The FCA observations of IFPR implementation
The FCA Investment Firm Prudential Requirements (IFPR) review
IFPR was implemented in January 2022 and the FCA have today published initial observations on how firms are implementing the requirements under the Internal Capital Adequacy and Risk Assessment (ICARA) process and reporting under IFPR.
What have the FCA said?
As part of their recent multi-firm review, the FCA have focused on capital and liquidity adequacy as well as wind-down planning and regulatory reporting. Their main comments relate to:
- Failure to consider firm specific risks and harms in order to assess individual firm threshold requirements
- Weaknesses in detailing operation of solo ICARA processes when completing ICARA on a consolidated basis
- Ensuring assessments made by the ICARA process are fully integrated into the firm’s approach to managing financial resources
- Strengthening the scope and quantification within wind-down processes
- Regulatory reports including inconsistent and inaccurate data
What did the FCA do?
The FCA selected a sample of investment firms and investment firm groups, including some of the largest and best resourced. They have based their findings on the ICARA documentation as well as discussions with senior management.
- Firm specific risks and harms
The FCA note that although firms are allowed to complete a group ICARA, they also need to consider the risks that each individual firm faces. Each firm must identify relevant threshold requirements, risk appetites and triggers for capital, liquid assets and wind-down, appropriate to the individual firms. The FCA feel that this was not done effectively; they highlight firms not capturing diversification effects and the effect of intragroup offsets.
- ICARA process assessments
The FCA highlighted that there were some instances where, although firms completed a consolidated ICARA process, they didn’t also complete a solo ICARA process, as required.
Assessments made as part of the ICARA process were not linked and integrated with each other, some firms had mismatches between the risks assessed and the risk management process used. The FCA feel firms didn’t adequately assess risks faced and didn’t use them to inform their ICARA process. Reverse stress testing is also highlighted as not being used consistently to assist in scenario analysis for wind-down. Attention is drawn to the firms need to integrate the wind-down planning process into the assessment of own funds and liquid assets.
Some firms had reduced capital requirements compared to previous regimes and the reasons for this were inadequately explained. The FCA comment that although some firms acknowledged risks, they did not factor these into their calculations as they did not mechanically fit into the calculations, potentially resulting in in accurate lower requirements.
Some firms threshold requirements were not linked to the firms understanding of specific risks. Some firms also failed to state whether intervention points resulted in discussions, actions, or an immediate commencement of wind-down. The FCA highlight the need for risk appetites to be clear and for firms to ensure that if their own funds or liquid asset thresholds are breached, the need to commence wind-down becomes urgent.
Finally, the FCA note that some firms have not addressed previous FCA feedback, and some have not involved their Boards or senior management adequately within the ICARA process.
- Wind-down plans
The FCA feel that the assessment of own funds and liquid assets for wind-down is not as robust as it is for ongoing activities. They highlight unrealistic assumptions, not enough detail within the modelling and not enough justification for the estimate of resources.
The FCA challenge that some firms do not commence wind-down with a stress backdrop, including the impact of client behaviours as a result of the stressed environment. Distressed asset sales and liquidity strains are noted as examples. The omission of group risk is also highlighted, where firms rely on other group entities e.g. a service entity and potential additional support needed for the service entity. Finally, the omission of firm specific processes, obligations and products is noted.
- Data Quality
The FCA note that they see the introduction of the ICARA as an opportunity for firms to ensure their submitted data is complete, consistent, and accurate.
What happens next?
Some firms will have their own individual feedback that they will be working through, others may be in a position where they have still to receive this. The FCA will publish final conclusions once they have completed their review on all firms and may publish interim views.
How can we help?
Devlin Mambo have extensive experience in assessing the impact of new regulations and in assisting in their effective implementation in a controlled, measured, and robust way. With a clear focus on long term partnerships, we will work hand in hand with you to help build the optimal IFPR framework for your business, with due consideration to your entity specific and consolidated requirements.