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What has happened?

In February 2023, the FCA published its initial observations on how firms are implementing its requirements for the internal capital adequacy and risk assessment (ICARA) process and reporting under the IFPR. 

MIFIDPRU investment firms are asked to consider these observations and how they can strengthen their processes.

What are the key points of the review?

The FCA’s review was focused on capital adequacy, liquidity adequacy and wind-down planning and this included reviewing how firms assessed their threshold requirements through their ICARA process and what framework they had adopted to manage financial resources. 

The FCA had selected a sample of investment firms and investment firm groups covering various business models for inclusion in the review, which included:

• Discussions with firms, including with senior members of their Board and management teams, on their approach to assessing risks and harms, quantifying own funds and liquid assets threshold requirements and the framework applied to managing own funds and liquid asset resources, and
• Reviewing ICARA documentation and other relevant information.

The FCA also reviewed the quality of data submitted by firms to comply with MIFIDPRU reporting requirements.

Some key observations made as part of the review are set down below.

ICARA process – investment firm groups

The FCA identified a lack of adequate assessments of threshold requirements for individual investment firms within investment firm groups.

ICARA process assessments

Assessments made as part of some firms’ ICARA processes were not linked and integrated with each other and the FCA found a mismatch in some firms’ ICARA analyses between the risks assessed and the risk management process used. 

Inadequately explained reduction in risk capital

The FCA saw a significant reduction in the capital requirement in several firms compared to their assessment under the previous regimes, for operational risk, credit risk and market risk. Some firms assessed no capital requirement for certain types of risk, against which capital was previously held. In some cases, these reductions were not adequately explained. 

Lack of comprehensive own funds and liquid assets triggers and limits framework

Although most firms identified own funds and liquid asset appetite thresholds or triggers, the FCA saw instances where these appetite levels used levels and triggers defined within MIFIDPRU without any link to the firm’s understanding of its risk. The firms’ own assessments of resources needed to support an orderly wind-down were often missing from their metrics. Many firms also have not tested the credibility of their intervention points around a wind-down decision – for instance by using a reverse stress scenario.

Previous FCA feedback not fully acted upon

The FCA observed that several firms had not fully acted on the feedback previously provided, particularly around approaches to capital and liquidity. 

Insufficient governance and Board & Executive involvement in ICARA

The FCA noted differing degrees of engagement by Boards and their delegated committees in the ICARA process. Some had not provided sufficient challenge and oversight over key elements of the ICARA process, and so had approved a process which does not provide confidence that the individual firm’s risks are adequately identified or addressed, and therefore whether harm could be caused through the failure of the firm.

Wind-down plans

The FCA found that compared to the assessment of own funds and liquid assets to support ongoing activities, the assessment of resources to support an orderly wind-down is less robust. This is evidenced in unrealistic assumptions, insufficiently detailed modelling, and poorly justified estimates of resources needed to support an orderly wind-down. 

Data quality

The FCA observed some firms providing inaccurate or incomplete data in their regulatory submissions. It considers that the poor quality of regulatory data submissions is an indicator of weaknesses in firms' systems and controls and this may also breach senior managers’ responsibilities under the SM&CR. 

Firms included in this initial part of the multi-firm review have received written feedback letters. 

The FCA is continuing with this multi-firm review. It intends to publish a concluding report after completion of the review and may publish further interim observations, where appropriate.

How can we help you?

Thistle Initiatives has supported 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 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 IFPR and MIFIDPRU arrangements, or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 0207 436 0630 or sending an email to info@thistleinitiatives.co.uk.