On 27 February 2023, the FCA published its initial observations from the first part of a multi-firm review on firms’ progress in implementing the internal capital adequacy and risk assessment (ICARA) process and reporting requirements under the Investment Firms Prudential Regime (IFPR).
The IFPR aims to streamline and simplify the prudential requirements for MiFID investment firms that are prudentially regulated by the FCA in the UK – known as MIFIDPRU investment firms. It refocuses prudential requirements and expectations beyond the risks the firm faces, to also consider and look to manage the potential harm the firm itself can pose to consumers and markets.
The IFPR and the corresponding prudential standards under MIFIDPRU began to apply on 1 January 2022. In order to support firms as they adapt to the new prudential standards, the FCA held various briefings and discussion forums, as well as carrying out a multi-firm review.
The review aims to assess the progress of firms in adopting the new regime, including the conduct of their ICARA processes. The FCA is sharing its initial observations from the first part of the review to assist firms in understanding and meeting the requirements and enhancing their processes.
The review is focussed on capital adequacy, liquidity adequacy and wind-down planning under the ICARA process, as well as regulatory reporting. Overall, the FCA found that most firms engaged well in the review and progress has been made in understanding the requirements. However, while firms have applied the relevant MIFIDPRU provisions, the review highlighted the following areas for firms to improve on:
- For firms which are part of investment firm groups, most opted to complete a ‘group ICARA’ process. However, for most of these, there was insufficient consideration of firm-specific risk and harms in the assessment of threshold requirements of individual firms required by MIFIDPRU.
- Among investment firm groups who completed an ICARA process on a ‘consolidated basis’, the FCA observed that only a few of them also operated solo ICARA processes by independently assessing the financial resource requirements of individual firms in the group, as required by MIFIDPRU.
- The assessments made as part of the ICARA process should be cohesive. They should also be fully integrated in the firm’s approach to managing financial resources to mitigate the risk and harms from its operations. The FCA found that this was not happening consistently within the initial group of firms reviewed.
- Wind-down planning assessments remain weak in terms of scope and quantification. This reflects an incomplete understanding of the purpose of the exercise and of guidance previously provided.
- The FCA has seen inconsistent and inaccurate data submitted in regulatory reports. Firms should ensure that all data submitted is accurate and of high quality.
Firms included in this initial part of the multi-firm review have received written feedback letters. The FCA will follow up with them through its usual supervisory activities.
The FCA is continuing with the multi-firm review and intends to publish a concluding report after completion of the review. It may also publish further interim observations, where appropriate.