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What has happened? 

The IFPR and the corresponding prudential standards under MIFIDPRU began on 1 January 2022. The IFPR applies to investment firms engaged in MiFID activities such as fund managers, asset managers, investment platforms, firms that deal on their own account, depositaries, and securities brokers. The IFPR introduced a requirement for all firms in scope of the regime to complete an ICARA process.

In November 2023, the FCA published the final report on its multi-firm review of firms’ progress in implementing the ICARA process and the reporting requirements under the IFPR. This covered MIFIDPRU investment firms and the UK parent entities of investment firm groups in the scope of the IFPR.

The review focused on capital adequacy, liquidity adequacy, and wind-down planning under the ICARA process. Some account was also taken of how firms were reporting under MIFIDPRU.

This final report should be read together with the report on the FCA’s initial observations published in February 2023 (this is available here).

What are the key points of the report?

Overall, the review highlighted that most firms reviewed engaged well and showed that they were able to make the transition to the new regulations. However, there were areas for improvement. These include improvements around group ICARA processes, internal intervention points, wind-down assessments, liquidity assessments, operational risk capital assessments, and regulatory data submissions.  

Firms must act now to consider the findings and assure themselves that they are meeting FCA rules.

Some of the key areas for improvement that the FCA noted are;

• Several firms applied insufficient consideration of cashflows and liquidity stresses, which led to an inadequate assessment of liquid asset requirements. These firms were at risk of running out of cash in stressed conditions, which could have resulted in firm failure. While firms assessed their liquid asset requirements through the ICARA process, the FCA noted that some of those reviewed did not adequately apply the guidance provided by MIFIDPRU to consider periods of financial stress.
  
  
• The FCA also saw that some firms failed to distinguish the analysis needed to assess their own funds resource from the analysis needed to assess their liquid asset resources and that some firms used the same analysis for both.
  
  
• For most firms, internal intervention points were not structured in a way that would ensure that actions by would be triggered in a timely fashion to mitigate harm, particularly from firm failure. Only a few firms reviewed made effective use of stress testing to identify by how much their resources should exceed threshold requirements in unstressed conditions, or to test the appropriateness of the setting of levels of resource in their risk appetite framework.
  
  
• Wind-down assessments applied inadequate consideration of the impact of membership of a group and individual firms within groups may not have adequately planned for potential failure. Where firms completed the ICARA process on an individual basis and prepared individual wind-down plans, those plans did not always recognise that the wind-down may have been caused by, or may cause, the wind-down of other firms in the group or the entire group.
  
  
• In some firms, there were significant failings in the application of capital models for operational risk. This gives the FCA little assurance that these firms have adequate resources to mitigate harm. Common failings identified include an incomplete assessment of risk from the point of view of an individual firm, inappropriate use of group models, and poor governance and oversight around complex modelling approaches. An incomplete assessment of risks means that individual firms will not have enough resources to manage their own risks. The lack of adequate model risk governance caused some firms reviewed to use incorrect models or relatively complex approaches, which led to incorrect or poorly understood results.
  
  
• Concerning data integrity, for some firms reviewed, the contents of the RegData MIF007 report were inconsistent with the information provided in the ICARA, in annual reports, and in internal management information. Guides on the completion of regulatory reports were not thoroughly followed and several data points were left blank.
  
  These issues are discussed in full in the key observations section of the report and a summary of good and poor practices has been provided by the FCA as Annex 1 to the report. Firms should also consider the good and poor practices cited in the FCA’s Observations on Wind-Down Planning and Assessing liquidity for orderly wind-down.
  
  Firms that are part of the multi-firm review receive written feedback letters and the FCA will follow up with them through its usual supervisory activities.

How can we help you? 

Thistle Initiatives has supported investment firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in meeting and complying with FCA regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your assessment or implementation of IFPR and MIFIDPRU, or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.