Investment Firms Prudential Regime (IFPR): Observations by the FCA

The Financial Conduct Authority (FCA) have published a paper on points and issues they have discovered since the implementation of the Investment Firms Prudential Regime (IFPR) in January 2022, and it doesn’t really make for good reading.

It shows firms have not grasped the fundamentals of what is required of them to demonstrate a keen knowledge of the new regime. In parts, it would appear that some firms, as well as not being clued up sufficiently, have approached the IFPR adopting somewhat of a blasé attitude bordering on arrogance.

ICARA

The ICARA (Internal Capital Adequacy and Risk Assessment) was introduced to replace the ICAAP (Internal Capital Adequacy Assessment Process) but rather than thinking of this as ground floor up substitution, it should be viewed more as evolving the ICAAP. Therefore, any good processes established under ICAAP should be integrated into a firm’s ICARA.

With the introduction of ICARA, firms need to possess sufficient financial resources to underpin their on-going business and also to be able to wind down the business in an orderly way. As well as this, firms need to pinpoint any risks of harm in their operations, and in doing so come up with the necessary resources to alleviate them. This applies to both on-going concerns and/or when winding down.

As well as the above, firms are required to analyse their business modelling, go over their recovery planning and what actions would need to be taken, utilise stress testing and have a firm grasp and plan for the need for winding down.

Risk of harms

Firms need to evaluate any risk of harm that may arise and supply rational estimates of their own funds and liquid assets, core and non-core, at any given time to comply with the OFAR (Overall Financial Adequacy Rule). Please note, non-core liquid assets can only be included if the firm is certain that they can quickly and easily be converted into cash and that any appropriate haircuts have been applied before assessment.

Investment groups

Also noted was that some firms that are a constituent of a larger investment firm group, completed either a group ICARA or one on a consolidated basis. Now, not that this is completely wrong, but permission from the FCA should be sought first, and, in both instances, there was inadequate attention paid to firm-specific potential harms and risks in the overall assessment and very few employed solo ICARA processes of independent firms within the group.

Alongside this, not enough cohesion was within the final assessment and firms did not correctly amalgamate their approach to managing resources to mitigate any future risks.

Wind-down planning

Once again, wind-down planning was seen to be lacking in range and quantification. The FCA has published plenty of guidelines and has proffered what it seeks from a firm’s wind-down plan, but it appears that not so many have been meeting these requirements. There have been many firms that have laid down what they believe is a sufficient wind-down plan but although that in itself may have proved to be adequate, there was no connection between the plan itself and actions the firm would implement should it unfortunately need to use them. The FCA are looking for well thought out plans and the essential measures necessary in order to operate a tidy wind-down and as little, preferably no, risk or harm to markets or consumers.

Regulatory reporting

Regulatory reporting was another area the FCA discovered poor professionalism. A lot of data submitted was seen to be inaccurate, deficient in quantity, and generally of poor quality, in turn displaying frailty in a firm’s systems and management of said data. Before any reports are submitted, they should be checked for accuracy, calibre and be of sufficient volume.

Training

The FCA have also recommended that all firms’ board members should receive in depth training of all things IFPR, in order to acquire the knowledge expected to ensure smooth running and that everything desired by the FCA has been catered for.

IFPR Checklist

• Have you taken the time and effort to understand and obtain a good knowledge of the IFPR regime?
• Have you employed the good practices you used in your ICAAP into your new ICARA? Remember, it’s an evolution process.
• Have you identified and hold sufficient resources to comply with the OFAR?
• Do you have a robust Risk of Harms Register in place?
• Have you analysed your business model, gone over your recovery planning and pinpointed the actions necessary to alleviate any problems?
• Have you identified all individual firms within your group? And has each firm completed its own assessment?
• Have you accurately recognised your thresholds by stress/reverse stress testing and put actions in place for if ever they get met or crossed?
• Have you got a comprehensive plan in place for an orderly wind-down if ever required?
• Do you understand fully your regulatory reporting requirements?
• Have your board members received training regarding the IFPR regime and do they have a firm grasp on what is needed to comply?

If you would like further, in-depth information regarding the IFPR regime including the ICARA process, please feel free to contact myself on rmartenstyn@geraldedelman.com.