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You may have already completed your first ICARA, but it’s worth reviewing the FCA’s first batch of findings to understand how you stack up and help plan future updates.
The multi-firm review of the ICARA process, published at the end of February, outlines the FCA’s initial observations. As the regulator points out, the publication doesn’t change any of the requirements, but firms should ‘consider how any of these observations apply to their process’.
Only a small percentage of the larger firms supervised by the FCA were asked to submit their first ICARA document before the end of 2022. These are firms who had already been subject to a previous review by FCA and had a capital add on (ICG). As such the findings are generally more relevant for the larger firms or groups subject to MIFDPRU.
In December, we analysed some common issues we were seeing in ICARAs for both SNI and non-SNI firms. The FCA’s review outlines some similar themes, and adds some further observations, in particular reflecting the size of company in the review – for example firms with group ICARAs.
FCA observations from the multi-firm ICARA review
Investment firm groups
Firms can choose to do their ICARA at group level but if they do so they still need to make sure that they consider the risks faced by each firm in the group and each individual firm in the group must demonstrate that they meet their own fund’s threshold requirement. Each firm needs to maintain its own wind-down plan and hold adequate resources to wind down in an orderly way.
ICARA process assessment
Under the old prudential regime, investment firms were required to hold a minimum amount of capital for risks such as credit risk. Although this rule is no longer applicable, where firms are not calculating a capital requirement for credit risk, they need to explain why the risk is no longer applicable to the firm or that controls in place fully mitigate the risk.
Lack of integration of triggers and limits in risk framework
Firms need to monitor their internal triggers and limits so they can take action when stressed events happen and triggers are hit and wind down if necessary. The FCA stated that the process of how this was monitored and how it would work, was not set out well in firms’ ICARAs.
Insufficient governance and Board involvement in ICARA
The FCA observed there was often a lack of challenge and oversight by Boards over key elements in the ICARA. They also said where firms can demonstrate Board training on the key parts of IFPR, this aides the challenge process. We have also seen that this results in a better review and challenge of the ICARA, by the Board, following training we have provided in the last year.
Wind-down plans
Wind-down planning forms an important part of a firm’s ICARA process as it is a key element of assessing the overall financial adequacy requirement. Firms need to model and assess their wind down plans and hold enough capital and liquid asset resources so they do not cause harm in wind down. Although the process has been in place for a while for regulated firms, FCA has still identified material gaps in the process from the ICARAs it reviewed. In all feedback, we see the FCA providing robust comments on the wind down plans they have seen.
Areas of weakness include the following:
- Inadequate consideration of what stress will cause the firm to fail.
- Ignoring the impact of being part of a group and inter-group dependencies.
- Some wind down plans reviewed were missing key information such as the wind down financial models.
Poor data quality in returns
This has been raised as an issue before but the FCA has made it clear that it views poor quality of data submissions as an indicator of weakness in a firm’s systems and controls. We recommend that firms make sure returns are reviewed as part of a compliance monitoring exercise or as a third party review or internal audit programme.
We can help
Our specialist Prudential team has supported over 300 firms in preparing their ICARAs. You can find out more about our findings at our March webinar. If you need support with any element of compliance with the IFPR, get in touch.
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