Unlocking the ICARA: Navigating the IFPR Regulatory Landscape

Welcome to our comprehensive guide on the Internal Capital Adequacy and Risk Assessment (ICARA) – the cornerstone of the Investment Firms Prudential Regime (IFPR). In this article, we delve deep into the practical challenges faced by firms as they grapple with implementing the ICARA. As trusted advisors, we recognise the need for clear insights and guidance in meeting regulatory standards.

Understanding the IFPR

The IFPR, situated in the MIFIDPRU sourcebook of the FCA Handbook, covers a spectrum of vital aspects including capital and liquidity requirements, recovery planning, governance, remuneration, public disclosures, and regulatory reporting. It encompasses FCA-authorised firms with MiFID permissions, now referred to as ‘MIFIDPRU investment firms’.

One of the significant shifts under the IFPR is the classification of firms into two broad categories: Small Non-Interconnected (SNI) and non-SNI firms. These categories are subject to distinct requirements due to variations in their size and nature of business.

Own Funds Requirement and ‘K-Factors’

Under the IFPR, firms are mandated to maintain a permanent minimum amount and fixed overheads as part of their own funds requirement. Non-SNI firms face an additional component based on ‘k-factors,’ which are coefficients linked to business activities, designed to mitigate the ‘risk of harm’ posed by the firm.

Liquidity has gained prominence in the IFPR. Firms must maintain a minimum amount of liquid assets and calculate additional resource requirements throughout economic cycles and during wind-down phases.

The ICARA Unveiled

The ICARA represents the heart of the IFPR. This assessment process obliges both SNI and non-SNI firms to demonstrate their capacity to fulfill the Overall Financial Adequacy Rule (OFAR). Meeting the OFAR entails assessing the required amount of Own Funds and Liquid Assets to:

1. Sustain a viable business through economic fluctuations.
2. Execute a seamless orderly wind-down.

While the ICARA inherits some concepts from the ICAAP framework, it introduces several vital additions, including the Own Funds Threshold Requirement (OFTR), Liquid Assets Threshold Requirement (LATR), and considering wind-down costs in assessing financial resource needs.

The OFAR became a regulatory requirement on January 1, 2022. Consequently, all MIFIDPRU investment firms are expected to develop an effective ‘ICARA process’ capable of calculating the OFTR and LATR.

Getting it Right: Key Considerations

Implementing new regulations often requires time for practical adjustments and for regulatory expectations to crystallise. Firms must comprehend the requirements, identify potential challenges, and adopt best practices in developing internal processes.

Risk vs Harm

The ICARA introduces a shift from a ‘risk-based’ approach to a ‘harms-led’ assessment. Firms must identify and quantify the harms they pose to clients, the market, and themselves. Mapping risk taxonomies to harms ensures clarity and highlights gaps in the previous risk universe.

Liquidity Challenges

Liquidity implementation can be challenging. Firms must meet ongoing liability obligations, maintain sufficient liquid assets, and plan for wind-down. Quantifying liquid asset requirements through granular cashflow analysis and understanding the interaction between components is essential.

Wind-Down Planning

The ICARA mandates comprehensive Wind-Down Plans (WDP). These plans must align with capital and liquidity risk management, focusing on cashflow management and group-wide implications. The Wind Down Planning Guide (WDPG) provides clear guidance on structure and content.

FCA’s Role in Testing the ICARA

The FCA recognises the importance of the ICARA and conducts SREP reviews to assess its implementation. While ICARA processes should be embedded by now, many firms are still developing their first ICARA document. Feedback from the initial MIF007 reviews and SREP work will shed light on FCA expectations.

How We Can Assist

Navigating the intricacies of the ICARA and IFPR implementation can be daunting. Our team of regulatory specialists and prudential experts is dedicated to helping firms overcome challenges and avoid pitfalls. Contact us today on 0800 689 0190 or email info@complianceconsultant.org to embark on a successful journey towards regulatory compliance.

In conclusion, the ICARA is a pivotal component of the evolving regulatory landscape for investment firms. Understanding its intricacies and proactively addressing challenges is paramount for firms seeking to thrive in this new environment. Stay tuned for more as we delve deeper into the IFPR’s key aspects.