The Investment Firm Prudential Regime

The Financial Conduct Authority (FCA) recently published it’s observations on the implementation of the Investment Firm Prudential Regime (IFPR) which has been in effect for 15 months. We have found through our work with clients that the complexity and nuance involved in the new rules have led to some uncertainty about whether they have fully implemented IFPR correctly. 

Key areas to consider from the FCA’s observations include: 

1. Internal Capital Adequacy and Risk Assessment (ICARA):  

Some firms approach their ICARA as a ‘tick box’ exercise, with a disconnect between risk management and the ICARA process. 
It is apparent that the use of the ICARA has not been utilised to inform the setting of risk appetites, risk indicator triggers and early warning indicators. In addition to this, the implementation of limits and thresholds do not effectively stimulate management actions even in the event they are crossed.  

Firms should ensure that their approach to managing capital and liquidity is embedded within their organisation. Boards and senior management of firms may not have the requisite knowledge of their activities, operations, and risk management processes to provide effective challenge and oversight of the ICARA, it may be time for training to ensure appropriate diligence considering the IFPR. 

2. Wind-down Plans:

Despite being a regulatory requirement, wind-down planning has received less attention compared to ongoing own funds and liquid asset requirement assessments. Firms should reassess their existing wind-down plans and consider guidance from the FCA. Firms need to expand their scope of this whilst considering base case wind-down costs and focus on the development of an operable wind-down plan.  

Firms have yet to give enough consideration to stressed events which lead to the wind down decisions having to be made. Firms involved in group scenarios are relying too much on resources provided by other parts of the group, and whether they will be able to access these resources should a wind-down scenario present itself.  

3. Data Quality and Reporting:  

The FCA continues to flag concerns about the quality, completeness, and accuracy of firms’ regulatory submissions. The IFPR implementation ‘grace period’ is over and firms relying on it to date should consider significant changes. Firms should ensure consistency in the data they supply to the FCA and develop formal, documented processes for periodic data gathering and submission reviews. These will support the completion of submissions and the review of such submissions must be prioritised going forward. This will ensure that potential key person risk within the reporting process is mitigated. 

4. Consolidation:

The IFPR introduced more extensive consolidation rules, requiring many exempt-CAD firms to consider if they are part of an investment firm group. Firms have struggled with identifying groups and understanding the basis for their ICARA preparation. To address these challenges, firms should analyse their group structure, understand regulatory consolidation, and identify relevant financial undertakings. 

When approaching the ICARA process, firms can either conduct a consolidated ICARA (requiring a VREQ application) or a group ICARA. The former assesses threshold requirements for the entire investment firm group, while the latter applies a single process to each MIFIDPRU investment firm within the group. The FCA emphasises the importance of sufficient granularity in both approaches. 

5. MiFIDPRU Annual Disclosures:

In the event of a thorough preparation and full consideration of all the ICARA elements, firms will be able to use this work to assist with their annual MiFIDPRU disclosures. The areas which are covered under the disclosures include, risk management objectives and policies, remuneration policies and practices, investment policy where applicable and the ICARA work supports them.  

In conclusion, there is still some distance to travel before the implementation of the IFPR is complete and fully embedded. Firms should proactively enhance and embed their ICARA process to stay ahead of the FCA’s expectations. 

Objectivus can help in addressing prudential issues with our in-house experts. Gurminder Mahal has specialised in financial risk management with regulated firms for over two decades. He regularly consults with Firms covering a wide range of projects including ICARA documents, resolution and recovery planning, wind-down planning and prudential risk. In addition, he has experience working to address specific regulatory concerns or industry wide feedback from regulators.