2019s wind-down planning guidance<\/a> and in FG20\/1<\/a>, leading to incomplete analyses of the requirements.<\/p>\n

The key elements of this guidance:<\/p>\n